1

February 27, 2003

VICENTE SY, TRINIDAD PAULINO, 6B’S TRUCKING CORPORATION, and SBT TRUCKING 1

CORPORATION, petitioners,
vs.
HON. COURT OF APPEALS and JAIME SAHOT, respondents.

DECISION

QUISUMBING, J.:

This petition for review seeks the reversal of the decision of the Court of Appeals dated February 29, 2000, in CA-
2

G.R. SP No. 52671, affirming with modification the decision of the National Labor Relations Commission
3

promulgated on June 20, 1996 in NLRC NCR CA No. 010526-96. Petitioners also pray for the reinstatement of the
decision of the Labor Arbiter in NLRC NCR Case No. 00-09-06717-94.
4

Culled from the records are the following facts of this case:

Sometime in 1958, private respondent Jaime Sahot started working as a truck helper for petitioners’ family-owned
5

trucking business named Vicente Sy Trucking. In 1965, he became a truck driver of the same family business,
renamed T. Paulino Trucking Service, later 6B’s Trucking Corporation in 1985, and thereafter known as SBT
Trucking Corporation since 1994. Throughout all these changes in names and for 36 years, private respondent
continuously served the trucking business of petitioners.

In April 1994, Sahot was already 59 years old. He had been incurring absences as he was suffering from various
ailments. Particularly causing him pain was his left thigh, which greatly affected the performance of his task as a
driver. He inquired about his medical and retirement benefits with the Social Security System (SSS) on April 25,
1994, but discovered that his premium payments had not been remitted by his employer.

Sahot had filed a week-long leave sometime in May 1994. On May 27th, he was medically examined and treated
for EOR, presleyopia, hypertensive retinopathy G II (Annexes "G-5" and "G-3", pp. 48, 104, respectively), HPM,
6

UTI, Osteoarthritis (Annex "G-4", p. 105), and heart enlargement (Annex G, p. 107). On said grounds, Belen
7 8

Paulino of the SBT Trucking Service management told him to file a formal request for extension of his leave. At the
end of his week-long absence, Sahot applied for extension of his leave for the whole month of June, 1994. It was
at this time when petitioners allegedly threatened to terminate his employment should he refuse to go back to
work.

At this point, Sahot found himself in a dilemma. He was facing dismissal if he refused to work, But he could not
retire on pension because petitioners never paid his correct SSS premiums. The fact remained he could no longer
work as his left thigh hurt abominably. Petitioners ended his dilemma. They carried out their threat and dismissed
him from work, effective June 30, 1994. He ended up sick, jobless and penniless.

On September 13, 1994, Sahot filed with the NLRC NCR Arbitration Branch, a complaint for illegal dismissal,
docketed as NLRC NCR Case No. 00-09-06717-94. He prayed for the recovery of separation pay and attorneys
fees against Vicente Sy and Trinidad Paulino-Sy, Belen Paulino, Vicente Sy Trucking, T. Paulino Trucking Service,
6B’s Trucking and SBT Trucking, herein petitioners.

For their part, petitioners admitted they had a trucking business in the 1950s but denied employing helpers and
drivers. They contend that private respondent was not illegally dismissed as a driver because he was in fact
petitioner’s industrial partner. They add that it was not until the year 1994, when SBT Trucking Corporation was
established, and only then did respondent Sahot become an employee of the company, with a monthly salary that
reached P4,160.00 at the time of his separation.
Petitioners further claimed that sometime prior to June 1, 1994, Sahot went on leave and was not able to report for
work for almost seven days. On June 1, 1994, Sahot asked permission to extend his leave of absence until June
30, 1994. It appeared that from the expiration of his leave, private respondent never reported back to work nor did
he file an extension of his leave. Instead, he filed the complaint for illegal dismissal against the trucking company
and its owners.

Petitioners add that due to Sahot’s refusal to work after the expiration of his authorized leave of absence, he
should be deemed to have voluntarily resigned from his work. They contended that Sahot had all the time to
extend his leave or at least inform petitioners of his health condition. Lastly, they cited NLRC Case No. RE-4997-
76, entitled "Manuelito Jimenez et al. vs. T. Paulino Trucking Service," as a defense in view of the alleged
similarity in the factual milieu and issues of said case to that of Sahot’s, hence they are in pari material and
Sahot’s complaint ought also to be dismissed.

The NLRC NCR Arbitration Branch, through Labor Arbiter Ariel Cadiente Santos, ruled that there was no illegal
dismissal in Sahot’s case. Private respondent had failed to report to work. Moreover, said the Labor Arbiter,
petitioners and private respondent were industrial partners before January 1994. The Labor Arbiter concluded by
ordering petitioners to pay "financial assistance" of P15,000 to Sahot for having served the company as a regular
employee since January 1994 only.

On appeal, the National Labor Relations Commission modified the judgment of the Labor Arbiter. It declared that
private respondent was an employee, not an industrial partner, since the start. Private respondent Sahot did not
abandon his job but his employment was terminated on account of his illness, pursuant to Article 284 of the Labor
9

Code. Accordingly, the NLRC ordered petitioners to pay private respondent separation pay in the amount of
P60,320.00, at the rate of P2,080.00 per year for 29 years of service.

Petitioners assailed the decision of the NLRC before the Court of Appeals. In its decision dated February 29,
2000, the appellate court affirmed with modification the judgment of the NLRC. It held that private respondent was
indeed an employee of petitioners since 1958. It also increased the amount of separation pay awarded to private
respondent to P74,880, computed at the rate of P2,080 per year for 36 years of service from 1958 to 1994. It
decreed:

WHEREFORE, the assailed decision is hereby AFFIRMED with MODIFICATION. SB Trucking Corporation is
hereby directed to pay complainant Jaime Sahot the sum of SEVENTY-FOUR THOUSAND EIGHT HUNDRED
EIGHTY (P74,880.00) PESOS as and for his separation pay. 10

Hence, the instant petition anchored on the following contentions:

RESPONDENT COURT OF APPEALS IN PROMULGATING THE QUESTION[ED] DECISION AFFIRMING WITH

MODIFICATION THE DECISION OF NATIONAL LABOR RELATIONS COMMISSION DECIDED NOT IN
ACCORD WITH LAW AND PUT AT NAUGHT ARTICLE 402 OF THE CIVIL CODE. 11

II

RESPONDENT COURT OF APPEALS VIOLATED SUPREME COURT RULING THAT THE NATIONAL LABOR
RELATIONS COMMISSION IS BOUND BY THE FACTUAL FINDINGS OF THE LABOR ARBITER AS THE
LATTER WAS IN A BETTER POSITION TO OBSERVE THE DEMEANOR AND DEPORTMENT OF THE
WITNESSES IN THE CASE OF ASSOCIATION OF INDEPENDENT UNIONS IN THE PHILIPPINES VERSUS
NATIONAL CAPITAL REGION (305 SCRA 233). 12

III

PRIVATE RESPONDENT WAS NOT DISMISS[ED] BY RESPONDENT SBT TRUCKING CORPORATION. 13

Three issues are to be resolved: (1) Whether or not an employer-employee relationship existed between
petitioners and respondent Sahot; (2) Whether or not there was valid dismissal; and (3) Whether or not
respondent Sahot is entitled to separation pay.
Crucial to the resolution of this case is the determination of the first issue. Before a case for illegal dismissal can
prosper, an employer-employee relationship must first be established. 14

Petitioners invoke the decision of the Labor Arbiter Ariel Cadiente Santos which found that respondent Sahot was
not an employee but was in fact, petitioners’ industrial partner. It is contended that it was the Labor Arbiter who
15

heard the case and had the opportunity to observe the demeanor and deportment of the parties. The same
conclusion, aver petitioners, is supported by substantial evidence. Moreover, it is argued that the findings of fact
16

of the Labor Arbiter was wrongly overturned by the NLRC when the latter made the following pronouncement:

We agree with complainant that there was error committed by the Labor Arbiter when he concluded that
complainant was an industrial partner prior to 1994. A computation of the age of complainant shows that he was
only twenty-three (23) years when he started working with respondent as truck helper. How can we entertain in our
mind that a twenty-three (23) year old man, working as a truck helper, be considered an industrial partner. Hence
we rule that complainant was only an employee, not a partner of respondents from the time complainant started
working for respondent. 17

Because the Court of Appeals also found that an employer-employee relationship existed, petitioners aver that the
appellate court’s decision gives an "imprimatur" to the "illegal" finding and conclusion of the NLRC.

Private respondent, for his part, denies that he was ever an industrial partner of petitioners. There was no written
agreement, no proof that he received a share in petitioners’ profits, nor was there anything to show he had any
participation with respect to the running of the business. 18

The elements to determine the existence of an employment relationship are: (a) the selection and engagement of
the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employer’s power to control the
employee’s conduct. The most important element is the employer’s control of the employee’s conduct, not only as
to the result of the work to be done, but also as to the means and methods to accomplish it. 19

As found by the appellate court, petitioners owned and operated a trucking business since the 1950s and by their
own allegations, they determined private respondent’s wages and rest day. Records of the case show that private
20

respondent actually engaged in work as an employee. During the entire course of his employment he did not have
the freedom to determine where he would go, what he would do, and how he would do it. He merely followed
instructions of petitioners and was content to do so, as long as he was paid his wages. Indeed, said the CA,
private respondent had worked as a truck helper and driver of petitioners not for his own pleasure but under the
latter’s control.

Article 1767 of the Civil Code states that in a contract of partnership two or more persons bind themselves to
21

contribute money, property or industry to a common fund, with the intention of dividing the profits among
themselves. Not one of these circumstances is present in this case. No written agreement exists to prove the
22

partnership between the parties. Private respondent did not contribute money, property or industry for the purpose
of engaging in the supposed business. There is no proof that he was receiving a share in the profits as a matter of
course, during the period when the trucking business was under operation. Neither is there any proof that he had
actively participated in the management, administration and adoption of policies of the business. Thus, the NLRC
and the CA did not err in reversing the finding of the Labor Arbiter that private respondent was an industrial partner
from 1958 to 1994.

On this point, we affirm the findings of the appellate court and the NLRC. Private respondent Jaime Sahot was not
an industrial partner but an employee of petitioners from 1958 to 1994. The existence of an employer-employee
relationship is ultimately a question of fact and the findings thereon by the NLRC, as affirmed by the Court of
23

Appeals, deserve not only respect but finality when supported by substantial evidence. Substantial evidence is
such amount of relevant evidence which a reasonable mind might accept as adequate to justify a conclusion. 24

Time and again this Court has said that "if doubt exists between the evidence presented by the employer and the
employee, the scales of justice must be tilted in favor of the latter." Here, we entertain no doubt. Private
25

respondent since the beginning was an employee of, not an industrial partner in, the trucking business.

Coming now to the second issue, was private respondent validly dismissed by petitioners?
 Petitioners contend that it was private respondent who refused to go back to work. The decision of the Labor
Arbiter pointed out that during the conciliation proceedings, petitioners requested respondent Sahot to report back
for work. However, in the same proceedings, Sahot stated that he was no longer fit to continue working, and
instead he demanded separation pay. Petitioners then retorted that if Sahot did not like to work as a driver
anymore, then he could be given a job that was less strenuous, such as working as a checker. However, Sahot
declined that suggestion. Based on the foregoing recitals, petitioners assert that it is clear that Sahot was not
dismissed but it was of his own volition that he did not report for work anymore.

In his decision, the Labor Arbiter concluded that:

While it may be true that respondents insisted that complainant continue working with respondents despite his
alleged illness, there is no direct evidence that will prove that complainant’s illness prevents or incapacitates him
from performing the function of a driver. The fact remains that complainant suddenly stopped working due to
boredom or otherwise when he refused to work as a checker which certainly is a much less strenuous job than a
driver.
26

But dealing the Labor Arbiter a reversal on this score the NLRC, concurred in by the Court of Appeals, held that:

While it was very obvious that complainant did not have any intention to report back to work due to his illness
which incapacitated him to perform his job, such intention cannot be construed to be an abandonment. Instead,
the same should have been considered as one of those falling under the just causes of terminating an
employment. The insistence of respondent in making complainant work did not change the scenario.

It is worthy to note that respondent is engaged in the trucking business where physical strength is of utmost
requirement (sic). Complainant started working with respondent as truck helper at age twenty-three (23), then as
truck driver since 1965. Complainant was already fifty-nine (59) when the complaint was filed and suffering from
various illness triggered by his work and age.

xxx 27

In termination cases, the burden is upon the employer to show by substantial evidence that the termination was for
lawful cause and validly made. Article 277(b) of the Labor Code puts the burden of proving that the dismissal of
28

an employee was for a valid or authorized cause on the employer, without distinction whether the employer admits
or does not admit the dismissal. For an employee’s dismissal to be valid, (a) the dismissal must be for a valid
29

cause and (b) the employee must be afforded due process. 30

Article 284 of the Labor Code authorizes an employer to terminate an employee on the ground of disease, viz:

Art. 284. Disease as a ground for termination- An employer may terminate the services of an employee who has
been found to be suffering from any disease and whose continued employment is prohibited by law or prejudicial
to his health as well as the health of his co-employees: xxx

However, in order to validly terminate employment on this ground, Book VI, Rule I, Section 8 of the Omnibus
Implementing Rules of the Labor Code requires:

Sec. 8. Disease as a ground for dismissal- Where the employee suffers from a disease and his continued
employment is prohibited by law or prejudicial to his health or to the health of his co-employees, the employer
shall not terminate his employment unless there is a certification by competent public health authority that the
disease is of such nature or at such a stage that it cannot be cured within a period of six (6) months even with
proper medical treatment. If the disease or ailment can be cured within the period, the employer shall not
terminate the employee but shall ask the employee to take a leave. The employer shall reinstate such employee to
his former position immediately upon the restoration of his normal health. (Italics supplied).

As this Court stated in Triple Eight integrated Services, Inc. vs. NLRC, the requirement for a medical certificate
31

under Article 284 of the Labor Code cannot be dispensed with; otherwise, it would sanction the unilateral and
arbitrary determination by the employer of the gravity or extent of the employee’s illness and thus defeat the public
policy in the protection of labor.
In the case at bar, the employer clearly did not comply with the medical certificate requirement before Sahot’s
dismissal was effected. In the same case of Sevillana vs. I.T. (International) Corp., we ruled:

Since the burden of proving the validity of the dismissal of the employee rests on the employer, the latter should
likewise bear the burden of showing that the requisites for a valid dismissal due to a disease have been complied
with. In the absence of the required certification by a competent public health authority, this Court has ruled
against the validity of the employee’s dismissal. It is therefore incumbent upon the private respondents to prove by
the quantum of evidence required by law that petitioner was not dismissed, or if dismissed, that the dismissal was
not illegal; otherwise, the dismissal would be unjustified. This Court will not sanction a dismissal premised on mere
conjectures and suspicions, the evidence must be substantial and not arbitrary and must be founded on clearly
established facts sufficient to warrant his separation from work. 32

In addition, we must likewise determine if the procedural aspect of due process had been complied with by the
employer.

From the records, it clearly appears that procedural due process was not observed in the separation of private
respondent by the management of the trucking company. The employer is required to furnish an employee with
two written notices before the latter is dismissed: (1) the notice to apprise the employee of the particular acts or
omissions for which his dismissal is sought, which is the equivalent of a charge; and (2) the notice informing the
employee of his dismissal, to be issued after the employee has been given reasonable opportunity to answer and
to be heard on his defense. These, the petitioners failed to do, even only for record purposes. What management
33

did was to threaten the employee with dismissal, then actually implement the threat when the occasion presented
itself because of private respondent’s painful left thigh.

All told, both the substantive and procedural aspects of due process were violated. Clearly, therefore, Sahot’s
dismissal is tainted with invalidity.

On the last issue, as held by the Court of Appeals, respondent Jaime Sahot is entitled to separation pay. The law
is clear on the matter. An employee who is terminated because of disease is entitled to "separation pay equivalent
to at least one month salary or to one-half month salary for every year of service, whichever is greater
xxx." Following the formula set in Art. 284 of the Labor Code, his separation pay was computed by the appellate
34

court at P2,080 times 36 years (1958 to 1994) or P74,880. We agree with the computation, after noting that his
last monthly salary was P4,160.00 so that one-half thereof is P2,080.00. Finding no reversible error nor grave
abuse of discretion on the part of appellate court, we are constrained to sustain its decision. To avoid further delay
in the payment due the separated worker, whose claim was filed way back in 1994, this decision is immediately
executory. Otherwise, six percent (6%) interest per annum should be charged thereon, for any delay, pursuant to
provisions of the Civil Code.

WHEREFORE, the petition is DENIED and the decision of the Court of Appeals dated February 29, 2000 is
AFFIRMED. Petitioners must pay private respondent Jaime Sahot his separation pay for 36 years of service at the
rate of one-half monthly pay for every year of service, amounting to P74,880.00, with interest of six per centum
(6%) per annum from finality of this decision until fully paid.

Costs against petitioners.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, and Callejo, Sr., JJ., concur.

Austria-Martinez, J., no part.

Footnotes

1
Sometimes referred to as "SB Trucking Corp." in some parts of the records.

Substituted herein by his wife Editha Sahot. Jaime Sahot died on May 1, 1996, per Certificate of Death,
5

Rollo, p. 241.

9
ART. 284 . Disease as ground for termination.-An employer may terminate the services of an employee
who has been found to be suffering from any disease and whose continued employment is prohibited by
law or is prejudicial to his health as well as to the health of his co-employees: Provided, That he is paid
separation pay equivalent to at least one (1) month salary or to one-half month salary for every year of
service, whichever is greater, a fraction of at least six (6) months being considered as one (1) whole year.

14
Palomado v. National Labor Relations Commission, 257 SCRA 680, 695 (1996).

The Labor Arbiter based this pronouncement on alleged res judicata. It appears that a decision was
15

rendered in another case, NLRC Case No. RE 4997-76, where Labor Arbiter Crescencio J. Ramos
declared that other drivers also in the same company, were declared to be industrial partners and not
employees. Labor Arbiter Ariel Cadiente Santos adopted said findings. See Rollo, p. 114.

Consisting of the position paper of Petitioners and of a decision in a "similar" case decided by Labor
16

Arbiter Crescencio J. Ramos in NLRC Case No. RG-4997-76, entitled "Manuelito Jimenez, et al. versus T.
Paulino Trucking Service." See Rollo, pp. 35, 112-121.

Caurdanetaan Piece Workers Union v. Laguesma, 286 SCRA 401, 420 (1998); Maraguinot, Jr. v. NLRC,
19

284 SCRA 539, 552 (1998); APP Mutual Benefit Association, Inc. v. NLRC, 267 SCRA 47, 57
(1997); Aurora Land Projects Corp. v. NLRC, 266 SCRA 48, 59 (1997); Encyclopedia Britannica (Phils.),
Inc. v. NLRC, 264 SCRA 1,6-7 (1996).

ART. 1767. By the contract of partnership two or more persons bind themselves to contribute money,
21

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

Two or more persons may also form a partnership for the exercise of a profession.

22
Afisco Insurance Corporation v. Court of Appeals, 302 SCRA 1, 13 (1999).

23
Santos v. National Labor Relations Commission, 293 SCRA 113, 125 (1998).

24
Triple Eight Integrated Services, Inc. v. NLRC, 299 SCRA 608, 614 (1998).

29
Sevillana v. I.T. (International) Corp., 356 SCRA 451, 466 (2001).

33
Tiu v. NLRC, 251 SCRA 540, 551 (1992).

34
Labor Code, Art. 284, see note 9, supra.
2
G.R. No. 144214 July 14, 2003

LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO JOSE, petitioners,

vs.
DONALDO EFREN C. RAMIREZ and Spouses CESAR G. RAMIREZ JR. and CARMELITA C.
RAMIREZ,respondents.

PANGANIBAN, J.:

A share in a partnership can be returned only after the completion of the latter's dissolution, liquidation and
winding up of the business.

The Case

The Petition for Review on Certiorari before us challenges the March 23, 2000 Decision 1 and the July 26, 2000
Resolution2 of the Court of Appeals3 (CA) in CA-GR CV No. 41026. The assailed Decision disposed as follows:

"WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992 rendered by the
Regional Trial Court, Branch 148, Makati City is hereby SET ASIDE and NULLIFIED and in lieu thereof a
new decision is rendered ordering the [petitioners] jointly and severally to pay and reimburse to
[respondents] the amount of P253,114.00. No pronouncement as to costs." 4

Reconsideration was denied in the impugned Resolution.

The Facts

On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus Jose formed a partnership with a capital of
P750,000 for the operation of a restaurant and catering business under the name "Aquarius Food House and
Catering Services."5 Villareal was appointed general manager and Carmelito Jose, operations manager.

Respondent Donaldo Efren C. Ramirez joined as a partner in the business on September 5, 1984. His capital
contribution of P250,000 was paid by his parents, Respondents Cesar and Carmelita Ramirez. 6

After Jesus Jose withdrew from the partnership in January 1987, his capital contribution of P250,000 was
refunded to him in cash by agreement of the partners. 7

In the same month, without prior knowledge of respondents, petitioners closed down the restaurant, allegedly
because of increased rental. The restaurant furniture and equipment were deposited in the respondents' house for
storage.8

On March 1, 1987, respondent spouses wrote petitioners, saying that they were no longer interested in continuing
their partnership or in reopening the restaurant, and that they were accepting the latter's offer to return their capital
contribution.9

On October 13, 1987, Carmelita Ramirez wrote another letter informing petitioners of the deterioration of the
restaurant furniture and equipment stored in their house. She also reiterated the request for the return of their one-
third share in the equity of the partnership. The repeated oral and written requests were, however, left unheeded. 10

Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently filed a Complaint 11 dated
November 10, 1987, for the collection of a sum of money from petitioners.
In their Answer, petitioners contended that respondents had expressed a desire to withdraw from the partnership
and had called for its dissolution under Articles 1830 and 1831 of the Civil Code; that respondents had been paid,
upon the turnover to them of furniture and equipment worth over P400,000; and that the latter had no right to
demand a return of their equity because their share, together with the rest of the capital of the partnership, had
been spent as a result of irreversible business losses.12

In their Reply, respondents alleged that they did not know of any loan encumbrance on the restaurant. According
to them, if such allegation were true, then the loans incurred by petitioners should be regarded as purely personal
and, as such, not chargeable to the partnership. The former further averred that they had not received any regular
report or accounting from the latter, who had solely managed the business. Respondents also alleged that they
expected the equipment and the furniture stored in their house to be removed by petitioners as soon as the latter
found a better location for the restaurant.13

Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose of Restaurant Furniture and
Equipment14 on July 8, 1988. The furniture and the equipment stored in their house were inventoried and
appraised at P29,000.15 The display freezer was sold for P5,000 and the proceeds were paid to them. 16

After trial, the RTC 17 ruled that the parties had voluntarily entered into a partnership, which could be dissolved at
any time. Petitioners clearly intended to dissolve it when they stopped operating the restaurant. Hence, the trial
court, in its July 21, 1992 Decision, held there liable as follows:18

"WHEREFORE, judgment is hereby rendered in favor of [respondents] and against the [petitioners]
ordering the [petitioners] to pay jointly and severally the following:

(a) Actual damages in the amount of P250,000.00

(b) Attorney's fee in the amount of P30,000.00

(c) Costs of suit."

The CA Ruling

The CA held that, although respondents had no right to demand the return of their capital contribution, the
partnership was nonetheless dissolved when petitioners lost interest in continuing the restaurant business with
them. Because petitioners never gave a proper accounting of the partnership accounts for liquidation purposes,
and because no sufficient evidence was presented to show financial losses, the CA. computed their liability as
follows:

"Consequently, since what has been proven is only the outstanding obligation of the partnership in the
amount of P240,658.00, although contracted by the partnership before [respondents'] have joined the
partnership but in accordance with Article 1826 of the New Civil Code, they are liable which must have to
be deducted from the remaining capitalization of the said partnership which is in the amount of
P1,000,000.00 resulting in the amount of P759,342.00, and in order to get the share of [respondents], this
amount of P759,342.00 must be divided into three (3) shares or in the amount of P253,114.00 for each
share and which is the only amount which [petitioner] will return to [respondents'] representing the
contribution to the partnership minus the outstanding debt thereof."19

Hence, this Petition.20

Issues

In their Memorandum,21 petitioners submit the following issues for our consideration:

"9.1. Whether the Honorable Court of Appeals' decision ordering the distribution of the capital contribution,
instead of the net capital after the dissolution and liquidation of a partnership, thereby treating the capital
contribution like a loan, is in accordance with law and jurisprudence;
 "9.2. Whether the Honorable Court of Appeals' decision ordering the petitioners to jointly and severally pay
and reimburse the amount of [P]253,114.00 is supported by the evidence on record; and

"9.3. Whether the Honorable Court of Appeals was correct in making [n]o pronouncement as to costs." 22

On closer scrutiny, the issues are as follows: (1) whether petitioners are liable to respondents for the latter's share
in the partnership; (2) whether the CA's computation of P253,114 as respondents' share is correct; and (3)
whether the CA was likewise correct in not assessing costs.

This Court's Ruling

The Petition has merit.

First Issue:
Share in Partnership

Both the trial and the appellate courts found that a partnership had indeed existed, and that it was dissolved on
March 1, 1987. They found that the dissolution took place when respondents informed petitioners of the intention
to discontinue it because of the former's dissatisfaction with, and loss of trust in, the latter's management of the
partnership affairs. These findings were amply supported by the evidence on record. Respondents consequently
demanded from petitioners the return of their one-third equity in the partnership.

We hold that respondents have no right to demand from petitioners the return of their equity share. Except as
managers of the partnership, petitioners did not personally hold its equity or assets. "The partnership has a
juridical personality separate and distinct from that of each of the partners." 23 Since the capital was contributed to
the partnership, not to petitioners, it is the partnership that must refund the equity of the retiring partners. 24

Second Issue:
What Must Be Returned?

Since it is the partnership, as a separate and distinct entity, that must refund the shares of the partners, the
amount to be refunded is necessarily limited to its total resources. In other words, it can only pay out what it has in
its coffers, which consists of all its assets. However, before the partners can be paid their shares, the creditors of
the partnership must first be compensated.25 After all the creditors have been paid, whatever is left of the
partnership assets becomes available for the payment of the partners' shares.

Evidently, in the present case, the exact amount of refund equivalent to respondents' one-third share in the
partnership cannot be determined until all the partnership assets will have been liquidated — in other words, sold
and converted to cash — and all partnership creditors, if any, paid. The CA's computation of the amount to be
refunded to respondents as their share was thus erroneous.

First, it seems that the appellate court was under the misapprehension that the total capital contribution was
equivalent to the gross assets to be distributed to the partners at the time of the dissolution of the partnership. We
cannot sustain the underlying idea that the capital contribution at the beginning of the partnership remains intact,
unimpaired and available for distribution or return to the partners. Such idea is speculative, conjectural and totally
without factual or legal support.

Generally, in the pursuit of a partnership business, its capital is either increased by profits earned or decreased by
losses sustained. It does not remain static and unaffected by the changing fortunes of the business. In the present
case, the financial statements presented before the trial court showed that the business had made meager
profits.26However, notable therefrom is the omission of any provision for the depreciation 27 of the furniture and the
equipment. The amortization of the goodwill28 (initially valued at P500,000) is not reflected either. Properly taking
these non-cash items into account will show that the partnership was actually sustaining substantial losses, which
consequently decreased the capital of the partnership. Both the trial and the appellate courts in fact recognized
the decrease of the partnership assets to almost nil, but the latter failed to recognize the consequent
corresponding decrease of the capital.
Second, the CA's finding that the partnership had an outstanding obligation in the amount of P240,658 was not
supported by evidence. We sustain the contrary finding of the RTC, which had rejected the contention that the
obligation belonged to the partnership for the following reason:

"x x x [E]vidence on record failed to show the exact loan owed by the partnership to its creditors. The
balance sheet (Exh. '4') does not reveal the total loan. The Agreement (Exh. 'A') par. 6 shows an
outstanding obligation of P240,055.00 which the partnership owes to different creditors, while the
Certification issued by Mercator Finance (Exh. '8') shows that it was Sps. Diogenes P. Villareal and
Luzviminda J. Villareal, the former being the nominal party defendant in the instant case, who obtained a
loan of P355,000.00 on Oct. 1983, when the original partnership was not yet formed."

Third, the CA failed to reduce the capitalization by P250,000, which was the amount paid by the partnership to
Jesus Jose when he withdrew from the partnership.

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

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

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

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

Third Issue:
Costs

Section 1, Rule 142, provides:

"SECTION 1. Costs ordinarily follow results of suit. — Unless otherwise provided in these rules, costs shall
be allowed to the prevailing party as a matter of course, but the court shall have power, for special
reasons, to adjudge that either party shall pay the costs of an action, or that the same be divided, as may
be equitable. No costs shall be allowed against the Republic of the Philippines unless otherwise provided
by law."

Although, as a rule, costs are adjudged against the losing party, courts have discretion, "for special reasons," to
decree otherwise. When a lower court is reversed, the higher court normally does not award costs, because the
losing party relied on the lower court's judgment which is presumed to have been issued in good faith, even if
found later on to be erroneous. Unless shown to be patently capricious, the award shall not be disturbed by a
reviewing tribunal.

WHEREFORE, the Petition is GRANTED, and the assailed Decision and Resolution SET ASIDE. This disposition
is without prejudice to proper proceedings for the accounting, the liquidation and the distribution of the remaining
partnership assets, if any. No pronouncement as to costs.

SO ORDERED.
Puno, Corona and Carpio-Morales, JJ ., concur.
Sandoval-Gutierrez, J ., on official leave.

Footnotes

20
The case was deemed submitted for decision upon this Court's receipt of petitioners' Memorandum on
July 18, 2001.

21
Petitioners' Memorandum was signed by Atty. Teodoro L. Regala Jr., while the Memorandum for
respondents was signed by Atty. Jose M. Ricafrente.

23
Art. 1768 of the Civil Code.

24
Magdusa v. Albaran, 115 Phil. 511, June 30, 1962.

25
Article 1839 of the Civil Code provides thus:

"Article 1839. In settling accounts between the partners after dissolution, the following rules shall
be observed, subject to any agreement to the contrary:

(1) The assets of the partnership are:

(a) The partnership property,

(b) The contributions of the partners necessary for the payment of all the liabilities specified
in No. 2.

(2) The liabilities of the partnership shall rank in order of payment as follows:

(a) Those owing to creditors other than partners,

(b) Those owing to partners other than for capital and profits,

(c) Those owing to partners in respect of capital,

(d) Those owing the partners in respect of profits.

(3) The assets shall applied in the order of their declaration in No. 1 of this article to the satisfaction
of the liabilities.

(4) The partners shall contribute, as provided by article 1797, the amount necessary to satisfy the
liabilities.

(5) An assignee for the benefit of creditors or any person appointed by the court shall have the
right to enforce the contributions specified in the preceding number.

(6) Any partner or his legal representative shall have the right to enforce the contributions specified
in No. 4, to the extent of the amount which he has paid in excess of his share of the liability.

(7) The individual property of a deceased partner shall be liable for the contributions specified in
No. 4.

(8) When partnership property and the individual properties of the partners are in possession of a
court for distribution, partnership creditors shall have priority on partnership property, saving the
rights of lien or secured creditors.
 (9) Where a partner has become insolvent or his estate is insolvent, the claims against his
separate property shall rank in the following order:

(a) Those owing to separate creditors;

(b) Those owing to partnership creditors;

(c) Those owing to partnership by way of contribution."

26
Annexes "D"-"D-8"; rollo, pp. 205–212.

27
As an accepted business practice, furniture and equipment are depreciated over five years to recognize
the decrease in their value due to wear and tear.

28
As an accepted business practice, 1/5 of the original value of goodwill is charged as a business expense
every year, such that at the end of five years goodwill no longer appears as an asset of the business.

Esguerra v. Court of Appeals, 335 Phil. 58, 69, February 3, 1997; Sanchez v. Court of Appeals, 345 Phil.
29

155, 190–191, September 29, 1997.

3 G.R. No. 135813 October 25, 2001

FERNANDO SANTOS, petitioner,

vs.
SPOUSES ARSENIO and NIEVES REYES, respondents.

PANGANIBAN, J.:

As a general rule, the factual findings of the Court of Appeals affirming those of the trial court are binding on the
Supreme Court. However, there are several exceptions to this principle. In the present case, we find occasion to
apply both the rule and one of the exceptions.

The Case

Before us is a Petition for Review on Certiorari assailing the November 28, 1997 Decision, 1 as well as the August
17, 1998 and the October 9, 1998 Resolutions,2 issued by the Court of Appeals (CA) in CA-GR CV No. 34742. The
Assailed Decision disposed as follows:

"WHEREFORE, the decision appealed from is AFFIRMED save as for the counterclaim which is hereby
DISMISSED. Costs against [petitioner]."3

Resolving respondent's Motion for Reconsideration, the August 17, 1998 Resolution ruled as follows:

"WHEREFORE, [respondents'] motion for reconsideration is GRANTED. Accordingly, the court's decision
dated November 28, 1997 is hereby MODIFIED in that the decision appealed from is AFFIRMED in toto,
with costs against [petitioner]."4

The October 9, 1998 Resolution denied "for lack of merit" petitioner's Motion for Reconsideration of the August 17,
1998 Resolution.5

The Facts

The events that led to this case are summarized by the CA as follows:

"Sometime in June, 1986, [Petitioner] Fernando Santos and [Respondent] Nieves Reyes were introduced
to each other by one Meliton Zabat regarding a lending business venture proposed by Nieves. It was
verbally agreed that [petitioner would] act as financier while [Nieves] and Zabat [would] take charge of
solicitation of members and collection of loan payments. The venture was launched on June 13, 1986, with
the understanding that [petitioner] would receive 70% of the profits while x x x Nieves and Zabat would
earn 15% each.

"In July, 1986, x x x Nieves introduced Cesar Gragera to [petitioner]. Gragera, as chairman of the Monte
Maria Development Corporation6 (Monte Maria, for brevity), sought short-term loans for members of the
corporation. [Petitioner] and Gragera executed an agreement providing funds for Monte Maria's members.
Under the agreement, Monte Maria, represented by Gragera, was entitled to P1.31 commission per
thousand paid daily to [petitioner] (Exh. 'A')x x x . Nieves kept the books as representative of [petitioner]
while [Respondent] Arsenio, husband of Nieves, acted as credit investigator.

"On August 6, 1986, [petitioner], x x x [Nieves] and Zabat executed the 'Article of Agreement' which
formalized their earlier verbal arrangement.
 "[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in the same lending business in
competition with their partnership[.] Zabat was thereby expelled from the partnership. The operations with
Monte Maria continued.

"On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money and damages. [Petitioner]
charged [respondents], allegedly in their capacities as employees of [petitioner], with having
misappropriated funds intended for Gragera for the period July 8, 1986 up to March 31, 1987. Upon
Gragera's complaint that his commissions were inadequately remitted, [petitioner] entrusted P200,000.00
to x x x Nieves to be given to Gragerax x x . Nieves allegedly failed to account for the amount. [Petitioner]
asserted that after examination of the records, he found that of the total amount of P4,623,201.90
entrusted to [respondents], only P3,068,133.20 was remitted to Gragera, thereby leaving the balance of
P1,555,065.70 unaccounted for.

"In their answer, [respondents] asserted that they were partners and not mere employees of [petitioner].
The complaint, they alleged, was filed to preempt and prevent them from claiming their rightful share to the
profits of the partnership.

"x x x Arsenio alleged that he was enticed by [petitioner] to take the place of Zabat after [petitioner] learned
of Zabat's activities. Arsenio resigned from his job at the Asian Development Bank to join the partnership.

"For her part, x x x Nieves claimed that she participated in the business as a partner, as the lending activity
with Monte Maria originated from her initiative. Except for the limited period of July 8, 1986 through August
20, 1986, she did not handle sums intended for Gragera. Collections were turned over to Gragera because
he guaranteed 100% payment of all sums loaned by Monte Maria. Entries she made on worksheets were
based on this assumptive 100% collection of all loans. The loan releases were made less Gragera's
agreed commission. Because of this arrangement, she neither received payments from borrowers nor
remitted any amount to Gragera. Her job was merely to make worksheets (Exhs. '15' to '15-
DDDDDDDDDD') to convey to [petitioner] how much he would earn if all the sums guaranteed by Gragera
were collected.

"[Petitioner] on the other hand insisted that [respondents] were his mere employees and not partners with
respect to the agreement with Gragera. He claimed that after he discovered Zabat's activities, he ceased
infusing funds, thereby causing the extinguishment of the partnership. The agreement with Gragera was a
distinct partnership [from] that of [respondent] and Zabat. [Petitioner] asserted that [respondents] were
hired as salaried employees with respect to the partnership between [petitioner] and Gragera.

"[Petitioner] further asserted that in Nieves' capacity as bookkeeper, she received all payments from which
Nieves deducted Gragera's commission. The commission would then be remitted to Gragera. She likewise
determined loan releases.

"During the pre-trial, the parties narrowed the issues to the following points: whether [respondents] were
employees or partners of [petitioner], whether [petitioner] entrusted money to [respondents] for delivery to
Gragera, whether the P1,555,068.70 claimed under the complaint was actually remitted to Gragera and
whether [respondents] were entitled to their counterclaim for share in the profits." 7

Ruling of the Trial Court

In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere employees, of
petitioner. It further ruled that Gragera was only a commission agent of petitioner, not his partner. Petitioner
moreover failed to prove that he had entrusted any money to Nieves. Thus, respondents' counterclaim for their
share in the partnership and for damages was granted. The trial court disposed as follows:

"39. WHEREFORE, the Court hereby renders

judgment as follows:
39.1. THE SECOND AMENDED COMPLAINT
dated July 26, 1989 is DISMISSED.

39.2. The [Petitioner] FERNANDO J. SANTOS is

ordered to pay the [Respondent] NIEVES S.
REYES, the following:

39.2.1. P3,064,428.0 - The 15 percent share of the

0 [respondent] NIEVES S.
REYES in the profits of her
joint venture with the
[petitioner].

39.2.2. Six(6) percent - As damages from August 3,

of 1987 until the P3,064,428.00
P3,064,428.0 is fully paid.
0

39.2.3. P50,000.00 - As moral damages

39.2.4. P10,000.00 - As exemplary damages

39.3. The [petitioner] FERNANDO J. SANTOS is

ordered to pay the [respondent] ARSENIO
REYES, the following:

39.3.1. P2,899,739.5 - The balance of the 15

0 percent share of the
[respondent] ARSENIO
REYES in the profits of his
joint venture with the
[petitioner].

39.3.2. Six(6) percent - As damages from August 3,

of 1987 until the P2,899,739.50
P2,899,739.5 is fully paid.
0

39.3.3. P25,000.00 - As moral damages

39.3.4. P10,000.00 - As exemplary damages

 39.4. The [petitioner] FERNANDO
J. SANTOS is ordered to pay
the [respondents]:

39.4.1. P50,000.00 - As attorney's fees; and

39.4.2. The cost of the suit."8

Ruling of the Court of Appeals

On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents was dismissed. Upon
the latter's Motion for Reconsideration, however, the trial court's Decision was reinstated in toto. Subsequently,
petitioner's own Motion for Reconsideration was denied in the CA Resolution of October 9, 1998.

The CA ruled that the following circumstances indicated the existence of a partnership among the parties: (1) it
was Nieves who broached to petitioner the idea of starting a money-lending business and introduced him to
Gragera; (2) Arsenio received "dividends" or "profit-shares" covering the period July 15 to August 7, 1986 (Exh.
"6"); and (3) the partnership contract was executed after the Agreement with Gragera and petitioner and thus
showed the parties' intention to consider it as a transaction of the partnership. In their common venture, petitioner
invested capital while respondents contributed industry or services, with the intention of sharing in the profits of the
business.

The CA disbelieved petitioner's claim that Nieves had misappropriated a total of P200,000 which was supposed to
be delivered to Gragera to cover unpaid commissions. It was his task to collect the amounts due, while hers was
merely to prepare the daily cash flow reports (Exhs. "15-15DDDDDDDDDD") to keep track of his collections.

Hence, this Petition.9

Issue

Petitioner asks this Court to rule on the following issues:10

"Whether or not Respondent Court of Appeals acted with grave abuse of discretion tantamount to excess
or lack of jurisdiction in:

1. Holding that private respondents were partners/joint venturers and not employees of Santos in
connection with the agreement between Santos and Monte Maria/Gragera;

2. Affirming the findings of the trial court that the phrase 'Received by' on documents signed by Nieves
Reyes signified receipt of copies of the documents and not of the sums shown thereon;

3. Affirming that the signature of Nieves Reyes on Exhibit 'E' was a forgery;

4. Finding that Exhibit 'H' [did] not establish receipt by Nieves Reyes of P200,000.00 for delivery to
Gragera;

5 Affirming the dismissal of Santos' [Second] Amended Complaint;

6. Affirming the decision of the trial court, upholding private respondents' counterclaim;

7. Denying Santos' motion for reconsideration dated September 11, 1998."

Succinctly put, the following were the issues raised by petitioner: (1) whether the parties' relationship was one of
partnership or of employer employee; (2) whether Nieves misappropriated the sums of money allegedly entrusted
to her for delivery to Gragera as his commissions; and (3) whether respondents were entitled to the partnership
profits as determined by the trial court.

The Court's Ruling

The Petition is partly meritorious.

First Issue:
Business Relationship

Petitioner maintains that he employed the services of respondent spouses in the money-lending venture with
Gragera, with Nieves as bookkeeper and Arsenio as credit investigator. That Nieves introduced Gragera to Santos
did not make her a partner. She was only a witness to the Agreement between the two. Separate from the
partnership between petitioner and Gragera was that which existed among petitioner, Nieves and Zabat, a
partnership that was dissolved when Zabat was expelled.

On the other hand, both the CA and the trial court rejected petitioner's contentions and ruled that the business
relationship was one of partnership. We quote from the CA Decision, as follows:

"[Respondents] were industrial partners of [petitioner]x x x . Nieves herself provided the initiative in the
lending activities with Monte Maria. In consonance with the agreement between appellant, Nieves and
Zabat (later replaced by Arsenio), [respondents] contributed industry to the common fund with the intention
of sharing in the profits of the partnership. [Respondents] provided services without which the partnership
would not have [had] the wherewithal to carry on the purpose for which it was organized and as such
[were] considered industrial partners (Evangelista v. Abad Santos, 51 SCRA 416 [1973]).

"While concededly, the partnership between [petitioner,] Nieves and Zabat was technically dissolved by the
expulsion of Zabat therefrom, the remaining partners simply continued the business of the partnership
without undergoing the procedure relative to dissolution. Instead, they invited Arsenio to participate as a
partner in their operations. There was therefore, no intent to dissolve the earlier partnership. The
partnership between [petitioner,] Nieves and Arsenio simply took over and continued the business of the
former partnership with Zabat, one of the incidents of which was the lending operations with Monte Maria.

xxx xxx xxx

"Gragera and [petitioner] were not partners. The money-lending activities undertaken with Monte Maria
was done in pursuit of the business for which the partnership between [petitioner], Nieves and Zabat (later
Arsenio) was organized. Gragera who represented Monte Maria was merely paid commissions in
exchange for the collection of loans. The commissions were fixed on gross returns, regardless of the
expenses incurred in the operation of the business. The sharing of gross returns does not in itself establish
a partnership."11

We agree with both courts on this point. 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.12 The "Articles of Agreement" stipulated that the signatories shall share the profits of the business in a
70-15-15 manner, with petitioner getting the lion's share.13 This stipulation clearly proved the establishment of a
partnership.

We find no cogent reason to disagree with the lower courts that the partnership continued lending money to the
members of the Monte Maria Community Development Group, Inc., which later on changed its business name to
Private Association for Community Development, Inc. (PACDI). Nieves was not merely petitioner's employee. She
discharged her bookkeeping duties in accordance with paragraphs 2 and 3 of the Agreement, which states as
follows:
 "2. That the SECOND PARTY and THIRD PARTY shall handle the solicitation and screening of
prospective borrowers, and shall x x x each be responsible in handling the collection of the loan payments
of the borrowers that they each solicited.

"3. That the bookkeeping and daily balancing of account of the business operation shall be handled by the
SECOND PARTY."14

The "Second Party" named in the Agreement was none other than Nieves Reyes. On the other hand, Arsenio's
duties as credit investigator are subsumed under the phrase "screening of prospective borrowers." Because of this
Agreement and the disbursement of monthly "allowances" and "profit shares" or "dividends" (Exh. "6") to Arsenio,
we uphold the factual finding of both courts that he replaced Zabat in the partnership.

Indeed, the partnership was established to engage in a money-lending business, despite the fact that it was
formalized only after the Memorandum of Agreement had been signed by petitioner and Gragera. Contrary to
petitioner's contention, there is no evidence to show that a different business venture is referred to in this
Agreement, which was executed on August 6, 1986, or about a month after the Memorandum had been signed by
petitioner and Gragera on July 14, 1986. The Agreement itself attests to this fact:

"WHEREAS, the parties have decided to formalize the terms of their business relationship in order that
their respective interests may be properly defined and established for their mutual benefit and
understanding."15

Second Issue:
No Proof of Misappropriation of Gragera's Unpaid Commission

Petitioner faults the CA finding that Nieves did not misappropriate money intended for Gragera's commission.
According to him, Gragera remitted his daily collection to Nieves. This is shown by Exhibit "B." (the "Schedule of
Daily Payments"), which bears her signature under the words "received by." For the period July 1986 to March
1987, Gragera should have earned a total commission of P4,282,429.30. However, only P3,068,133.20 was
received by him. Thus, petitioner infers that she misappropriated the difference of P1,214,296.10, which
represented the unpaid commissions. Exhibit "H." is an untitled tabulation which, according to him, shows that
Gragera was also entitled to a commission of P200,000, an amount that was never delivered by Nieves. 16

On this point, the CA ruled that Exhibits "B," "F," "E" and "H" did not show that Nieves received for delivery to
Gragera any amount from which the P1,214,296.10 unpaid commission was supposed to come, and that such
exhibits were insufficient proof that she had embezzled P200,000. Said the CA:

"The presentation of Exhibit "D" vaguely denominated as 'members ledger' does not clearly establish that
Nieves received amounts from Monte Maria's members. The document does not clearly state what
amounts the entries thereon represent. More importantly, Nieves made the entries for the limited period of
January 11, 1987 to February 17, 1987 only while the rest were made by Gragera's own staff.

"Neither can we give probative value to Exhibit 'E' which allegedly shows acknowledgment of the
remittance of commissions to Verona Gonzales. The document is a private one and its due execution and
authenticity have not been duly proved as required in [S]ection 20, Rule 132 of the Rules of Court which
states:

'SECTION 20. Proof of Private Document — Before any private document offered as authentic is
received in evidence, its due execution and authenticity must be proved either:

(a) By anyone who saw the document executed or written; or

(b) By evidence of the genuineness of the signature or handwriting of the maker.

'Any other private document need only be identified as that which it is claimed to be.'

"The court a quo even ruled that the signature thereon was a forgery, as it found that:
 'x x x . But NIEVES denied that Exh. E-1 is her signature; she claimed that it is a forgery. The initial
stroke of Exh. E-1 starts from up and goes downward. The initial stroke of the genuine signatures
of NIEVES (Exhs. A-3, B-1, F-1, among others) starts from below and goes upward. This
difference in the start of the initial stroke of the signatures Exhs. E-1 and of the genuine signatures
lends credence to Nieves' claim that the signature Exh. E-1 is a forgery.'

xxx xxx xxx

"Nieves' testimony that the schedules of daily payment (Exhs. 'B' and 'F') were based on the
predetermined 100% collection as guaranteed by Gragera is credible and clearly in accord with the
evidence. A perusal of Exhs. "B" and "F" as well as Exhs. '15' to 15-DDDDDDDDDD' reveal that the entries
were indeed based on the 100% assumptive collection guaranteed by Gragera. Thus, the total amount
recorded on Exh. 'B' is exactly the number of borrowers multiplied by the projected collection of P150.00
per borrower. This holds true for Exh. 'F.'

"Corollarily, Nieves' explanation that the documents were pro forma and that she signed them not to signify
that she collected the amounts but that she received the documents themselves is more believable than
[petitioner's] assertion that she actually handled the amounts.

"Contrary to [petitioner's] assertion, Exhibit 'H' does not unequivocally establish that x x x Nieves received
P200,000.00 as commission for Gragera. As correctly stated by the court a quo, the document showed a
liquidation of P240.000 00 and not P200,000.00.

"Accordingly, we find Nieves' testimony that after August 20, 1986, all collections were made by Gragera
believable and worthy of credence. Since Gragera guaranteed a daily 100% payment of the loans, he took
charge of the collections. As [petitioner's] representative,

Nieves merely prepared the daily cash flow reports (Exh. '15' to '15 DDDDDDDDDD') to enable [petitioner]
to keep track of Gragera's operations. Gragera on the other hand devised the schedule of daily payment
(Exhs. 'B' and 'F') to record the projected gross daily collections.

"As aptly observed by the court a quo:

'26.1. As between the versions of SANTOS and NIEVES on how the commissions of GRAGERA
[were] paid to him[,] that of NIEVES is more logical and practical and therefore, more believable.
SANTOS' version would have given rise to this improbable situation: GRAGERA would collect the
daily amortizations and then give them to NIEVES; NIEVES would get GRAGERA's commissions
from the amortizations and then give such commission to GRAGERA."' 17

These findings are in harmony with the trial court's ruling, which we quote below:

"21. Exh. H does not prove that SANTOS gave to NIEVES and the latter received P200,000.00 for delivery
to GRAGERA. Exh. H shows under its sixth column 'ADDITIONAL CASH' that the additional cash was
P240,000.00. If Exh. H were the liquidation of the P200,000.00 as alleged by SANTOS, then his claim is
not true. This is so because it is a liquidation of the sum of P240,000.00.

"21.1. SANTOS claimed that he learned of NIEVES' failure to give the P200,000.00 to GRAGERA when he
received the latter's letter complaining of its delayed release. Assuming as true SANTOS' claim that he
gave P200,000.00 to GRAGERA, there is no competent evidence that NIEVES did not give it to
GRAGERA. The only proof that NIEVES did not give it is the letter. But SANTOS did not even present the
letter in evidence. He did not explain why he did not.

"21.2. The evidence shows that all money transactions of the money-lending business of SANTOS were
covered by petty cash vouchers. It is therefore strange why SANTOS did not present any voucher or
receipt covering the P200,000.00."18

In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70 from the partnership.
She did not remit P1,214,296.10 to Gragera, because he had deducted his commissions before remitting his
collections. Exhibits "B" and "F" are merely computations of what Gragera should collect for the day; they do not
show that Nieves received the amounts stated therein. Neither is there sufficient proof that she misappropriated
P200,000, because Exhibit "H." does not indicate that such amount was received by her; in fact, it shows a
different figure.

Petitioner has utterly failed to demonstrate why a review of these factual findings is warranted. Well-entrenched is
the basic rule that factual findings of the Court of Appeals affirming those of the trial court are binding and
conclusive on the Supreme Court.19 Although there are exceptions to this rule, petitioner has not satisfactorily
shown that any of them is applicable to this issue.

Third Issue:
Accounting of Partnership

Petitioner refuses any liability for respondents' claims on the profits of the partnership. He maintains that "both
business propositions were flops," as his investments were "consumed and eaten up by the commissions
orchestrated to be due Gragera" — a situation that "could not have been rendered possible without complicity
between Nieves and Gragera."

Respondent spouses, on the other hand, postulate that petitioner instituted the action below to avoid payment of
the demands of Nieves, because sometime in March 1987, she "signified to petitioner that it was about time to get
her share of the profits which had already accumulated to some P3 million." Respondents add that while the
partnership has not declared dividends or liquidated its earnings, the profits are already reflected on paper. To
prove the counterclaim of Nieves, the spouses show that from June 13, 1986 up to April 19, 1987, the profit totaled
P20,429,520 (Exhs. "10" et seq. and "15" et seq.). Based on that income, her 15 percent share under the joint
venture amounts to P3,064,428 (Exh. "10-I-3"); and Arsenio's, P2,026,000 minus the P30,000 which was already
advanced to him (Petty Cash Vouchers, Exhs. "6, 6-A to 6-B").

The CA originally held that respondents' counterclaim was premature, pending an accounting of the partnership.
However, in its assailed Resolution of August 17, 1998, it turned volte face. Affirming the trial court's ruling on the
counterclaim, it held as follows:

"We earlier ruled that there is still need for an accounting of the profits and losses of the partnership before
we can rule with certainty as to the respective shares of the partners. Upon a further review of the records
of this case, however, there appears to be sufficient basis to determine the amount of shares of the parties
and damages incurred by [respondents]. The fact is that the court a quo already made such a
determination [in its] decision dated August 13, 1991 on the basis of the facts on record." 20

The trial court's ruling alluded to above is quoted below:

"27. The defendants' counterclaim for the payment of their share in the profits of their joint venture with
SANTOS is supported by the evidence.

"27.1. NIEVES testified that: Her claim to a share in the profits is based on the agreement (Exhs. 5, 5-A
and 5-B). The profits are shown in the working papers (Exhs. 10 to 10-I, inclusive) which she prepared.
Exhs. 10 to 10-I (inclusive) were based on the daily cash flow reports of which Exh. 3 is a sample. The
originals of the daily cash flow reports (Exhs. 3 and 15 to 15-D(10) were given to SANTOS. The joint
venture had a net profit of P20,429,520.00 (Exh. 10-I-1), from its operations from June 13, 1986 to April
19, 1987 (Exh. 1-I-4). She had a share of P3,064,428.00 (Exh. 10-I-3) and ARSENIO, about
P2,926,000.00, in the profits.

"27.1.1 SANTOS never denied NIEVES' testimony that the money-lending business he was engaged in
netted a profit and that the originals of the daily case flow reports were furnished to him. SANTOS however
alleged that the money-lending operation of his joint venture with NIEVES and ZABAT resulted in a loss of
about half a million pesos to him. But such loss, even if true, does not negate NIEVES' claim that overall,
the joint venture among them — SANTOS, NIEVES and ARSENIO — netted a profit. There is no reason
for the Court to doubt the veracity of [the testimony of] NIEVES.
 "27.2 The P26,260.50 which ARSENIO received as part of his share in the profits (Exhs. 6, 6-A and 6-B)
should be deducted from his total share."21

After a close examination of respondents' exhibits, we find reason to disagree with the CA. Exhibit "10-I" 22 shows
that the partnership earned a "total income" of P20,429,520 for the period June 13, 1986 until April 19, 1987. This
entry is derived from the sum of the amounts under the following column headings: "2-Day Advance Collection,"
"Service Fee," "Notarial Fee," "Application Fee," "Net Interest Income" and "Interest Income on Investment." Such
entries represent the collections of the money-lending business or its gross income.

The "total income" shown on Exhibit "10-I" did not consider the expenses sustained by the partnership. For
instance, it did not factor in the "gross loan releases" representing the money loaned to clients. Since the business
is money-lending, such releases are comparable with the inventory or supplies in other business enterprises.

Noticeably missing from the computation of the "total income" is the deduction of the weekly allowance disbursed
to respondents. Exhibits "I" et seq. and "J" et seq. 23 show that Arsenio received allowances from July 19, 1986 to
March 27, 1987 in the aggregate amount of P25,500; and Nieves, from July 12, 1986 to March 27, 1987, in the
total amount of P25,600. These allowances are different from the profit already received by Arsenio. They
represent expenses that should have been deducted from the business profits. The point is that all expenses
incurred by the money-lending enterprise of the parties must first be deducted from the "total income" in order to
arrive at the "net profit" of the partnership. The share of each one of them should be based on this "net profit" and
not from the "gross income" or "total income" reflected in Exhibit "10-I," which the two courts invariably referred to
as "cash flow" sheets.

Similarly, Exhibits "15" et seq.,24 which are the "Daily Cashflow Reports," do not reflect the business expenses
incurred by the parties, because they show only the daily cash collections. Contrary to the rulings of both the trial
and the appellate courts, respondents' exhibits do not reflect the complete financial condition of the money-lending
business. The lower courts obviously labored over a mistaken notion that Exhibit " 10-I-1" represented the "net
profits" earned by the partnership.

For the purpose of determining the profit that should go to an industrial partner (who shares in the profits but is not
liable for the losses), the gross income from all the transactions carried on by the firm must be added together,
and from this sum must be subtracted the expenses or the losses sustained in the business. Only in the difference
representing the net profits does the industrial partner share. But if, on the contrary, the losses exceed the income,
the industrial partner does not share in the losses.25

When the judgment of the CA is premised on a misapprehension of facts or a failure to notice certain relevant
facts that would otherwise justify a different conclusion, as in this particular issue, a review of its factual findings
may be conducted, as an exception to the general rule applied to the first two issues. 26

The trial court has the advantage of observing the witnesses while they are testifying, an opportunity not available
to appellate courts. Thus, its assessment of the credibility of witnesses and their testimonies are accorded great
weight, even finality, when supported by substantial evidence; more so when such assessment is affirmed by the
CA. But when the issue involves the evaluation of exhibits or documents that are attached to the case records, as
in the third issue, the rule may be relaxed. Under that situation, this Court has a similar opportunity to inspect,
examine and evaluate those records, independently of the lower courts. Hence, we deem the award of the
partnership share, as computed by the trial court and adopted by the CA, to be incomplete and not binding on this
Court.

WHEREFORE, the Petition is partly GRANTED. The assailed November 28, 1997 Decision is AFFIRMED, but the
challenged Resolutions dated August 17, 1998 and October 9, 1998 are REVERSED and SET ASIDE. No costs.

SO ORDERED.

Melo, and Sandoval-Gutierrez, JJ., concur.

Vitug, J., on official leave.
Footnotes

1
First Division, composed of JJ Fidel P. Purisima, chairman; Corona Ibay-Somera, member; and Oswaldo
D. Agcaoili, member and ponente.

2
Special Former First Division, composed of JJ. Quirino D. Abad Santos Jr., chairman (vice J. Purisima);
Ibay-Somera and Agcaoili.

3
CA Decision, p. 12; rollo, p. 96.

4
CA Resolution, p. 3; rollo, p. 241.

5
Rollo, p; 128.

6
Referred to by petitioner in his Memorandum (p. 4) as "Monte Maria Community Development Group,
Inc."

7
CA Decision, pp. 2-4; rollo, 86-88.

8
RTC Decision, pp. 16-17; rollo, pp. 82-83.

9
On November 4, 1999, the Court received the Memorandum for the Respondents, signed by Atty. Benito
P. Fabie. Petitioner's Memorandum, signed by Atty. Arcangelita M. Romilla-Lontok, was received on
October 20, 1999. In its October 27, 1999 Resolution, this Court required the CA to explain the
discrepancy in the copies of the August 17, 1998 Resolution received by the parties and to furnish it with
an authentic copy thereof. The CA complied on November 12, 1999, the date on which this case was
deemed submitted for resolution.

10
Memorandum for the Petitioner, pp. 7-8; rollo, pp. 180-181.

11
CA Decision, pp. 7-8; rollo, pp. 91-92.

12
Art. 1767, Civil Code. The essential elements of a partnership are as follows: (1) an agreement to
contribute money, property or industry to a common fund; and (2) an intent to divide the profits among the
contracting parties. Vitug, Compendium of Civil Law & Jurisprudence, 1993 rev. ed., p. 707; Fue Leung v.
Intermediate Appellate Court, 169 SCRA 746, 754, January 31, 1989; and Evangelista v. Collector of
Internal Revenue, 102 Phil. 140, 144, October 15, 1957.

13
Par. 4, Articles of Agreement, Annex "D"; rollo, p. 56.

14
Annex "D" of the Petition; rollo, p. 56.

15
Annex "D" of the Petition; rollo, p. 56.

16
Petitioner claims that Nieves embezzled P1,555,068.70 from the partnership (rollo, p. 12), the amount
broken down as follows:

P1,214,296.10 - unpaid commission due

Gragera (Exh. "C-l")

140,772.60 - unpaid commission for the

two-day advance payment of
clients (Exh. "C-l l ")
 200,000.00 - cash actually delivered by
petitioner to Nieves (Exh. "H")

17
CA Decision, pp. 10-11; rollo, pp. 94-95.

18
RTC Decision, p. 12; rollo, p. 78.

National Steel Corp. v. Court of Appeals, 283 SCRA 45, 66, December 12, 1997; Fuentes v. Court of
19

Appeals, 268 SCRA 703, 708-709, February 26, 1997; Sps. Lagandaon v. Court of Appeals, 290 SCRA
330, 341, May 21, 1998.

20
CA Resolution, p. 2; rollo, p. 240.

21
RTC Decision, p. 14; rollo, p. 80.

22
"Daily Interest Income & Other Income Control," Folder II, Records.

23
Folder I, Records.

24
Folder II, Records.

Criado v. Gutierrez Hermanos, 37 Phil. 883, 894-895, March 23, 1918; and Moran Jr. v. Court of
25

Appeals, 133 SCRA 88, 96, October 31, 1984.

26
Fuentes v. CA, supra at 709.

4 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, affirming the
1

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 Belo’s name should not appear in any documents relating to
their transactions with West Bend Company. Instead, they agreed to use Anay’s 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 Belo’s 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 Tocao’s 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 for her excellent job
4

performance. On October 7, 1987, in the presence of Anay, Belo signed a memo entitling her to a thirty-seven
5

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 addressed to the Cubao sales office to the effect that she was no longer the vice-president of
6

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. Anay attempted to contact Belo. She wrote him twice to demand her overriding commission for the period
7

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 against
8

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, Marjorie Tocao and Belo asserted that the "alleged agreement" with Anay that was "neither
9

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 attorney’s fees and P20,000.00 as costs of suit.

SO ORDERED."

The trial court held that there was indeed an "oral partnership agreement between the plaintiff and the
defendants," based on the following: (a) there was an intention to create a partnership; (b) a common fund was
established through contributions consisting of money and industry, and (c) there was a joint interest in the profits.
The testimony of Elizabeth Bantilan, Anay’s cousin and the administrative officer of Geminesse Enterprise from
August 21, 1986 until it was absorbed by Royal International, Inc., buttressed the fact that a partnership existed
between the parties. The letter of Roger Muencheberg of West Bend Company stating that he awarded the
distributorship to Anay and Marjorie Tocao because he was convinced that with Marjorie’s financial contribution
and Anay’s experience, the combination of the two would be invaluable to the partnership, also supported that
conclusion. Belo’s claim that he was merely a "guarantor" has no basis since there was no written evidence
thereof as required by Article 2055 of the Civil Code. Moreover, his acts of attending and/or presiding over
meetings of Geminesse Enterprise plus his issuance of a memo giving Anay 37% commission on personal sales
belied this. On the contrary, it demonstrated his involvement as a partner in the business.

The trial court further held that the payment of commissions did not preclude the existence of the partnership
inasmuch as such practice is often resorted to in business circles as an impetus to bigger sales volume. It did not
matter that the agreement was not in writing because Article 1771 of the Civil Code provides that a partnership
may be "constituted in any form." The fact that Geminesse Enterprise was registered in Marjorie Tocao’s name is
not determinative of whether or not the business was managed and operated by a sole proprietor or a partnership.
What was registered with the Bureau of Domestic Trade was merely the business name or style of Geminesse
Enterprise.

The trial court finally held that a partner who is excluded wrongfully from a partnership is an innocent partner.
Hence, the guilty partner must give him his due upon the dissolution of the partnership as well as damages or
share in the profits "realized from the appropriation of the partnership business and goodwill." An innocent partner
thus possesses "pecuniary interest in every existing contract that was incomplete and in the trade name of the co-
partnership and assets at the time he was wrongfully expelled."

Petitioners’ appeal to the Court of Appeals was dismissed, but the amount of damages awarded by the trial court
11

were reduced to P50,000.00 for moral damages and P50,000.00 as exemplary damages. Their Motion for
Reconsideration was denied by the Court of Appeals for lack of merit. Petitioners Belo and Marjorie Tocao are
12

now before this Court on a petition for review on certiorari, asserting that there was no business partnership
between them and herein private respondent Nenita A. Anay who is, therefore, not entitled to the damages
awarded to her by the Court of Appeals.

Petitioners Tocao and Belo contend that the Court of Appeals erroneously held that a partnership existed between
them and private respondent Anay because Geminesse Enterprise "came into being" exactly a year before the
"alleged partnership" was formed, and that it was very unlikely that petitioner Belo would invest the sum of
P2,500,000.00 with petitioner Tocao contributing nothing, without any "memorandum whatsoever regarding the
alleged partnership."13

The issue of whether or not a partnership exists is a factual matter which are within the exclusive domain of both
the trial and appellate courts. This Court cannot set aside factual findings of such courts absent any showing that
there is no evidence to support the conclusion drawn by the court a quo. In this case, both the trial court and the
14

Court of Appeals are one in ruling that petitioners and private respondent established a business partnership. This
Court finds no reason to rule otherwise.

To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or more persons bind
themselves to contribute money, property or industry to a common fund; and (2) intention on the part of the
partners to divide the profits among themselves. It may be constituted in any form; a public instrument is
15

necessary only where immovable property or real rights are contributed thereto. This implies that since a contract
16

of partnership is consensual, an oral contract of partnership is as good as a written one. Where no immovable
property or real rights are involved, what matters is that the parties have complied with the requisites of a
partnership. The fact that there appears to be no record in the Securities and Exchange Commission of a public
instrument embodying the partnership agreement pursuant to Article 1772 of the Civil Code did not cause the
17

nullification of the partnership. The pertinent provision of the Civil Code on the matter states:

Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners, even
in case of failure to comply with the requirements of article 1772, first paragraph.

Petitioners admit that private respondent had the expertise to engage in the business of distributorship of
cookware. Private respondent contributed such expertise to the partnership and hence, under the law, she was the
industrial or managing partner. It was through her reputation with the West Bend Company that the partnership
was able to open the business of distributorship of that company’s cookware products; it was through the same
efforts that the business was propelled to financial success. Petitioner Tocao herself admitted private respondent’s
indispensable role in putting up the business when, upon being asked if private respondent held the positions of
marketing manager and vice-president for sales, she testified thus:
"A: No, sir at the start she was the marketing manager because there were no one to sell yet, it’s only me there
then her and then two (2) people, so about four (4). Now, after that when she recruited already Oscar Abella and
Lina Torda-Cruz these two (2) people were given the designation of marketing managers of which definitely Nita
as superior to them would be the Vice President." 18

By the set-up of the business, third persons were made to believe that a partnership had indeed been forged
between petitioners and private respondents. Thus, the communication dated June 4, 1986 of Missy Jagler of
West Bend Company to Roger Muencheberg of the same company states:

"Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the operations. Marge does not
have cookware experience. Nita Anay has started to gather former managers, Lina Torda and Dory Vista. She has
also gathered former demonstrators, Betty Bantilan, Eloisa Lamela, Menchu Javier. They will continue to gather
other key people and build up the organization. All they need is the finance and the products to sell." 19

On the other hand, petitioner Belo’s denial that he financed the partnership rings hollow in the face of the
established fact that he presided over meetings regarding matters affecting the operation of the business.
Moreover, his having authorized in writing on October 7, 1987, on a stationery of his own business firm, Wilcon
Builders Supply, that private respondent should receive thirty-seven (37%) of the proceeds of her personal sales,
could not be interpreted otherwise than that he had a proprietary interest in the business. His claim that he was
merely a guarantor is belied by that personal act of proprietorship in the business. Moreover, if he was indeed a
guarantor of future debts of petitioner Tocao under Article 2053 of the Civil Code, he should have presented
20

documentary evidence therefor. While Article 2055 of the Civil Code simply provides that guaranty must be
"express," Article 1403, the Statute of Frauds, requires that "a special promise to answer for the debt, default or
miscarriage of another" be in writing. 21

Petitioner Tocao, a former ramp model, was also a capitalist in the partnership. She claimed that she herself
22

financed the business. Her and petitioner Belo’s roles as both capitalists to the partnership with private respondent
are buttressed by petitioner Tocao’s admissions that petitioner Belo was her boyfriend and that the partnership
was not their only business venture together. They also established a firm that they called "Wiji," the combination
of petitioner Belo’s first name, William, and her nickname, Jiji. The special relationship between them dovetails
23

with petitioner Belo’s claim that he was acting in behalf of petitioner Tocao. Significantly, in the early stage of the
business operation, petitioners requested West Bend Company to allow them to "utilize their banking and trading
facilities in Singapore" in the matter of importation and payment of the cookware products. The inevitable
24

conclusion, therefore, was that petitioners merged their respective capital and infused the amount into the
partnership of distributing cookware with private respondent as the managing partner.

The business venture operated under Geminesse Enterprise did not result in an employer-employee relationship
between petitioners and private respondent. While it is true that the receipt of a percentage of net profits
constitutes only prima facie evidence that the recipient is a partner in the business, the evidence in the case at
25

bar controverts an employer-employee relationship between the parties. In the first place, private respondent had
a voice in the management of the affairs of the cookware distributorship, including selection of people who would
26

constitute the administrative staff and the sales force. Secondly, petitioner Tocao’s admissions militate against an
employer-employee relationship. She admitted that, like her who owned Geminesse Enterprise, private 27

respondent received only commissions and transportation and representation allowances and not a fixed
28

salary. Petitioner Tocao testified:

29

"Q: Of course. Now, I am showing to you certain documents already marked as Exhs. ‘X’ and ‘Y.’ Please go over
this. Exh. ‘Y’ is denominated `Cubao overrides’ 8-21-87 with ending August 21, 1987, will you please go over this
and tell the Honorable Court whether you ever came across this document and know of your own knowledge the
amount ---

A: Yes, sir this is what I am talking about earlier. That’s the one I am telling you earlier a certain percentage for
promotions, advertising, incentive.

Q: I see. Now, this promotion, advertising, incentive, there is a figure here and words which I quote: ‘Overrides
Marjorie Ann Tocao P21,410.50’ this means that you have received this amount?

A: Oh yes, sir.
Q: I see. And, by way of amplification this is what you are saying as one representing commission, representation,
advertising and promotion?

A: Yes, sir.

Q: I see. Below your name is the words and figure and I quote ‘Nita D. Anay P21,410.50’, what is this?

A: That’s her overriding commission.

Q: Overriding commission, I see. Of course, you are telling this Honorable Court that there being the same
P21,410.50 is merely by coincidence?

A: No, sir, I made it a point that we were equal because the way I look at her kasi, you know in a sense because
of her expertise in the business she is vital to my business. So, as part of the incentive I offer her the same thing.

Q: So, in short you are saying that this you have shared together, I mean having gotten from the company
P21,140.50 is your way of indicating that you were treating her as an equal?

A: As an equal.

Q: As an equal, I see. You were treating her as an equal?

A: Yes, sir.

Q: I am calling again your attention to Exh. ‘Y’ ‘Overrides Makati the other one is ---

A: That is the same thing, sir.

Q: With ending August 21, words and figure ‘Overrides Marjorie Ann Tocao P15,314.25’ the amount there you will
acknowledge you have received that?

A: Yes, sir.

Q: Again in concept of commission, representation, promotion, etc.?

A: Yes, sir.

Q: Okey. Below your name is the name of Nita Anay P15,314.25 that is also an indication that she received the
same amount?

A: Yes, sir.

Q: And, as in your previous statement it is not by coincidence that these two (2) are the same?

A: No, sir.

Q: It is again in concept of you treating Miss Anay as your equal?

A: Yes, sir." (Italics supplied.) 30

If indeed petitioner Tocao was private respondent’s employer, it is difficult to believe that they shall receive the
same income in the business. In a partnership, each partner must share in the profits and losses of the venture,
except that the industrial partner shall not be liable for the losses. As an industrial partner, private respondent had
31

the right to demand for a formal accounting of the business and to receive her share in the net profit. 32
The fact that the cookware distributorship was operated under the name of Geminesse Enterprise, a sole
proprietorship, is of no moment. What was registered with the Bureau of Domestic Trade on August 19, 1987 was
merely the name of that enterprise. While it is true that in her undated application for renewal of registration of
33

that firm name, petitioner Tocao indicated that it would be engaged in retail of "kitchenwares, cookwares, utensils,
skillet," she also admitted that the enterprise was only "60% to 70% for the cookware business," while 20% to
34

30% of its business activity was devoted to the sale of water sterilizer or purifier. Indubitably then, the business
35

name Geminesse Enterprise was used only for practical reasons - it was utilized as the common name for
petitioner Tocao’s various business activities, which included the distributorship of cookware.

Petitioners underscore the fact that the Court of Appeals did not return the "unaccounted and unremitted stocks of
Geminesse Enterprise amounting to P208,250.00." Obviously a ploy to offset the damages awarded to private
36

respondent, that claim, more than anything else, proves the existence of a partnership between them. In Idos v.
Court of Appeals, this Court said:

"The best evidence of the existence of the partnership, which was not yet terminated (though in the winding up
stage), were the unsold goods and uncollected receivables, which were presented to the trial court. Since the
partnership has not been terminated, the petitioner and private complainant remained as co-partners. x x x." 37

It is not surprising then that, even after private respondent had been unceremoniously booted out of the
partnership in October 1987, she still received her overriding commission until December 1987.

Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the partnership to reap for herself
and/or for petitioner Belo financial gains resulting from private respondent’s efforts to make the business venture a
success. Thus, as petitioner Tocao became adept in the business operation, she started to assert herself to the
extent that she would even shout at private respondent in front of other people. Her instruction to Lina Torda Cruz,
38

marketing manager, not to allow private respondent to hold office in both the Makati and Cubao sales offices
concretely spoke of her perception that private respondent was no longer necessary in the business
operation, and resulted in a falling out between the two. However, a mere falling out or misunderstanding between
39

partners does not convert the partnership into a sham organization. The partnership exists until dissolved under
40

the law. Since the partnership created by petitioners and private respondent has no fixed term and is therefore a
partnership at will predicated on their mutual desire and consent, it may be dissolved by the will of a partner. Thus:

"x x x. 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 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 but that it can
result in a liability for damages."
41

An unjustified dissolution by a partner can subject him to action for damages because by the mutual agency that
arises in a partnership, the doctrine of delectus personae allows the partners to have the power, although not
necessarily the right to dissolve the partnership. 42

In this case, petitioner Tocao’s unilateral exclusion of private respondent from the partnership is shown by her
memo to the Cubao office plainly stating that private respondent was, as of October 9, 1987, no longer the vice-
president for sales of Geminesse Enterprise. By that memo, petitioner Tocao effected her own withdrawal from
43

the partnership and considered herself as having ceased to be associated with the partnership in the carrying on
of the business. Nevertheless, the partnership was not terminated thereby; it continues until the winding up of the
business. 44

The winding up of partnership affairs has not yet been undertaken by the partnership. This is manifest in
1âwphi1

petitioners’ claim for stocks that had been entrusted to private respondent in the pursuit of the partnership
business.

The determination of the amount of damages commensurate with the factual findings upon which it is based is
primarily the task of the trial court. The Court of Appeals may modify that amount only when its factual findings
45

are diametrically opposed to that of the lower court, or the award is palpably or scandalously and unreasonably
46

excessive. However, exemplary damages that are awarded "by way of example or correction for the public
47
good," should be reduced to P50,000.00, the amount correctly awarded by the Court of Appeals. Concomitantly,
48

the award of moral damages of P100,000.00 was excessive and should be likewise reduced to P50,000.00.
Similarly, attorney’s fees that should be granted on account of the award of exemplary damages and petitioners’
evident bad faith in refusing to satisfy private respondent’s plainly valid, just and demandable claims, appear to
49

have been excessively granted by the trial court and should therefore be reduced to P25,000.00.

WHEREFORE, the instant petition for review on certiorari is DENIED. The partnership among petitioners and
private respondent is ordered dissolved, and the parties are ordered to effect the winding up and liquidation of the
partnership pursuant to the pertinent provisions of the Civil Code. This case is remanded to the Regional Trial
Court for proper proceedings relative to said dissolution. The appealed decisions of the Regional Trial Court and
the Court of Appeals are AFFIRMED with MODIFICATIONS, as follows ---

1. Petitioners are ordered to submit to the Regional Trial Court a formal account of the partnership affairs
for the years 1987 and 1988, pursuant to Article 1809 of the Civil Code, in order to determine private
respondent’s ten percent (10%) share in the net profits of the partnership;

2. Petitioners are ordered, jointly and severally, to pay private respondent five percent (5%) overriding
commission for the one hundred and fifty (150) cookware sets available for disposition since the time
private respondent was wrongfully excluded from the partnership by petitioners;

3. Petitioners are ordered, jointly and severally, to pay private respondent overriding commission on the
total production which, for the period covering January 8, 1988 to February 5, 1988, amounted to
P32,000.00;

4. Petitioners are ordered, jointly and severally, to pay private respondent moral damages in the amount of
P50,000.00, exemplary damages in the amount of P50,000.00 and attorney’s fees in the amount of
P25,000.00.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.

Footnotes

Presiding Justice Nathanael P. de Pano, Jr., ponente; Associate Justices Fermin A. Martin, Jr. and
1

Conchita Carpio Morales, concurring.

2
Presided by Judge Leticia P. Morales.

3
Exh. VV.

4
Exh. WW.

5
Exh. CC.

6
Exh. JJ.

7
Exh. HH.

8
Rollo, p. 67-73.

9
Rollo, pp. 79-82.

10
Record, p. 71.
11
Decision dated August 9, 1996; Rollo, pp. 24-37.

12
Resolution dated December 5, 1996; Rollo, pp. 39-43.

13
Petition, p. 15.

14
Alicbusan v. Court of Appeals, 336 Phil. 321, 326-327 (1997).

Civil Code, Art. 1767; Fue Leung v. Intermediate Appellate Court, 169 SCRA 746, 754 (1989); citing Yulo
15

v. Yang Chiao Cheng, 106 Phil. 110 (1959).

16
Civil Code, Art. 1771; Agad v. Mabato, 132 Phil. 634, 636 (1968).

Civil Code, Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in
17

money or property, shall appear in a public instrument, which must be recorded in the Office of the
Securities and Exchange Commission.

Failure to comply with the requirements of the preceding paragraph shall not affect the liability of
the partnership and the members thereof to third persons.

18
TSN, November 12, 1991, p. 49.

19
Exh. C-5-A.

Civil Code, Art. 2053. A guaranty may also be given as security for future debts, the amount of which is
20

not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional
obligation may also be secured.

21
V TOLENTINO, CIVIL CODE OF THE PHILIPPINES, p. 507, 1992 ed.

22
TSN, November 12, 1991, p. 4.

23
Ibid., p. 44.

24
Exh. C-4; TSN, December 16, 1991, pp. 15-18.

25
Sardane v. Court of Appeals, 167 SCRA 524, 530-531 (1998).

26
Ibid.

27
TSN, November 12, 1991, pp. 54.

28
Ibid., pp. 52-53.

29
Ibid., p. 50.

30
Ibid., pp. 56-59.

31
Civil Code, Art. 1797; Moran, Jr. v. Court of Appeals, 218 Phil. 105, 112 (1984).

32
Civil Code, Art. 1799; Evangelista & Co. v. Abad Santos, 151-A Phil. 853, 860 (1973).

33
Exh. 5.

34
Exh. 5-A.
 35
TSN, November 12, 1991, p. 42.

36
Petition, p. 10; Rollo, p. 18.

37
296 SCRA 194, 206 (1998).

38
TSN, June 14, 1989, pp. 5-6.

39
TSN, November 12, 1991, p. 35.

40
Muñasque v. Court of Appeals, 139 SCRA 533, 540 (1985).

41
Ortega v. Court of Appeals, 315 Phil. 573, 580-581 (1995).

42
Ibid., at p. 581.

43
Exh. 7.

44
Singsong v. Isabela Sawmill, 88 SCRA 623 (1979).

45
Air France v. Carrascoso, 124 Phil. 722, 742 (1966).

46
Prudencio v. Alliance Transport System, Inc., 148 SCRA 440, 447 (1987).

47
Ibid.; Philippine Airlines, Inc. v. Court of Appeals, 226 SCRA 423, 425 (1993).

48
Civil Code, Art. 2229.

49
Civil Code, Art. 2208 (1) & (5).

5 G.R. No. 164401 June 25, 2008

LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners,

vs.
THE HONORABLE COURT OF APPEALS; THE HONORABLE PRESIDING JUDGE, Regional Trial Court,
Branch 11, Sindangan, Zamboanga Del Norte; THE REGIONAL TRIAL COURT SHERIFF, Branch 11,
Sindangan, Zamboanga Del Norte; THE CLERK OF COURT OF MANILA, as Ex-Officio Sheriff; and
LAMBERTO T. CHUA, respondents.

DECISION

VELASCO, JR., J.:

The Case

Before us is a petition for review under Rule 45, seeking to nullify and set aside the Decision 1 and Resolution
dated November 6, 2003 and July 6, 2004, respectively, of the Court of Appeals (CA) in CA-G.R. SP No. 75688.
The impugned CA Decision and Resolution denied the petition for certiorari interposed by petitioners assailing the
Resolutions2 dated November 6, 2002 and January 7, 2003, respectively, of the Regional Trial Court (RTC),
Branch 11 in Sindangan, Zamboanga Del Norte in Civil Case No. S-494, a suit for winding up of partnership
affairs, accounting, and recovery of shares commenced thereat by respondent Lamberto T. Chua.

The Facts

In 1977, Chua and Jacinto Sunga formed a partnership to engage in the marketing of liquefied petroleum gas. For
convenience, the business, pursued under the name, Shellite Gas Appliance Center (Shellite), was registered as a
sole proprietorship in the name of Jacinto, albeit the partnership arrangement called for equal sharing of the net
profit.

After Jacinto’s death in 1989, his widow, petitioner Cecilia Sunga, and married daughter, petitioner Lilibeth Sunga-
Chan, continued with the business without Chua’s consent. Chua’s subsequent repeated demands for accounting
and winding up went unheeded, prompting him to file on June 22, 1992 a Complaint for Winding Up of a
Partnership Affairs, Accounting, Appraisal and Recovery of Shares and Damages with Writ of Preliminary
Attachment, docketed as Civil Case No. S-494 of the RTC in Sindangan, Zamboanga del Norte and raffled to
Branch 11 of the court.

After trial, the RTC rendered, on October 7, 1997, judgment finding for Chua, as plaintiff a quo. The RTC’s
decision would subsequently be upheld by the CA in CA-G.R. CV No. 58751 and by this Court per its Decision
dated August 15, 2001 in G.R. No. 143340.3 The corresponding Entry of Judgment4 would later issue declaring the
October 7, 1997 RTC decision final and executory as of December 20, 2001. The fallo of the RTC’s decision
reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as follows:

(1) DIRECTING them to render an accounting in acceptable form under accounting procedures
and standards of the properties, assets, income and profits of [Shellite] since the time of
death of Jacinto L. Sunga, from whom they continued the business operations including all
businesses derived from [Shellite]; submit an inventory, and appraisal of all these properties,
assets, income, profits, etc. to the Court and to plaintiff for approval or disapproval;

(2) ORDERING them to return and restitute to the partnership any and all properties, assets,
income and profits they misapplied and converted to their own use and advantage that legally
pertain to the plaintiff and account for the properties mentioned in pars. A and B on pages 4-5 of
this petition as basis;

(3) DIRECTING them to restitute and pay to the plaintiff ½ shares and interest of the
plaintiff in the partnership of the listed properties, assets and good will in schedules A, B and C,
on pages 4-5 of the petition;

(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the
partnership from 1988 to May 30, 1992, when the plaintiff learned of the closure of the store the
sum of P35,000.00 per month, with legal rate of interest until fully paid;

(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities
pursuant to law, after delivering to the plaintiff all the ½ interest, shares, participation and equity in
the partnership, or the value thereof in money or money’s worth, if the properties are not physically
divisible;

(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and hold
them liable to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and,

(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorney’s [fee] and
P25,000.00 as litigation expenses.

NO special pronouncements as to COSTS.

 SO ORDERED.5 (Emphasis supplied.)

Via an Order6 dated January 16, 2002, the RTC granted Chua’s motion for execution. Over a month later, the
RTC, acting on another motion of Chua, issued an amended writ of execution. 7

It seems, however, that the amended writ of execution could not be immediately implemented, for, in an omnibus
motion of April 3, 2002, Chua, inter alia, asked the trial court to commission a certified public accountant (CPA) to
undertake the accounting work and inventory of the partnership assets if petitioners refuse to do it within the time
set by the court. Chua later moved to withdraw his motion and instead ask the admission of an accounting report
prepared by CPA Cheryl A. Gahuman. In the report under the heading, Computation of Claims,8 Chua’s aggregate
claim, arrived at using the compounding-of-interest method, amounted to PhP 14,277,344.94. Subsequently, the
RTC admitted and approved the computation of claims in view of petitioners’ failure and refusal, despite notice, to
appear and submit an accounting report on the winding up of the partnership on the scheduled hearings on April
29 and 30, 2002.9

After another lengthy proceedings, petitioners, on September 24, 2002, submitted their own CPA-certified
valuation and accounting report. In it, petitioners limited Chua’s entitlement from the winding up of partnership
affairs to an aggregate amount of PhP 3,154,736.65 only.10 Chua, on the other hand, submitted a new
computation,11 this time applying simple interest on the various items covered by his claim. Under this
methodology, Chua’s aggregate claim went down to PhP 8,733,644.75.

On November 6, 2002, the RTC issued a Resolution,12 rejecting the accounting report petitioners submitted, while
approving the new computation of claims Chua submitted. The fallo of the resolution reads:

WHEREFORE, premises considered, this Court resolves, as it is hereby resolved, that the Computation of
Claims submitted by the plaintiff dated October 15, 2002 amounting to P8,733,644.75 be APPROVED in
all respects as the final computation and accounting of the defendants’ liabilities in favor of the plaintiff in
the above-captioned case, DISAPPROVING for the purpose, in its entirety, the computation and
accounting filed by the defendants.

SO RESOLVED.13

Petitioners sought reconsideration, but their motion was denied by the RTC per its Resolution of January 7,
2003.14

In due time, petitioners went to the CA on a petition for certiorari15 under Rule 65, assailing the November 6, 2002
and January 7, 2003 resolutions of the RTC, the recourse docketed as CA-G.R. SP No. 75688.

The Ruling of the CA

As stated at the outset, the CA, in the herein assailed Decision of November 6, 2003, denied the petition for
certiorari, thus:

WHEREFORE, the foregoing considered, the Petition is hereby DENIED for lack of merit.

SO ORDERED.16

The CA predicated its denial action on the ensuing main premises:

1. Petitioners, by not appearing on the hearing dates, i.e., April 29 and 30, 2002, scheduled to consider Chua’s
computation of claims, or rendering, as required, an accounting of the winding up of the partnership, are deemed
to have waived their right to interpose any objection to the computation of claims thus submitted by Chua.

2. The 12% interest added on the amounts due is proper as the unwarranted keeping by petitioners of Chua’s
money passes as an involuntary loan and forbearance of money.
3. The reiterative arguments set forth in petitioners’ pleadings below were part of their delaying tactics. Petitioners
had come to the appellate court at least thrice and to this Court twice. Petitioners had more than enough time to
question the award and it is now too late in the day to change what had become final and executory.

Petitioners’ motion for reconsideration was rejected by the appellate court through the assailed Resolution 17 dated
July 6, 2004. Therein, the CA explained that the imposition of the 12% interest for forbearance of credit or money
was proper pursuant to paragraph 1 of the October 7, 1997 RTC decision, as the computation done by CPA
Gahuman was made in "acceptable form under accounting procedures and standards of the properties, assets,
income and profits of [Shellite]."18 Moreover, the CA ruled that the imposition of interest is not based on par. 3 of
the October 7, 1997 RTC decision as the phrase "shares and interests" mentioned therein refers not to an
imposition of interest for use of money in a loan or credit, but to a legal share or right. The appellate court also
held that the imposition of interest on the partnership assets falls under par. 2 in relation to par. 1 of the final RTC
decision as the restitution mentioned therein does not simply mean restoration but also reparation for the injury or
damage committed against the rightful owner of the property.

Finally, the CA declared the partnership assets referred to in the final decision as "liquidated claim" since the claim
of Chua is ascertainable by mathematical computation; therefore, interest is recoverable as an element of
damage.

The Issues

Hence, the instant petition with petitioners raising the following issues for our consideration:

I.

Whether or not the Regional Trial Court can [impose] interest on a final judgment of unliquidated claims.

II.

Whether or not the Sheriff can enforce the whole divisible obligation under judgment only against one
Defendant.

III.

Whether or not the absolute community of property of spouses Lilibeth Sunga Chan with her husband
Norberto Chan can be lawfully made to answer for the liability of Lilibeth Chan under the judgment. 19

Significant Intervening Events

In the meantime, pending resolution of the instant petition for review and even before the resolution by the CA of
its CA-G.R. SP No. 75688, the following relevant events transpired:

1. Following the RTC’s approval of Chua’s computation of claims in the amount of PhP 8,733,644.75, the
sheriff of Manila levied upon petitioner Sunga-Chan’s property located along Linao St., Paco, Manila,
covered by Transfer Certificate of Title (TCT) No. 208782,20 over which a building leased to the Philippine
National Bank (PNB) stood. In the auction sale of the levied lot, Chua, with a tender of PhP 8
million,21 emerged as the winning bidder.

2. On January 21, 2005, Chua moved for the issuance of a final deed of sale and a writ of possession. He
also asked the RTC to order the Registry of Deeds of Manila to cancel TCT No. 208782 and to issue a
new certificate. Despite petitioners’ opposition on the ground of prematurity, a final deed of sale 22 was
issued on February 16, 2005.

3. On February 18, 2005, Chua moved for the confirmation of the sheriff’s final deed of sale and for the
issuance of an order for the cancellation of TCT No. 208782. Petitioners again interposed an opposition in
which they informed the RTC that this Court had already granted due course to their petition for review on
January 31, 2005;
 4. On April 11, 2005, the RTC, via a Resolution, confirmed the sheriff’s final deed of sale, ordered the
Registry of Deeds of Manila to cancel TCT No. 208782, and granted a writ of possession 23 in favor of
Chua.

5. On May 3, 2005, petitioners filed before this Court a petition for the issuance of a temporary restraining
order (TRO). On May 24, 2005, the sheriff of Manila issued a Notice to Vacate 24 against petitioners,
compelling petitioners to repair to this Court anew for the resolution of their petition for a TRO.

6. On May 31, 2005, the Court issued a TRO,25 enjoining the RTC and the sheriff from enforcing the April
11, 2005 writ of possession and the May 24, 2005 Notice to Vacate. Consequently, the RTC issued an
Order26 on June 17, 2005, suspending the execution proceedings before it.

7. Owing to the clashing ownership claims over the leased Paco property, coupled with the filing of an
unlawful detainer suit before the Metropolitan Trial Court (MeTC) in Manila against PNB, the Court, upon
the bank’s motion, allowed, by Resolution27 dated April 26, 2006, the consignation of the monthly rentals
with the MeTC hearing the ejectment case.

The Court’s Ruling

The petition is partly meritorious.

First Issue: Interest Proper in Forbearance of Credit

Petitioners, citing Article 221328 of the Civil Code, fault the trial court for imposing, in the execution of its final
judgment, interests on what they considered as unliquidated claims. Among these was the claim for goodwill upon
which the RTC attached a monetary value of PhP 250,000. Petitioners also question the imposition of 12% interest
on the claimed monthly profits of PhP 35,000, reckoned from 1988 to October 15, 1992. To petitioners, the
imposable rate should only be 6% and computed from the finality of the RTC’s underlying decision, i.e., from
December 20, 2001.

Third on the petitioners’ list of unliquidated claims is the yet-to-be established value of the one-half partnership
share and interest adjudicated to Chua, which, they submit, must first be determined with reasonable certainty in a
judicial proceeding. And in this regard, petitioners, citing Eastern Shipping Lines, Inc. v. Court of Appeals,29 would
ascribe error on the RTC for adding a 12% per annum interest on the approved valuation of the one-half share of
the assets, inclusive of goodwill, due Chua.

Petitioners are partly correct.

For clarity, we reproduce the summary valuations and accounting reports on the computation of claims certified to
by the parties’ respective CPAs. Chua claimed the following:

A 50% share on assets (exclusive of

goodwill) at fair market value P
(Schedule 1) 1,613,550.00

B 50% share in the monetary value of

goodwill (P500,000 x 50%) 250,000.00

C Legal interest on share of assets

from June 1, 1992 to Oct. 15, 2002 at
12% interest per year (Schedule 2) 2,008,869.75
 D Unreceived profits from 1988 to
1992 and its corresponding interest
from Jan. 1, 1988 to Oct. 15, 2002
(Schedule 3) 4,761,225.00

E Damages 50,000.00

F Attorney’s fees 25,000.00

G Litigation fees 25,000.00

P
TOTAL AMOUNT 8,733,644.75

On the other hand, petitioners acknowledged the following to be due to Chua:

Total Assets – Schedule 1 P2,431,956.35

50% due to Lamberto Chua P1,215,978.16

Total Alleged Profit, Net of

Payments Made,
May 1992-Sch. 2 1,613,758.49

50% share in the monetary value of

goodwill
(500,000 x 50%) 250,000.00

Moral and Exemplary Damages 50,000.00

Attorney’s Fee 25,000.00

Litigation Fee 25,000.00

TOTAL AMOUNT P3,154,736.65

As may be recalled, the trial court admitted and approved Chua’s computation of claims amounting to PhP
8,733,644.75, but rejected that of petitioners, who came up with the figure of only PhP 3,154,736.65. We highlight
the substantial differences in the accounting reports on the following items, to wit: (1) the aggregate amount of the
partnership assets bearing on the 50% share of Chua thereon; (2) interests added on Chua’s share of the assets;
(3) amount of profits from 1988 through May 30, 1992, net of alleged payments made to Chua; and (4) interests
added on the amount entered as profits.

From the foregoing submitted valuation reports, there can be no dispute about the goodwill earned thru the years
by Shellite. In fact, the parties, by their own judicial admissions, agreed on the monetary value, i.e., PhP 250,000,
of this item. Clearly then, petitioners contradict themselves when they say that such amount of goodwill is without
basis. Thus, the Court is loathed to disturb the trial court’s approval of the amount of PhP 250,000, representing
the monetary value of the goodwill, to be paid to Chua.

Neither is the Court inclined to interfere with the CA’s conclusion as to the total amount of the partnership profit,
that is, PhP 1,855,000, generated for the period January 1988 through May 30, 1992, and the total partnership
assets of PhP 3,227,100, 50% of which, or PhP 1,613,550, pertains to Chua as his share. To be sure, petitioners
have not adduced adequate evidence to belie the above CA’s factual determination, confirmatory of the trial
court’s own. Needless to stress, it is not the duty of the Court, not being a trier of facts, to analyze or weigh all over
again the evidence or premises supportive of such determination, absent, as here, the most compelling and
cogent reasons.

This brings us to the question of the propriety of the imposition of interest and, if proper, the imposable rate of
interest applicable.

In Reformina v. Tomol, Jr.,30 the Court held that the legal interest at 12% per annum under Central Bank (CB)
Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for transactions
involving payment of indemnities in the concept of damages arising from default in the performance of obligations
in general and/or for money judgment not involving a loan or forbearance of money, goods, or credit, the
governing provision is Art. 2209 of the Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently provides:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.

The term "forbearance," within the context of usury law, has been described as a contractual obligation of a lender
or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt
then due and payable.31

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate,
as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money,
goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while the
6% per annum under Art. 2209 of the Civil Code applies "when the transaction involves the payment of
indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in
general,"32 with the application of both rates reckoned "from the time the complaint was filed until the [adjudged]
amount is fully paid."33In either instance, the reckoning period for the commencement of the running of the legal
interest shall be subject to the condition "that the courts are vested with discretion, depending on the equities of
each case, on the award of interest."34

Otherwise formulated, the norm to be followed in the future on the rates and application thereof is:

I. – When an obligation, regardless of its source, is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.
 II. – With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation breached consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.

2. When an obligation not constituting loans or forbearance of money is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to run only from
the date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.35

Guided by the foregoing rules, the award to Chua of the amount representing earned but unremitted profits, i.e..
PhP 35,000 monthly, from January 1988 until May 30, 1992, must earn interest at 6% per annum reckoned from
October 7, 1997, the rendition date of the RTC decision, until December 20, 2001, when the said decision became
final and executory. Thereafter, the total of the monthly profits inclusive of the add on 6% interest shall earn 12%
per annum reckoned from December 20, 2001 until fully paid, as the award for that item is considered to be, by
then, equivalent to a forbearance of credit. Likewise, the PhP 250,000 award, representing the goodwill value of
the business, the award of PhP 50,000 for moral and exemplary damages, PhP 25,000 attorney’s fee, and PhP
25,000 litigation fee shall earn 12% per annum from December 20, 2001 until fully paid.

Anent the impasse over the partnership assets, we are inclined to agree with petitioners’ assertion that Chua’s
share and interest on such assets partake of an unliquidated claim which, until reasonably determined, shall not
earn interest for him. As may be noted, the legal norm for interest to accrue is "reasonably determinable," not, as
Chua suggested and the CA declared, determinable by mathematical computation.

The Court has certainly not lost sight of the fact that the October 7, 1997 RTC decision clearly directed petitioners
to render an accounting, inventory, and appraisal of the partnership assets and then to wind up the partnership
affairs by restituting and delivering to Chua his one-half share of the accounted partnership assets. The directive
itself is a recognition that the exact share and interest of Chua over the partnership cannot be determined with
reasonable precision without going through with the inventory and accounting process. In fine, a liquidated claim
cannot validly be asserted without accounting. In net effect, Chua’s interest and share over the partnership asset,
exclusive of the goodwill, assumed the nature of a liquidated claim only after the trial court, through its November
6, 2002 resolution, approved the assets inventory and accounting report on such assets.

Considering that Chua’s computation of claim, as approved by the trial court, was submitted only on October 15,
2002, no interest in his favor can be added to his share of the partnership assets. Consequently, the computation
of claims of Chua should be as follows:

(1) 50% share on assets (exclusive of

goodwill) PhP
at fair market value 1,613,550.00
(2) 50% share in the monetary value of
goodwill
(PhP 500,000 x 50%) 250,000.00

(3) 12% interest on share of goodwill

from December 20, 2001 to October
15, 2000
[PhP 250,000 x 0.12 x 299/365 days] 24,575.34

(4) Unreceived profits from 1988 to

May 30, 1992 1,855,000.00

(5) 6% interest on unreceived profits

from January 1, 1988 to December 20,
200136 1,360,362.50

(6) 12% interest on unreceived profits

from December

20, 2001 to October 15, 2002

[PhP 3,215,362.50 x 12% x 299/365
days] 316,074.54

(7) Moral and exemplary damages 50,000.00

(8) Attorney’s fee 25,000.00

(9) Litigation fee 25,000.00

(10) 12% interest on moral and

exemplary damages,

attorney’s fee, and litigation fee from

December 20, 2001 to October 15,
2002
[PhP 100,000 x 12% x 299/365 days] 9,830.14

PhP
TOTAL AMOUNT 5,529,392.52

Second Issue: Petitioners’ Obligation Solidary

Petitioners, on the submission that their liability under the RTC decision is divisible, impugn the implementation of
the amended writ of execution, particularly the levy on execution of the absolute community property of spouses
petitioner Sunga-Chan and Norberto Chan. Joint, instead of solidary, liability for any and all claims of Chua is
obviously petitioners’ thesis.

Under the circumstances surrounding the case, we hold that the obligation of petitioners is solidary for several
reasons.

For one, the complaint of Chua for winding up of partnership affairs, accounting, appraisal, and recovery of shares
and damages is clearly a suit to enforce a solidary or joint and several obligation on the part of petitioners. As it
were, the continuance of the business and management of Shellite by petitioners against the will of Chua gave
rise to a solidary obligation, the acts complained of not being severable in nature. Indeed, it is well-nigh impossible
to draw the line between when the liability of one petitioner ends and the liability of the other starts. In this kind of
situation, the law itself imposes solidary obligation. Art. 1207 of the Civil Code thus provides:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, or that each of the latter is
bound to render, entire compliance with the prestation. There is solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity. (Emphasis
ours.)

Any suggestion that the obligation to undertake an inventory, render an accounting of partnership assets, and to
wind up the partnership affairs is divisible ought to be dismissed.

For the other, the duty of petitioners to remit to Chua his half interest and share of the total partnership assets
proceeds from petitioners’ indivisible obligation to render an accounting and inventory of such assets. The need for
the imposition of a solidary liability becomes all the more pronounced considering the impossibility of quantifying
how much of the partnership assets or profits was misappropriated by each petitioner.

And for a third, petitioners’ obligation for the payment of damages and attorney’s and litigation fees ought to be
solidary in nature, they having resisted in bad faith a legitimate claim and thus compelled Chua to litigate.

Third Issue: Community Property Liable

Primarily anchored as the last issue is the erroneous theory of divisibility of petitioners’ obligation and their joint
liability therefor. The Court needs to dwell on it lengthily.

Given the solidary liability of petitioners to satisfy the judgment award, respondent sheriff cannot really be faulted
for levying upon and then selling at public auction the property of petitioner Sunga-Chan to answer for the whole
obligation of petitioners. The fact that the levied parcel of land is a conjugal or community property, as the case
may be, of spouses Norberto and Sunga-Chan does not per se vitiate the levy and the consequent sale of the
property. Verily, said property is not among those exempted from execution under Section 13, 37 Rule 39 of the
Rules of Court.

And it cannot be overemphasized that the TRO issued by the Court on May 31, 2005 came after the auction sale
in question.

Parenthetically, the records show that spouses Sunga-Chan and Norberto were married on February 4, 1992, or
after the effectivity of the Family Code on August 3, 1988. Withal, their absolute community property may be held
liable for the obligations contracted by either spouse. Specifically, Art. 94 of said Code pertinently provides:

Art. 94. The absolute community of property shall be liable for:

(1) x x x x

(2) All debts and obligations contracted during the marriage by the designated administrator-spouse for the
benefit of the community, or by both spouses, or by one spouse with the consent of the other.
 (3) Debts and obligations contracted by either spouse without the consent of the other to the extent that
the family may have been benefited. (Emphasis ours.)

Absent any indication otherwise, the use and appropriation by petitioner Sunga-Chan of the assets of Shellite
even after the business was discontinued on May 30, 1992 may reasonably be considered to have been used for
her and her husband’s benefit.

It may be stressed at this juncture that Chua’s legitimate claim against petitioners, as readjusted in this disposition,
amounts to only PhP 5,529,392.52, whereas Sunga-Chan’s auctioned property which Chua acquired, as the
highest bidder, fetched a price of PhP 8 million. In net effect, Chua owes petitioner Sunga-Chan the amount of
PhP 2,470,607.48, representing the excess of the purchase price over his legitimate claims.

Following the auction, the corresponding certificate of sale dated January 15, 2004 was annotated on TCT No.
208782. On January 21, 2005, Chua moved for the issuance of a final deed of sale (1) to order the Registry of
Deeds of Manila to cancel TCT No. 208782; (2) to issue a new TCT in his name; and (3) for the RTC to issue a
writ of possession in his favor. And as earlier stated, the RTC granted Chua’s motion, albeit the Court restrained
the enforcement of the RTC’s package of orders via a TRO issued on May 31, 2005.

Therefore, subject to the payment by Chua of PhP 2,470,607.48 to petitioner Sunga-Chan, we affirm the RTC’s
April 11, 2005 resolution, confirming the sheriff’s final deed of sale of the levied property, ordering the Registry of
Deeds of Manila to cancel TCT No. 208782, and issuing a writ of possession in favor of Chua.

WHEREFORE, this petition is PARTLY GRANTED. Accordingly, the assailed decision and resolution of the CA in
CA-G.R. SP No. 75688 are hereby AFFIRMED with the following MODIFICATIONS:

(1) The Resolutions dated November 6, 2002 and January 7, 2003 of the RTC, Branch 11 in Sindangan,
Zamboanga Del Norte in Civil Case No. S-494, as effectively upheld by the CA, are AFFIRMED with the
modification that the approved claim of respondent Chua is hereby corrected and adjusted to cover only the
aggregate amount of PhP 5,529,392.52;

(2) Subject to the payment by respondent Chua of PhP 2,470,607.48 to petitioner Sunga-Chan, the Resolution
dated April 11, 2005 of the RTC, confirming the sheriff’s final deed of sale of the levied property, ordering the
Registry of Deeds of Manila to cancel TCT No. 208782, and issuing a writ of possession in favor of respondent
Chua, is AFFIRMED; and

The TRO issued by the Court on May 31, 2005 in the instant petition is LIFTED.

No pronouncement as to costs.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

ANTONIO T. CARPIO DANTE O. TINGA

 Associate Justice Associate Justice

ARTURO D. BRION
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Court’s Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby
certified that the conclusions in the above Decision were reached in consultation before the case was assigned to
the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

Footnotes

1
Rollo, pp. 36-45. Penned by Associate Justice Romeo A. Brawner (Chairperson, now retired) and
concurred in by Associate Justices Jose L. Sabio, Jr. and Jose C. Reyes, Jr.

2
Id. at 90-91. Penned by Judge Mariano S. Macias.

3
Reported in 363 SCRA 249.

4
Rollo, p. 69.

5
Id. at 38.

6
Id. at 72.

7
Id. at 73-76.

8
Id. at 78-81.

9
Id. at 77.

10
Id. at 40.

11
Id. at 85-89.
12
Id. at 90.

13
Id.

14
Id. at 91.

15
Id. at 93-112.

16
Supra note 1, at 45.

17
Rollo, pp. 47-55.

18
Id. at 52.

19
Id. at 175.

20
Id. at 304-307.

21
Id. at 92, Minutes of Sale.

22
Id. at 256-257.

23
Id. at 238-240.

24
Id. at 264-265.

25
Id. at 266-267.

26
Id. at 276.

27
Id. at 446A-446B.

28
Art. 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand
can be established with reasonable certainty.

29
G.R. No. 97412, July 12, 1994, 234 SCRA 78.

30
No. L-59096, October 11, 1985, 139 SCRA 260.

31
Eastern Shipping Lines, Inc., supra note 29, at 93-94; citing Black’s Law Dictionary 644 (1990).

32
Id. at 94.

33
Id. at 92; citing Florendo v. Ruiz, G.R. No. 60225, May 8, 1992, 208 SCRA 542; Reformina, supra note
30.

34
Id. at 94-95.

35
Id. at 95-97.

36
Interest computed as follows:
 Intere
st Period Interest

(month
Year Principal Rate s) Earned Balance

420,000.0 351,750.0 771,750.0

1988 0 6% 167.5 0 0

420,000.0 326,550.0 746,550.0

1989 0 6% 155.5 0 0

420,000.0 301,350.0 721,350.0

1990 0 6% 143.5 0 0

420,000.0 276,150.0 696,150.0

1991 0 6% 131.5 0 0

175,000.0 104,562.5 279,562.5

1992 0 6% 119.5 0 0

Total 1,855,000 1,360,362

s .00 .50

PhP
TOTAL (Principal plus Interest), as of 3,215,362
December 20, 2001 .50

37
SEC. 13. Property exempt from execution.––Except as otherwise expressly provided by law, the
following property, and no other, shall be exempt from execution:

(a) The judgment obligor’s family home as provided by law, or the homestead in which he resides,
and the land necessarily used in connection therewith;

(b) Ordinary tools and implements personally used by him in his trade, employment or livelihood;

(c) Three horses x x x or other beasts of burden x x x;

(d) His necessary clothing and articles for ordinary personal use, excluding jewelry;

(e) Household furniture and utensils necessary for housekeeping x x x;

 (f) Provisions for individual or family use sufficient for four months;

(g) The professional libraries and equipment of judges, lawyers, physicians x x x;

(h) One fishing boat and accessories x x x;

(i) So much of the salaries, wages, or earnings of the judgment obligor x x x;

(j) Lettered gravestones;

(k) Monies, benefits, privileges, or annuities accruing or x x x growing out of any life insurance;

(l) The right to receive legal support, or money or property obtained as such support, or any
pension or gratuity from the Government;

(m) Properties specially exempted by law.

But no article or species of property mentioned in this section shall be exempt from execution
issued upon a judgment recovered for its price or upon a judgment of foreclosure of a mortgage
thereon.

6 G.R. No. 126881 October 3, 2000

HEIRS OF TAN ENG KEE, petitioners,

vs.
COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President TAN ENG
LAY,respondents.

DE LEON, JR., J.:

In this petition for review on certiorari, petitioners pray for the reversal of the Decision dated March 13, 1996 of the
1

former Fifth Division of the Court of Appeals in CA-G.R. CV No. 47937, the dispositive portion of which states:
2

THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the complaint
dismissed.

The facts are:

Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law spouse of the
decedent, joined by their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio, collectively known as
herein petitioners HEIRS OF TAN ENG KEE, filed suit against the decedent's brother TAN ENG LAY on February
19, 1990. The complaint, docketed as Civil Case No. 1983-R in the Regional Trial Court of Baguio City was for
3

accounting, liquidation and winding up of the alleged partnership formed after World War II between Tan Eng Kee
and Tan Eng Lay. On March 18, 1991, the petitioners filed an amended complaint impleading private respondent
4

herein BENGUET LUMBER COMPANY, as represented by Tan Eng Lay. The amended complaint was admitted by
the trial court in its Order dated May 3, 1991. 5

The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan Eng Lay,
pooling their resources and industry together, entered into a partnership engaged in the business of selling lumber
and hardware and construction supplies. They named their enterprise "Benguet Lumber" which they jointly
managed until Tan Eng Kee's death. Petitioners herein averred that the business prospered due to the hard work
and thrift of the alleged partners. However, they claimed that in 1981, Tan Eng Lay and his children caused the
conversion of the partnership "Benguet Lumber" into a corporation called "Benguet Lumber Company." The
incorporation was purportedly a ruse to deprive Tan Eng Kee and his heirs of their rightful participation in the
profits of the business. Petitioners prayed for accounting of the partnership assets, and the dissolution, winding up
and liquidation thereof, and the equal division of the net assets of Benguet Lumber.

After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment on April 12, 1995, to wit:
6

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

a) Declaring that Benguet Lumber is a joint venture which is akin to a particular partnership;

b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or partners in a
business venture and/or particular partnership called Benguet Lumber and as such should share in the
profits and/or losses of the business venture or particular partnership;

c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet Lumber Co.
Inc. and as such the heirs or legal representatives of the deceased Tan Eng Kee have a legal right to
share in said assets;

d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as partner in a
particular partnership have descended to the plaintiffs who are his legal heirs.

e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of Benguet Lumber
Company Inc. to render an accounting of all the assets of Benguet Lumber Company, Inc. so the plaintiffs
know their proper share in the business;

f) Ordering the appointment of a receiver to preserve and/or administer the assets of Benguet Lumber
Company, Inc. until such time that said corporation is finally liquidated are directed to submit the name of
any person they want to be appointed as receiver failing in which this Court will appoint the Branch Clerk
of Court or another one who is qualified to act as such.

g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in filing the instant
case.

h) Dismissing the counter-claim of the defendant for lack of merit.

SO ORDERED.

Private respondent sought relief before the Court of Appeals which, on March 13, 1996, rendered the assailed
decision reversing the judgment of the trial court. Petitioners' motion for reconsideration was denied by the Court
7

of Appeals in a Resolution dated October 11, 1996.

8

Hence, the present petition.

As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and Wilborn Tan
for the use of allegedly falsified documents in a judicial proceeding. Petitioners complained that Exhibits "4" to "4-
U" offered by the defendants before the trial court, consisting of payrolls indicating that Tan Eng Kee was a mere
employee of Benguet Lumber, were fake, based on the discrepancy in the signatures of Tan Eng Kee. They also
filed Criminal Cases Nos. 78857-78870 against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all
surnamed Tan, for alleged falsification of commercial documents by a private individual. On March 20, 1999, the
Municipal Trial Court of Baguio City, Branch 1, wherein the charges were filed, rendered judgment dismissing the
9

cases for insufficiency of evidence.

In their assignment of errors, petitioners claim that:

 I

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP
BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS
NO FIRM ACCOUNT; (B) THERE WAS NO FIRM LETTERHEADS SUBMITTED AS EVIDENCE; (C)
THERE WAS NO CERTIFICATE OF PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO
PROFITS AND LOSSES; AND (E) THERE WAS NO TIME FIXED FOR THE DURATION OF THE
PARTNERSHIP (PAGE 13, DECISION).

II

THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING

TESTIMONY OF RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A SOLE
PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY AN EMPLOYEE THEREOF.

III

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING FACTS WHICH
WERE DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT SUPPORT THE EXISTENCE
OF A PARTNERSHIP JUST BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP DULY
RECORDED BEFORE THE SECURITIES AND EXCHANGE COMMISSION:

a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE
BENGUET LUMBER COMPOUND;

b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE EMPLOYEES OF
BENGUET LUMBER;

c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE EMPLOYEES
THEREIN;

d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING THE PRICES OF
STOCKS TO BE SOLD TO THE PUBLIC; AND

e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS TO THE
SUPPLIERS (PAGE 18, DECISION).

IV

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP
JUST BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO TAN AND VERONICA CHOI,
TOGETHER WITH THEIR WITNESS BEATRIZ TANDOC, ADMITTED THAT THEY DO NOT KNOW
WHEN THE ESTABLISHMENT KNOWN IN BAGUIO CITY AS BENGUET LUMBER WAS STARTED AS A
PARTNERSHIP (PAGE 16-17, DECISION).

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP
BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE THE PRESENT
CAPITAL OR ASSETS OF BENGUET LUMBER IS DEFINITELY MORE THAN P3,000.00 AND AS SUCH
THE EXECUTION OF A PUBLIC INSTRUMENT CREATING A PARTNERSHIP SHOULD HAVE BEEN
MADE AND NO SUCH PUBLIC INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17,
DECISION).

As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not be disturbed
on appeal if such are supported by the evidence. Our jurisdiction, it must be emphasized, does not include review
10

of factual issues. Thus:

 Filing of petition with Supreme Court. — A party desiring to appeal by certiorari from a judgment or final
order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts
whenever authorized by law, may file with the Supreme Court a verified petition for review on
certiorari. The petition shall raise only questions of law which must be distinctly set forth. [emphasis
11

supplied]

Admitted exceptions have been recognized, though, and when present, may compel us to analyze the evidentiary
basis on which the lower court rendered judgment. Review of factual issues is therefore warranted:

(1) when the factual findings of the Court of Appeals and the trial court are contradictory;

(2) when the findings are grounded entirely on speculation, surmises, or conjectures;

(3) when the inference made by the Court of Appeals from its findings of fact is manifestly mistaken,
absurd, or impossible;

(4) when there is grave abuse of discretion in the appreciation of facts;

(5) when the appellate court, in making its findings, goes beyond the issues of the case, and such findings
are contrary to the admissions of both appellant and appellee;

(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;

(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered, will justify
a different conclusion;

(8) when the findings of fact are themselves conflicting;

(9) when the findings of fact are conclusions without citation of the specific evidence on which they are
based; and

(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence but such
findings are contradicted by the evidence on record. 12

In reversing the trial court, the Court of Appeals ruled, to wit:

We note that the Court a quo over extended the issue because while the plaintiffs mentioned only the
existence of a partnership, the Court in turn went beyond that by justifying the existence of a joint venture.

When mention is made of a joint venture, it would presuppose parity of standing between the parties,
equal proprietary interest and the exercise by the parties equally of the conduct of the business, thus:

xxx xxx xxx

We have the admission that the father of the plaintiffs was not a partner of the Benguet Lumber before the
war. The appellees however argued that (Rollo, p. 104; Brief, p. 6) this is because during the war, the
entire stocks of the pre-war Benguet Lumber were confiscated if not burned by the Japanese. After the
war, because of the absence of capital to start a lumber and hardware business, Lay and Kee pooled the
proceeds of their individual businesses earned from buying and selling military supplies, so that the
common fund would be enough to form a partnership, both in the lumber and hardware business. That Lay
and Kee actually established the Benguet Lumber in Baguio City, was even testified to by witnesses.
Because of the pooling of resources, the post-war Benguet Lumber was eventually established. That the
father of the plaintiffs and Lay were partners, is obvious from the fact that: (1) they conducted the affairs of
the business during Kee's lifetime, jointly, (2) they were the ones giving orders to the employees, (3) they
were the ones preparing orders from the suppliers, (4) their families stayed together at the Benguet
Lumber compound, and (5) all their children were employed in the business in different capacities.
 xxx xxx xxx

It is obvious that there was no partnership whatsoever. Except for a firm name, there was no firm account,
no firm letterheads submitted as evidence, no certificate of partnership, no agreement as to profits and
losses, and no time fixed for the duration of the partnership. There was even no attempt to submit an
accounting corresponding to the period after the war until Kee's death in 1984. It had no business book, no
written account nor any memorandum for that matter and no license mentioning the existence of a
partnership [citation omitted].

Also, the exhibits support the establishment of only a proprietorship. The certification dated March 4, 1971,
Exhibit "2", mentioned co-defendant Lay as the only registered owner of the Benguet Lumber and
Hardware. His application for registration, effective 1954, in fact mentioned that his business started in
1945 until 1985 (thereafter, the incorporation). The deceased, Kee, on the other hand, was merely an
employee of the Benguet Lumber Company, on the basis of his SSS coverage effective 1958, Exhibit "3".
In the Payrolls, Exhibits "4" to "4-U", inclusive, for the years 1982 to 1983, Kee was similarly listed only as
an employee; precisely, he was on the payroll listing. In the Termination Notice, Exhibit "5", Lay was
mentioned also as the proprietor.

xxx xxx xxx

We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in any form, but
when an immovable is constituted, the execution of a public instrument becomes necessary. This is
equally true if the capitalization exceeds P3,000.00, in which case a public instrument is also necessary,
and which is to be recorded with the Securities and Exchange Commission. In this case at bar, we can
easily assume that the business establishment, which from the language of the appellees, prospered
(pars. 5 & 9, Complaint), definitely exceeded P3,000.00, in addition to the accumulation of real properties
and to the fact that it is now a compound. The execution of a public instrument, on the other hand, was
never established by the appellees.

And then in 1981, the business was incorporated and the incorporators were only Lay and the members of
his family. There is no proof either that the capital assets of the partnership, assuming them to be in
existence, were maliciously assigned or transferred by Lay, supposedly to the corporation and since then
have been treated as a part of the latter's capital assets, contrary to the allegations in pars. 6, 7 and 8 of
the complaint.

These are not evidences supporting the existence of a partnership:

1) That Kee was living in a bunk house just across the lumber store, and then in a room in the bunk house
in Trinidad, but within the compound of the lumber establishment, as testified to by Tandoc; 2) that both
Lay and Kee were seated on a table and were "commanding people" as testified to by the son, Elpidio Tan;
3) that both were supervising the laborers, as testified to by Victoria Choi; and 4) that Dionisio Peralta was
supposedly being told by Kee that the proceeds of the 80 pieces of the G.I. sheets were added to the
business.

Partnership presupposes the following elements [citation omitted]: 1) a contract, either oral or written.
However, if it involves real property or where the capital is P3,000.00 or more, the execution of a contract
is necessary; 2) the capacity of the parties to execute the contract; 3) money property or industry
contribution; 4) community of funds and interest, mentioning equality of the partners or one having a
proportionate share in the benefits; and 5) intention to divide the profits, being the true test of the
partnership. The intention to join in the business venture for the purpose of obtaining profits thereafter to
be divided, must be established. We cannot see these elements from the testimonial evidence of the
appellees.

As can be seen, the appellate court disputed and differed from the trial court which had adjudged that TAN ENG
KEE and TAN ENG LAY had allegedly entered into a joint venture. In this connection, we have held that whether a
partnership exists is a factual matter; consequently, since the appeal is brought to us under Rule 45, we cannot
entertain inquiries relative to the correctness of the assessment of the evidence by the court a quo. Inasmuch as
13
the Court of Appeals and the trial court had reached conflicting conclusions, perforce we must examine the record
to determine if the reversal was justified.

The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet Lumber. A contract
of partnership is defined by law as one where:

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

Two or more persons may also form a partnership for the exercise of a profession. 14

Thus, in order to constitute a partnership, it must be established that (1) two or more persons bound
themselves to contribute money, property, or industry to a common fund, and (2) they intend to divide the
profits among themselves. The agreement need not be formally reduced into writing, since statute allows
15

the oral constitution of a partnership, save in two instances: (1) when immovable property or real rights are
contributed, and (2) when the partnership has a capital of three thousand pesos or more. In both cases, a
16 17

public instrument is required. An inventory to be signed by the parties and attached to the public
18

instrument is also indispensable to the validity of the partnership whenever immovable property is
contributed to the partnership. 19

The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture, which it said is akin
to a particular partnership. A particular partnership is distinguished from a joint adventure, to wit:
20

(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal partnership,
with no firm name and no legal personality. In a joint account, the participating merchants can transact
business under their own name, and can be individually liable therefor.

(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the
business of pursuing to a successful termination may continue for a number of years; a partnership
generally relates to a continuing business of various transactions of a certain kind.21

A joint venture "presupposes generally a parity of standing between the joint co-ventures or partners, in which
each party has an equal proprietary interest in the capital or property contributed, and where each party exercises
equal rights in the conduct of the business." Nonetheless, in Aurbach, et. al. v. Sanitary Wares Manufacturing
22

Corporation, et. al., we expressed the view that a joint venture may be likened to a particular partnership, thus:
23

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

Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of partnership
but there is none. The alleged partnership, though, was never formally organized. In addition, petitioners point out
that the New Civil Code was not yet in effect when the partnership was allegedly formed sometime in 1945,
although the contrary may well be argued that nothing prevented the parties from complying with the provisions of
the New Civil Code when it took effect on August 30, 1950. But all that is in the past. The net effect, however, is
that we are asked to determine whether a partnership existed based purely on circumstantial evidence. A review of
the record persuades us that the Court of Appeals correctly reversed the decision of the trial court. The evidence
presented by petitioners falls short of the quantum of proof required to establish a partnership.

Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could have
expounded on the precise nature of the business relationship between them. In the absence of evidence, we
cannot accept as an established fact that Tan Eng Kee allegedly contributed his resources to a common fund for
the purpose of establishing a partnership. The testimonies to that effect of petitioners' witnesses is directly
controverted by Tan Eng Lay. It should be noted that it is not with the number of witnesses wherein preponderance
lies; the quality of their testimonies is to be considered. None of petitioners' witnesses could suitably account for
24

the beginnings of Benguet Lumber Company, except perhaps for Dionisio Peralta whose deceased wife was
related to Matilde Abubo. He stated that when he met Tan Eng Kee after the liberation, the latter asked the former
25

to accompany him to get 80 pieces of G.I. sheets supposedly owned by both brothers. Tan Eng Lay, however,
26

denied knowledge of this meeting or of the conversation between Peralta and his brother. Tan Eng Lay
27

consistently testified that he had his business and his brother had his, that it was only later on that his said brother,
Tan Eng Kee, came to work for him. Be that as it may, co-ownership or co-possession (specifically here, of the G.I.
sheets) is not an indicium of the existence of a partnership. 28

Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in existence,
Tan Eng Kee never asked for an accounting. The essence of a partnership is that the partners share in the profits
and losses. Each has the right to demand an accounting as long as the partnership exists. We have allowed a
29 30

scenario wherein "[i]f excellent relations exist among the partners at the start of the business and all the partners
are more interested in seeing the firm grow rather than get immediate returns, a deferment of sharing in the profits
is perfectly plausible." But in the situation in the case at bar, the deferment, if any, had gone on too long to be
31

plausible. A person is presumed to take ordinary care of his concerns. As we explained in another case:
32

In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second place, she did not
furnish any help or intervention in the management of the theatre. In the third place, it does not appear
that she has even demanded from defendant any accounting of the expenses and earnings of the
business. Were she really a partner, her first concern should have been to find out how the business was
progressing, whether the expenses were legitimate, whether the earnings were correct, etc. She was
absolutely silent with respect to any of the acts that a partner should have done; all that she did was to
receive her share of P3,000.00 a month, which cannot be interpreted in any manner than a payment for
the use of the premises which she had leased from the owners. Clearly, plaintiff had always acted in
accordance with the original letter of defendant of June 17, 1945 (Exh. "A"), which shows that both parties
considered this offer as the real contract between them. [emphasis supplied]
33

A demand for periodic accounting is evidence of a partnership. During his lifetime, Tan Eng Kee appeared never
34

to have made any such demand for accounting from his brother, Tang Eng Lay.

This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of payrolls purporting to
show that Tan Eng Kee was an ordinary employee of Benguet Lumber, as it was then called. The authenticity of
these documents was questioned by petitioners, to the extent that they filed criminal charges against Tan Eng Lay
and his wife and children. As aforesaid, the criminal cases were dismissed for insufficiency of evidence. Exhibits
"4" to "4-U" in fact shows that Tan Eng Kee received sums as wages of an employee. In connection therewith,
Article 1769 of the Civil Code provides:

In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as
to third persons;

(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or
co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property which the returns are derived;
 (4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a
partner in the business, but no such inference shall be drawn if such profits were received in payment:

(a) As a debt by installment or otherwise;

(b) As wages of an employee or rent to a landlord;

(c) As an annuity to a widow or representative of a deceased partner;

(d) As interest on a loan, though the amount of payment vary with the profits of the business;

(e) As the consideration for the sale of a goodwill of a business or other property by installments or
otherwise.

In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an employee, not a partner.
Even if the payrolls as evidence were discarded, petitioners would still be back to square one, so to speak, since
they did not present and offer evidence that would show that Tan Eng Kee received amounts of money allegedly
representing his share in the profits of the enterprise. Petitioners failed to show how much their father, Tan Eng
Kee, received, if any, as his share in the profits of Benguet Lumber Company for any particular period. Hence,
they failed to prove that Tan Eng Kee and Tan Eng Lay intended to divide the profits of the business between
themselves, which is one of the essential features of a partnership.

Nevertheless, petitioners would still want us to infer or believe the alleged existence of a partnership from this set
of circumstances: that Tan Eng Lay and Tan Eng Kee were commanding the employees; that both were
supervising the employees; that both were the ones who determined the price at which the stocks were to be sold;
and that both placed orders to the suppliers of the Benguet Lumber Company. They also point out that the families
of the brothers Tan Eng Kee and Tan Eng Lay lived at the Benguet Lumber Company compound, a privilege not
extended to its ordinary employees.

However, private respondent counters that:

Petitioners seem to have missed the point in asserting that the above enumerated powers and privileges
granted in favor of Tan Eng Kee, were indicative of his being a partner in Benguet Lumber for the following
reasons:

(i) even a mere supervisor in a company, factory or store gives orders and directions to his subordinates.
So long, therefore, that an employee's position is higher in rank, it is not unusual that he orders around
those lower in rank.

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

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

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

In the instant case, we find private respondent's arguments to be well-taken. Where circumstances taken singly
may be inadequate to prove the intent to form a partnership, nevertheless, the collective effect of these
circumstances may be such as to support a finding of the existence of the parties' intent. Yet, in the case at
36

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

There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of. Hence, the
petition must fail.

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

SO ORDERED.

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

Footnotes:

1
Rollo, pp. 129-147.

2
Justice Bernardo LL. Salas, ponente, with Justices Pedro A. Ramirez and Ma. Alicia Austria-Martinez,
concurring.

3
Records, pp. 1-4.

4
Records, pp. 123-126.

5
Records, p. 130.

6
Records, pp. 632-647.

7
Rollo, pp. 148-159.

8
Rollo, p. 173.

9
Rollo, pp. 412-419.

Brusas v. Court of Appeals, 313 SCRA 176, 188 (1999); Guerrero v. Court of Appeals, 285 SCRA 670,
10

678 (1998); Atillo III v. Court of Appeals, 266 SCRA 596, 605-606 (1997); Mallari v. Court of Appeals, 265
SCRA 456, 461 (1996).

11
1997 RULES OF CIVIL PROCEDURES, Rule 45, Sec. 1.

12
Fuentes v. Court of Appeals, 268 SCRA 703, 708-709 (1997).

13
Cf . Alicbusan v. Court of Appeals, 269 SCRA 336, 340-341 (1997).

14
CIVIL CODE, Art. 1767.
 15
Yulo v. Yang Chiao Seng, 106 Phil. 110, 116 (1959).

16
CIVIL CODE, Art. 1771.

17
CIVIL CODE, Art. 1772.

18
Note, however, Article 1768 of the Civil Code which provides: "The partnership has a juridical personality
separate and distinct from that of each of the partners, even in case of failure to comply with the
requirements of Article 1772, first paragraph."

19
CIVIL CODE, Art. 1773.

"A particular partnership has for its object determinate things, their use or fruits, or a specific
20

undertaking, or the exercise of a profession or vocation." (CIVIL CODE, Art. 1783)

21
V.E. PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED 546 (13th ed., 1995).

22
Sevilla v. Court of Appeals, 160 SCRA 171, 181 (1988).

23
180 SCRA 130, 146-147 (1989).

24
REVISED RULES ON EVIDENCE, Rule 133, Sec. 1.

25
TSN, June 23, 1990, p. 9.

26
TSN, January 28, 1993, p. 85.

27
TSN, July 1, 1993, p. 13; TSN, July 8, 1993, p. 4.

28
Navarro v. Court of Appeals, 222 SCRA 675, 679 (1993); CIVIL CODE, Art. 1769.

29
Moran v. Court of Appeals, 133 SCRA 88, 95 (1984).

30
Fue Lung v. Intermediate Appellate Court, 169 SCRA 746, 755 (1989).

31
Id., at 754.

32
1997 RULES OF CIVIL PROCEDURE, Rule 131, Sec. 3, Par. (d).

33
Yulo v. Yang Chiao Seng, 106 Phil. 110, 117 (1959).

34
Estanislao, Jr. vs. Court of Appeals, 160 SCRA 830, 837 (1988).

35
Private Respondent's Memorandum, Rollo, p. 390.

36
Evangelista, et. al. v. Collector of Internal Revenue, et al., 102 Phil. 141, 146 (1957).

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

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

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 partner, 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, which disposed as follows:
1

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 plaintiff's 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 for 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 attorney's 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 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 respondents filed a collection
suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was
brought against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing
Corporation" was a nonexistent corporation as shown by a Certification from the Securities and Exchange
Commission. On September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff
5

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. The trial court maintained the Writ, and upon motion of private respondent, ordered the sale of the
6

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 in Civil Case No. 1492-MN
9

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. The Compromise Agreement provided:
10

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

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

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

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint
liability could be presumed from the equal distribution of the profit and loss. 21

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and may
thus be held liable as a such for the fishing nets and floats purchased by and for the use of the partnership. The
appellate court ruled:

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

Hence, petitioner brought this recourse before this Court. 14

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 LIM'S GOODS.

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

This Court's Ruling

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:

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

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

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

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

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

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

(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry docking and
other expenses for the boats would be shouldered by Chua and Yao;
 (6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and Chua
entrusted the ownership papers of two other boats, Chua's FB Lady Anne Mel and Yao's FB Tracy
to Lim Tong Lim.

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

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

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

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a
fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus
Lim who was petitioner's brother. In their Compromise Agreement, they subsequently revealed their intention to
pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss.
These boats, the purchase and the repair of which were financed with borrowed money, fell under the term
"common fund" under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an
intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the
boats would be divided equally among them also shows that they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets
and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of
their business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not in
the acquisition of the aforesaid equipment, without which the business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the
fishing business. They purchased the boats, which constituted the main assets of the partnership, and they agreed
that the proceeds from the sales and operations thereof would be divided among them.

We stress that under Rule 45, a petition for review like the present case should involve only questions of law.
Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that
the present action is embraced by one of the exceptions to the rule. In assailing the factual findings of the two
16

lower courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.

Compromise Agreement

Not the Sole Basis of Partnership

Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership was the
Compromise Agreement. He also claims that the settlement was entered into only to end the dispute among them,
but not to adjudicate their preexisting rights and obligations. His arguments are baseless. The Agreement was but
an embodiment of the relationship extant among the parties prior to its execution.

A proper adjudication of claimants' rights mandates that courts must review and thoroughly appraise all relevant
facts. Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In
implying that the lower courts have decided on the basis of one piece of document alone, petitioner fails to
appreciate that the CA and the RTC delved into the history of the document and explored all the possible
consequential combinations in harmony with law, logic and fairness. Verily, the two lower courts' factual findings
mentioned above nullified petitioner's argument that the existence of a partnership was based only on the
Compromise Agreement.

Petitioner Was a Partner,

 Not a Lessor

We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua and Yao, not a
partner in the fishing venture. His argument allegedly finds support in the Contract of Lease and the registration
papers showing that he was the owner of the boats, including F/B Lourdes where the nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his own
boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. No
lessor would do what petitioner did. Indeed, his consent to the sale proved that there was a preexisting partnership
among all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which
debts were undertaken in order to finance the acquisition and the upgrading of the vessels which would be used in
their fishing business. The sale of the boats, as well as the division among the three of the balance remaining after
the payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own
property but an asset of the partnership. It is not uncommon to register the properties acquired from a loan in the
name of the person the lender trusts, who in this case is the petitioner himself. After all, he is the brother of the
creditor, Jesus Lim.

We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his property to pay a debt he did
not incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao,
and not to him. Again, we disagree.

Sec. 21 of the Corporation Code of the Philippines provides:

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

One who assumes an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from
denying its corporate existence. "The reason behind this doctrine is obvious — an unincorporated association has
no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation
as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act
or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting
or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered into or for other acts performed as such agent. 17

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first
instance, an unincorporated association, which represented itself to be a corporation, will be estopped from
denying its corporate capacity in a suit against it by a third person who relied in good faith on such representation.
It cannot allege lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue
of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or
took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it
sold. The only question here is whether petitioner should be held jointly liable with Chua and Yao. Petitioner
18

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 rapier's thrust.
Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance
and chief enemy, deserves scant consideration from courts. There should be no vested rights in
technicalities.

Third Issue:

Validity of Attachment

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

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

Melo, Purisima and Gonzaga-Reyes, JJ., concur.

Vitug, J., pls. see concurring opinion.

Separate Opinions

VITUG, J., concurring opinion;

I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice Artemio V. Panganiban,
particularly the finding that Antonio Chua, Peter Yao and petitioner Lim Tong Lim have incurred the liabilities of
general partners. I merely would wish to elucidate a bit, albeit briefly, the liability of partners in a general
partnership.

When a person by his act or deed represents himself as a partner in an existing partnership or with one or more
persons not actual partners, he is deemed an agent of such persons consenting to such representation and in the
same manner, if he were a partner, with respect to persons who rely upon the representation. The association
1

formed by Chua, Yao and Lim, should be, as it has been deemed, a de facto partnership with all the consequent
obligations for the purpose of enforcing the rights of third persons. The liability of general partners (in a general
partnership as so opposed to a limited partnership) is laid down in Article 1816 which posits that all partners shall
2

be liable pro rata beyond the partnership assets for all the contracts which may have been entered into in its
name, under its signature, and by a person authorized to act for the partnership. This rule is to be construed along
with other provisions of the Civil Code which postulate that the partners can be held solidarily liable with the
partnership specifically in these instances — (1) where, by any wrongful act or omission of any partner acting in
the ordinary course of the business of the partnership or with the authority of his co-partners, loss or injury is
caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable
therefor to the same extent as the partner so acting or omitting to act; (2) where one partner acting within the
scope of his apparent authority receives money or property of a third person and misapplies it; and (3) where the
partnership in the course of its business receives money or property of a third person and the money or property
so received is misapplied by any partner while it is in the custody of the partnership — consistently with the rules
3

on the nature of civil liability in delicts and quasi-delicts.

Footnotes

1 Penned by J. Portia Alino-Hormachuelos; with the concurrence of JJ. Buenaventura J.

Guerrero, Division chairman, and Presbitero J. Velasco Jr., member.

2 CA Decision, p. 12; rollo, p. 36.

3 RTC Decision penned by Judge Maximiano C. Asuncion. pp. 11-12; rollo, pp. 48-49.

4 CA Decision, pp. 1-2; rollo, pp. 25-26.

5 Ibid., p. 2; rollo, p. 26.

6 RTC Decision, p. 2; Rollo, p. 39.

7 Petition, p. 4; rollo, p. 11.

8 Ibid.

9 RTC Decision, pp. 6-7; rollo, pp. 43-44.

10 Respondent's Memorandum, pp. 5, 8; rollo, pp. 107, 109.

11 CA Decision, pp. 9-10; rollo, pp. 33-34.

12 RTC Decision, p. 10; rollo, p. 47.

13 Ibid.

14 This case was deemed submitted for resolution on August 10, 1999, when this Court
received petitioner's Memorandum signed by Atty. Roberto A. Abad. Respondent's
Memorandum signed by Atty. Benjamin S. Benito was filed earlier on July 27, 1999.
15 Nos. 1-7 are from CA Decision p. 9 (rollo, p. 33); No. 8 is from RTC Decision, p. 5 (rollo,
p. 42); and No. 9 is from CA Decision, pp. 9-10 (rollo, pp. 33-34).

16 See Fuentes v. Court of Appeals, 268 SCRA 703, February 26, 1997.

17 Salvatierra v. Garlitos, 103 SCRA 757, May 23, 1958, per Felix J.; citing Fay v. Noble, 7
Cushing [Mass.] 188.

18 The liability is joint if it is not specifically stated that it is solidary," Maramba v. Lozano,
126 Phil 833, June 29, 1967, per Makalintal, J. See also Article 1207 of the Civil Code,
which provides: "The concurrence of two or more creditors or of two or more debtors in one
[and] the same obligation does not imply that each one of the former has a right to
demand, or that each one of the latter is bound to render, entire compliance with the
prestation. There is a solidary liability only when the obligation expressly so states, or when
the law or the nature of the obligation requires solidarity.

19 16 Phil. 315, July 26, 1910, per Moreland, J.

VITUG, J., concurring opinion;

1 Art. 1825. When a person, by words spoken or written or by conduct, represents himself,
or consents to another representing him to anyone, as a partner in an existing partnership
or with one or more persons not actual partners, he is liable to any such persons to whom
such representation has been made, who has, on the faith of such representation, given
credit to the actual or apparent partnership, and if he has made such representation or
consented to its being made in a public manner he is liable to such person, whether the
representation has or has not been made or communicated to such person so giving credit
by or with the knowledge of the apparent partner making the representation or consenting
to its being made:

(1) When a partnership liability results, he is liable as though he were an actual member of
the partnership;

(2) When no partnership liability results, he is liable pro rata with the other persons, if any,
so consenting to the contract or representation as to incur liability, otherwise separately.

When a person has been thus represented to be a partner in an existing partnership, or

with one or more persons not actual partners, he is an agent of the persons consenting to
such representation to bind them to the same extent and in the same manner as though he
were a partner in fact, with respect to persons who rely upon the representation. When all
the members of the existing partnership consent to the representation, a partnership act or
obligation results; but in all other cases it is the joint act or obligation of the person acting
and the persons consenting to the representation.

2 All partners, including industrial ones, shall be liable pro rata with all their property and
after all the partnership assets have been exhausted, for the contracts which may be
entered into in the name and for the account of the partnership, under its signature and by
a person authorized to act for the partnership. However, any partner may enter into a
separate obligation to perform a partnership contract.

3 Art. 1824 in relation to Article 1822 and Article 1823, New Civil Code.
8 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 Provisions which states:

xxx xxx xxx

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

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

The parol evidence Rule under Rule 130 provides:

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

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

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

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

xxx xxx xxx

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

It has been ruled:

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

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

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

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

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

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

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

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

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

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

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

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

Sec. 100. Agreements by stockholders.-

xxx xxx xxx

2. An agreement between two or more stockholders, if in writing and signed by the parties thereto,
may provide that in exercising any voting rights, the shares held by them shall be voted as therein
provided, or as they may agree, or as determined in accordance with a procedure agreed upon by
them.

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

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

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

As correctly held by the SEC Hearing Officer:

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

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

Paragraph 2 refers to pooling and voting agreements in particular. Does this provision necessarily
imply that these agreements can be valid only in close corporations as defined by the Code?
Suppose that a corporation has twenty five stockholders, and therefore cannot qualify as a close
corporation under section 96, can some of them enter into an agreement to vote as a unit in the
election of directors? It is submitted that there is no reason for denying stockholders of
corporations other than close ones the right to enter into not voting or pooling agreements to
protect their interests, as long as they do not intend to commit any wrong, or fraud on the other
stockholders not parties to the agreement. Of course, voting or pooling agreements are perhaps
more useful and more often resorted to in close corporations. But they may also be found
necessary even in widely held corporations. Moreover, since the Code limits the legal meaning of
close corporations to those which comply with the requisites laid down by section 96, it is entirely
possible that a corporation which is in fact a close corporation will not come within the definition. In
such case, its stockholders should not be precluded from entering into contracts like voting
agreements if these are otherwise valid. (Campos & Lopez-Campos, op cit, p. 405)

In short, even assuming that sec. 5(a) of the Agreement relating to the designation or nomination
of directors restricts the right of the Agreement's signatories to vote for directors, such contractual
provision, as correctly held by the SEC, is valid and binding upon the signatories thereto, which
include appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity during elections of
Saniwares' board of directors, the Court of Appeals correctly stated:

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

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

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

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

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

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

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

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

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

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

Moreover, the usual rules as regards the construction and operations of contracts generally apply to a contract of
joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).

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

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

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

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

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

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

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

With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed by the
appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V. Lagdameo,
Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly
elected directors of Saniwares at the March 8,1983 annual stockholders' meeting.

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

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

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

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

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

SO ORDERED.

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

Feliciano, J., took no part.

9 G.R. No. L-31684 June 28, 1973

EVANGELISTA & CO., DOMINGO C. EVANGELISTA, JR., CONCHITA B. NAVARRO and LEONARDA
ATIENZA ABAD SABTOS, petitioners,
vs.
ESTRELLA ABAD SANTOS, respondent.

Leonardo Abola for petitioners.

Baisas, Alberto & Associates for respondent.

MAKALINTAL, J.:

On October 9, 1954 a co-partnership was formed under the name of "Evangelista & Co." On June 7, 1955 the
Articles of Co-partnership was amended as to include herein respondent, Estrella Abad Santos, as industrial
partner, with herein petitioners Domingo C. Evangelista, Jr., Leonardo Atienza Abad Santos and Conchita P.
Navarro, the original capitalist partners, remaining in that capacity, with a contribution of P17,500 each. The
amended Articles provided, inter alia, that "the contribution of Estrella Abad Santos consists of her industry being
an industrial partner", and that the profits and losses "shall be divided and distributed among the partners ... in the
proportion of 70% for the first three partners, Domingo C. Evangelista, Jr., Conchita P. Navarro and Leonardo
Atienza Abad Santos to be divided among them equally; and 30% for the fourth partner Estrella Abad Santos."

On December 17, 1963 herein respondent filed suit against the three other partners in the Court of First Instance
of Manila, alleging that the partnership, which was also made a party-defendant, had been paying dividends to the
partners except to her; and that notwithstanding her demands the defendants had refused and continued to refuse
and let her examine the partnership books or to give her information regarding the partnership affairs to pay her
any share in the dividends declared by the partnership. She therefore prayed that the defendants be ordered to
render accounting to her of the partnership business and to pay her corresponding share in the partnership profits
after such accounting, plus attorney's fees and costs.

The defendants, in their answer, denied ever having declared dividends or distributed profits of the partnership;
denied likewise that the plaintiff ever demanded that she be allowed to examine the partnership books; and byway
of affirmative defense alleged that the amended Articles of Co-partnership did not express the true agreement of
the parties, which was that the plaintiff was not an industrial partner; that she did not in fact contribute industry to
the partnership; and that her share of 30% was to be based on the profits which might be realized by the
partnership only until full payment of the loan which it had obtained in December, 1955 from the Rehabilitation
Finance Corporation in the sum of P30,000, for which the plaintiff had signed a promisory note as co-maker and
mortgaged her property as security.

The parties are in agreement that the main issue in this case is "whether the plaintiff-appellee (respondent here) is
an industrial partner as claimed by her or merely a profit sharer entitled to 30% of the net profits that may be
realized by the partnership from June 7, 1955 until the mortgage loan from the Rehabilitation Finance Corporation
shall be fully paid, as claimed by appellants (herein petitioners)." On that issue the Court of First Instance found for
the plaintiff and rendered judgement "declaring her an industrial partner of Evangelista & Co.; ordering the
defendants to render an accounting of the business operations of the (said) partnership ... from June 7, 1955; to
pay the plaintiff such amounts as may be due as her share in the partnership profits and/or dividends after such an
accounting has been properly made; to pay plaintiff attorney's fees in the sum of P2,000.00 and the costs of this
suit."

The defendants appealed to the Court of Appeals, which thereafter affirmed judgments of the court a quo.

In the petition before Us the petitioners have assigned the following errors:
 I. The Court of Appeals erred in the finding that the respondent is an industrial partner of
Evangelista & Co., notwithstanding the admitted fact that since 1954 and until after promulgation of
the decision of the appellate court the said respondent was one of the judges of the City Court of
Manila, and despite its findings that respondent had been paid for services allegedly contributed by
her to the partnership. In this connection the Court of Appeals erred:

(A) In finding that the "amended Articles of Co-partnership," Exhibit "A" is

conclusive evidence that respondent was in fact made an industrial partner of
Evangelista & Co.

(B) In not finding that a portion of respondent's testimony quoted in the decision
proves that said respondent did not bind herself to contribute her industry, and she
could not, and in fact did not, because she was one of the judges of the City Court
of Manila since 1954.

(C) In finding that respondent did not in fact contribute her industry, despite the
appellate court's own finding that she has been paid for the services allegedly
rendered by her, as well as for the loans of money made by her to the partnership.

II. The lower court erred in not finding that in any event the respondent was lawfully excluded from,
and deprived of, her alleged share, interests and participation, as an alleged industrial partner, in
the partnership Evangelista & Co., and its profits or net income.

III. The Court of Appeals erred in affirming in toto the decision of the trial court whereby respondent
was declared an industrial partner of the petitioner, and petitioners were ordered to render an
accounting of the business operation of the partnership from June 7, 1955, and to pay the
respondent her alleged share in the net profits of the partnership plus the sum of P2,000.00 as
attorney's fees and the costs of the suit, instead of dismissing respondent's complaint, with costs,
against the respondent.

It is quite obvious that the questions raised in the first assigned errors refer to the facts as found by the Court of
Appeals. The evidence presented by the parties as the trial in support of their respective positions on the issue of
whether or not the respondent was an industrial partner was thoroughly analyzed by the Court of Appeals on its
decision, to the extent of reproducing verbatim therein the lengthy testimony of the witnesses.

It is not the function of the Supreme Court to analyze or weigh such evidence all over again, its jurisdiction being
limited to reviewing errors of law that might have been commited by the lower court. It should be observed, in this
regard, that the Court of Appeals did not hold that the Articles of Co-partnership, identified in the record as Exhibit
"A", was conclusive evidence that the respondent was an industrial partner of the said company, but considered it
together with other factors, consisting of both testimonial and documentary evidences, in arriving at the factual
conclusion expressed in the decision.

The findings of the Court of Appeals on the various points raised in the first assignment of error are hereunder
reproduced if only to demonstrate that the same were made after a through analysis of then evidence, and hence
are beyond this Court's power of review.

The aforequoted findings of the lower Court are assailed under Appellants' first assigned error,
wherein it is pointed out that "Appellee's documentary evidence does not conclusively prove that
appellee was in fact admitted by appellants as industrial partner of Evangelista & Co." and that
"The grounds relied upon by the lower Court are untenable" (Pages 21 and 26, Appellant's Brief).

The first point refers to Exhibit A, B, C, K, K-1, J, N and S, appellants' complaint being that "In
finding that the appellee is an industrial partner of appellant Evangelista & Co., herein referred to
as the partnership — the lower court relied mainly on the appellee's documentary evidence,
entirely disregarding facts and circumstances established by appellants" evidence which contradict
the said finding' (Page 21, Appellants' Brief). The lower court could not have done otherwise but
rely on the exhibits just mentioned, first, because appellants have admitted their genuineness and
due execution, hence they were admitted without objection by the lower court when appellee
 rested her case and, secondly the said exhibits indubitably show the appellee is an industrial
partner of appellant company. Appellants are virtually estopped from attempting to detract from the
probative force of the said exhibits because they all bear the imprint of their knowledge and
consent, and there is no credible showing that they ever protested against or opposed their
contents prior of the filing of their answer to appellee's complaint. As a matter of fact, all the
appellant Evangelista, Jr., would have us believe — as against the cumulative force of appellee's
aforesaid documentary evidence — is the appellee's Exhibit "A", as confirmed and corroborated by
the other exhibits already mentioned, does not express the true intent and agreement of the parties
thereto, the real understanding between them being the appellee would be merely a profit sharer
entitled to 30% of the net profits that may be realized between the partners from June 7, 1955, until
the mortgage loan of P30,000.00 to be obtained from the RFC shall have been fully paid. This
version, however, is discredited not only by the aforesaid documentary evidence brought forward
by the appellee, but also by the fact that from June 7, 1955 up to the filing of their answer to the
complaint on February 8, 1964 — or a period of over eight (8) years — appellants did nothing to
correct the alleged false agreement of the parties contained in Exhibit "A". It is thus reasonable to
suppose that, had appellee not filed the present action, appellants would not have advanced this
obvious afterthought that Exhibit "A" does not express the true intent and agreement of the parties
thereto.

At pages 32-33 of appellants' brief, they also make much of the argument that 'there is an
overriding fact which proves that the parties to the Amended Articles of Partnership, Exhibit "A", did
not contemplate to make the appellee Estrella Abad Santos, an industrial partner of Evangelista &
Co. It is an admitted fact that since before the execution of the amended articles of partnership,
Exhibit "A", the appellee Estrella Abad Santos has been, and up to the present time still is, one of
the judges of the City Court of Manila, devoting all her time to the performance of the duties of her
public office. This fact proves beyond peradventure that it was never contemplated between the
parties, for she could not lawfully contribute her full time and industry which is the obligation of an
industrial partner pursuant to Art. 1789 of the Civil Code.

The Court of Appeals then proceeded to consider appellee's testimony on this point, quoting it in the decision, and
then concluded as follows:

One cannot read appellee's testimony just quoted without gaining the very definite impression that,
even as she was and still is a Judge of the City Court of Manila, she has rendered services for
appellants without which they would not have had the wherewithal to operate the business for
which appellant company was organized. Article 1767 of the New Civil Code which provides that
"By 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, 'does not
specify the kind of industry that a partner may thus contribute, hence the said services may
legitimately be considered as appellee's contribution to the common fund. Another article of the
same Code relied upon appellants reads:

'ART. 1789. An industrial partner cannot engage in business for himself, unless the
partnership expressly permits him to do so; and if he should do so, the capitalist
partners may either exclude him from the firm or avail themselves of the benefits
which he may have obtained in violation of this provision, with a right to damages in
either case.'

It is not disputed that the provision against the industrial partner engaging in business for himself
seeks to prevent any conflict of interest between the industrial partner and the partnership, and to
insure faithful compliance by said partner with this prestation. There is no pretense, however, even
on the part of the appellee is engaged in any business antagonistic to that of appellant company,
since being a Judge of one of the branches of the City Court of Manila can hardly be characterized
as a business. That appellee has faithfully complied with her prestation with respect to appellants
is clearly shown by the fact that it was only after filing of the complaint in this case and the answer
thereto appellants exercised their right of exclusion under the codal art just mentioned by alleging
in their Supplemental Answer dated June 29, 1964 — or after around nine (9) years from June 7,
1955 — subsequent to the filing of defendants' answer to the complaint, defendants reached an
agreement whereby the herein plaintiff been excluded from, and deprived of, her alleged share,
 interests or participation, as an alleged industrial partner, in the defendant partnership and/or in its
net profits or income, on the ground plaintiff has never contributed her industry to the partnership,
instead she has been and still is a judge of the City Court (formerly Municipal Court) of the City of
Manila, devoting her time to performance of her duties as such judge and enjoying the privilege
and emoluments appertaining to the said office, aside from teaching in law school in Manila,
without the express consent of the herein defendants' (Record On Appeal, pp. 24-25). Having
always knows as a appellee as a City judge even before she joined appellant company on June 7,
1955 as an industrial partner, why did it take appellants many yearn before excluding her from said
company as aforequoted allegations? And how can they reconcile such exclusive with their main
theory that appellee has never been such a partner because "The real agreement evidenced by
Exhibit "A" was to grant the appellee a share of 30% of the net profits which the appellant
partnership may realize from June 7, 1955, until the mortgage of P30,000.00 obtained from the
Rehabilitation Finance Corporal shall have been fully paid." (Appellants Brief, p. 38).

What has gone before persuades us to hold with the lower Court that appellee is an industrial
partner of appellant company, with the right to demand for a formal accounting and to receive her
share in the net profit that may result from such an accounting, which right appellants take
exception under their second assigned error. Our said holding is based on the following article of
the New Civil Code:

'ART. 1899. Any partner shall have the right to a formal account as to partnership
affairs:

(1) If he is wrongfully excluded from the partnership business or possession of its property by his
co-partners;

(2) If the right exists under the terms of any agreement;

(3) As provided by article 1807;

(4) Whenever other circumstance render it just and reasonable.

We find no reason in this case to depart from the rule which limits this Court's appellate jurisdiction to reviewing
only errors of law, accepting as conclusive the factual findings of the lower court upon its own assessment of the
evidence.

The judgment appealed from is affirmed, with costs.

Zaldivar, Castro, Fernando, Teehankee, Barredo, Makasiar, Antonio and Esguerra, JJ., concur.

10 G.R. No. L-59956 October 31, 1984

ISABELO MORAN, JR., petitioner,

vs.
THE HON. COURT OF APPEALS and MARIANO E. PECSON, respondents.

GUTIERREZ, JR., J.: ñé+.£ªwph!1

This is a petition for review on certiorari of the decision of the respondent Court of Appeals which ordered
petitioner Isabelo Moran, Jr. to pay damages to respondent Mariano E, Pecson.

As found by the respondent Court of Appeals, the undisputed facts indicate that: têñ.£îhqwâ£

xxx xxx xxx

... on February 22, 1971 Pecson and Moran entered into an agreement whereby both would
contribute P15,000 each for the purpose of printing 95,000 posters (featuring the delegates to the
1971 Constitutional Convention), with Moran actually supervising the work; that Pecson would
receive a commission of P l,000 a month starting on April 15, 1971 up to December 15, 1971; that
on December 15, 1971, a liquidation of the accounts in the distribution and printing of the 95,000
posters would be made, that Pecson gave Moran P10,000 for which the latter issued a receipt; that
only a few posters were printed; that on or about May 28, 1971, Moran executed in favor of Pecson
a promissory note in the amount of P20,000 payable in two equal installments (P10,000 payable
on or before June 15, 1971 and P10,000 payable on or before June 30, 1971), the whole sum
becoming due upon default in the payment of the first installment on the date due, complete with
the costs of collection.

Private respondent Pecson filed with the Court of First Instance of Manila an action for the recovery of a sum of
money and alleged in his complaint three (3) causes of action, namely: (1) on the alleged partnership agreement,
the return of his contribution of P10,000.00, payment of his share in the profits that the partnership would have
earned, and, payment of unpaid commission; (2) on the alleged promissory note, payment of the sum of
P20,000.00; and, (3) moral and exemplary damages and attorney's fees.

After the trial, the Court of First Instance held that: têñ.£îhqwâ£

From the evidence presented it is clear in the mind of the court that by virtue of the partnership
agreement entered into by the parties-plaintiff and defendant the plaintiff did contribute
P10,000.00, and another sum of P7,000.00 for the Voice of the Veteran or Delegate Magazine. Of
the expected 95,000 copies of the posters, the defendant was able to print 2,000 copies only
authorized of which, however, were sold at P5.00 each. Nothing more was done after this and it
can be said that the venture did not really get off the ground. On the other hand, the plaintiff failed
to give his full contribution of P15,000.00. Thus, each party is entitled to rescind the contract which
right is implied in reciprocal obligations under Article 1385 of the Civil Code whereunder 'rescission
creates the obligation to return the things which were the object of the contract ...

WHEREFORE, the court hereby renders judgment ordering defendant Isabelo C. Moran, Jr. to
return to plaintiff Mariano E. Pecson the sum of P17,000.00, with interest at the legal rate from the
filing of the complaint on June 19, 1972, and the costs of the suit.

For insufficiency of evidence, the counterclaim is hereby dismissed.

From this decision, both parties appealed to the respondent Court of Appeals. The latter likewise rendered a
decision against the petitioner. The dispositive portion of the decision reads: têñ.£îhqwâ£

PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a new one is
hereby rendered, ordering defendant-appellant Isabelo C. Moran, Jr. to pay plaintiff- appellant
Mariano E. Pecson:

(a) Forty-seven thousand five hundred (P47,500) (the amount that could have accrued to Pecson
under their agreement);

(b) Eight thousand (P8,000), (the commission for eight months);

(c) Seven thousand (P7,000) (as a return of Pecson's investment for the Veteran's Project);
 (d) Legal interest on (a), (b) and (c) from the date the complaint was filed (up to the time payment
is made)

The petitioner contends that the respondent Court of Appeals decided questions of substance in a way not in
accord with law and with Supreme Court decisions when it committed the following errors:

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C.

MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P47,500 AS THE SUPPOSED
EXPECTED PROFITS DUE HIM.

II

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C.

MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P8,000, AS SUPPOSED
COMMISSION IN THE PARTNERSHIP ARISING OUT OF PECSON'S INVESTMENT.

III

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C.

MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P7,000 AS A SUPPOSED
RETURN OF INVESTMENT IN A MAGAZINE VENTURE.

IV

ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT, THE
HONORABLE COURT OF APPEALS DID NOT EVEN OFFSET PAYMENTS ADMITTEDLY RECEIVED BY
PECSON FROM MORAN.

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT GRANTING THE PETITIONER'S
COMPULSORY COUNTERCLAIM FOR DAMAGES.

The first question raised in this petition refers to the award of P47,500.00 as the private respondent's share in the
unrealized profits of the partnership. The petitioner contends that the award is highly speculative. The petitioner
maintains that the respondent court did not take into account the great risks involved in the business undertaking.

We agree with the petitioner that the award of speculative damages has no basis in fact and law.

There is no dispute over the nature of the agreement between the petitioner and the private respondent. It is a
contract of partnership. The latter in his complaint alleged that he was induced by the petitioner to enter into a
partnership with him under the following terms and conditions: têñ.£îhqwâ£

1. That the partnership will print colored posters of the delegates to the Constitutional Convention;

2. That they will invest the amount of Fifteen Thousand Pesos (P15,000.00) each;

3. That they will print Ninety Five Thousand (95,000) copies of the said posters;

4. That plaintiff will receive a commission of One Thousand Pesos (P1,000.00) a month starting
April 15, 1971 up to December 15, 1971;

5. That upon the termination of the partnership on December 15, 1971, a liquidation of the account
pertaining to the distribution and printing of the said 95,000 posters shall be made.
The petitioner on the other hand admitted in his answer the existence of the partnership.

The rule is, when a partner who has undertaken to contribute a sum of money fails to do so, he becomes a debtor
of the partnership for whatever he may have promised to contribute (Art. 1786, Civil Code) and for interests and
damages from the time he should have complied with his obligation (Art. 1788, Civil Code). Thus in Uy v. Puzon
(79 SCRA 598), which interpreted Art. 2200 of the Civil Code of the Philippines, we allowed a total of P200,000.00
compensatory damages in favor of the appellee because the appellant therein was remiss in his obligations as a
partner and as prime contractor of the construction projects in question. This case was decided on a particular set
of facts. We awarded compensatory damages in the Uy case because there was a finding that the constructing
business is a profitable one and that the UP construction company derived some profits from its contractors in the
construction of roads and bridges despite its deficient capital." Besides, there was evidence to show that the
partnership made some profits during the periods from July 2, 1956 to December 31, 1957 and from January 1,
1958 up to September 30, 1959. The profits on two government contracts worth P2,327,335.76 were not
speculative. In the instant case, there is no evidence whatsoever that the partnership between the petitioner and
the private respondent would have been a profitable venture. In fact, it was a failure doomed from the start. There
is therefore no basis for the award of speculative damages in favor of the private respondent.

Furthermore, in the Uy case, only Puzon failed to give his full contribution while Uy contributed much more than
what was expected of him. In this case, however, there was mutual breach. Private respondent failed to give his
entire contribution in the amount of P15,000.00. He contributed only P10,000.00. The petitioner likewise failed to
give any of the amount expected of him. He further failed to comply with the agreement to print 95,000 copies of
the posters. Instead, he printed only 2,000 copies.

Article 1797 of the Civil Code provides: têñ.£îhqwâ£

The losses and profits shall be distributed in conformity with the agreement. If only the share of
each partner in the profits has been agreed upon, the share of each in the losses shall be in the
same proportion.

Being a contract of partnership, each partner must share in the profits and losses of the venture. That is the
essence of a partnership. And even with an assurance made by one of the partners that they would earn a huge
amount of profits, in the absence of fraud, the other partner cannot claim a right to recover the highly speculative
profits. It is a rare business venture guaranteed to give 100% profits. In this case, on an investment of P15,000.00,
the respondent was supposed to earn a guaranteed P1,000.00 a month for eight months and around P142,500.00
on 95,000 posters costing P2.00 each but 2,000 of which were sold at P5.00 each. The fantastic nature of
expected profits is obvious. We have to take various factors into account. The failure of the Commission on
Elections to proclaim all the 320 candidates of the Constitutional Convention on time was a major factor. The
petitioner undesirable his best business judgment and felt that it would be a losing venture to go on with the
printing of the agreed 95,000 copies of the posters. Hidden risks in any business venture have to be considered.

It does not follow however that the private respondent is not entitled to recover any amount from the petitioner.
The records show that the private respondent gave P10,000.00 to the petitioner. The latter used this amount for
the printing of 2,000 posters at a cost of P2.00 per poster or a total printing cost of P4,000.00. The records further
show that the 2,000 copies were sold at P5.00 each. The gross income therefore was P10,000.00. Deducting the
printing costs of P4,000.00 from the gross income of P10,000.00 and with no evidence on the cost of distribution,
the net profits amount to only P6,000.00. This net profit of P6,000.00 should be divided between the petitioner and
the private respondent. And since only P4,000.00 was undesirable by the petitioner in printing the 2,000 copies,
the remaining P6,000.00 should therefore be returned to the private respondent.

Relative to the second alleged error, the petitioner submits that the award of P8,000.00 as Pecson's supposed
commission has no justifiable basis in law.

Again, we agree with the petitioner.

The partnership agreement stipulated that the petitioner would give the private respondent a monthly commission
of Pl,000.00 from April 15, 1971 to December 15, 1971 for a total of eight (8) monthly commissions. The
agreement does not state the basis of the commission. The payment of the commission could only have been
predicated on relatively extravagant profits. The parties could not have intended the giving of a commission inspite
of loss or failure of the venture. Since the venture was a failure, the private respondent is not entitled to the
P8,000.00 commission.

Anent the third assigned error, the petitioner maintains that the respondent Court of Appeals erred in holding him
liable to the private respondent in the sum of P7,000.00 as a supposed return of investment in a magazine
venture.

In awarding P7,000.00 to the private respondent as his supposed return of investment in the "Voice of the
Veterans" magazine venture, the respondent court ruled that: têñ.£îhqwâ£

xxx xxx xxx

... Moran admittedly signed the promissory note of P20,000 in favor of Pecson. Moran does not
question the due execution of said note. Must Moran therefore pay the amount of P20,000? The
evidence indicates that the P20,000 was assigned by Moran to cover the following: têñ.£îhqwâ£

(a) P 7,000 — the amount of the PNB check given by Pecson to

Moran representing Pecson's investment in Moran's other project
(the publication and printing of the 'Voice of the Veterans');

(b) P10,000 — to cover the return of Pecson's contribution in the

project of the Posters;

(c) P3,000 — representing Pecson's commission for three months

(April, May, June, 1971).

Of said P20,000 Moran has to pay P7,000 (as a return of Pecson's investment for the Veterans'
project, for this project never left the ground) ...

As a rule, the findings of facts of the Court of Appeals are final and conclusive and cannot be reviewed on appeal
to this Court (Amigo v. Teves, 96 Phil. 252), provided they are borne out by the record or are based on substantial
evidence (Alsua-Betts v. Court of Appeals, 92 SCRA 332). However, this rule admits of certain exceptions. Thus,
in Carolina Industries Inc. v. CMS Stock Brokerage, Inc., et al., (97 SCRA 734), we held that this Court retains the
power to review and rectify the findings of fact of the Court of Appeals when (1) the conclusion is a finding
grounded entirely on speculation, surmises and conjectures; (2) when the inference made is manifestly mistaken
absurd and impossible; (3) where there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; and (5) when the court, in making its findings, went beyond the issues of the case and
the same are contrary to the admissions of both the appellant and the appellee.

In this case, there is misapprehension of facts. The evidence of the private respondent himself shows that his
investment in the "Voice of Veterans" project amounted to only P3,000.00. The remaining P4,000.00 was the
amount of profit that the private respondent expected to receive.

The records show the following exhibits- têñ.£îhqwâ£

E — Xerox copy of PNB Manager's Check No. 234265 dated March 22, 1971 in favor of
defendant. Defendant admitted the authenticity of this check and of his receipt of the proceeds
thereof (t.s.n., pp. 3-4, Nov. 29, 1972). This exhibit is being offered for the purpose of showing
plaintiff's capital investment in the printing of the "Voice of the Veterans" for which he was promised
a fixed profit of P8,000. This investment of P6,000.00 and the promised profit of P8,000 are
covered by defendant's promissory note for P14,000 dated March 31, 1971 marked by defendant
as Exhibit 2 (t.s.n., pp. 20-21, Nov. 29, 1972), and by plaintiff as Exhibit P. Later, defendant
returned P3,000.00 of the P6,000.00 investment thereby proportionately reducing the promised
profit to P4,000. With the balance of P3,000 (capital) and P4,000 (promised profit), defendant
signed and executed the promissory note for P7,000 marked Exhibit 3 for the defendant and
Exhibit M for plaintiff. Of this P7,000, defendant paid P4,000 representing full return of the capital
investment and P1,000 partial payment of the promised profit. The P3,000 balance of the promised
 profit was made part consideration of the P20,000 promissory note (t.s.n., pp. 22-24, Nov. 29,
1972). It is, therefore, being presented to show the consideration for the P20,000 promissory note.

F — Xerox copy of PNB Manager's check dated May 29, 1971 for P7,000 in favor of defendant.
The authenticity of the check and his receipt of the proceeds thereof were admitted by the
defendant (t.s.n., pp. 3-4, Nov. 29, 1972). This P 7,000 is part consideration, and in cash, of the
P20,000 promissory note (t.s.n., p. 25, Nov. 29, 1972), and it is being presented to show the
consideration for the P20,000 note and the existence and validity of the obligation.

xxx xxx xxx

L-Book entitled "Voice of the Veterans" which is being offered for the purpose of showing the
subject matter of the other partnership agreement and in which plaintiff invested the P6,000
(Exhibit E) which, together with the promised profit of P8,000 made up for the consideration of the
P14,000 promissory note (Exhibit 2; Exhibit P). As explained in connection with Exhibit E. the
P3,000 balance of the promised profit was later made part consideration of the P20,000
promissory note.

M-Promissory note for P7,000 dated March 30, 1971. This is also defendant's Exhibit E. This
document is being offered for the purpose of further showing the transaction as explained in
connection with Exhibits E and L.

N-Receipt of plaintiff dated March 30, 1971 for the return of his P3,000 out of his capital investment
of P6,000 (Exh. E) in the P14,000 promissory note (Exh. 2; P). This is also defendant's Exhibit 4.
This document is being offered in support of plaintiff's explanation in connection with Exhibits E, L,
and M to show the transaction mentioned therein.

xxx xxx xxx

P-Promissory note for P14,000.00. This is also defendant's Exhibit 2. It is being offered for the
purpose of showing the transaction as explained in connection with Exhibits E, L, M, and N above.

Explaining the above-quoted exhibits, respondent Pecson testified that: têñ.£îhqwâ£

Q During the pre-trial of this case, Mr. Pecson, the defendant presented a
promissory note in the amount of P14,000.00 which has been marked as Exhibit 2.
Do you know this promissory note?

A Yes, sir.

Q What is this promissory note, in connection with your transaction with the
defendant?

A This promissory note is for the printing of the "Voice of the Veterans".

Q What is this "Voice of the Veterans", Mr. Pecson?

A It is a book. têñ.£îhqwâ£

(T.S.N., p. 19, Nov. 29, 1972)

Q And what does the amount of P14,000.00 indicated in the promissory note,
Exhibit 2, represent?

A It represents the P6,000.00 cash which I gave to Mr. Moran, as evidenced by the
Philippine National Bank Manager's check and the P8,000.00 profit assured me by
Mr. Moran which I will derive from the printing of this "Voice of the Veterans" book.
Q You said that the P6,000.00 of this P14,000.00 is covered by, a Manager's
check. I show you Exhibit E, is this the Manager's check that mentioned?

A Yes, sir.

Q What happened to this promissory note of P14,000.00 which you said

represented P6,000.00 of your investment and P8,000.00 promised profits?

A Latter, Mr. Moran returned to me P3,000.00 which represented one-half (1/2) of

the P6,000.00 capital I gave to him.

Q As a consequence of the return by Mr. Moran of one-half (1/2) of the P6,000.00

capital you gave to him, what happened to the promised profit of P8,000.00?

A It was reduced to one-half (1/2) which is P4,000.00.

Q Was there any document executed by Mr. Moran in connection with the Balance
of P3,000.00 of your capital investment and the P4,000.00 promised profits?

A Yes, sir, he executed a promissory note.

Q I show you a promissory note in the amount of P7,000.00 dated March 30, 1971
which for purposes of Identification I request the same to be marked as Exhibit M. .
.

Court têñ.£îhqwâ£

Mark it as Exhibit M.

Q (continuing) is this the promissory note which you said was executed by Mr.
Moran in connection with your transaction regarding the printing of the "Voice of the
Veterans"?

A Yes, sir. (T.S.N., pp. 20-22, Nov. 29, 1972).

Q What happened to this promissory note executed by Mr. Moran, Mr. Pecson?

A Mr. Moran paid me P4,000.00 out of the P7,000.00 as shown by the promissory
note.

Q Was there a receipt issued by you covering this payment of P4,000.00 in favor of
Mr. Moran?

A Yes, sir.

(T.S.N., p. 23, Nov. 29, 1972).

Q You stated that Mr. Moran paid the amount of P4,000.00 on account of the
P7,000.00 covered by the promissory note, Exhibit M. What does this P4,000.00
covered by Exhibit N represent?

A This P4,000.00 represents the P3,000.00 which he has returned of my P6,000.00

capital investment and the P1,000.00 represents partial payment of the P4,000.00
profit that was promised to me by Mr. Moran.

Q And what happened to the balance of P3,000.00 under the promissory note,
Exhibit M?
 A The balance of P3,000.00 and the rest of the profit was applied as part of the
consideration of the promissory note of P20,000.00.

(T.S.N., pp. 23-24, Nov. 29, 1972).

The respondent court erred when it concluded that the project never left the ground because the project did take
place. Only it failed. It was the private respondent himself who presented a copy of the book entitled "Voice of the
Veterans" in the lower court as Exhibit "L". Therefore, it would be error to state that the project never took place
and on this basis decree the return of the private respondent's investment.

As already mentioned, there are risks in any business venture and the failure of the undertaking cannot entirely be
blamed on the managing partner alone, specially if the latter exercised his best business judgment, which seems
to be true in this case. In view of the foregoing, there is no reason to pass upon the fourth and fifth assignments of
errors raised by the petitioner. We likewise find no valid basis for the grant of the counterclaim.

WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals (now Intermediate
Appellate Court) is hereby SET ASIDE and a new one is rendered ordering the petitioner Isabelo Moran, Jr., to
pay private respondent Mariano Pecson SIX THOUSAND (P6,000.00) PESOS representing the amount of the
private respondent's contribution to the partnership but which remained unused; and THREE THOUSAND
(P3,000.00) PESOS representing one half (1/2) of the net profits gained by the partnership in the sale of the two
thousand (2,000) copies of the posters, with interests at the legal rate on both amounts from the date the
complaint was filed until full payment is made.

SO ORDERED. 1äwphï1.ñët

Teehankee (Chairman), Melencio-Herrera, Plana and Relova, JJ., concur.

De la Fuente J., took no part.

11 Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

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

Orlando Velasco for petitioners.

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

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

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

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

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

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

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

Year I La Bu
n nd ildi
v ng
e
s
t
m
e
n
t

A Ac Ac
c co co
c un un
 o t t
u
n
t

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

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

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

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

The original assessment was as follows:

1955

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

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

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

1956

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

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

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

(See Exhibit 13, page 50, BIR records)

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

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

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE
CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM
TRANSACTIONS THEREFROM (sic);

III.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR
CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED

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

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT

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

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

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

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

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the
properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said
properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oña, in
the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were
divided among petitioners proportionately in accordance with their respective shares in the inheritance. In these
circumstances, it is Our considered view that from the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oña as
a common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared
by them proportionally, such act was tantamonut to actually contributing such incomes to a common fund and, in
effect, they thereby formed an unregistered partnership within the purview of the above-mentioned provisions of
the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-
owners rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned.
Before the partition and distribution of the estate of the deceased, all the income thereof does belong commonly to
all the heirs, obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow
that such status as co-owners continues until the inheritance is actually and physically distributed among the heirs,
for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continue
holding said shares under the common management of the administrator or executor or of anyone chosen by
them and engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for
heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal
Revenue Code.

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

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

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

xxx xxx xxx

Similarly, the American Law

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

The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on. ... . (8 Merten's Law of Federal Income Taxation,
p. 562 Note 63; emphasis ours.)

For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships — with the exception only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute
a partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L-
24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by
appellants therein.

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

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

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

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

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

Even if we were to yield to the decision of this Honorable Court that the herein
petitioners have formed an unregistered partnership and, therefore, have to be
taxed as such, it might be recalled that the petitioners in their individual income tax
returns reported their shares of the profits of the unregistered partnership. We think
it only fair and equitable that the various amounts paid by the individual petitioners
as income tax on their respective shares of the unregistered partnership should be
deducted from the deficiency income tax found by this Honorable Court against the
unregistered partnership. (page 7, Memorandum for the Petitioner in Support of
Their Motion for Reconsideration, Oct. 28, 1961.)
 In other words, it is the position of petitioners that the taxable income of the partnership must be
reduced by the amounts of income tax paid by each petitioner on his share of partnership profits.
This is not correct; rather, it should be the other way around. The partnership profits distributable to
the partners (petitioners herein) should be reduced by the amounts of income tax assessed
against the partnership. Consequently, each of the petitioners in his individual capacity overpaid
his income tax for the years in question, but the income tax due from the partnership has been
correctly assessed. Since the individual income tax liabilities of petitioners are not in issue in this
proceeding, it is not proper for the Court to pass upon the same.

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

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

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

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

Castro, J., took no part.

Concepcion, C.J., is on leave.

Footnotes

1 In other words, the assessment was affirmed except for the sum of P100.00 which was the total
of two P50-items purportedly for "Compromise for non-filing" which the Tax Court held to be
unjustified, since there was no compromise agreement to speak of.

12 G.R. No. L-55397 February 29, 1988

TAI TONG CHUACHE & CO., petitioner,
vs.
THE INSURANCE COMMISSION and TRAVELLERS MULTI-INDEMNITY CORPORATION, respondents.

GANCAYCO, J.:

This petition for review on certiorari seeks the reversal of the decision of the Insurance Commission in IC Case #367 1 dismissing the complaint 2 for recovery of
the alleged unpaid balance of the proceeds of the Fire Insurance Policies issued by herein respondent insurance company in favor of petitioner-intervenor.

The facts of the case as found by respondent Insurance Commission are as follows:

Complainants acquired from a certain Rolando Gonzales a parcel of land and a building located at
San Rafael Village, Davao City. Complainants assumed the mortgage of the building in favor of
S.S.S., which building was insured with respondent S.S.S. Accredited Group of Insurers for
P25,000.00.

On April 19, 1975, Azucena Palomo obtained a loan from Tai Tong Chuache Inc. in the amount of
P100,000.00. To secure the payment of the loan, a mortgage was executed over the land and the
building in favor of Tai Tong Chuache & Co. (Exhibit "1" and "1-A"). On April 25, 1975, Arsenio
Chua, representative of Thai Tong Chuache & Co. insured the latter's interest with Travellers Multi-
Indemnity Corporation for P100,000.00 (P70,000.00 for the building and P30,000.00 for the
contents thereof) (Exhibit "A-a," contents thereof) (Exhibit "A-a").

On June 11, 1975, Pedro Palomo secured a Fire Insurance Policy No. F- 02500 (Exhibit "A"),
covering the building for P50,000.00 with respondent Zenith Insurance Corporation. On July 16,
1975, another Fire Insurance Policy No. 8459 (Exhibit "B") was procured from respondent
Philippine British Assurance Company, covering the same building for P50,000.00 and the
contents thereof for P70,000.00.

On July 31, 1975, the building and the contents were totally razed by fire.

Adjustment Standard Corporation submitted a report as follow

xxx xxx xxx

... Thus the apportioned share of each company is as follows:

Policy Com Risk Insur Pays

No..
pany es

MIRO Zenit Buildi P50,0 P17,

h ng 00 610.
93

F- Insur
02500 ance

Corp.
F- Phil. Hous 70,00 24,6
84590 ehold 0 55.3
1

Britis
h

Assc
o.
Co.

Inc. FFF 50,00 39,1

& F5 0 86.1
0

Policy Com Risk Insur Pays

No. pany es

FIC- SSS
15381 Accre

dited
Grou
p

of Buildi P25,0 P8,8

Insur ng 00 05.4
ers 7

Total P195, P90,

s 000 257.
81

We are showing hereunder another apportionment of the loss which includes the Travellers Multi-
Indemnity policy for reference purposes.

Policy No. Comp Risk Injure Pays

any s
MIRO/ Zenit
h

F- Insur
02500 ance

Corp. Buildi P50,0 P11,

ng 00 877.
14

F- Phil.
84590

Britis
h

Assc I- 70,00 16,6

o. Co. Buildi 0 28.0
ng 0

II-
Buildi
ng

FFF 50,00 24,9

& PE 0 18.7
9

PVC- SSS Accre

15181 dited

Grou
p of

Insur Buildi 25,00 5,93

ers ng 0 8.50
 F-599 Insur I-Ref 30,00 14,4
DV ers 0 67.3
1

Multi II- 70,00 16,6

Buildi 0 28.0
ng 0

Total P295. P90,

s 000 257.
81

Based on the computation of the loss, including the Travellers Multi- Indemnity, respondents,
Zenith Insurance, Phil. British Assurance and S.S.S. Accredited Group of Insurers, paid their
corresponding shares of the loss. Complainants were paid the following: P41,546.79 by Philippine
British Assurance Co., P11,877.14 by Zenith Insurance Corporation, and P5,936.57 by S.S.S.
Group of Accredited Insurers (Par. 6. Amended Complaint). Demand was made from respondent
Travellers Multi-Indemnity for its share in the loss but the same was refused. Hence, complainants
demanded from the other three (3) respondents the balance of each share in the loss based on the
computation of the Adjustment Standards Report excluding Travellers Multi-Indemnity in the
amount of P30,894.31 (P5,732.79-Zenith Insurance: P22,294.62, Phil. British: and P2,866.90, SSS
Accredited) but the same was refused, hence, this action.

In their answers, Philippine British Assurance and Zenith Insurance Corporation admitted the
material allegations in the complaint, but denied liability on the ground that the claim of the
complainants had already been waived, extinguished or paid. Both companies set up counterclaim
in the total amount of P 91,546.79.

Instead of filing an answer, SSS Accredited Group of Insurers informed the Commission in its letter
of July 22, 1977 that the herein claim of complainants for the balance had been paid in the amount
of P 5,938.57 in full, based on the Adjustment Standards Corporation Report of September 22,
1975.

Travellers Insurance, on its part, admitted the issuance of the Policy No. 599 DV and alleged as its
special and affirmative defenses the following, to wit: that Fire Policy No. 599 DV, covering the
furniture and building of complainants was secured by a certain Arsenio Chua, mortgage creditor,
for the purpose of protecting his mortgage credit against the complainants; that the said policy was
issued in the name of Azucena Palomo, only to indicate that she owns the insured premises; that
the policy contains an endorsement in favor of Arsenio Chua as his mortgage interest may appear
to indicate that insured was Arsenio Chua and the complainants; that the premium due on said fire
policy was paid by Arsenio Chua; that respondent Travellers is not liable to pay complainants.

On May 31, 1977, Tai Tong Chuache & Co. filed a complaint in intervention claiming the proceeds
of the fire Insurance Policy No. F-559 DV, issued by respondent Travellers Multi-Indemnity.

Travellers Insurance, in answer to the complaint in intervention, alleged that the Intervenor is not
entitled to indemnity under its Fire Insurance Policy for lack of insurable interest before the loss of
the insured premises and that the complainants, spouses Pedro and Azucena Palomo, had
already paid in full their mortgage indebtedness to the intervenor. 3

As adverted to above respondent Insurance Commission dismissed spouses Palomos' complaint on the ground
that the insurance policy subject of the complaint was taken out by Tai Tong Chuache & Company, petitioner
herein, for its own interest only as mortgagee of the insured property and thus complainant as mortgagors of the
insured property have no right of action against herein respondent. It likewise dismissed petitioner's complaint in
intervention in the following words:

We move on the issue of liability of respondent Travellers Multi-Indemnity to the Intervenor-

mortgagee. The complainant testified that she was still indebted to Intervenor in the amount of
P100,000.00. Such allegation has not however, been sufficiently proven by documentary evidence.
The certification (Exhibit 'E-e') issued by the Court of First Instance of Davao, Branch 11, indicate
that the complainant was Antonio Lopez Chua and not Tai Tong Chuache & Company. 4

From the above decision, only intervenor Tai Tong Chuache filed a motion for reconsideration but it was likewise
denied hence, the present petition.

It is the contention of the petitioner that respondent Insurance Commission decided an issue not raised in the
pleadings of the parties in that it ruled that a certain Arsenio Lopez Chua is the one entitled to the insurance
proceeds and not Tai Tong Chuache & Company.

This Court cannot fault petitioner for the above erroneous interpretation of the decision appealed from considering
the manner it was written. As correctly pointed out by respondent insurance commission in their comment, the
5

decision did not pronounce that it was Arsenio Lopez Chua who has insurable interest over the insured property.
Perusal of the decision reveals however that it readily absolved respondent insurance company from liability on
the basis of the commissioner's conclusion that at the time of the occurrence of the peril insured against petitioner
as mortgagee had no more insurable interest over the insured property. It was based on the inference that the
credit secured by the mortgaged property was already paid by the Palomos before the said property was gutted
down by fire. The foregoing conclusion was arrived at on the basis of the certification issued by the then Court of
First Instance of Davao, Branch II that in a certain civil action against the Palomos, Antonio Lopez Chua stands as
the complainant and not petitioner Tai Tong Chuache & Company.

We find the petition to be impressed with merit. It is a well known postulate that the case of a party is constituted
by his own affirmative allegations. Under Section 1, Rule 131 each party must prove his own affirmative
6

allegations by the amount of evidence required by law which in civil cases as in the present case is
preponderance of evidence. The party, whether plaintiff or defendant, who asserts the affirmative of the issue has
the burden of presenting at the trial such amount of evidence as required by law to obtain favorable
judgment. Thus, petitioner who is claiming a right over the insurance must prove its case. Likewise, respondent
7

insurance company to avoid liability under the policy by setting up an affirmative defense of lack of insurable
interest on the part of the petitioner must prove its own affirmative allegations.

It will be recalled that respondent insurance company did not assail the validity of the insurance policy taken out
by petitioner over the mortgaged property. Neither did it deny that the said property was totally razed by fire within
the period covered by the insurance. Respondent, as mentioned earlier advanced an affirmative defense of lack of
insurable interest on the part of the petitioner that before the occurrence of the peril insured against the Palomos
had already paid their credit due the petitioner. Respondent having admitted the material allegations in the
complaint, has the burden of proof to show that petitioner has no insurable interest over the insured property at the
time the contingency took place. Upon that point, there is a failure of proof. Respondent, it will be noted, exerted
no effort to present any evidence to substantiate its claim, while petitioner did. For said respondent's failure, the
decision must be adverse to it.

However, as adverted to earlier, respondent Insurance Commission absolved respondent insurance company from
liability on the basis of the certification issued by the then Court of First Instance of Davao, Branch II, that in a
certain civil action against the Palomos, Arsenio Lopez Chua stands as the complainant and not Tai Tong
Chuache. From said evidence respondent commission inferred that the credit extended by herein petitioner to the
Palomos secured by the insured property must have been paid. Such is a glaring error which this Court cannot
sanction. Respondent Commission's findings are based upon a mere inference.

The record of the case shows that the petitioner to support its claim for the insurance proceeds offered as
evidence the contract of mortgage (Exh. 1) which has not been cancelled nor released. It has been held in a long
line of cases that when the creditor is in possession of the document of credit, he need not prove non-payment for
it is presumed. The validity of the insurance policy taken b petitioner was not assailed by private respondent.
8
Moreover, petitioner's claim that the loan extended to the Palomos has not yet been paid was corroborated by
Azucena Palomo who testified that they are still indebted to herein petitioner. 9

Public respondent argues however, that if the civil case really stemmed from the loan granted to Azucena Palomo
by petitioner the same should have been brought by Tai Tong Chuache or by its representative in its own behalf.
From the above premise respondent concluded that the obligation secured by the insured property must have
been paid.

The premise is correct but the conclusion is wrong. Citing Rule 3, Sec. 2 respondent pointed out that the action
10

must be brought in the name of the real party in interest. We agree. However, it should be borne in mind that
petitioner being a partnership may sue and be sued in its name or by its duly authorized representative. The fact
that Arsenio Lopez Chua is the representative of petitioner is not questioned. Petitioner's declaration that Arsenio
Lopez Chua acts as the managing partner of the partnership was corroborated by respondent insurance
company. Thus Chua as the managing partner of the partnership may execute all acts of
11

administration including the right to sue debtors of the partnership in case of their failure to pay their obligations
12

when it became due and demandable. Or at the very least, Chua being a partner of petitioner Tai Tong Chuache &
Company is an agent of the partnership. Being an agent, it is understood that he acted for and in behalf of the
firm. Public respondent's allegation that the civil case flied by Arsenio Chua was in his capacity as personal
13

creditor of spouses Palomo has no basis.

The respondent insurance company having issued a policy in favor of herein petitioner which policy was of legal
force and effect at the time of the fire, it is bound by its terms and conditions. Upon its failure to prove the
allegation of lack of insurable interest on the part of the petitioner, respondent insurance company is and must be
held liable.

IN VIEW OF THE FOREGOING, the decision appealed from is hereby SET ASIDE and ANOTHER judgment is
rendered order private respondent Travellers Multi-Indemnity Corporation to pay petitioner the face value of
Insurance Policy No. 599-DV in the amount of P100,000.00. Costs against said private respondent.

SO ORDERED.

Teehankee, C.J., Narvasa, Cruz and Griño-Aquino, JJ., concur.

Footnotes

1 Penned by Commissioner Gregoria Cruz-Arnaldo

2 Filed by Pedro Palomo and Azucena Palomo.

3 Pages 30-34, Rollo.

4 Pages 35-36, Rollo.

5 See Supra.

6 Revised Rules of Court.

7 Vol. 6, Moran, Revised Rules of Court, Page 4,1980 Ed.

8 Veloso vs. Veloso, 8 Phil. 83; Merchant vs. International Banking Corporation, 9 Phil. 554; Miller
vs. Jones, 9 Phil. 648; Chua vs. Vargas, 11 Phil. 219; Gana va. Sheriff of Laguna, et al., 32 Phil.
236.

9 Pages 4, 6, Decision, I.C. Case No. 367.

 10 Revised Rules of Court.

11 Page 4, Decision, Supra. (Respondent referred to the petitioner and Arsenio Lopez Chua
interchangeably).

12 Art. 1800 Civil Code.

13 Bachrach vs. a Protectors, 37 Phil. 441, 1918.

13 G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO),
CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,

vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and
HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO
MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No.
66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No. 66135. The
plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was
dismissed but in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff
the amount of P311,056.02, with interest at the rate of 12% per annum compounded monthly; plus
15% of the amount awarded to plaintiff as attorney's fees from July 2,1966, until full payment is
made; plus P70,000.00 moral and exemplary damages.
 It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses
aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is further required
to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half, the
amount of Pl84,878.74 with interest from the filing of the cross-complaints until the amount is fully
paid; plus moral and exemplary damages in the amount of P184,878.84 with interest from the filing
of the cross-complaints until the amount is fully paid; plus moral and exemplary damages in the
amount of P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another
P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants
Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is
required to indemnify the defendants Bormaheco and the Cervanteses the amount of P20,000.00
as attorney's fees and the amount of P4,379.21, per year from 1966 with legal rate of interest up to
the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as
attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith.
The fact that the properties of the Bormaheco and the Cervanteses were attached and that they
were required to file a counterbond in order to dissolve the attachment, is not an act of bad faith.
When a man tries to protect his rights, he should not be saddled with moral or exemplary
damages. Furthermore, the rights exercised were provided for in the Rules of Court, and it was the
court that ordered it, in the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for it
only secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would be
liable for damages in performing an act which is clearly within its power and which is the reason for
its being, then nobody would engage in the insurance business. No further claim or counter-claim
for or against anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator of
Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales
contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare
parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No.
PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as surety
executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the
balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto
Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds used in
the purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to a new
corporation proposed by Lim to expand his airline business. They executed two (2) separate indemnity
agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim
for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors principally
agree and bind themselves jointly and severally to indemnify and hold and save harmless Pioneer from and
against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind and
nature which Pioneer may incur in consequence of having become surety upon the bond/note and to pay,
reimburse and make good to Pioneer, its successors and assigns, all sums and amounts of money which it or its
representatives should or may pay or cause to be paid or become liable to pay on them of whatever kind and
nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of
chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein that Lim
transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the
Register of Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to the Chattel
Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety.
Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of
Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of
the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary
attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were
not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to
litigation and for recovery of the sums of money they advanced to Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's
complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against all the
defendants was dismissed. In all other respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE

APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY
COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA
AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM
HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No.
84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of
liability under the surety bond in favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiffs instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real party in interest to institute the
instant action as it does not stand to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from
defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present
any evidence that it is the attorney-in-fact of the reinsurance company, authorized to institute an
action for and in behalf of the latter. To qualify a person to be a real party in interest in whose name
an action must be prosecuted, he must appear to be the present real owner of the right sought to
be enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has been held
that the real party in interest is the party who would be benefited or injured by the judgment or the
party entitled to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By
real party in interest is meant a present substantial interest as distinguished from a mere
 expectancy or a future, contingent, subordinate or consequential interest (Garcia v. David, 67 Phil.
27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW
2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in
interest as it has already been paid by the reinsurer the sum of P295,000.00 — the bulk of
defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer,
the former was able to foreclose extra-judicially one of the subject airplanes and its spare engine,
realizing the total amount of P37,050.00 from the sale of the mortgaged chattels. Adding the sum
of P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it is patent that
plaintiff has been overpaid in the amount of P33,383.72 considering that the total amount it had
paid to JDA totals to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has already been
paid by the reinsurance company of the amount plaintiff has paid to JDA as surety of defendant
Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no person should unjustly
enrich himself at the expense of another (Article 22, New Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was paid by
its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties herein both in their
answers in the court below and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming
hypothetically that it was paid by its reinsurer, still none of the respondents had any interest in the matter since the
reinsurance is strictly between the petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3)
pursuant to the indemnity agreements, the petitioner is entitled to recover from respondents Bormaheco and
Maglana; and (4) the principle of unjust enrichment is not applicable considering that whatever amount he would
recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the
parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to
JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim against
defendants, considering the amount it has realized from the sale of the mortgaged properties?
(Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor
of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid with the said
amount the bulk of its alleged liability to JDA under the said surety bond, it is plain that on this
score it no longer has any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for
the amount paid to it by the reinsurers, notwithstanding that the cause of action pertains to the
latter, Pioneer says: The reinsurers opted instead that the Pioneer Insurance & Surety Corporation
shall pursue alone the case.. . . . Pioneer Insurance & Surety Corporation is representing the
reinsurers to recover the amount.' In other words, insofar as the amount paid to it by the reinsurers
Pioneer is suing defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as
attorney-in- fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has no
 right to institute and maintain in its own name an action for the benefit of the reinsurers. It is well-
settled that an action brought by an attorney-in-fact in his own name instead of that of the principal
will not prosper, and this is so even where the name of the principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be
prosecuted in the name of the real party in interest.' This provision is mandatory.
The real party in interest is the party who would be benefitted or injured by the
judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a real party in
interest, that there is no law permitting an action to be brought by an attorney-in-
fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and
Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L-
22347,1968, 23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00
from the reinsurers, the uninsured portion of what it paid to JDA is the difference between the two
amounts, or P3,666.28. This is the amount for which Pioneer may sue defendants, assuming that
the indemnity agreement is still valid and effective. But since the amount realized from the sale of
the mortgaged chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine,
or a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more
claim against defendants. (Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this
admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers to the
petitioner. Therefore, the petitioner's argument that the respondents had no interest in the reinsurance contract as
this is strictly between the petitioner as insured and the reinsuring company pursuant to Section 91 (should be
Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are
acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time
Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general applicable to actions or
contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA.
380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer
or the person who has violated the contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the
person causing the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil.
1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of
Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the insurer, it is
provided in said article that the insurer is deemed subrogated to the rights of the insured against
the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the
aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision,
the real party in interest with regard to the portion of the indemnity paid is the insurer and not the
insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as
against the respondents for the reason that the petitioner was not the real party in interest in the complaint and,
therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been
dismissed on the premise that the evidence on record shows that it is entitled to recover from the counter
indemnitors. It does not, however, cite any grounds except its allegation that respondent "Maglanas defense and
evidence are certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its finding
that the counter-indemnitors are not liable to the petitioner. The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective
after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue
the bond provided that the same would be mortgaged to it, but this was not possible because the
planes were still in Japan and could not be mortgaged here in the Philippines. As soon as the
aircrafts were brought to the Philippines, they would be mortgaged to Pioneer Insurance to cover
the bond, and this indemnity agreement would be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have impaired and
rendered insufficient the security under the chattel mortgage and there is thus no
other sufficient security for the claim sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no other security for the
claim sought to be enforced by this action, which necessarily means that the indemnity agreement
had ceased to have any force and effect at the time this action was instituted. Sec 2, Rule 129,
Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and
spare parts, no longer has any further action against the defendants as indemnitors to recover any
unpaid balance of the price. The indemnity agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make payments to the latter. Articles 2067 and 2080
of the New Civil Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of foreclosure

precludes any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer
as surety having made of the payments to JDA, the alternative remedies open to Pioneer were as
provided in Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial
foreclosure and the instant suit. Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the purchaser to recover any unpaid
balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance
Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention that
Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of
JDA as vendor, having subrogated it in such rights. Nor may the application of the provision be
validly opposed on the ground that these defendants and defendant Maglana are not the vendee
but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974,
61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates
discharged these defendants from any liability as alleged indemnitors. The change of the maturity
dates of the obligations of Lim, or SAL extinguish the original obligations thru novations thus
discharging the indemnitors.

The principal hereof shall be paid in eight equal successive three months interval
installments, the first of which shall be due and payable 25 August 1965, the
remainder of which ... shall be due and payable on the 26th day x x x of each
succeeding three months and the last of which shall be due and payable 26th May
1967.

However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and
JDA, modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eight equal successive three month interval
installments the first of which shall be due and payable 4 September 1965, the
remainder of which ... shall be due and payable on the 4th day ... of each
succeeding months and the last of which shall be due and payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates
different from that fixed in the aforesaid memorandum; the due date of the first installment appears
as October 15, 1965, and those of the rest of the installments, the 15th of each succeeding three
months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected twice, were done
without the knowledge, much less, would have it believed that these defendants Maglana (sic).
Pioneer's official Numeriano Carbonel would have it believed that these defendants and defendant
Maglana knew of and consented to the modification of the obligations. But if that were so, there
would have been the corresponding documents in the form of a written notice to as well as written
conformity of these defendants, and there are no such document. The consequence of this was
the extinguishment of the obligations and of the surety bond secured by the indemnity agreement
which was thereby also extinguished. Applicable by analogy are the rulings of the Supreme Court
in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic
Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty The mere failure on the part of the creditor
to demand payment after the debt has become due does not of itself constitute any
extension time referred to herein, (New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v.
Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action to recover from these defendants, as
supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the surety
bond, the failure of JDA to present its claim to Pioneer within ten days from default of Lim or SAL
on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the
indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from
his co-debtors if such payment is made after the obligation has prescribed or
became illegal.
 These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety
by reason of the filing of the instant case against them and the attachment and garnishment of
their properties. The instant action is clearly unfounded insofar as plaintiff drags these defendants
and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement was to do
business through the corporate vehicle but who failed to incorporate the entity in which they had
chosen to invest? How are the losses to be treated in situations where their contributions to the
intended 'corporation' were invested not through the corporate form? This Petition presents these
fundamental questions which we believe were resolved erroneously by the Court of Appeals ('CA').
(Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents Bormaheco,
Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto partnership among them
was created, and that as a consequence of such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution. The petitioner, therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by the respondents to the petitioner as their contributions to the
intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total
amount of P184,878.74 as correctly found by the trial court, with interest from the filing of the
cross-complaints until the amount is fully paid. Defendant Lim should pay one-half of the said
amount to Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is
established in the records that defendant Lim had duly received the amount of Pl51,000.00 from
defendants Bormaheco and Maglana representing the latter's participation in the ownership of the
subject airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the stockholders in a defectively
incorporated association should be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121,
96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name occupy the position of partners
inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons
associate themselves together under articles to purchase property to carry on a business, and their
organization is so defective as to come short of creating a corporation within the statute, they
become in legal effect partners inter se, and their rights as members of the company to the
property acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A.
268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain persons associated
themselves as a corporation for the development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was ever issued in the corporation,
it was treated as a trustee for the associates in an action between them for an accounting, and its
capital stock was treated as partnership assets, sold, and the proceeds distributed among them in
proportion to the value of the property contributed by each (Shorb v. Beaudry, 56 Cal.
446). However, such a relation does not necessarily exist, for ordinarily persons cannot be made
to assume the relation of partners, as between themselves, when their purpose is that no
partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29
 L.Ed. 688), and it should be implied only when necessary to do justice between the parties; thus,
one who takes no part except to subscribe for stock in a proposed corporation which is never
legally formed does not become a partner with other subscribers who engage in business under
the name of the pretended corporation, so as to be liable as such in an action for settlement of the
alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation
between certain stockholders and other stockholders, who were also directors, will not be implied
in the absence of an agreement, so as to make the former liable to contribute for payment of debts
illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris
Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during the
pretrial despite notification. In his answer, the petitioner denied having received any amount from respondents
Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court, however, found through Exhibit
58, that the petitioner received the amount of P151,000.00 representing the participation of Bormaheco and Atty.
Constancio B. Maglana in the ownership of the subject airplanes and spare parts. The record shows that
defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite
his representations to them. This gives credence to the cross-claims of the respondents to the effect that they
were induced and lured by the petitioner to make contributions to a proposed corporation which was never formed
because the petitioner reneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to
expand his airline business. Lim was to procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the required permits for the operation
thereof. Maglana sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to
Lim which Cervantes did and Lim acknowledged receipt thereof. Cervantes, likewise, delivered his
share of the undertaking. Lim in an undertaking sometime on or about August 9,1965, promised to
incorporate his airline in accordance with their agreement and proceeded to acquire the planes on
his own account. Since then up to the filing of this answer, Lim has refused, failed and still refuses
to set up the corporation or return the money of Maglana. (Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third
party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase
two airplanes and spare parts from Japan which the latter considered as their lawful contribution
and participation in the proposed corporation to be known as SAL. Arrangements and negotiations
were undertaken by defendant Lim. Down payments were advanced by defendants Bormaheco
and the Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement among the
defendants, defendant Lim in connivance with the plaintiff, signed and executed the alleged chattel
mortgage and surety bond agreement in his personal capacity as the alleged proprietor of the SAL.
The answering defendants learned for the first time of this trickery and misrepresentation of the
other, Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant
Lim, thereby forcing them to file an adverse claim in the form of third party claim. Notwithstanding
repeated oral demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to
surrender the possession of the two planes and their accessories and or return the amount
advanced by the former amounting to an aggregate sum of P 178,997.14 as evidenced by a
statement of accounts, the latter ignored, omitted and refused to comply with them. (Record on
Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership
was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the
proposed corporation. The record shows that the petitioner was acting on his own and not in behalf of his other
would-be incorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.

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

Feliciano, J., took no part.

14 G.R. NOS. 166299-300 December 13, 2005

AURELIO K. LITONJUA, JR., Petitioner,

vs.
EDUARDO K. LITONJUA, SR., ROBERT T. YANG, ANGLO PHILS. MARITIME, INC., CINEPLEX, INC., DDM
GARMENTS, INC., EDDIE K. LITONJUA SHIPPING AGENCY, INC., EDDIE K. LITONJUA SHIPPING CO., INC.,
LITONJUA SECURITIES, INC. (formerly E. K. Litonjua Sec), LUNETA THEATER, INC., E & L REALTY,
(formerly E & L INT’L SHIPPING CORP.), FNP CO., INC., HOME ENTERPRISES, INC., BEAUMONT DEV.
REALTY CO., INC., GLOED LAND CORP., EQUITY TRADING CO., INC., 3D CORP., "L" DEV. CORP, LCM
THEATRICAL ENTERPRISES, INC., LITONJUA SHIPPING CO. INC., MACOIL INC., ODEON REALTY CORP.,
SARATOGA REALTY, INC., ACT THEATER INC. (formerly General Theatrical & Film Exchange, INC.),
AVENUE REALTY, INC., AVENUE THEATER, INC. and LVF PHILIPPINES, INC., (Formerly VF
PHILIPPINES),Respondents.

DECISION

GARCIA, J.:

In this petition for review under Rule 45 of the Rules of Court, petitioner Aurelio K. Litonjua, Jr. seeks to nullify and
set aside the Decision of the Court of Appeals (CA) dated March 31, 2004 in consolidated cases C.A. G.R. Sp.
1

No. 76987 and C.A. G.R. SP. No 78774 and its Resolution dated December 07, 2004, denying petitioner’s motion
2

for reconsideration.

The recourse is cast against the following factual backdrop:

Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K. Litonjua, Sr. (Eduardo) are brothers.
The legal dispute between them started when, on December 4, 2002, in the Regional Trial Court (RTC) at Pasig
City, Aurelio filed a suit against his brother Eduardo and herein respondent Robert T. Yang (Yang) and several
corporations for specific performance and accounting. In his complaint, docketed as Civil Case No. 69235 and
3

eventually raffled to Branch 68 of the court, Aurelio alleged that, since June 1973, he and Eduardo are into a joint
4

venture/partnership arrangement in the Odeon Theater business which had expanded thru investment in Cineplex,
Inc., LCM Theatrical Enterprises, Odeon Realty Corporation (operator of Odeon I and II theatres), Avenue Realty,
Inc., owner of lands and buildings, among other corporations. Yang is described in the complaint as petitioner’s
and Eduardo’s partner in their Odeon Theater investment. The same complaint also contained the following
5

material averments:

3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered into a joint venture/partnership for the continuation
of their family business and common family funds ….

3.01.1 This joint venture/[partnership] agreement was contained in a memorandum addressed by Eduardo to his
siblings, parents and other relatives. Copy of this memorandum is attached hereto and made an integral part
as Annex "A" and the portion referring to [Aurelio] submarked as Annex "A-1".
3.02 It was then agreed upon between [Aurelio] and Eduardo that in consideration of [Aurelio’s] retaining his share
in the remaining family businesses (mostly, movie theaters, shipping and land development) and contributing his
industry to the continued operation of these businesses, [Aurelio] will be given P1 Million or 10% equity in all these
businesses and those to be subsequently acquired by them whichever is greater. . . .

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

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

xxx xxx xxx

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

xxx xxx xxx

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

xxx xxx xxx

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

For ease of reference, Annex "A-1" of the complaint, which petitioner asserts to have been meant for him by his
brother Eduardo, pertinently reads:

10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:

You have now your own life to live after having been married. ….

I am trying my best to mold you the way I work so you can follow the pattern …. You will be the only one left with
the company, among us brothers and I will ask you to stay as I want you to run this office every time I am away. I
want you to run it the way I am trying to run it because I will be all alone and I will depend entirely to you (sic). My
sons will not be ready to help me yet until about maybe 15/20 years from now. Whatever is left in the corporation, I
will make sure that you get ONE MILLION PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is
greater. We two will gamble the whole thing of what I have and what you are entitled to. …. It will be you and me
alone on this. If ever I pass away, I want you to take care of all of this. You keep my share for my two sons are
ready take over but give them the chance to run the company which I have built.

xxx xxx xxx

Because you will need a place to stay, I will arrange to give you first ONE HUNDRED THOUSANDS PESOS:
(P100, 000.00) in cash or asset, like Lt. Artiaga so you can live better there. The rest I will give you in form of
stocks which you can keep. This stock I assure you is good and saleable. I will also gladly give you the share of
Wack-Wack …and Valley Golf … because you have been good. The rest will be in stocks from all the corporations
which I repeat, ten percent (10%) equity. 6

On December 20, 2002, Eduardo and the corporate respondents, as defendants a quo, filed a joint ANSWER With
Compulsory Counterclaim denying under oath the material allegations of the complaint, more particularly that
portion thereof depicting petitioner and Eduardo as having entered into a contract of partnership. As affirmative
defenses, Eduardo, et al., apart from raising a jurisdictional matter, alleged that the complaint states no cause of
action, since no cause of action may be derived from the actionable document, i.e., Annex "A-1", being void under
the terms of Article 1767 in relation to Article 1773 of the Civil Code, infra. It is further alleged that whatever
undertaking Eduardo agreed to do, if any, under Annex "A-1", are unenforceable under the provisions of the
Statute of Frauds. 7

For his part, Yang - who was served with summons long after the other defendants submitted their answer –
moved to dismiss on the ground, inter alia, that, as to him, petitioner has no cause of action and the complaint
does not state any. Petitioner opposed this motion to dismiss.
8

On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative Defenses. To this motion, petitioner
9

interposed an Opposition with ex-Parte Motion to Set the Case for Pre-trial. 10

Acting on the separate motions immediately adverted to above, the trial court, in an Omnibus Order dated March
5, 2003, denied the affirmative defenses and, except for Yang, set the case for pre-trial on April 10, 2003. 11

In another Omnibus Order of April 2, 2003, the same court denied the motion of Eduardo, et al., for
reconsideration and Yang’s motion to dismiss. The following then transpired insofar as Yang is concerned:
12

1. On April 14, 2003, Yang filed his ANSWER, but expressly reserved the right to seek reconsideration of the April
2, 2003 Omnibus Order and to pursue his failed motion to dismiss to its full resolution.
13

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

3. On August 26, 2003, Yang went to the Court of Appeals (CA) in a petition for certiorari under Rule 65 of the
Rules of Court, docketed as CA-G.R. SP No. 78774, to nullify the separate orders of the trial court, the first
15

denying his motion to dismiss the basic complaint and, the second, denying his motion for reconsideration.

Earlier, Eduardo and the corporate defendants, on the contention that grave abuse of discretion and injudicious
haste attended the issuance of the trial court’s aforementioned Omnibus Orders dated March 5, and April 2, 2003,
sought relief from the CA via similar recourse. Their petition for certiorari was docketed as CA G.R. SP No. 76987.

Per its resolution dated October 2, 2003, the CA’s 14th Division ordered the consolidation of CA G.R. SP No.
16

78774 with CA G.R. SP No. 76987.

Following the submission by the parties of their respective Memoranda of Authorities, the appellate court came out
with the herein assailed Decision dated March 31, 2004, finding for Eduardo and Yang, as lead petitioners
therein, disposing as follows:

WHEREFORE, judgment is hereby rendered granting the issuance of the writ of certiorari in these consolidated
cases annulling, reversing and setting aside the assailed orders of the court a quo dated March 5, 2003, April 2,
2003 and July 4, 2003 and the complaint filed by private respondent [now petitioner Aurelio] against all the
petitioners [now herein respondents Eduardo, et al.] with the court a quo is hereby dismissed.

SO ORDERED. (Emphasis in the original; words in bracket added.)

17

Explaining its case disposition, the appellate court stated, inter alia, that the alleged partnership, as evidenced by
the actionable documents, Annex "A" and "A-1" attached to the complaint, and upon which petitioner solely
predicates his right/s allegedly violated by Eduardo, Yang and the corporate defendants a quo is "void or legally
inexistent".

In time, petitioner moved for reconsideration but his motion was denied by the CA in its equally
assailed Resolution of December 7, 2004. . 18

Hence, petitioner’s present recourse, on the contention that the CA erred:

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

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

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

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

The petition lacks merit.

Petitioner’s demand, as defined in the petitory portion of his complaint in the trial court, is for delivery or payment
to him, as Eduardo’s and Yang’s partner, of his partnership/joint venture share, after an accounting has been duly
conducted of what he deems to be partnership/joint venture property. 19

A partnership exists when two or more persons agree to place their money, effects, labor, and skill in lawful
commerce or business, with the understanding that there shall be a proportionate sharing of the profits and losses
between them. A contract of partnership is defined by the Civil Code as one where two or more persons bound
20

themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits
among themselves. A joint venture, on the other hand, is hardly distinguishable from, and may be likened to, a
21

partnership since their elements are similar, i.e., community of interests in the business and sharing of profits and
losses. Being a form of partnership, a joint venture is generally governed by the law on partnership. 22

The underlying issue that necessarily comes to mind in this proceedings is whether or not petitioner and
respondent Eduardo are partners in the theatre, shipping and realty business, as one claims but which the other
denies. And the issue bearing on the first assigned error relates to the question of what legal provision is
applicable under the premises, petitioner seeking, as it were, to enforce the actionable document - Annex "A-1" -
which he depicts in his complaint to be the contract of partnership/joint venture between himself and Eduardo.
Clearly, then, a look at the legal provisions determinative of the existence, or defining the formal requisites, of a
partnership is indicated. Foremost of these are the following provisions of the Civil Code:

Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary.

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

Failure to comply with the requirement of the preceding paragraph shall not affect the liability of the partnership
and the members thereof to third persons.

Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of
said property is not made, signed by the parties, and attached to the public instrument.

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

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

Significantly enough, petitioner matter-of-factly concurred with the appellate court’s observation that, prescinding
from what he himself alleged in his basic complaint, his contribution to the partnership consisted of his share in the
Litonjua family businesses which owned variable immovable properties. Petitioner’s assertion in his motion for
reconsideration of the CA’s decision, that "what was to be contributed to the business [of the partnership] was
24

[petitioner’s] industry and his share in the family [theatre and land development] business" leaves no room for
speculation as to what petitioner contributed to the perceived partnership.

Lest it be overlooked, the contract-validating inventory requirement under Article 1773 of the Civil Code applies as
long real property or real rights are initially brought into the partnership. In short, it is really of no moment which of
the partners, or, in this case, who between petitioner and his brother Eduardo, contributed immovables. In context,
the more important consideration is that real property was contributed, in which case an inventory of the
contributed property duly signed by the parties should be attached to the public instrument, else there is legally no
partnership to speak of.

Petitioner, in an obvious bid to evade the application of Article 1773, argues that the immovables in question were
not contributed, but were acquired after the formation of the supposed partnership. Needless to stress, the Court
cannot accord cogency to this specious argument. For, as earlier stated, petitioner himself admitted contributing
his share in the supposed shipping, movie theatres and realty development family businesses which already
owned immovables even before Annex "A-1" was allegedly executed.

Considering thus the value and nature of petitioner’s alleged contribution to the purported partnership, the Court,
even if so disposed, cannot plausibly extend Annex "A-1" the legal effects that petitioner so desires and pleads to
be given. Annex "A-1", in fine, cannot support the existence of the partnership sued upon and sought to be
enforced. The legal and factual milieu of the case calls for this disposition. A partnership may be constituted in any
form, save when immovable property or real rights are contributed thereto or when the partnership has a capital of
at least ₱3,000.00, in which case a public instrument shall be necessary. And if only to stress what has repeatedly
25

been articulated, an inventory to be signed by the parties and attached to the public instrument is
also indispensable to the validity of the partnership whenever immovable property is contributed to it.

Given the foregoing perspective, what the appellate court wrote in its assailed Decision about the probative value
26

and legal effect of Annex "A-1" commends itself for concurrence:

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

Likewise well-taken are the following complementary excerpts from the CA’s equally assailed Resolution of
December 7, 2004 denying petitioner’s motion for reconsideration:
27

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

Under the second assigned error, it is petitioner’s posture that Annex "A-1", assuming its inefficacy or nullity as a
partnership document, nevertheless created demandable rights in his favor. As petitioner succinctly puts it in this
petition:

43. Contrariwise, this actionable document, especially its above-quoted provisions, established an actionable
contract even though it may not be a partnership. This actionable contract is what is known as an innominate
contract (Civil Code, Article 1307).

44. It may not be a contract of loan, or a mortgage or whatever, but surely the contract does create rights and
obligations of the parties and which rights and obligations may be enforceable and demandable. Just because the
relationship created by the agreement cannot be specifically labeled or pigeonholed into a category of nominate
contract does not mean it is void or unenforceable.

Petitioner has thus thrusted the notion of an innominate contract on this Court - and earlier on the CA after he
experienced a reversal of fortune thereat - as an afterthought. The appellate court, however, cannot really be
faulted for not yielding to petitioner’s dubious stratagem of altering his theory of joint venture/partnership to an
innominate contract. For, at bottom, the appellate court’s certiorari jurisdiction was circumscribed by what was
alleged to have been the order/s issued by the trial court in grave abuse of discretion. As respondent Yang
pointedly observed, since the parties’ basic position had been well-defined, that of petitioner being that the
28

actionable document established a partnership/joint venture, it is on those positions that the appellate court
exercised its certiorari jurisdiction. Petitioner’s act of changing his original theory is an impermissible practice and
constitutes, as the CA aptly declared, an admission of the untenability of such theory in the first place.

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

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

But even assuming in gratia argumenti that Annex "A-1" partakes of a perfected innominate contract, petitioner’s
complaint would still be dismissible as against Eduardo and, more so, against Yang. It cannot be over-emphasized
that petitioner points to Eduardo as the author of Annex "A-1". Withal, even on this consideration alone,
petitioner’s claim against Yang is doomed from the very start.

As it were, the only portion of Annex "A-1" which could perhaps be remotely regarded as vesting petitioner with a
right to demand from respondent Eduardo the observance of a determinate conduct, reads:

xxx You will be the only one left with the company, among us brothers and I will ask you to stay as I want you to
run this office everytime I am away. I want you to run it the way I am trying to run it because I will be alone and I
will depend entirely to you, My sons will not be ready to help me yet until about maybe 15/20 years from
now. Whatever is left in the corporation, I will make sure that you get ONE MILLION PESOS (P1,000,000.00) or
ten percent (10%) equity, whichever is greater. (Underscoring added)

It is at once apparent that what respondent Eduardo imposed upon himself under the above passage, if he indeed
wrote Annex "A-1", is a promise which is not to be performed within one year from "contract" execution on June
22, 1973. Accordingly, the agreement embodied in Annex "A-1" is covered by the Statute of Frauds
and ergounenforceable for non-compliance therewith. By force of the statute of frauds, an agreement that by its
30

terms is not to be performed within a year from the making thereof shall be unenforceable by action, unless the
same, or some note or memorandum thereof, be in writing and subscribed by the party charged. Corollarily, no
action can be proved unless the requirement exacted by the statute of frauds is complied with. 31
Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10% equity of the family businesses
supposedly promised by Eduardo to give in the near future. Any suggestion that the stated amount or the equity
component of the promise was intended to go to a common fund would be to read something not written
in Annex"A-1". Thus, even this angle alone argues against the very idea of a partnership, the creation of which
requires two or more contracting minds mutually agreeing to contribute money, property or industry to a common
fund with the intention of dividing the profits between or among themselves. 32

In sum then, the Court rules, as did the CA, that petitioner’s complaint for specific performance anchored on an
actionable document of partnership which is legally inexistent or void or, at best, unenforceable does not state a
cause of action as against respondent Eduardo and the corporate defendants. And if no of action can successfully
be maintained against respondent Eduardo because no valid partnership existed between him and petitioner, the
Court cannot see its way clear on how the same action could plausibly prosper against Yang. Surely, Yang could
not have become a partner in, or could not have had any form of business relationship with, an inexistent
partnership.

As may be noted, petitioner has not, in his complaint, provide the logical nexus that would tie Yang to him as his
partner. In fact, attendant circumstances would indicate the contrary. Consider:

1. Petitioner asserted in his complaint that his so-called joint venture/partnership with Eduardo was "for the
continuation of their family business and common family funds which were theretofore being mainly managed by
Eduardo." But Yang denies kinship with the Litonjua family and petitioner has not disputed the disclaimer.
33

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

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

Needless to stress, petitioner has not sufficiently established in his complaint the legal vinculum whence he
sourced his right to drag Yang into the fray. The Court of Appeals, in its assailed decision, captured and formulated
the legal situation in the following wise:

[Respondent] Yang, … is impleaded because, as alleged in the complaint, he is a "partner" of [Eduardo] and the
[petitioner] in the Odeon Theater Investment which expanded through reinvestments of profits and direct
investments in several corporations, thus:

xxx xxx xxx

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

Pressing its point, the CA later stated in its resolution denying petitioner’s motion for reconsideration the following:

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

The last issue raised by petitioner, referring to whether or not he changed his theory of the case, as peremptorily
determined by the CA, has been discussed at length earlier and need not detain us long. Suffice it to say that after
the CA has ruled that the alleged partnership is inexistent, petitioner took a different tack. Thus, from a joint
venture/partnership theory which he adopted and consistently pursued in his complaint, petitioner embraced the
innominate contract theory. Illustrative of this shift is petitioner’s statement in par. #8 of his motion for
reconsideration of the CA’s decision combined with what he said in par. # 43 of this petition, as follows:

8. Whether or not the actionable document creates a partnership, joint venture, or whatever, is a legal matter.
What is determinative for purposes of sufficiency of the complainant’s allegations, is whether the actionable
document bears out an actionable contract – be it a partnership, a joint venture or whatever or some innominate
contract … It may be noted that one kind of innominate contract is what is known as du ut facias (I give that you
may do). 37

43. Contrariwise, this actionable document, especially its above-quoted provisions, established an actionable
contract even though it may not be a partnership. This actionable contract is what is known as an innominate
contract (Civil Code, Article 1307).38

Springing surprises on the opposing party is offensive to the sporting idea of fair play, justice and due process;
hence, the proscription against a party shifting from one theory at the trial court to a new and different theory in the
appellate court. On the same rationale, an issue which was neither averred in the complaint cannot be raised for
39

the first time on appeal. It is not difficult, therefore, to agree with the CA when it made short shrift of petitioner’s
40

innominate contract theory on the basis of the foregoing basic reasons.

Petitioner’s protestation that his act of introducing the concept of innominate contract was not a case of changing
theories but of supporting his pleaded cause of action – that of the existence of a partnership - by another legal
perspective/argument, strikes the Court as a strained attempt to rationalize an untenable position. Paragraph 12 of
his motion for reconsideration of the CA’s decision virtually relegates partnership as a fall-back theory. Two
paragraphs later, in the same notion, petitioner faults the appellate court for reading, with myopic eyes, the
actionable document solely as establishing a partnership/joint venture. Verily, the cited paragraphs are a study of a
party hedging on whether or not to pursue the original cause of action or altogether abandoning the same, thus:

12. Incidentally, assuming that the actionable document created a partnership between [respondent] Eduardo, Sr.
and [petitioner], no immovables were contributed to this partnership. xxx

14. All told, the Decision takes off from a false premise that the actionable document attached to the complaint
does not establish a contractual relationship between [petitioner] and … Eduardo, Sr. and Roberto T Yang simply
because his document does not create a partnership or a joint venture. This is … a myopic reading of the
actionable document.

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

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

Cost against the petitioner.

SO ORDERED.

CANCIO C. GARCIA

Associate Justice

WE CONCUR:

ARTEMIO V. PANGANIBAN

Associate Justice

ANGELINA SANDOVAL-GUTIERREZ RENATO C. CORONA

Associate Justice Associate Justice

CONCHITA CARPIO MORALES

Associate Justice

ATTESTATION

I attest that the conclusions in the above decision were reached in consultation before the case was assigned to
the writer of the opinion of the Court’s Division.

ARTEMIO V. PANGANIBAN

Associate Justice

Chairman, Third Division

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairman's Attestation, it is hereby certified
that the conclusions in the above decision were reached in consultation before the case was assigned to the writer
of the opinion of the Court.

HILARIO G. DAVIDE, JR.

Chief Justice

Footnotes
1
Penned by Associate Justice Bienvenido L. Reyes, concurred in by Associate Justices Conrado M.
Vasquez, Jr. and Arsenio J. Magpale; Rollo, pp. 27 et seq.

2
Rollo, pp. 58 et seq.

3
Ibid, pp. 63 et seq.

4
Presided by Hon. Santiago G. Estrella.

5
Par. 2.03 of the Complaint.

6
Rollo, p. 552.

7
Id., pp. 70 et seq.

8
Id., pp. 99 et seq.

9
Id., pp.87 et seq.

10
Id., pp. 93 et seq.

11
Id., pp. 97-98.

12
Id., pp. 135 et seq.

13
See Note No. 8, supra.

14
Rollo, p. 161.

15
Ibid, pp. 206 et seq.

16
Id., p. 253.

As corrected per CA Resolution dated July 14, 2004 to conform to the actual dates of the assailed orders;
17

Rollo, pp. 326 et seq. The correction consisted of changing the dates "March 5, 2002, April 2, 2002 and
July 2, 2003" appearing in the original CA decision to "March 5, 2003, April 2, 2003 and July 4, 2003",
respectively.

18
See Note #2, supra.

19
Complaint, p. 6; Rollo, p. 68.

20
Black’s Law Dictionary, 6th ed., p. 1120.

21
Art. 1767.

Heirs of Tan Eng Kee vs. CA, 341 SCRA 740 [2000], citing Aurbach vs. Sanitary Wares Manufacturing
22

Corp. , 180 SCRA 130 [1989].

23
At. p. 6 of the Decision, Rollo, p. 42.

24
At p. 6 of the motion for reconsideration; Rollo, p. 55.

25
Vitug, COMPENDIUM of CIVIL LAW and JURISPRUDENCE, Rev. ed., (1993), p. 712.

26
See Note #1, supra.
27
See Note #2, supra.

28
Page 26 of Yang’s Memorandum; Rollo, p. 494.

29
Page 4 of the CA’s assailed Resolution; Rollo, p. 61.

30
#2 (a) of Art. 1403 of the Civil Code.

31
Tolentino, CIVIL CODE OF THE PHILIPPINES, Vol. IV, 1991 ed., p. 617.