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Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-12541 August 28, 1959

ROSARIO U. YULO, assisted by her husband JOSE C.


YULO, plaintiffs-appellants,
vs.
YANG CHIAO SENG, defendant-appellee.

Punzalan, Yabut, Eusebio & Tiburcio for appellants.


Augusto Francisco and Julian T. Ocampo for appellee.

LABRADOR, J.:

Appeal from the judgment of the Court of First Instance of


Manila, Hon. Bienvenido A. Tan, presiding, dismissing
plaintiff's complaint as well as defendant's counterclaim.
The appeal is prosecuted by plaintiff.

The record discloses that on June 17, 1945, defendant


Yang Chiao Seng wrote a letter to the palintiff Mrs. Rosario
U. Yulo, proposing the formation of a partnership between
them to run and operate a theatre on the premises
occupied by former Cine Oro at Plaza Sta. Cruz, Manila.
The principal conditions of the offer are (1) that Yang
Chiao Seng guarantees Mrs. Yulo a monthly participation
of P3,000 payable quarterly in advance within the first 15
days of each quarter, (2) that the partnership shall be for a
period of two years and six months, starting from July 1,
1945 to December 31, 1947, with the condition that if the
land is expropriated or rendered impracticable for the
business, or if the owner constructs a permanent building
thereon, or Mrs. Yulo's right of lease is terminated by the
owner, then the partnership shall be terminated even if the
period for which the partnership was agreed to be
established has not yet expired; (3) that Mrs. Yulo is
authorized personally to conduct such business in the
lobby of the building as is ordinarily carried on in lobbies of
theatres in operation, provided the said business may not
obstruct the free ingress and agrees of patrons of the
theatre; (4) that after December 31, 1947, all
improvements placed by the partnership shall belong to
Mrs. Yulo, but if the partnership agreement is terminated
before the lapse of one and a half years period under any
of the causes mentioned in paragraph (2), then Yang
Chiao Seng shall have the right to remove and take away
all improvements that the partnership may place in the
premises.

Pursuant to the above offer, which plaintiff evidently


accepted, the parties executed a partnership agreement
establishing the "Yang & Company, Limited," which was to
exist from July 1, 1945 to December 31, 1947. It states that
it will conduct and carry on the business of operating a
theatre for the exhibition of motion and talking pictures.
The capital is fixed at P100,000, P80,000 of which is to be
furnished by Yang Chiao Seng and P20,000, by Mrs. Yulo.
All gains and profits are to be distributed among the
partners in the same proportion as their capital contribution
and the liability of Mrs. Yulo, in case of loss, shall be limited
to her capital contribution (Exh. "B").

In June , 1946, they executed a supplementary agreement,


extending the partnership for a period of three years
beginning January 1, 1948 to December 31, 1950. The
benefits are to be divided between them at the rate of
50-50 and after December 31, 1950, the showhouse
building shall belong exclusively to the second party, Mrs.
Yulo.

The land on which the theatre was constructed was leased


by plaintiff Mrs. Yulo from Emilia Carrion Santa Marina and
Maria Carrion Santa Marina. In the contract of lease it was
stipulated that the lease shall continue for an indefinite
period of time, but that after one year the lease may be
cancelled by either party by written notice to the other party
at least 90 days before the date of cancellation. The last
contract was executed between the owners and Mrs. Yulo
on April 5, 1948. But on April 12, 1949, the attorney for the
owners notified Mrs. Yulo of the owner's desire to cancel
the contract of lease on July 31, 1949. In view of the above
notice, Mrs. Yulo and her husband brought a civil action to
the Court of First Instance of Manila on July 3, 1949 to
declare the lease of the premises. On February 9, 1950,
the Municipal Court of Manila rendered judgment ordering
the ejectment of Mrs. Yulo and Mr. Yang. The judgment
was appealed. In the Court of First Instance, the two cases
were afterwards heard jointly, and judgment was rendered
dismissing the complaint of Mrs. Yulo and her husband,
and declaring the contract of lease of the premises
terminated as of July 31, 1949, and fixing the reasonable
monthly rentals of said premises at P100. Both parties
appealed from said decision and the Court of Appeals, on
April 30, 1955, affirmed the judgment.

On October 27, 1950, Mrs. Yulo demanded from Yang


Chiao Seng her share in the profits of the business. Yang
answered the letter saying that upon the advice of his
counsel he had to suspend the payment (of the rentals)
because of the pendency of the ejectment suit by the
owners of the land against Mrs. Yulo. In this letter Yang
alleges that inasmuch as he is a sublessee and inasmuch
as Mrs. Yulo has not paid to the lessors the rentals from
August, 1949, he was retaining the rentals to make good to
the landowners the rentals due from Mrs. Yulo in arrears
(Exh. "E").

In view of the refusal of Yang to pay her the amount


agreed upon, Mrs. Yulo instituted this action on May 26,
1954, alleging the existence of a partnership between
them and that the defendant Yang Chiao Seng has refused
to pay her share from December, 1949 to December, 1950;
that after December 31, 1950 the partnership between Mrs.
Yulo and Yang terminated, as a result of which, plaintiff
became the absolute owner of the building occupied by the
Cine Astor; that the reasonable rental that the defendant
should pay therefor from January, 1951 is P5,000; that the
defendant has acted maliciously and refuses to pay the
participation of the plaintiff in the profits of the business
amounting to P35,000 from November, 1949 to October,
1950, and that as a result of such bad faith and malice on
the part of the defendant, Mrs. Yulo has suffered damages
in the amount of P160,000 and exemplary damages to the
extent of P5,000. The prayer includes a demand for the
payment of the above sums plus the sum of P10,000 for
the attorney's fees.

In answer to the complaint, defendant alleges that the real


agreement between the plaintiff and the defendant was
one of lease and not of partnership; that the partnership
was adopted as a subterfuge to get around the prohibition
contained in the contract of lease between the owners and
the plaintiff against the sublease of the said property. As to
the other claims, he denies the same and alleges that the
fair rental value of the land is only P1,100. By way of
counterclaim he alleges that by reason of an attachment
issued against the properties of the defendant the latter
has suffered damages amounting to P100,000.

The first hearing was had on April 19, 1955, at which time
only the plaintiff appeared. The court heard evidence of the
plaintiff in the absence of the defendant and thereafter
rendered judgment ordering the defendant to pay to the
plaintiff P41,000 for her participation in the business up to
December, 1950; P5,000 as monthly rental for the use and
occupation of the building from January 1, 1951 until
defendant vacates the same, and P3,000 for the use and
occupation of the lobby from July 1, 1945 until defendant
vacates the property. This decision, however, was set
aside on a motion for reconsideration. In said motion it is
claimed that defendant failed to appear at the hearing
because of his honest belief that a joint petition for
postponement filed by both parties, in view of a possible
amicable settlement, would be granted; that in view of the
decision of the Court of Appeals in two previous cases
between the owners of the land and the plaintiff Rosario
Yulo, the plaintiff has no right to claim the alleged
participation in the profit of the business, etc. The court,
finding the above motion, well-founded, set aside its
decision and a new trial was held. After trial the court
rendered the decision making the following findings: that it
is not true that a partnership was created between the
plaintiff and the defendant because defendant has not
actually contributed the sum mentioned in the Articles of
Partnership, or any other amount; that the real agreement
between the plaintiff and the defendant is not of the
partnership but one of the lease for the reason that under
the agreement the plaintiff did not share either in the profits
or in the losses of the business as required by Article 1769
of the Civil Code; and that the fact that plaintiff was granted
a "guaranteed participation" in the profits also belies the
supposed existence of a partnership between them. It.
therefore, denied plaintiff's claim for damages or supposed
participation in the profits.

As to her claim for damages for the refusal of the


defendant to allow the use of the supposed lobby of the
theatre, the court after ocular inspection found that the said
lobby was very narrow space leading to the balcony of the
theatre which could not be used for business purposes
under existing ordinances of the City of Manila because it
would constitute a hazard and danger to the patrons of the
theatre. The court, therefore, dismissed the complaint; so
did it dismiss the defendant's counterclaim, on the ground
that the defendant failed to present sufficient evidence to
sustain the same. It is against this decision that the appeal
has been prosecuted by plaintiff to this Court.
The first assignment of error imputed to the trial court is its
order setting aside its former decision and allowing a new
trial. This assignment of error is without merit. As that
parties agreed to postpone the trial because of a probable
amicable settlement, the plaintiff could not take advantage
of defendant's absence at the time fixed for the hearing.
The lower court, therefore, did not err in setting aside its
former judgment. The final result of the hearing shown by
the decision indicates that the setting aside of the previous
decision was in the interest of justice.

In the second assignment of error plaintiff-appellant claims


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

The most important issue raised in the appeal is that


contained in the fourth assignment of error, to the effect
that the lower court erred in holding that the written
contracts, Exhs. "A", "B", and "C, between plaintiff and
defendant, are one of lease and not of partnership. We
have gone over the evidence and we fully agree with the
conclusion of the trial court that the agreement was a
sublease, not a partnership. The following are the
requisites of partnership: (1) two or more persons who bind
themselves to contribute money, property, or industry to a
common fund; (2) intention on the part of the partners to
divide the profits among themselves. (Art. 1767, Civil
Code.).
In the first place, plaintiff did not furnish the supposed
P20,000 capital. In the second place, she did not furnish
any help or intervention in the management of the theatre.
In the third place, it does not appear that she has ever
demanded from defendant any accounting of the expenses
and earnings of the business. Were she really a partner,
her first concern should have been to find out how the
business was progressing, whether the expenses were
legitimate, whether the earnings were correct, etc. She
was absolutely silent with respect to any of the acts that a
partner should have done; all that she did was to receive
her share of P3,000 a month, which can not be interpreted
in any manner than a payment for the use of the premises
which she had leased from the owners. Clearly, plaintiff
had always acted in accordance with the original letter of
defendant of June 17, 1945 (Exh. "A"), which shows that
both parties considered this offer as the real contract
between them.

Plaintiff claims the sum of P41,000 as representing her


share or participation in the business from December,
1949. But the original letter of the defendant, Exh. "A",
expressly states that the agreement between the plaintiff
and the defendant was to end upon the termination of the
right of the plaintiff to the lease. Plaintiff's right having
terminated in July, 1949 as found by the Court of Appeals,
the partnership agreement or the agreement for her to
receive a participation of P3,000 automatically ceased as
of said date.

We find no error in the judgment of the court below and we


affirm it in toto, with costs against plaintiff-appellant.

Paras C.J., Padilla, Bautista Angelo, Endencia, and


Barrera, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 109248 July 3, 1995

GREGORIO F. ORTEGA, TOMAS O. DEL CASTILLO,


JR., and BENJAMIN T. BACORRO, petitioners,
vs.
HON. COURT OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION and JOAQUIN L.
MISA,respondents.

VITUG, J.:

The instant petition seeks a review of the decision


rendered by the Court of Appeals, dated 26 February 1993,
in CA-G.R. SP No. 24638 and No. 24648 affirming in
toto that of the Securities and Exchange Commission
("SEC") in SEC AC 254.

The antecedents of the controversy, summarized by


respondent Commission and quoted at length by the
appellate court in its decision, are hereunder restated.

The law firm of ROSS, LAWRENCE, SELPH and


CARRASCOSO was duly registered in the Mercantile
Registry on 4 January 1937 and reconstituted with the
Securities and Exchange Commission on 4 August 1948.
The SEC records show that there were several
subsequent amendments to the articles of partnership on
18 September 1958, to change the firm [name] to ROSS,
SELPH and CARRASCOSO; on 6 July 1965 . . . to ROSS,
SELPH, SALCEDO, DEL ROSARIO, BITO & MISA; on 18
April 1972 to SALCEDO, DEL ROSARIO, BITO, MISA &
LOZADA; on 4 December 1972 to SALCEDO, DEL
ROSARIO, BITO, MISA & LOZADA; on 11 March 1977 to
DEL ROSARIO, BITO, MISA & LOZADA; on 7 June 1977
to BITO, MISA & LOZADA; on 19 December 1980,
[Joaquin L. Misa] appellees Jesus B. Bito and Mariano M.
Lozada associated themselves together, as senior
partners with respondents-appellees Gregorio F. Ortega,
Tomas O. del Castillo, Jr., and Benjamin Bacorro, as junior
partners.

On February 17, 1988, petitioner-appellant wrote the


respondents-appellees a letter stating:

I am withdrawing and retiring from the firm of Bito, Misa


and Lozada, effective at the end of this month.

"I trust that the accountants will be instructed to make the


proper liquidation of my participation in the firm."

On the same day, petitioner-appellant wrote


respondents-appellees another letter stating:

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


meeting with all of you with regard to the mechanics of
liquidation, and more particularly, my interest in the two
floors of this building. I would like to have this resolved
soon because it has to do with my own plans."

On 19 February 1988, petitioner-appellant wrote


respondents-appellees another letter stating:

"The partnership has ceased to be mutually satisfactory


because of the working conditions of our employees
including the assistant attorneys. All my efforts to
ameliorate the below subsistence level of the pay scale of
our employees have been thwarted by the other partners.
Not only have they refused to give meaningful increases to
the employees, even attorneys, are dressed down publicly
in a loud voice in a manner that deprived them of their
self-respect. The result of such policies is the formation of
the union, including the assistant attorneys."

On 30 June 1988, petitioner filed with this Commission's


Securities Investigation and Clearing Department (SICD) a
petition for dissolution and liquidation of partnership,
docketed as SEC Case No. 3384 praying that the
Commission:

"1. Decree the formal dissolution and order the immediate


liquidation of (the partnership of) Bito, Misa & Lozada;

"2. Order the respondents to deliver or pay for petitioner's


share in the partnership assets plus the profits, rent or
interest attributable to the use of his right in the assets of
the dissolved partnership;

"3. Enjoin respondents from using the firm name of Bito,


Misa & Lozada in any of their correspondence, checks and
pleadings and to pay petitioners damages for the use
thereof despite the dissolution of the partnership in the
amount of at least P50,000.00;

"4. Order respondents jointly and severally to pay


petitioner attorney's fees and expense of litigation in such
amounts as maybe proven during the trial and which the
Commission may deem just and equitable under the
premises but in no case less than ten (10%) per cent of the
value of the shares of petitioner or P100,000.00;

"5. Order the respondents to pay petitioner moral damages


with the amount of P500,000.00 and exemplary damages
in the amount of P200,000.00.
"Petitioner likewise prayed for such other and further reliefs
that the Commission may deem just and equitable under
the premises."

On 13 July 1988, respondents-appellees filed their


opposition to the petition.

On 13 July 1988, petitioner filed his Reply to the


Opposition.

On 31 March 1989, the hearing officer rendered a decision


ruling that:

"[P]etitioner's withdrawal from the law firm Bito, Misa &


Lozada did not dissolve the said law partnership.
Accordingly, the petitioner and respondents are hereby
enjoined to abide by the provisions of the Agreement
relative to the matter governing the liquidation of the
shares of any retiring or withdrawing partner in the
partnership interest."1

On appeal, the SEC en banc reversed the decision of the


Hearing Officer and held that the withdrawal of Attorney
Joaquin L. Misa had dissolved the partnership of "Bito,
Misa & Lozada." The Commission ruled that, being a
partnership at will, the law firm could be dissolved by any
partner at anytime, such as by his withdrawal therefrom,
regardless of good faith or bad faith, since no partner can
be forced to continue in the partnership against his will. In
its decision, dated 17 January 1990, the SEC held:

WHEREFORE, premises considered the appealed order of


31 March 1989 is hereby REVERSED insofar as it
concludes that the partnership of Bito, Misa & Lozada has
not been dissolved. The case is hereby REMANDED to the
Hearing Officer for determination of the respective rights
and obligations of the parties.2
The parties sought a reconsideration of the above decision.
Attorney Misa, in addition, asked for an appointment of a
receiver to take over the assets of the dissolved
partnership and to take charge of the winding up of its
affairs. On 4 April 1991, respondent SEC issued an order
denying reconsideration, as well as rejecting the petition
for receivership, and reiterating the remand of the case to
the Hearing Officer.

The parties filed with the appellate court separate appeals


(docketed CA-G.R. SP No. 24638 and CA-G.R. SP No.
24648).

During the pendency of the case with the Court of Appeals,


Attorney Jesus Bito and Attorney Mariano Lozada both
died on, respectively, 05 September 1991 and 21
December 1991. The death of the two partners, as well as
the admission of new partners, in the law firm prompted
Attorney Misa to renew his application for receivership (in
CA G.R. SP No. 24648). He expressed concern over the
need to preserve and care for the partnership assets. The
other partners opposed the prayer.

The Court of Appeals, finding no reversible error on the


part of respondent Commission, AFFIRMED in toto the
SEC decision and order appealed from. In fine, the
appellate court held, per its decision of 26 February 1993,
(a) that Atty. Misa's withdrawal from the partnership had
changed the relation of the parties and inevitably caused
the dissolution of the partnership; (b) that such withdrawal
was not in bad faith; (c) that the liquidation should be to the
extent of Attorney Misa's interest or participation in the
partnership which could be computed and paid in the
manner stipulated in the partnership agreement; (d) that
the case should be remanded to the SEC Hearing Officer
for the corresponding determination of the value of
Attorney Misa's share in the partnership assets; and (e)
that the appointment of a receiver was unnecessary as no
sufficient proof had been shown to indicate that the
partnership assets were in any such danger of being lost,
removed or materially impaired.

In this petition for review under Rule 45 of the Rules of


Court, petitioners confine themselves to the following
issues:

1. Whether or not the Court of Appeals has erred in holding


that the partnership of Bito, Misa & Lozada (now Bito,
Lozada, Ortega & Castillo) is a partnership at will;

2. Whether or not the Court of Appeals has erred in holding


that the withdrawal of private respondent dissolved the
partnership regardless of his good or bad faith; and

3. Whether or not the Court of Appeals has erred in holding


that private respondent's demand for the dissolution of the
partnership so that he can get a physical partition of
partnership was not made in bad faith;

to which matters we shall, accordingly, likewise limit


ourselves.

A partnership that does not fix its term is a partnership at


will. That the law firm "Bito, Misa & Lozada," and now "Bito,
Lozada, Ortega and Castillo," is indeed such a partnership
need not be unduly belabored. We quote, with approval,
like did the appellate court, the findings and disquisition of
respondent SEC on this matter; viz:

The partnership agreement (amended articles of 19


August 1948) does not provide for a specified period or
undertaking. The "DURATION" clause simply states:

"5. DURATION. The partnership shall continue so long as


mutually satisfactory and upon the death or legal
incapacity of one of the partners, shall be continued by the
surviving partners."
The hearing officer however opined that the partnership is
one for a specific undertaking and hence not a partnership
at will, citing paragraph 2 of the Amended Articles of
Partnership (19 August 1948):

"2. Purpose. The purpose for which the partnership is


formed, is to act as legal adviser and representative of any
individual, firm and corporation engaged in commercial,
industrial or other lawful businesses and occupations; to
counsel and advise such persons and entities with respect
to their legal and other affairs; and to appear for and
represent their principals and client in all courts of justice
and government departments and offices in the Philippines,
and elsewhere when legally authorized to do so."

The "purpose" of the partnership is not the specific


undertaking referred to in the law. Otherwise, all
partnerships, which necessarily must have a purpose,
would all be considered as partnerships for a definite
undertaking. There would therefore be no need to provide
for articles on partnership at will as none would so exist.
Apparently what the law contemplates, is a specific
undertaking or "project" which has a definite or definable
period of completion.3

The birth and life of a partnership at will is predicated on


the mutual desire and consent of the partners. The right to
choose with whom a person wishes to associate himself is
the very foundation and essence of that partnership. Its
continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each partner's
capability to give it, and the absence of a cause for
dissolution provided by the law itself. Verily, any one of the
partners may, at his sole pleasure, dictate a dissolution of
the partnership at will. He must, however, act in good faith,
not that the attendance of bad faith can prevent the
dissolution of the partnership4but that it can result in a
liability for damages.5
In passing, neither would the presence of a period for its
specific duration or the statement of a particular purpose
for its creation prevent the dissolution of any partnership by
an act or will of a partner.6 Among partners,7 mutual
agency arises and the doctrine of delectus
personae allows them to have the power, although not
necessarily the right, to dissolve the partnership. An
unjustified dissolution by the partner can subject him to a
possible action for damages.

The dissolution of a partnership is the change in the


relation of the parties caused by any partner ceasing to be
associated in the carrying on, as might be distinguished
from the winding up of, the business.8 Upon its dissolution,
the partnership continues and its legal personality is
retained until the complete winding up of its business
culminating in its termination.9

The liquidation of the assets of the partnership following its


dissolution is governed by various provisions of the Civil
Code; 10 however, an agreement of the partners, like any
other contract, is binding among them and normally takes
precedence to the extent applicable over the Code's
general provisions. We here take note of paragraph 8 of
the "Amendment to Articles of Partnership" reading thusly:

. . . In the event of the death or retirement of any partner,


his interest in the partnership shall be liquidated and paid
in accordance with the existing agreements and his
partnership participation shall revert to the Senior Partners
for allocation as the Senior Partners may
determine; provided, however, that with respect to the two
(2) floors of office condominium which the partnership is
now acquiring, consisting of the 5th and the 6th floors of
the Alpap Building, 140 Alfaro Street, Salcedo Village,
Makati, Metro Manila, their true value at the time of such
death or retirement shall be determined by two (2)
independent appraisers, one to be appointed (by the
partnership and the other by the) retiring partner or the
heirs of a deceased partner, as the case may be. In the
event of any disagreement between the said appraisers a
third appraiser will be appointed by them whose decision
shall be final. The share of the retiring or deceased partner
in the aforementioned two (2) floor office condominium
shall be determined upon the basis of the valuation above
mentioned which shall be paid monthly within the first ten
(10) days of every month in installments of not less than
P20,000.00 for the Senior Partners, P10,000.00 in the
case of two (2) existing Junior Partners and P5,000.00 in
the case of the new Junior Partner. 11

The term "retirement" must have been used in the articles,


as we so hold, in a generic sense to mean the dissociation
by a partner, inclusive of resignation or withdrawal, from
the partnership that thereby dissolves it.

On the third and final issue, we accord due respect to the


appellate court and respondent Commission on their
common factual finding, i.e., that Attorney Misa did not act
in bad faith. Public respondents viewed his withdrawal to
have been spurred by "interpersonal conflict" among the
partners. It would not be right, we agree, to let any of the
partners remain in the partnership under such an
atmosphere of animosity; certainly, not against their
will. 12 Indeed, for as long as the reason for withdrawal of a
partner is not contrary to the dictates of justice and fairness,
nor for the purpose of unduly visiting harm and damage
upon the partnership, bad faithcannot be said to
characterize the act. Bad faith, in the context here used, is
no different from its normal concept of a conscious and
intentional design to do a wrongful act for a dishonest
purpose or moral obliquity.

WHEREFORE, the decision appealed from is AFFIRMED.


No pronouncement on costs.
SO ORDERED.

FIRST DIVISION

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

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,


vs. COURT OF APPEALS and NENITA A.
ANAY, respondents.

DECISION
YNARES-SANTIAGO, J.:

This is a petition for review of the Decision of the Court


of Appeals in CA-G.R. CV No. 41616,[1] affirming the
Decision of the Regional Trial Court of Makati, Branch 140,
in Civil Case No. 88-509.[2]
Fresh from her stint as marketing adviser of Technolux
in Bangkok, Thailand, private respondent Nenita A. Anay
met petitioner William T. Belo, then the vice-president for
operations of Ultra Clean Water Purifier, through her
former employer in Bangkok. Belo introduced Anay to
petitioner Marjorie Tocao, who conveyed her desire to
enter into a joint venture with her for the importation and
local distribution of kitchen cookwares. Belo volunteered to
finance the joint venture and assigned to Anay the job of
marketing the product considering her experience and
established relationship with West Bend Company, a
manufacturer of kitchen wares in Wisconsin, U.S.A. Under
the joint venture, Belo acted as capitalist, Tocao as
president and general manager, and Anay as head of the
marketing department and later, vice-president for
sales. Anay organized the administrative staff and sales
force while Tocao hired and fired employees, determined
commissions and/or salaries of the employees, and
assigned them to different branches. The parties agreed
that Belos name should not appear in any documents
relating to their transactions with West Bend
Company. Instead, they agreed to use Anays name in
securing distributorship of cookware from that
company. The parties agreed further that Anay would be
entitled to: (1) ten percent (10%) of the annual net profits of
the business; (2) overriding commission of six percent (6%)
of the overall weekly production; (3) thirty percent (30%) of
the sales she would make; and (4) two percent (2%) for her
demonstration services. The agreement was not reduced
to writing on the strength of Belos assurances that he was
sincere, dependable and honest when it came to financial
commitments.
Anay having secured the distributorship of cookware
products from the West Bend Company and organized the
administrative staff and the sales force, the cookware
business took off successfully. They operated under the
name of Geminesse Enterprise, a sole proprietorship
registered in Marjorie Tocaos name, with office at 712
Rufino Building, Ayala Avenue, Makati City. Belo made
good his monetary commitments to Anay. Thereafter,
Roger Muencheberg of West Bend Company invited Anay
to the distributor/dealer meeting in West Bend, Wisconsin,
U.S.A., from July 19 to 21, 1987 and to the southwestern
regional convention in Pismo Beach, California, U.S.A.,
from July 25-26, 1987. Anay accepted the invitation with
the consent of Marjorie Tocao who, as president and
general manager of Geminesse Enterprise, even wrote a
letter to the Visa Section of the U.S. Embassy in Manila on
July 13, 1987. A portion of the letter reads:

Ms. Nenita D. Anay (sic), who has been patronizing and


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

Anay arrived from the U.S.A. in mid-August 1987, and


immediately undertook the task of saving the business on
account of the unsatisfactory sales record in the Makati
and Cubao offices. On August 31, 1987, she received a
plaque of appreciation from the administrative and sales
people through Marjorie Tocao[4] for her excellent job
performance. On October 7, 1987, in the presence of Anay,
Belo signed a memo[5] entitling her to a thirty-seven
percent (37%) commission for her personal sales "up Dec
31/87. Belo explained to her that said commission was
apart from her ten percent (10%) share in the profits. On
October 9, 1987, Anay learned that Marjorie Tocao had
signed a letter[6] addressed to the Cubao sales office to the
effect that she was no longer the vice-president of
Geminesse Enterprise. The following day, October 10, she
received a note from Lina T. Cruz, marketing manager,
that Marjorie Tocao had barred her from holding office and
conducting demonstrations in both Makati and Cubao
offices.[7] Anay attempted to contact Belo. She wrote him
twice to demand her overriding commission for the period
of January 8, 1988 to February 5, 1988 and the audit of the
company to determine her share in the net profits. When
her letters were not answered, Anay consulted her lawyer,
who, in turn, wrote Belo a letter. Still, that letter was not
answered.
Anay still received her five percent (5%) overriding
commission up to December 1987. The following year,
1988, she did not receive the same commission although
the company netted a gross sales of P13,300,360.00.
On April 5, 1988, Nenita A. Anay filed Civil Case No.
88-509, a complaint for sum of money with
damages[8] against Marjorie D. Tocao and William Belo
before the Regional Trial Court of Makati, Branch 140.
In her complaint, Anay prayed that defendants be
ordered to pay her, jointly and severally, the following: (1)
P32,00.00 as unpaid overriding commission from January
8, 1988 to February 5, 1988; (2) P100,000.00 as moral
damages, and (3) P100,000.00 as exemplary damages.
The plaintiff also prayed for an audit of the finances of
Geminesse Enterprise from the inception of its business
operation until she was illegally dismissed to determine her
ten percent (10%) share in the net profits. She further
prayed that she be paid the five percent (5%) overriding
commission on the remaining 150 West Bend cookware
sets before her dismissal.
In their answer,[9] Marjorie Tocao and Belo asserted that
the alleged agreement with Anay that was neither reduced
in writing, nor ratified, was either unenforceable or void or
inexistent. As far as Belo was concerned, his only role was
to introduce Anay to Marjorie Tocao. There could not have
been a partnership because, as Anay herself admitted,
Geminesse Enterprise was the sole proprietorship of
Marjorie Tocao. Because Anay merely acted as marketing
demonstrator of Geminesse Enterprise for an agreed
remuneration, and her complaint referred to either her
compensation or dismissal, such complaint should have
been lodged with the Department of Labor and not with the
regular court.
Petitioners (defendants therein) further alleged that
Anay filed the complaint on account of ill-will and
resentment because Marjorie Tocao did not allow her to
lord it over in the Geminesse Enterprise. Anay had acted
like she owned the enterprise because of her experience
and expertise. Hence, petitioners were the ones who
suffered actual damages including unreturned and
unaccounted stocks of Geminesse Enterprise, and serious
anxiety, besmirched reputation in the business world, and
various damages not less than P500,000.00. They also
alleged that, to vindicate their names, they had to hire
counsel for a fee of P23,000.00.
At the pre-trial conference, the issues were limited to: (a)
whether or not the plaintiff was an employee or partner of
Marjorie Tocao and Belo, and (b) whether or not the
parties are entitled to damages.[10]
In their defense, Belo denied that Anay was supposed
to receive a share in the profit of the business. He,
however, admitted that the two had agreed that Anay
would receive a three to four percent (3-4%) share in the
gross sales of the cookware. He denied contributing capital
to the business or receiving a share in its profits as he
merely served as a guarantor of Marjorie Tocao, who was
new in the business. He attended and/or presided over
business meetings of the venture in his capacity as a
guarantor but he never participated in decision-making. He
claimed that he wrote the memo granting the plaintiff
thirty-seven percent (37%) commission upon her dismissal
from the business venture at the request of Tocao,
because Anay had no other income.
For her part, Marjorie Tocao denied having entered into
an oral partnership agreement with Anay. However, she
admitted that Anay was an expert in the cookware
business and hence, they agreed to grant her the following
commissions: thirty-seven percent (37%) on personal
sales; five percent (5%) on gross sales; two percent (2%)
on product demonstrations, and two percent (2%) for
recruitment of personnel. Marjorie denied that they agreed
on a ten percent (10%) commission on the net profits.
Marjorie claimed that she got the capital for the business
out of the sale of the sewing machines used in her
garments business and from Peter Lo, a Singaporean
friend-financier who loaned her the funds with
interest. Because she treated Anay as her co-equal,
Marjorie received the same amounts of commissions as
her. However, Anay failed to account for stocks valued at
P200,000.00.
On April 22, 1993, the trial court rendered a decision the
dispositive part of which is as follows:

WHEREFORE, in view of the foregoing, judgment is hereby


rendered:

1. Ordering defendants to submit to the Court a


formal account as to the partnership affairs for the
years 1987 and 1988 pursuant to Art. 1809 of the
Civil Code in order to determine the ten percent
(10%) share of plaintiff in the net profits of the
cookware business;
2. Ordering defendants to pay five percent (5%)
overriding commission for the one hundred and
fifty (150) cookware sets available for disposition
when plaintiff was wrongfully excluded from the
partnership by defendants;
3. Ordering defendants to pay plaintiff overriding
commission on the total production which for the
period covering January 8, 1988 to February 5,
1988 amounted to P32,000.00;
4. Ordering defendants to pay P100,000.00 as moral
damages and P100,000.00 as exemplary
damages, and
5. Ordering defendants to pay P50,000.00 as
attorneys fees and P20,000.00 as costs of suit.

SO ORDERED.

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, Anays 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 Marjories financial contribution and Anays experience,
the combination of the two would be invaluable to the
partnership, also supported that conclusion. Belos 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 Tocaos
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[11] was
dismissed, but the amount of damages awarded by the trial
court 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.[12] Petitioners Belo and Marjorie Tocao are
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.[14] In this case, both the trial court and
the 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.[15] It may be
constituted in any form; a public instrument is necessary
only where immovable property or real rights are
contributed thereto.[16] This implies that since a contract 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[17] did not cause the 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 companys cookware products; it was
through the same efforts that the business was propelled
to financial success. Petitioner Tocao herself admitted
private respondents 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, its
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 Belos 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,[20] he should have presented 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,[22] was also a
capitalist in the partnership. She claimed that she herself
financed the business. Her and petitioner Belos roles as
both capitalists to the partnership with private respondent
are buttressed by petitioner Tocaos 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 Belos first name, William, and her nickname,
Jiji.[23] The special relationship between them dovetails
with petitioner Belos 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.[24] The inevitable
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,[25] the evidence in the case at 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,[26] including selection of people who would
constitute the administrative staff and the sales force.
Secondly, petitioner Tocaos admissions militate against an
employer-employee relationship. She admitted that, like
her who owned Geminesse Enterprise,[27] private
respondent received only commissions and transportation
and representation allowances[28] and not a fixed
salary.[29] Petitioner Tocao testified:
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. Thats
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: Thats 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 respondents
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.[31] As an industrial partner, private respondent had
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.[33] While it is true that in
her undated application for renewal of registration of that
firm name, petitioner Tocao indicated that it would be
engaged in retail of kitchenwares, cookwares, utensils,
skillet,[34] she also admitted that the enterprise was only
60% to 70% for the cookware business, while 20% to 30%
of its business activity was devoted to the sale of water
sterilizer or purifier.[35] Indubitably then, the business name
Geminesse Enterprise was used only for practical reasons
- it was utilized as the common name for petitioner Tocaos
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.[36] Obviously a ploy to offset the damages
awarded to private 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 respondents 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.[38] Her instruction to Lina Torda Cruz,
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,[39] and
resulted in a falling out between the two. However, a mere
falling out or misunderstanding between partners does not
convert the partnership into a sham organization.[40] The
partnership exists until dissolved under 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 partners
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 Tocaos 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.[43] By
that memo, petitioner Tocao effected her own withdrawal
from 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
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.[45] The Court of
Appeals may modify that amount only when its factual
findings are diametrically opposed to that of the lower
court,[46] or the award is palpably or scandalously and
unreasonably excessive.[47] However, exemplary damages
that are awarded by way of example or correction for the
public good,[48] should be reduced to P50,000.00, the
amount correctly awarded by the Court of
Appeals. Concomitantly, the award of moral damages of
P100,000.00 was excessive and should be likewise
reduced to P50,000.00. Similarly, attorneys fees that
should be granted on account of the award of exemplary
damages and petitioners evident bad faith in refusing to
satisfy private respondents plainly valid, just and
demandable claims,[49] appear to 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 respondents 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 attorneys
fees in the amount of P25,000.00.

SO ORDERED.
SPECIAL FIRST DIVISION

[G.R. No. 124293. September 24, 2003]

JG SUMMIT HOLDINGS, INC., petitioner, vs. COURT


OF APPEALS, COMMITTEE ON PRIVATIZATION,
its Chairman and Members; ASSET
PRIVATIZATION TRUST and PHILYARDS
HOLDINGS, INC.,respondents.

RESOLUTION
PUNO, J.:

The core issue posed by the Motions for


Reconsideration is whether a shipyard is a public utility
whose capitalization must be sixty percent (60%) owned
by Filipinos. Our resolution of this issue will determine the
fate of the shipbuilding and ship repair industry. It can
either spell the industrys demise or breathe new life to the
struggling but potentially healthy partner in the countrys bid
for economic growth. It can either kill an initiative yet in its
infancy, or harness creativity in the productive disposition
of government assets.
The facts are undisputed and can be summarized
briefly as follows:
On January 27, 1977, the National Investment and
Development Corporation (NIDC), a government
corporation, entered into a Joint Venture Agreement (JVA)
with Kawasaki Heavy Industries, Ltd. of Kobe, Japan
(KAWASAKI) for the construction, operation and
management of the Subic National Shipyard, Inc. (SNS)
which subsequently became the Philippine Shipyard and
Engineering Corporation (PHILSECO). Under the JVA, the
NIDC and KAWASAKI will contribute P330 million for the
capitalization of PHILSECO in the proportion of 60%-40%
respectively.[1] One of its salient features is the grant to the
parties of the right of first refusal should either of them
decide to sell, assign or transfer its interest in the joint
venture, viz:

1.4 Neither party shall sell, transfer or assign all or any part of
its interest in SNS [PHILSECO] to any third party without
giving the other under the same terms the right of first refusal.
This provision shall not apply if the transferee is a corporation
owned or controlled by the GOVERNMENT or by a
KAWASAKI affiliate.[2]

On November 25, 1986, NIDC transferred all its rights,


title and interest in PHILSECO to the Philippine National
Bank (PNB). Such interests were subsequently transferred
to the National Government pursuant to Administrative
Order No. 14. On December 8, 1986, President Corazon C.
Aquino issued Proclamation No. 50 establishing the
Committee on Privatization (COP) and the Asset
Privatization Trust (APT) to take title to, and possession of,
conserve, manage and dispose of non-performing assets
of the National Government. Thereafter, on February 27,
1987, a trust agreement was entered into between the
National Government and the APT wherein the latter was
named the trustee of the National Governments share in
PHILSECO. In 1989, as a result of a quasi-reorganization
of PHILSECO to settle its huge obligations to PNB, the
National Governments shareholdings in PHILSECO
increased to 97.41% thereby reducing KAWASAKIs
shareholdings to 2.59%.[3]
In the interest of the national economy and the
government, the COP and the APT deemed it best to sell
the National Governments share in PHILSECO to private
entities. After a series of negotiations between the APT
and KAWASAKI, they agreed that the latters right of first
refusal under the JVA be exchanged for the right to top by
five percent (5%) the highest bid for the said shares. They
further agreed that KAWASAKI would be entitled to name
a company in which it was a stockholder, which could
exercise the right to top. On September 7, 1990,
KAWASAKI informed APT that Philyards Holdings, Inc.
(PHI) would exercise its right to top.[4]
At the pre-bidding conference held on September 18,
1993, interested bidders were given copies of the JVA
between NIDC and KAWASAKI, and of the Asset Specific
Bidding Rules (ASBR) drafted for the National
Governments 87.6% equity share in PHILSECO.[5] The
provisions of the ASBR were explained to the interested
bidders who were notified that the bidding would be held
on December 2, 1993. A portion of the ASBR reads:

1.0 The subject of this Asset Privatization Trust (APT) sale


through public bidding is the National Governments equity in
PHILSECO consisting of 896,869,942 shares of stock
(representing 87.67% of PHILSECOs outstanding capital stock),
which will be sold as a whole block in accordance with the rules
herein enumerated.

...

2.0 The highest bid, as well as the buyer, shall be subject to the
final approval of both the APT Board of Trustees and the
Committee on Privatization (COP).

2.1 APT reserves the right in its sole discretion, to reject any or
all bids.

3.0 This public bidding shall be on an Indicative Price Bidding


basis. The Indicative price set for the National Governments
87.67% equity in PHILSECO is PESOS: ONE BILLION
THREE HUNDRED MILLION (P1,300,000,000.00).

...
6.0 The highest qualified bid will be submitted to the APT
Board of Trustees at its regular meeting following the bidding,
for the purpose of determining whether or not it should be
endorsed by the APT Board of Trustees to the COP, and the
latter approves the same. The APT shall advise Kawasaki Heavy
Industries, Inc. and/or its nominee, Philyards Holdings, Inc., that
the highest bid is acceptable to the National Government.
Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc.
shall then have a period of thirty (30) calendar days from the
date of receipt of such advice from APT within which to
exercise their Option to Top the Highest Bid by offering a bid
equivalent to the highest bid plus five (5%) percent thereof.

6.1 Should Kawasaki Heavy Industries, Inc. and/or Philyards


Holdings, Inc. exercise their Option to Top the Highest Bid,
they shall so notify the APT about such exercise of their option
and deposit with APT the amount equivalent to ten percent
(10%) of the highest bid plus five percent (5%) thereof within
the thirty (30)-day period mentioned in paragraph 6.0 above.
APT will then serve notice upon Kawasaki Heavy Industries,
Inc. and/or Philyards Holdings, Inc. declaring them as the
preferred bidder and they shall have a period of ninety (90) days
from the receipt of the APTs notice within which to pay the
balance of their bid price.

6.2 Should Kawasaki Heavy Industries, Inc. and/or Philyards


Holdings, Inc. fail to exercise their Option to Top the Highest
Bid within the thirty (30)-day period, APT will declare the
highest bidder as the winning bidder.

...

12.0 The bidder shall be solely responsible for examining with


appropriate care these rules, the official bid forms, including any
addenda or amendments thereto issued during the bidding period.
The bidder shall likewise be responsible for informing itself
with respect to any and all conditions concerning the
PHILSECO Shares which may, in any manner, affect the
bidders proposal. Failure on the part of the bidder to so examine
and inform itself shall be its sole risk and no relief for error or
omission will be given by APT or COP. . ..[6]

At the public bidding on the said date, petitioner J.G.


Summit Holdings, Inc. submitted a bid of Two Billion and
Thirty Million Pesos (P2,030,000,000.00) with an
acknowledgement of KAWASAKI/Philyards right to
top, viz:

4. I/We understand that the Committee on Privatization (COP)


has up to thirty (30) days to act on APTs recommendation based
on the result of this bidding. Should the COP approve the
highest bid, APT shall advise Kawasaki Heavy Industries, Inc.
and/or its nominee, Philyards Holdings, Inc. that the highest bid
is acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or Philyards Holdings, Inc. shall then have a
period of thirty (30) calendar days from the date of receipt of
such advice from APT within which to exercise their Option to
Top the Highest Bid by offering a bid equivalent to the highest
bid plus five (5%) percent thereof.[7]

As petitioner was declared the highest bidder, the COP


approved the sale on December 3, 1993 subject to the
right of Kawasaki Heavy Industries, Inc./Philyards Holdings,
Inc. to top JGSMIs bid by 5% as specified in the bidding
rules.[8]
On December 29, 1993, petitioner informed APT that it
was protesting the offer of PHI to top its bid on the grounds
that: (a) the KAWASAKI/PHI consortium composed of
Kawasaki, Philyards, Mitsui, Keppel, SM Group, ICTSI and
Insular Life violated the ASBR because the last four (4)
companies were the losing bidders thereby circumventing
the law and prejudicing the weak winning bidder; (b) only
KAWASAKI could exercise the right to top; (c) giving the
same option to top to PHI constituted unwarranted benefit
to a third party; (d) no right of first refusal can be exercised
in a public bidding or auction sale; and (e) the JG Summit
consortium was not estopped from questioning the
proceedings.[9]
On February 2, 1994, petitioner was notified that PHI
had fully paid the balance of the purchase price of the
subject bidding. On February 7, 1994, the APT notified
petitioner that PHI had exercised its option to top the
highest bid and that the COP had approved the same on
January 6, 1994. On February 24, 1994, the APT and PHI
executed a Stock Purchase Agreement.[10] Consequently,
petitioner filed with this Court a Petition for Mandamus
under G.R. No. 114057. On May 11, 1994, said petition
was referred to the Court of Appeals. On July 18, 1995, the
Court of Appeals denied the same for lack of merit. It ruled
that the petition for mandamus was not the proper remedy
to question the constitutionality or legality of the right of
first refusal and the right to top that was exercised by
KAWASAKI/PHI, and that the matter must be brought by
the proper party in the proper forum at the proper time and
threshed out in a full blown trial. The Court of Appeals
further ruled that the right of first refusal and the right to top
are prima facie legal and that the petitioner, by
participating in the public bidding, with full knowledge of
the right to top granted to KASAWASAKI/Philyards
is . . .estopped from questioning the validity of the award
given to Philyards after the latter exercised the right to top
and had paid in full the purchase price of the subject
shares, pursuant to the ASBR. Petitioner filed a Motion for
Reconsideration of said Decision which was denied on
March 15, 1996. Petitioner thus filed a Petition
for Certiorari with this Court alleging grave abuse of
discretion on the part of the appellate court.[11]
On November 20, 2000, this Court rendered the now
assailed Decision ruling among others that the Court of
Appeals erred when it dismissed the petition on the sole
ground of the impropriety of the special civil action
of mandamus because the petition was also one
of certiorari.[12] It further ruled that a shipyard like
PHILSECO is a public utility whose capitalization must be
sixty percent (60%) Filipino-owned.[13] Consequently, the
right to top granted to KAWASAKI under the Asset
Specific Bidding Rules (ASBR) drafted for the sale of the
87.67% equity of the National Government in PHILSECO
is illegal---not only because it violates the rules on
competitive bidding--- but more so, because it allows
foreign corporations to own more than 40% equity in the
shipyard.[14] It also held that although the petitioner had the
opportunity to examine the ASBR before it participated in
the bidding, it cannot be estopped from questioning the
unconstitutional, illegal and inequitable provisions
thereof.[15] Thus, this Court voided the transfer of the
national governments 87.67% share in PHILSECO to
Philyard Holdings, Inc., and upheld the right of JG Summit,
as the highest bidder, to take title to the said shares, viz:

WHEREFORE, the instant petition for review on certiorari


is GRANTED. The assailed Decision and Resolution of the
Court of Appeals are REVERSED and SET ASIDE. Petitioner
is ordered to pay to APT its bid price of Two Billion Thirty
Million Pesos (P2,030,000,000.00 ), less its bid deposit plus
interests upon the finality of this Decision. In turn, APT is
ordered to:

(a) accept the said amount of P2,030,000,000.00 less


bid deposit and interests from petitioner;

(b) execute a Stock Purchase Agreement with


petitioner;

(c) cause the issuance in favor of petitioner of the


certificates of stocks representing 87.6% of
PHILSECOs total capitalization;

(d) return to private respondent PHGI the amount of


Two Billion One Hundred Thirty-One Million
Five Hundred Thousand Pesos
(P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates
issued to PHI.

SO ORDERED.[16]

In separate Motions for


Reconsideration, respondents submit three basic issues
[17]

for our resolution: (1) Whether PHILSECO is a public utility;


(2) Whether under the 1977 JVA, KAWASAKI can exercise
its right of first refusal only up to 40% of the total
capitalization of PHILSECO; and (3) Whether the right to
top granted to KAWASAKI violates the principles of
competitive bidding.

I.
Whether PHILSECO is a Public Utility.

After carefully reviewing the applicable laws and


jurisprudence, we hold that PHILSECO is not a public
utility for the following reasons:
First. By nature, a shipyard is not a public utility.
A public utility is a business or service engaged in
regularly supplying the public with some commodity or
service of public consequence such as electricity, gas,
water, transportation, telephone or telegraph service.[18] To
constitute a public utility, the facility must be necessary for
the maintenance of life and occupation of the residents.
However, the fact that a business offers services or goods
that promote public good and serve the interest of the
public does not automatically make it a public utility. Public
use is not synonymous with public interest. As its name
indicates, the term public utility implies public
use and service to the public. The
principal determinative characteristic of a public utility is
that of service to, or readiness to serve, an indefinite public
or portion of the public as such which has a legal right to
demand and receive its services or commodities. Stated
otherwise, the owner or person in control of a public utility
must have devoted it to such use that the public generally
or that part of the public which has been served and has
accepted the service, has the right to demand that use or
service so long as it is continued, with reasonable
efficiency and under proper charges.[19] Unlike a private
enterprise which independently determines whom it will
serve, a public utility holds out generally and may not
refuse legitimate demand for service.[20] Thus, in Iloilo Ice
and Cold Storage Co. vs. Public Utility Board,[21] this
Court defined public use, viz:

Public use means the same as use by the public. The essential
feature of the public use is that it is not confined to privileged
individuals, but is open to the indefinite public. It is this
indefinite or unrestricted quality that gives it its public character.
In determining whether a use is public, we must look not only to
the character of the business to be done, but also to the proposed
mode of doing it. If the use is merely optional with the owners,
or the public benefit is merely incidental, it is not a public use,
authorizing the exercise of jurisdiction of the public utility
commission. There must be, in general, a right which the law
compels the owner to give to the general public. It is not enough
that the general prosperity of the public is promoted. Public use
is not synonymous with public interest. The true criterion by
which to judge the character of the use is whether the public
may enjoy it by right or only by permission.[22] (emphasis
supplied)

Applying the criterion laid down in Iloilo to the case at


bar, it is crystal clear that a shipyard cannot be
considered a public utility.
A shipyard is a place or enclosure where ships are built
or repaired.[23] Its nature dictates that it serves but a limited
clientele whom it may choose to serve at its discretion.
While it offers its facilities to whoever may wish to avail of
its services, a shipyard is not legally obliged to render
its services indiscriminately to the public. It has no
legal obligation to render the services sought by each and
every client. The fact that it publicly offers its services does
not give the public a legal right to demand that such
services be rendered.
There can be no disagreement that the shipbuilding and
ship repair industry is imbued with public interest as it
involves the maintenance of the seaworthiness of vessels
dedicated to the transportation of either persons or goods.
Nevertheless, the fact that a business is affected with
public interest does not imply that it is under a duty to
serve the public. While the business may be regulated for
public good, the regulation cannot justify the classification
of a purely private enterprise as a public utility. The
legislature cannot, by its mere declaration, make
something a public utility which is not in fact such; and a
private business operated under private contracts with
selected customers and not devoted to public use
cannot, by legislative fiat or by order of a public
service commission, be declared a public utility, since
that would be taking private property for public use without
just compensation, which cannot be done consistently with
the due process clause.[24]
It is worthy to note that automobile and aircraft
manufacturers, which are of similar nature to shipyards,
are not considered public utilities despite the fact that their
operations greatly impact on land and air transportation.
The reason is simple. Unlike commodities or services
traditionally regarded as public utilities such as electricity,
gas, water, transportation, telephone or telegraph service,
automobile and aircraft manufacturing---and for that matter
ship building and ship repair--- serve the public only
incidentally.
Second. There is no law declaring a shipyard as a
public utility.
History provides us hindsight and hindsight ought to
give us a better view of the intent of any law. The
succession of laws affecting the status of shipyards ought
not to obliterate, but rather, give us full picture of the intent
of the legislature. The totality of the circumstances,
including the contemporaneous interpretation accorded by
the administrative bodies tasked with the enforcement of
the law all lead to a singular conclusion: that shipyards are
not public utilities.
Since the enactment of Act No. 2307 which created the
Public Utility Commission (PUC) until its repeal by
Commonwealth Act No. 146, establishing the Public
Service Commission (PSC), a shipyard, by legislative
declaration, has been considered a public utility.[25] A
Certificate of Public Convenience (CPC) from the PSC to
the effect that the operation of the said service and the
authorization to do business will promote the public
interests in a proper and suitable manner is required
before any person or corporation may operate a
shipyard.[26] In addition, such persons or corporations
should abide by the citizenship requirement provided in
Article XIII, section 8 of the 1935 Constitution,[27] viz:

Sec. 8. No franchise, certificate, or any other form or


authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or other
entities organized under the laws of the Philippines, sixty per
centum of the capital of which is owned by citizens of the
Philippines, nor shall such franchise, certificate or authorization
be exclusive in character or for a longer period than fifty years.
No franchise or right shall be granted to any individual, firm or
corporation, except under the condition that it shall be subject to
amendment, alteration, or repeal by the National Assembly
when the public interest so requires. (emphasis supplied)

To accelerate the development of shipbuilding and ship


repair industry, former President Ferdinand E. Marcos
issued P.D. No. 666 granting the following incentives:
SECTION 1. Shipbuilding and ship repair yards duly registered
with the Maritime Industry Authority shall be entitled to the
following incentive benefits:

(a) Exemption from import duties and taxes.- The importation of


machinery, equipment and materials for shipbuilding, ship
repair and/or alteration, including indirect import, as well as
replacement and spare parts for the repair and overhaul of
vessels such as steel plates, electrical machinery and electronic
parts, shall be exempt from the payment of customs duty and
compensating tax: Provided, however, That the Maritime
Industry Authority certifies that the item or items imported are
not produced locally in sufficient quantity and acceptable
quality at reasonable prices, and that the importation is directly
and actually needed and will be used exclusively for the
construction, repair, alteration, or overhaul of merchant vessels,
and other watercrafts; Provided, further, That if the above
machinery, equipment, materials and spare parts are sold to
non-tax exempt persons or entities, the corresponding duties and
taxes shall be paid by the original importer; Provided, finally,
That local dealers and/or agents who sell machinery, equipment,
materials and accessories to shipyards for shipbuilding and ship
repair are entitled to tax credits, subject to approval by the total
tariff duties and compensating tax paid for said machinery,
equipment, materials and accessories.

(b) Accelerated depreciation.- Industrial plant and equipment


may, at the option of the shipbuilder and ship repairer, be
depreciated for any number of years between five years and
expected economic life.

(c) Exemption from contractors percentage tax.- The gross


receipts derived by shipbuilders and ship repairers from
shipbuilding and ship repairing activities shall be exempt from
the Contractors Tax provided in Section 91 of the National
Internal Revenue Code during the first ten years from
registration with the Maritime Industry Authority, provided that
such registration is effected not later than the year 1990;
Provided, That any and all amounts which would otherwise have
been paid as contractors tax shall be set aside as a separate fund,
to be known as Shipyard Development Fund, by the contractor
for the purpose of expansion, modernization and/or
improvement of the contractors own shipbuilding or ship
repairing facilities; Provided, That, for this purpose, the
contractor shall submit an annual statement of its receipts to the
Maritime Industry Authority; and Provided, further, That any
disbursement from such fund for any of the purposes
hereinabove stated shall be subject to approval by the Maritime
Industry Authority.

In addition, P.D. No. 666 removed the shipbuilding and


ship repair industry from the list of public utilities, thereby
freeing the industry from the 60% citizenship requirement
under the Constitution and from the need to obtain
Certificate of Public Convenience pursuant to section 15 of
C.A No. 146. Section 1 (d) of P.D. 666 reads:

(d) Registration required but not as a Public Utility.- The


business of constructing and repairing vessels or parts
thereof shall not be considered a public utility and no
Certificate of Public Convenience shall be required therefor.
However, no shipyard, graving dock, marine railway or marine
repair shop and no person or enterprise shall engage in
construction and/or repair of any vessel, or any phase or part
thereof, without a valid Certificate of Registration and license
for this purpose from the Maritime Industry Authority, except
those owned or operated by the Armed Forces of the Philippines
or by foreign governments pursuant to a treaty or agreement.
(emphasis supplied)

Any law, decree, executive order, or rules and


regulations inconsistent with P.D. No. 666 were repealed
or modified accordingly.[28] Consequently, sections 13 (b)
and 15 of C.A. No. 146 were repealed in so far as the
former law included shipyards in the list of public utilities
and required the certificate of public convenience for their
operation. Simply stated, the repeal was due to
irreconcilable inconsistency, and by definition, this kind of
repeal falls under the category of an implied repeal.[29]
On April 28, 1983, Batas Pambansa Blg. 391, also
known as the Investment Incentive Policy Act of 1983, was
enacted. It laid down the general policy of the government
to encourage private domestic and foreign investments in
the various sectors of the economy, to wit:

Sec. 2. Declaration of Investment Policy.- It is the policy of the


State to encourage private domestic and foreign investments in
industry, agriculture, mining and other sectors of the economy
which shall: provide significant employment opportunities
relative to the amount of the capital being invested; increase
productivity of the land, minerals, forestry, aquatic and other
resources of the country, and improve utilization of the products
thereof; improve technical skills of the people employed in the
enterprise; provide a foundation for the future development of
the economy; accelerate development of less developed regions
of the country; and result in increased volume and value of
exports for the economy.

It is the policy of the State to extend to projects which will


significantly contribute to the attainment of these
objectives, fiscal incentives without which said projects may
not be established in the locales, number and/or pace required
for optimum national economic development. Fiscal incentive
systems shall be devised to compensate for market
imperfections, reward performance of making contributions
to economic development, cost-efficient and be simple to
administer.

The fiscal incentives shall be extended to stimulate


establishment and assist initial operations of the enterprise, and
shall terminate after a period of not more than 10 years from
registration or start-up of operation unless a special period is
otherwise stated.
The foregoing declaration shall apply to all investment
incentive schemes and in particular will supersede article 2 of
Presidential Decree No. 1789. (emphases supplied)

With the new investment incentive regime, Batas


Pambansa Blg. 391 repealed the following laws, viz:

Sec. 20. The following provisions are hereby repealed:

1) Section 53, P.D. 463 (Mineral Resources Development


Decree);

2.) Section 1, P.D. 666 (Shipbuilding and Ship Repair


Industry);

3) Section 6, P.D. 1101 (Radioactive Minerals);

4) LOI 508 extending P.D. 791 and P.D. 924 (Sugar); and

5) The following articles of Presidential Decree 1789: 2,


18, 19, 22, 28, 30, 39, 49 (d), 62, and 77. Articles 45,
46 and 48 are hereby amended only with respect to
domestic and export producers.

All other laws, decrees, executive orders, administrative orders,


rules and regulations or parts thereof which are inconsistent with
the provisions of this Act are hereby repealed, amended or
modified accordingly.

All other incentive systems which are not in any way affected
by the provisions of this Act may be restructured by the
President so as to render them cost-efficient and to make them
conform with the other policy guidelines in the declaration of
policy provided in Section 2 of this Act.(emphasis supplied)

From the language of the afore-quoted provision, the


whole of P.D. No. 666, section 1 was expressly and
categorically repealed. As a consequence, the provisions
of C.A. No. 146, which were impliedly repealed by P.D. No.
666, section 1 were revived.[30] In other words, with the
enactment of Batas Pambansa Blg. 391, a shipyard
reverted back to its status as a public utility and as such,
requires a CPC for its operation.
The crux of the present controversy is the effect of the
express repeal of Batas Pambansa Blg. 391 by Executive
Order No. 226 issued by former President Corazon C.
Aquino under her emergency powers.
We rule that the express repeal of Batas Pambansa Blg.
391 by E.O. No. 226 did not revive Section 1 of P.D. No.
666. But more importantly, it also put a period to the
existence of sections 13 (b) and 15 of C.A. No. 146. It
bears emphasis that sections 13 (b) and 15 of C.A. No.
146, as originally written, owed their continued existence to
Batas Pambansa Blg. 391. Had the latter not repealed P.D.
No. 666, the former should have been modified
accordingly and shipyards effectively removed from the list
of public utilities. Ergo, with the express repeal of Batas
Pambansa Blg. 391 by E.O. No. 226, the revival of
sections 13 (b) and 15 of C.A. No. 146 had no more leg to
stand on. A law that has been expressly repealed ceases
to exist and becomes inoperative from the moment the
repealing law becomes effective.[31] Hence, there is simply
no basis in the conclusion that shipyards remain to be a
public utility. A repealed statute cannot be the basis for
classifying shipyards as public utilities.
In view of the foregoing, there can be no other
conclusion than to hold that a shipyard is not a pubic utility.
A shipyard has been considered a public utility merely by
legislative declaration. Absent this declaration, there is no
more reason why it should continuously be regarded as
such. The fact that the legislature did not clearly and
unambiguously express its intention to include shipyards in
the list of public utilities indicates that that it did not intend
to do so. Thus, a shipyard reverts back to its status as
non-public utility prior to the enactment of the Public
Service Law.
This interpretation is in accord with the uniform
interpretation placed upon it by the Board of Investments
(BOI), which was entrusted by the legislature with the
preparation of annual Investment Priorities Plan (IPPs).
The BOI has consistently classified shipyards as part of the
manufacturing sector and not of the public utilities sector.
The enactment of Batas Pambansa Blg. 391 did not alter
the treatment of the BOI on shipyards. It has been, as at
present, classified as part of the manufacturing and not of
the public utilities sector.[32]
Furthermore, of the 441 Ship Building and Ship Repair
(SBSR) entities registered with the MARINA,[33] none
appears to have an existing franchise. If we continue to
hold that a shipyard is a pubic utility, it is a necessary
consequence that all these entities should have obtained a
franchise as was the rule prior to the enactment of P.D. No.
666. But MARINA remains without authority, pursuant to
P.D. No. 474[34] to issue franchises for the operation of
shipyards. Surely,
the legislature did not intend to create a vacuum by
continuously treating a shipyard as a public utility without
giving MARINA the power to issue a Certificate of Public
Convenience (CPC) or a Certificate of Public Convenience
and Necessity (CPCN) as required by section 15 of C.A.
No. 146.
II.
Whether under the 1977 Joint Venture Agreement,
KAWASAKI can purchase only a maximum of 40%
of PHILSECOs total capitalization.

A careful reading of the 1977 Joint Venture Agreement


reveals that there is nothing that prevents KAWASAKI from
acquiring more than 40% of PHILSECOs total
capitalization. Section 1 of the 1977 JVA states:
1.3 The authorized capital stock of Philseco shall be P330
million. The parties shall thereafter increase their subscription in
Philseco as may be necessary and as called by the Board of
Directors, maintaining a proportion of 60%-40% for NIDC and
KAWASAKI respectively, up to a total subscribed and paid-up
capital stock of P312 million.

1.4 Neither party shall sell, transfer or assign all or any part of
its interest in SNS [renamed PHILSECO] to any third party
without giving the other under the same terms the right of first
refusal. This provision shall not apply if the transferee is a
corporation owned and controlled by the GOVERMENT [of the
Philippines] or by a Kawasaki affiliate.

1.5 The By-Laws of SNS [PHILSECO] shall grant the parties


preemptive rights to unissued shares of SNS [PHILSECO].[35]

Under section 1.3, the parties agreed to the amount


of P330 million as the total capitalization of their joint
venture. There was no mention of the amount of their initial
subscription. What is clear is that they are to infuse the
needed capital from time to time until the total subscribed
and paid-up capital reaches P312 million. The phrase
maintaining a proportion of 60%-40% refers to their
respective share of the burden each time the Board of
Directors decides to increase the subscription to reach the
target paid-up capital of P312 million. It does not bind the
parties to maintain the sharing scheme all throughout the
existence of their partnership.
The parties likewise agreed to arm themselves with
protective mechanisms to preserve their respective
interests in the partnership in the event that (a) one party
decides to sell its shares to third parties; and (b) new
Philseco shares are issued.Anent the first situation, the
non-selling party is given the right of first refusal under
section 1.4 to have a preferential right to buy or to refuse
the selling partys shares. The right of first refusal is meant
to protect the original or remaining joint venturer(s) or
shareholder(s) from the entry of third persons who are not
acceptable to it as co-venturer(s) or co-shareholder(s). The
joint venture between the Philippine Government and
KAWASAKI is in the nature of a partnership[36] which,
unlike an ordinary corporation, is based on delectus
personae.[37] No one can become a member of the
partnership association without the consent of all the other
associates. The right of first refusal thus ensures that the
parties are given control over who may become a new
partner in substitution of or in addition to the original
partners. Should the selling partner decide to dispose all its
shares, the non-selling partner may acquire all these
shares and terminate the partnership. No person or
corporation can be compelled to remain or to continue the
partnership. Of course, this presupposes that there are no
other restrictions in the maximum allowable share that the
non-selling partner may acquire such as the constitutional
restriction on foreign ownership in public utility. The theory
that KAWASAKI can acquire, as a maximum, only 40% of
PHILSECOs shares is correct only if a shipyard is a public
utility. In such instance, the non-selling partner who is an
alien can acquire only a maximum of 40% of the total
capitalization of a public utility despite the grant of first
refusal. The partners cannot, by mere agreement, avoid
the constitutional proscription. But as afore-discussed,
PHILSECO is not a public utility and no other restriction is
present that would limit the right of KAWASAKI to
purchase the Governments share to 40% of Philsecos total
capitalization.
Furthermore, the phrase under the same terms in
section 1.4 cannot be given an interpretation that would
limit the right of KAWASAKI to purchase PHILSECO
shares only to the extent of its original proportionate
contribution of 40% to the total capitalization of the
PHILSECO. Taken together with the whole of section
1.4, the phrase under the same terms means that a
partner to the joint venture that decides to sell its
shares to a third party shall make a similar offer to the
non-selling partner. The selling partner cannot make a
different or a more onerous offer to the non-selling partner.
The exercise of first refusal presupposes that the
non-selling partner is aware of the terms of the conditions
attendant to the sale for it to have a guided choice. While
the right of first refusal protects the non-selling partner
from the entry of third persons, it cannot also deprive the
other partner the right to sell its shares to third persons if,
under the same offer, it does not buy the shares.
Apart from the right of first refusal, the parties also
have preemptive rights under section 1.5 in the unissued
shares of Philseco. Unlike the former, this situation does
not contemplate transfer of a partners shares to third
parties but the issuance of new Philseco shares. The grant
of preemptive rights preserves the proportionate shares of
the original partners so as not to dilute their respective
interests with the issuance of the new shares. Unlike the
right of first refusal, a preemptive right gives a partner a
preferential right over the newly issued shares only to the
extent that it retains its original proportionate share in the
joint venture.
The case at bar does not concern the issuance of new
shares but the transfer of a partners share in the joint
venture. Verily, the operative protective mechanism is the
right of first refusal which does not impose any limitation in
the maximum shares that the non-selling partner may
acquire.
III.
Whether the right to top granted to KAWASAKI
in exchange for its right of first refusal violates
the principles of competitive bidding.

We also hold that the right to top granted to KAWASAKI


and exercised by private respondent did not violate the
rules of competitive bidding.
The word bidding in its comprehensive sense means
making an offer or an invitation to prospective contractors
whereby the government manifests its intention to make
proposals for the purpose of supplies, materials and
equipment for official business or public use, or for public
works or repair.[38] The three principles of public bidding
are: (1) the offer to the public; (2) an opportunity for
competition; and (3) a basis for comparison of bids.[39] As
long as these three principles are complied with, the public
bidding can be considered valid and legal. It is not
necessary that the highest bid be automatically accepted.
The bidding rules may specify other conditions or the
bidding process be subjected to certain reservation or
qualification such as when the owner reserves to himself
openly at the time of the sale the right to bid upon the
property, or openly announces a price below which the
property will not be sold. Hence, where the seller reserves
the right to refuse to accept any bid made, a binding sale is
not consummated between the seller and the bidder until
the seller accepts the bid. Furthermore, where a right is
reserved in the seller to reject any and all bids received,
the owner may exercise the right even after the auctioneer
has accepted a bid, and this applies to the auction of public
as well as private property. [40] Thus:

It is a settled rule that where the invitation to bid contains a


reservation for the Government to reject any or all bids, the
lowest or the highest bidder, as the case may be, is not entitled
to an award as a matter of right for it does not become a
ministerial duty of the Government to make such an award.
Thus, it has been held that where the right to reject is so
reserved, the lowest bid or any bid for that matter may be
rejected on a mere technicality, that all bids may be rejected,
even if arbitrarily and unwisely, or under a mistake, and that in
the exercise of a sound discretion, the award may be made to
another than the lowest bidder. And so, where the Government
as advertiser, availing itself of that right, makes its choice in
rejecting any or all bids, the losing bidder has no cause to
complain nor right to dispute that choice, unless an unfairness or
injustice is shown. Accordingly, he has no ground of action to
compel the Government to award the contract in his favor, nor
compel it to accept his bid.[41]

In the instant case, the sale of the Government shares


in PHILSECO was publicly known. All interested bidders
were welcomed. The basis for comparing the bids were
laid down. All bids were accepted sealed and were opened
and read in the presence of the COAs official
representative and before all interested bidders. The only
question that remains is whether or not the existence of
KAWASAKIs right to top destroys the essence of
competitive bidding so as to say that the bidders did not
have an opportunity for competition. We hold that it does
not.
The essence of competition in public bidding is that the
bidders are placed on equal footing. This means that all
qualified bidders have an equal chance of winning the
auction through their bids. In the case at bar, all of the
bidders were exposed to the same risk and were subjected
to the same condition, i.e., the existence of KAWASAKIs
right to top. Under the ASBR, the Government expressly
reserved the right to reject any or all bids, and manifested
its intention not to accept the highest bid should
KAWASAKI decide to exercise its right to top under the
ABSR. This reservation or qualification was made known
to the bidders in a pre-bidding conference held on
September 28, 1993. They all expressly accepted this
condition in writing without any qualification. Furthermore,
when the Committee on Privatization notified petitioner of
the approval of the sale of the National Government shares
of stock in PHILSECO, it specifically stated that such
approval was subject to the right of KAWASAKI Heavy
Industries, Inc./Philyards Holdings, Inc. to top JGSMIs bid
by 5% as specified in the bidding rules. Clearly, the
approval of the sale was a conditional one. Since Philyards
eventually exercised its right to top petitioners bid by 5%,
the sale was not consummated. Parenthetically, it cannot
be argued that the existence of the right to top set for
naught the entire public bidding. Had Philyards Holdings,
Inc. failed or refused to exercise its right to top, the sale
between the petitioner and the National Government would
have been consummated. In like manner, the existence of
the right to top cannot be likened to a second bidding,
which is countenanced, except when there is failure to bid
as when there is only one bidder or none at all. A
prohibited second bidding presupposes that based on the
terms and conditions of the sale, there is already a highest
bidder with the right to demand that the seller accept its bid.
In the instant case, the highest bidder was well aware that
the acceptance of its bid was conditioned upon the
non-exercise of the right to top.
To be sure, respondents did not circumvent the
requirements for bidding by granting KAWASAKI, a
non-bidder, the right to top the highest bidder. The fact that
KAWASAKIs nominee to exercise the right to top has
among its stockholders some losing bidders cannot also
be deemed unfair.
It must be emphasized that none of the parties
questions the existence of KAWASAKIs right of first refusal,
which is concededly the basis for the grant of the right to
top. Under KAWASAKIs right of first refusal, the National
Government is under the obligation to give preferential
right to KAWASAKI in the event it decides to sell its shares
in PHILSECO. It has to offer to KAWASAKI the shares and
give it the option to buy or refuse under the same
terms for which it is willing to sell the said shares to third
parties. KAWASAKI is not a mere non-bidder. It is a
partner in the joint venture; the incidents of which are
governed by the law on contracts and on partnership.
It is true that properties of the National Government, as
a rule, may be sold only after a public bidding is held.
Public bidding is the accepted method in arriving at a fair
and reasonable price and ensures that overpricing,
favoritism and other anomalous practices are eliminated or
minimized.[42] But the requirement for public bidding does
not negate the exercise of the right of first refusal. In fact,
public bidding is an essential first step in the exercise of
the right of first refusal because it is only after the public
bidding that the terms upon which the Government may be
said to be willing to sell its shares to third parties may be
known. It is only after the public bidding that the
Government will have a basis with which to offer
KAWASAKI the option to buy or forego the shares.
Assuming that the parties did not swap KAWASAKIs
right of first refusal with the right to top, KAWASAKI would
have been able to buy the National Governments shares in
PHILSECO under the same terms as offered by the
highest bidder. Stated otherwise, by exercising its right of
first refusal, KAWASAKI could have bought the shares for
only P2.03 billion and not the higher amount of P2.1315
billion. There is, thus, no basis in the submission that the
right to top unfairly favored KAWASAKI. In fact, with the
right to top, KAWASAKI stands to pay higher than it should
had it settled with its right of first refusal. The obvious
beneficiary of the scheme is the National Government.
If at all, the obvious consideration for the exchange of
the right of first refusal with the right to top is that
KAWASAKI can name a nominee, which it is a shareholder,
to exercise the right to top. This is a valid contractual
stipulation; the right to top is an assignable right and both
parties are aware of the full legal consequences of its
exercise. As aforesaid, all bidders were aware of the
existence of the right to top, and its possible effects on the
result of the public bidding was fully disclosed to them. The
petitioner, thus, cannot feign ignorance nor can it be
allowed to repudiate its acts and question the proceedings
it had fully adhered to.[43]
The fact that the losing bidder, Keppel Consortium
(composed of Keppel, SM Group, Insular Life Assurance,
Mitsui and ICTSI), has joined Philyards in the latters effort
to raise P2.131 billion necessary in exercising the right to
top is not contrary to law, public policy or public morals.
There is nothing in the ASBR that bars the losing bidders
from joining either the winning bidder (should the right to
top is not exercised) or KAWASAKI/PHI (should it exercise
its right to top as it did), to raise the purchase price. The
petitioner did not allege, nor was it shown by competent
evidence, that the participation of the losing bidders in the
public bidding was done with fraudulent intent. Absent any
proof of fraud, the formation by Philyards of a consortium is
legitimate in a free enterprise system. The appellate court
is thus correct in holding the petitioner estopped from
questioning the validity of the transfer of the National
Governments shares in PHILSECO to respondent.
Finally, no factual basis exists to support the view that
the drafting of the ASBR was illegal because no prior
approval was given by the COA for it, specifically the
provision on the right to top the highest bidder and that the
public auction on December 2, 1993 was not witnessed by
a COA representative. No evidence was proffered to prove
these allegations and the Court cannot make legal
conclusions out of mere allegations. Regularity in the
performance of official duties is presumed[44] and in the
absence of competent evidence to rebut this presumption,
this Court is duty bound to uphold this presumption.
IN VIEW OF THE FOREGOING, the Motion for
Reconsideration is hereby GRANTED. The impugned
Decision and Resolution of the Court of Appeals are
AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-12164 May 22, 1959

BENITO LIWANAG and MARIA LIWANAG


REYES, petitioners-appellants,
vs.
WORKMEN'S COMPENSATION COMMISSION, ET
AL., respondents-appellees.

J. de Guia for appellants.


Estanislao R. Bayot for appellees.

ENDENCIA, J.:

Appellants Benito Liwanag and Maria Liwanag Reyes are


co-owners of Liwanag Auto Supply, a commercial guard
who while in line of duty, was skilled by criminal hands. His
widow Ciriaca Vda. de Balderama and minor children
Genara, Carlos and Leogardo, all surnamed Balderama, in
due time filed a claim for compensation with the
Workmen's Compensation Commission, which was
granted in an award worded as follows:

WHEREFORE, the order of the referee under


consideration should be, as it is hereby, affirmed and
respondents Benito Liwanag and Maria Liwanag Reyes,
ordered.

1. To pay jointly and severally the amount of three


thousand Four Hundred Ninety Four and 40/100
(P3,494.40) Pesos to the claimants in lump sum; and

To pay to the Workmen's Compensation Funds the sum of


P4.00 (including P5.00 for this review) as fees, pursuant to
Section 55 of the Act.
In appealing the case to this Tribunal, appellants do not
question the right of appellees to compensation nor the
amount awarded. They only claim that, under the
Workmen's Compensation Act, the compensation is
divisible, hence the commission erred in ordering
appellants to pay jointly and severally the amount awarded.
They argue that there is nothing in the compensation Act
which provides that the obligation of an employer arising
from compensable injury or death of an employee should
be solidary obligation, the same should have been
specifically provided, and that, in absence of such clear
provision, the responsibility of appellants should not be
solidary but merely joint.

At first blush appellants' contention would seem to be well,


for ordinarily, the liability of the partners in a partnership is
not solidary; but the law governing the liability of partners is
not applicable to the case at bar wherein a claim for
compensation by dependents of an employee who died in
line of duty is involved. And although the Workmen's
Compensation Act does not contain any provision
expressly declaring solidary obligation of business
partners like the herein appellants, there are other
provisions of law from which it could be gathered that their
liability must be solidary. Arts. 1711 and 1712 of the new
Civil Code provide:

ART. 1711. Owners of enterprises and other employers


are obliged to pay compensation for the death of or injuries
to their laborers, workmen, mechanics or other employees,
even though the event may have been purely accidental or
entirely due to a fortuitous cause, if the death or personal
injury arose out of and in the course of the
employment. . . . .

ART. 1712. If the death or injury is due to the negligence of


a fellow-worker, the latter and the employer shall be
solidarily liable for compensation. . . . .
And section 2 of the Workmen's Compensation Act, as
amended reads in part as follows:

. . . The right to compensation as provided in this Act shall


not be defeated or impaired on the ground that the death,
injury or disease was due to the negligence of a fellow
servant or employee, without prejudice to the right of the
employer to proceed against the negligence party.

The provisions of the new Civil Code above quoted taken


together with those of Section 2 of the Workmen's
Compensation Act, reasonably indicate that in
compensation cases, the liability of business partners, like
appellants, should be solidary; otherwise, the right of the
employee may be defeated, or at least crippled. If the
responsibility of appellants were to be merely joint and
solidary, and one of them happens to be insolvent, the
amount awarded to the appellees would only be partially
satisfied, which is evidently contrary to the intent and
purposes of the Act. In the previous cases we have already
held that the Workmen's Compensation Act should be
construed fairly, reasonably and liberally in favor of and for
the benefit of the employee and his dependents; that all
doubts as to the right of compensation resolved in his favor;
and that it should be interpreted to promote its purpose.
Accordingly, the present controversy should be decided in
favor of the appellees.

Moreover, Art. 1207 of the new Civil Code provides:

. . . . There is solidary liability only when the obligation


expressly so states, or when the law or the nature of the
obligation requires solidarity.

Since the Workmen's Compensation Act was enacted to


give full protection to the employee, reason demands that
the nature of the obligation of the employers to pay
compensation to the heirs of their employee who died in
line of duty, should be solidary; otherwise, the purpose of
the law could not be attained.

Wherefore, finding no error in the award appealed from,


the same is hereby affirmed, with costs against appellants.

Paras, C. J., Bengzon, Padilla, Montemayor, Bautista


Angelo, Labrador, and Concepcion, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-28920 October 24, 1928

MAXIMO GUIDOTE, plaintiff-appellant,


vs.
ROMANA BORJA, as administratrix of the estate of
Narciso Santos, deceased, defendant-appellee.

Francisco, Lualhati and Lopez for appellant.


M. G. Goyena for appellee.

OSTRAND, J.:

On March 4, 1921, the plaintiff brought an action against


the administratrix of the estate of Narciso Santos,
deceased, to recover the sum of P9,534.14, a part of which
was alleged to be the net profits due the plaintiff in a
partnership business conducted under the name of "Taller
Sinukuan," in which the deceased was the capitalist
partner and the plaintiff the industrial partner, the rest of
the sum consisting of advances alleged to have been
made to said partnership by the plaintiff. The defendant in
her answer admitted the existence of the partnership and
in a cross-complaint and counter-claim prayed that the
plaintiff be ordered to render an accounting of the
partnership business and to pay to the estate of the
deceased the sum of P25,000 as net profits, credits, and
property pertaining to said deceased.

In the first trial of the case the plaintiff called several


witnesses and introduced a so-called accounting and a
mass of documentary evidence consisting of books, bills,
and alleged vouchers, which documentary evidence was
so hopelessly and inextricably confused that the court, as
stated in its decision, could not consider it of much
probative value. It was, however, fund as facts that the
aforesaid partnership had been formed, on or about June
15, 1918; that Narciso Santos died on April 6, 1920,
leaving the plaintiff as the surviving partner; and that
plaintiff failed to liquidate the affairs of the partnership and
to render an account thereof to the administratrix of
Santos' estate. The court, therefore, dismissed the
plaintiff's complaint and absolved the defendant therefrom,
and ordered the plaintiff to render a full and complete
accounting, verified by vouchers, of the partnership
business from June 15, 1918, until September 1, 1922. To
this decision and order the plaintiff duly excepted.

The plaintiff thereupon rendered an account prepared by


one Tomas Alfonso, a public accountant. Numerous
objections to said account were presented by the
defendant, and the court, upon hearing, disapproved the
account and ordered that the defendant submit to the court
an accounting of the partnership business from the date of
the commencement of the partnership, June 15, 1918, up
to the time the business was closed. 1awph!l.net

On January 25, 1924, the defendant presented an account


and liquidation prepared by a public accountant, Santiago
A. Lindaya, showing a balance of P29,088.95 in favor of
the defendant. The account was set down for hearing upon
the question of its approval or disapproval by the court, at
which hearing the defendant introduced the public
accountant Jose Turiano Santiago to testify as to the
results of an audit made by him of the accounts of the
partnership. Santiago testified that he had been a public
accountant for over 20 years, having appeared in court as
such on several occasions; that he had examined the
exhibits offered in evidence of the case by both parties;
that he had prepared a separate accounting or liquidation
similar in results to that prepared by Lindaya, but with a
few differences in the sums total; and that according to his
examination, the financial status of the partnership was as
follows:

Narciso Santos is a creditor of the


Taller Sinukuan in the sum of <br< td="">
P26,020.89 consisting as follows:
For his capital .................................. P12,588.53
For his credit ................................... 10,348.30
For his share of the profits ............ 3,068.06

Total ...................................................
26,020.89
Maximo Guidote is a debtor to the
Taller Sinukuan in the sum of
P20,020.89, consisting as follows:
For his debt (debito) ......................... P29,088.95
Less his share of the profits ........... 3,068.06
Total
balance ...................................... 26.020.89

In order to contradict the conclusions of Lindaya and Jose


Turiano Santiago, the plaintiff presented Tomas Alfonso
and the bookkeeper, Pio Gaudier, as witnesses in his favor.
In regard to the character of the testimony of these
witnesses, His Honor, the trial judge, says:

The testimony of these two witnesses is so unreliable that


the court can place no reliance thereon. Mr. Tomas
Alfonso is the same public accountant who filed the
liquidation Exhibit O on behalf of the plaintiff, in relation to
the partnership business, which liquidation was
disapproved by this court in its decision of August 20, 1923.
It is also to be noted that Mr. Alfonso would have this court
believe the proposition that the plaintiff, a mere industrial
partner, notwithstanding his having received the sum of
P21,649.61 on the various jobs and contracts of the "Taller
Sinukuan," had actually expended and paid out the sum of
P63,360.27, of P44,710.66 in excess of the gross receipts
of the business. This proposition is not only improbable on
its face, but it materially contradicts the allegations of
plaintiff's complaint to the effect that the advances made by
the plaintiff only the amount to P2,017.50.

Mr. Pio Gaudier is the same bookkeeper who prepared


three entirely separate and distinct liquidation for the same
partnership business all of which were repeated by the
court in its decisions of September 1, 1922 and the court
finds that the testimony given by him at the last hearing is
confusing, contradictory and unreliable.1awph!l.net

As to the other witnesses for the plaintiff His Honor further


says:

The testimony of the other witnesses for the plaintiff


deserves but scant consideration as evidence to overcome
the testimony of Mr. Santiago, as a whole particularly that
of the witness Chua Chak, who, after identifying and
testifying as to a certain exhibit shown him by counsel for
plaintiff, showed that he could neither read nor write
English, Spanish, or Tagalog, and that of the witness Mr.
Claro Reyes, who, after positively assuring the court that a
certain exhibit tendered him for identification was an
original document, was forced to admit that it was but a
mere copy.

The court therefore, found that the conclusions reached by


Santiago A. Lindaya as modified by Jose Turinao Santiago
were just and correct and ordered the plaintiff to pay the
defendant the sum of P26,020.89, Philippine currency, with
legal interest thereon from April 2, 1921, the date of the
defendant's answer, and to pay the costs. From this
judgment the plaintiff appealed to this court and presents
the following assignments of error:

(1) That the court erred in dismissing the plaintiff's


complaint and ordering him to present a liquidation of the
operations and accounts of the partnership formed with the
deceased Narciso Santos, from the beginning of the
partnership until September 1, 1922.

(2) That the court erred in approving the liquidation made


by the public accountant Santiago A. Lindaya, with the
modification introduced by the witness Jose Turiano
Santiago.

(3) That the court erred in ordering the plaintiff and


appellant to pay to the defendant and appellee the sum of
P26,020.89.

As to the first assignment of error there may be some merit


in the appellant's contention that the dismissal of his
complaint was premature. The better practise would,
perhaps, have been to let the complaint stand until the
result of the liquidation of the partnership affairs was
known. But under the circumstances of this case no harm
was done by the dismissal of the complaint, and the error,
if any there be, is not reversible.
Under the same assignment of error the plaintiff argues
that as the deceased up to the time of his death generally
took care of the payments and collections of the
partnership, his legal representatives were under the
obligation to render accounts of the operations of the
partnership, notwithstanding the fact that the plaintiff was
in charge of the business subsequent to the death of
Santos. This argument is without merit. In the case of Wahl
vs. Donaldson Sim & Co. (5 Phil., 11, 14), it was held that
the death of one of the partners dissolves the partnership,
but that the liquidation of its affairs is by law intrusted, not
to the executors of the deceased partner, but to the
surviving partners or the liquidators appointed by them
(citing article 229 of the Code of Commerce and secs. 664
and 665 of the Code of Civil Procedure). The same rule is
laid down by the Supreme Court of Spain in sentence of
October 12, 1870.

The other assignments of error have reference only to


questions of fact in regard to which the findings of the court
below seem to be as nearly correct as possible upon the
evidence presented. There may be errors in the
interpretation of the accounts, and it is possible that the
amount of P26,020.89 charged against the plaintiff is
excessive, but the evidence presented by him is so
confusing and unreliable as to be practically of no weight
and cannot serve as a basis for a readjustment of the
accounts prepared by the accountant Lindaya and the
apparently reliable witness, Jose Turiano Santiago.

We should, perhaps, have been more inclined to question


the conclusions of Lindaya and Santiago if the plaintiff had
shown a disposition to render an honest account of the
business and to effect a fair liquidation of the partnership
but instead of doing so, he has by means of very
questionable, and apparently false, evidence sought to
mulct his deceased partner's estate to the extent of over
P9,000. The rule for the conduct of a surviving partner is
thus stated in 20 R. C. L., 1003:

In equity surviving partners are treated as trustees of the


representatives of the deceased partner, in regard to the
interest of the deceased partner in the firm. As a
consequence of this trusteeship, surviving partners are
held in their dealings with the firm assets and the
representatives of the deceased to that nicety of dealing
and that strictness of accountability required of and
incident to the position of one occupying a confidential
relation. It is the duty of surviving partners to render an
account of the performance of their trust to the personal
representatives of the deceased partner, and to pay over
to them the share of such deceased member in the surplus
of firm property, whether it consists of real or personal
assets.

The appellant has completely failed to observe the rule


quoted, and he is not in position to complain if his
testimony and that of his witnesses is discredited.

The appealed judgment is affirmed with the costs against


the appellant. So ordered.

Avancea, C. J., Johnson, Street, Malcolm, Villamor,


Romualdez, and Villa-Real, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila

G.R. No. L-24332 January 31, 1978


RAMON RALLOS, Administrator of the Estate of
CONCEPCION RALLOS, petitioner,
vs.
FELIX GO CHAN & SONS REALTY CORPORATION and
COURT OF APPEALS, respondents.

Seno, Mendoza & Associates for petitioner.

Ramon Duterte for private respondent.

MUOZ PALMA, J.:

This is a case of an attorney-in-fact, Simeon Rallos, who


after of his death of his principal, Concepcion Rallos, sold
the latter's undivided share in a parcel of land pursuant to a
power of attorney which the principal had executed in favor.
The administrator of the estate of the went to court to have
the sale declared uneanforceable and to recover the
disposed share. The trial court granted the relief prayed for,
but upon appeal the Court of Appeals uphold the validity of
the sale and the complaint.

Hence, this Petition for Review on certiorari.

The following facts are not disputed. Concepcion and


Gerundia both surnamed Rallos were sisters and
registered co-owners of a parcel of land known as Lot No.
5983 of the Cadastral Survey of Cebu covered by Transfer
Certificate of Title No. 11116 of the Registry of Cebu. On
April 21, 1954, the sisters executed a special power of
attorney in favor of their brother, Simeon Rallos,
authorizing him to sell for and in their behalf lot 5983. On
March 3, 1955, Concepcion Rallos died. On September 12,
1955, Simeon Rallos sold the undivided shares of his
sisters Concepcion and Gerundia in lot 5983 to Felix Go
Chan & Sons Realty Corporation for the sum of
P10,686.90. The deed of sale was registered in the
Registry of Deeds of Cebu, TCT No. 11118 was cancelled,
and a new transfer certificate of Title No. 12989 was
issued in the named of the vendee.

On May 18, 1956 Ramon Rallos as administrator of the


Intestate Estate of Concepcion Rallos filed a complaint
docketed as Civil Case No. R-4530 of the Court of First
Instance of Cebu, praying (1) that the sale of the undivided
share of the deceased Concepcion Rallos in lot 5983 be d
unenforceable, and said share be reconveyed to her estate;
(2) that the Certificate of 'title issued in the name of Felix
Go Chan & Sons Realty Corporation be cancelled and
another title be issued in the names of the corporation and
the "Intestate estate of Concepcion Rallos" in equal
undivided and (3) that plaintiff be indemnified by way of
attorney's fees and payment of costs of suit. Named party
defendants were Felix Go Chan & Sons Realty
Corporation, Simeon Rallos, and the Register of Deeds of
Cebu, but subsequently, the latter was dropped from the
complaint. The complaint was amended twice; defendant
Corporation's Answer contained a crossclaim against its
co-defendant, Simon Rallos while the latter filed third-party
complaint against his sister, Gerundia Rallos While the
case was pending in the trial court, both Simon and his
sister Gerundia died and they were substituted by the
respective administrators of their estates.

After trial the court a quo rendered judgment with the


following dispositive portion:

A. On Plaintiffs Complaint

(1) Declaring the deed of sale, Exh. "C", null and void
insofar as the one-half pro-indiviso share of Concepcion
Rallos in the property in question, Lot 5983 of the
Cadastral Survey of Cebu is concerned;

(2) Ordering the Register of Deeds of Cebu City to cancel


Transfer Certificate of Title No. 12989 covering Lot 5983
and to issue in lieu thereof another in the names of FELIX
GO CHAN & SONS REALTY CORPORATION and the
Estate of Concepcion Rallos in the proportion of one-half
(1/2) share each pro-indiviso;

(3) Ordering Felix Go Chan & Sons Realty Corporation to


deliver the possession of an undivided one-half (1/2) share
of Lot 5983 to the herein plaintiff;

(4) Sentencing the defendant Juan T. Borromeo,


administrator of the Estate of Simeon Rallos, to pay to
plaintiff in concept of reasonable attorney's fees the sum of
P1,000.00; and

(5) Ordering both defendants to pay the costs jointly and


severally.

B. On GO CHANTS Cross-Claim:

(1) Sentencing the co-defendant Juan T. Borromeo,


administrator of the Estate of Simeon Rallos, to pay to
defendant Felix Co Chan & Sons Realty Corporation the
sum of P5,343.45, representing the price of one-half (1/2)
share of lot 5983;

(2) Ordering co-defendant Juan T. Borromeo, administrator


of the Estate of Simeon Rallos, to pay in concept of
reasonable attorney's fees to Felix Go Chan & Sons Realty
Corporation the sum of P500.00.

C. On Third-Party Complaint of defendant Juan T.


Borromeo administrator of Estate of Simeon Rallos,
against Josefina Rallos special administratrix of the Estate
of Gerundia Rallos:

(1) Dismissing the third-party complaint without prejudice


to filing either a complaint against the regular administrator
of the Estate of Gerundia Rallos or a claim in the
Intestate-Estate of Cerundia Rallos, covering the same
subject-matter of the third-party complaint, at bar. (pp.
98-100, Record on Appeal)

Felix Go Chan & Sons Realty Corporation appealed in due


time to the Court of Appeals from the foregoing judgment
insofar as it set aside the sale of the one-half (1/2) share of
Concepcion Rallos. The appellate tribunal, as adverted to
earlier, resolved the appeal on November 20, 1964 in favor
of the appellant corporation sustaining the sale in
question. 1 The appellee administrator, Ramon Rallos,
moved for a reconsider of the decision but the same was
denied in a resolution of March 4, 1965. 2

What is the legal effect of an act performed by an agent


after the death of his principal? Applied more particularly to
the instant case, We have the query. is the sale of the
undivided share of Concepcion Rallos in lot 5983 valid
although it was executed by the agent after the death of his
principal? What is the law in this jurisdiction as to the effect
of the death of the principal on the authority of the agent to
act for and in behalf of the latter? Is the fact of knowledge
of the death of the principal a material factor in determining
the legal effect of an act performed after such death?

Before proceedings to the issues, We shall briefly restate


certain principles of law relevant to the matter tinder
consideration.

1. It is a basic axiom in civil law embodied in our Civil Code


that no one may contract in the name of another without
being authorized by the latter, or unless he has by law a
right to represent him. 3 A contract entered into in the
name of another by one who has no authority or the legal
representation or who has acted beyond his powers, shall
be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been
executed, before it is revoked by the other contracting
party.4 Article 1403 (1) of the same Code also provides:
ART. 1403. The following contracts are unenforceable,
unless they are justified:

(1) Those entered into in the name of another person by


one who hi - been given no authority or legal
representation or who has acted beyond his powers; ...

Out of the above given principles, sprung the creation and


acceptance of the relationship of agency whereby one
party, caged the principal (mandante), authorizes another,
called the agent (mandatario), to act for and in his behalf in
transactions with third persons. The essential elements of
agency are: (1) there is consent, express or implied of the
parties to establish the relationship; (2) the object is the
execution of a juridical act in relation to a third person; (3)
the agents acts as a representative and not for himself,
and (4) the agent acts within the scope of his authority. 5

Agency is basically personal representative,


and derivative in nature. The authority of the agent to act
emanates from the powers granted to him by his principal;
his act is the act of the principal if done within the scope of
the authority. Qui facit per alium facit se. "He who acts
through another acts himself". 6

2. There are various ways of extinguishing agency, 7 but


her We are concerned only with one cause death of the
principal Paragraph 3 of Art. 1919 of the Civil Code which
was taken from Art. 1709 of the Spanish Civil Code
provides:

ART. 1919. Agency is extinguished.

xxx xxx xxx

3. By the death, civil interdiction, insanity or insolvency of


the principal or of the agent; ... (Emphasis supplied)
By reason of the very nature of the relationship between
Principal and agent, agency is extinguished by the death of
the principal or the agent. This is the law in this
jurisdiction.8

Manresa commenting on Art. 1709 of the Spanish Civil


Code explains that the rationale for the law is found in
the juridical basis of agency which is representation Them
being an in. integration of the personality of the principal
integration that of the agent it is not possible for the
representation to continue to exist once the death of either
is establish. Pothier agrees with Manresa that by reason of
the nature of agency, death is a necessary cause for its
extinction. Laurent says that the juridical tie between the
principal and the agent is severed ipso jure upon the death
of either without necessity for the heirs of the fact to notify
the agent of the fact of death of the former. 9

The same rule prevails at common law the death of the


principal effects instantaneous and absolute revocation of
the authority of the agent unless the Power be coupled
with an interest. 10 This is the prevalent rule in American
Jurisprudence where it is well-settled that a power without
an interest confer. red upon an agent is dissolved by the
principal's death, and any attempted execution of the
power afterward is not binding on the heirs or
representatives of the deceased. 11

3. Is the general rule provided for in Article 1919 that the


death of the principal or of the agent extinguishes the
agency, subject to any exception, and if so, is the instant
case within that exception? That is the determinative point
in issue in this litigation. It is the contention of respondent
corporation which was sustained by respondent court that
notwithstanding the death of the principal Concepcion
Rallos the act of the attorney-in-fact, Simeon Rallos in
selling the former's sham in the property is valid and
enforceable inasmuch as the corporation acted in good
faith in buying the property in question.

Articles 1930 and 1931 of the Civil Code provide the


exceptions to the general rule afore-mentioned.

ART. 1930. The agency shall remain in full force and effect
even after the death of the principal, if it has been
constituted in the common interest of the latter and of the
agent, or in the interest of a third person who has accepted
the stipulation in his favor.

ART. 1931. Anything done by the agent, without


knowledge of the death of the principal or of any other
cause which extinguishes the agency, is valid and shall be
fully effective with respect to third persons who may have
contracted with him in good. faith.

Article 1930 is not involved because admittedly the special


power of attorney executed in favor of Simeon Rallos was
not coupled with an interest.

Article 1931 is the applicable law. Under this provision, an


act done by the agent after the death of his principal is
valid and effective only under two conditions, viz: (1) that
the agent acted without knowledge of the death of the
principal and (2) that the third person who contracted with
the agent himself acted in good faith. Good faith here
means that the third person was not aware of the death of
the principal at the time he contracted with said agent.
These two requisites must concur the absence of one will
render the act of the agent invalid and unenforceable.

In the instant case, it cannot be questioned that the agent,


Simeon Rallos, knew of the death of his principal at the
time he sold the latter's share in Lot No. 5983 to
respondent corporation. The knowledge of the death is
clearly to be inferred from the pleadings filed by Simon
Rallos before the trial court. 12 That Simeon Rallos knew of
the death of his sister Concepcion is also a finding of fact
of the court a quo 13 and of respondent appellate court
when the latter stated that Simon Rallos 'must have known
of the death of his sister, and yet he proceeded with the
sale of the lot in the name of both his sisters Concepcion
and Gerundia Rallos without informing appellant (the realty
corporation) of the death of the former. 14

On the basis of the established knowledge of Simon Rallos


concerning the death of his principal Concepcion
Rallos, Article 1931 of the Civil Code is inapplicable. The
law expressly requires for its application lack of knowledge
on the part of the agent of the death of his principal; it is not
enough that the third person acted in good faith. Thus in
Buason & Reyes v. Panuyas, the Court applying Article
1738 of the old Civil rode now Art. 1931 of the new Civil
Code sustained the validity , of a sale made after the death
of the principal because it was not shown that the agent
knew of his principal's demise. 15 To the same effect is the
case of Herrera, et al., v. Luy Kim Guan, et al., 1961,
where in the words of Justice Jesus Barrera the Court
stated:

... even granting arguemendo that Luis Herrera did die in


1936, plaintiffs presented no proof and there is no
indication in the record, that the agent Luy Kim Guan was
aware of the death of his principal at the time he sold the
property. The death 6f the principal does not render the act
of an agent unenforceable, where the latter had no
knowledge of such extinguishment of the agency. (1 SCRA
406, 412)

4. In sustaining the validity of the sale to respondent


consideration the Court of Appeals reasoned out that there
is no provision in the Code which provides that whatever is
done by an agent having knowledge of the death of his
principal is void even with respect to third persons who
may have contracted with him in good faith and without
knowledge of the death of the principal. 16

We cannot see the merits of the foregoing argument as it


ignores the existence of the general rule enunciated in
Article 1919 that the death of the principal extinguishes the
agency. That being the general rule it follows afortiori that
any act of an agent after the death of his principal is
void ab initio unless the same fags under the exception
provided for in the aforementioned Articles 1930 and 1931.
Article 1931, being an exception to the general rule, is to
be strictly construed, it is not to be given an interpretation
or application beyond the clear import of its terms for
otherwise the courts will be involved in a process of
legislation outside of their judicial function.

5. Another argument advanced by respondent court is that


the vendee acting in good faith relied on the power of
attorney which was duly registered on the original
certificate of title recorded in the Register of Deeds of the
province of Cebu, that no notice of the death was aver
annotated on said certificate of title by the heirs of the
principal and accordingly they must suffer the
consequences of such omission. 17

To support such argument reference is made to a portion


in Manresa's Commentaries which We quote:

If the agency has been granted for the purpose of


contracting with certain persons, the revocation must be
made known to them. But if the agency is general iii nature,
without reference to particular person with whom the agent
is to contract, it is sufficient that the principal exercise due
diligence to make the revocation of the agency publicity
known.

In case of a general power which does not specify the


persons to whom represents' on should be made, it is the
general opinion that all acts, executed with third persons
who contracted in good faith, Without knowledge of the
revocation, are valid. In such case, the principal may
exercise his right against the agent, who, knowing of the
revocation, continued to assume a personality which he no
longer had. (Manresa Vol. 11, pp. 561 and 575; pp. 15-16,
rollo)

The above discourse however, treats of revocation by an


act of the principal as a mode of terminating an agency
which is to be distinguished from revocation by operation
of law such as death of the principal which obtains in this
case. On page six of this Opinion We stressed that by
reason of the very nature of the relationship between
principal and agent, agency is extinguished ipso jure upon
the death of either principal or agent. Although a
revocation of a power of attorney to be effective must be
communicated to the parties concerned, 18 yet a revocation
by operation of law, such as by death of the principal is, as
a rule, instantaneously effective inasmuch as "by legal
fiction the agent's exercise of authority is regarded as an
execution of the principal's continuing will. 19 With death,
the principal's will ceases or is the of authority is
extinguished.

The Civil Code does not impose a duty on the heirs to


notify the agent of the death of the principal What the Code
provides in Article 1932 is that, if the agent die his heirs
must notify the principal thereof, and in the meantime
adopt such measures as the circumstances may demand
in the interest of the latter. Hence, the fact that no notice of
the death of the principal was registered on the certificate
of title of the property in the Office of the Register of Deeds,
is not fatal to the cause of the estate of the principal

6. Holding that the good faith of a third person in said with


an agent affords the former sufficient protection,
respondent court drew a "parallel" between the instant
case and that of an innocent purchaser for value of a land,
stating that if a person purchases a registered land from
one who acquired it in bad faith even to the extent of
foregoing or falsifying the deed of sale in his favor the
registered owner has no recourse against such innocent
purchaser for value but only against the forger. 20

To support the correctness of this respondent corporation,


in its brief, cites the case of Blondeau, et al., v. Nano and
Vallejo, 61 Phil. 625. We quote from the brief:

In the case of Angel Blondeau et al. v. Agustin Nano et al.,


61 Phil. 630, one Vallejo was a co-owner of lands with
Agustin Nano. The latter had a power of attorney
supposedly executed by Vallejo Nano in his favor. Vallejo
delivered to Nano his land titles. The power was registered
in the Office of the Register of Deeds. When the
lawyer-husband of Angela Blondeau went to that Office, he
found all in order including the power of attorney. But
Vallejo denied having executed the power The lower court
sustained Vallejo and the plaintiff Blondeau appealed.
Reversing the decision of the court a quo, the Supreme
Court, quoting the ruling in the case of Eliason v.
Wilborn, 261 U.S. 457, held:

But there is a narrower ground on which the defenses of


the defendant- appellee must be overruled. Agustin Nano
had possession of Jose Vallejo's title papers. Without
those title papers handed over to Nano with the
acquiescence of Vallejo, a fraud could not have been
perpetuated. When Fernando de la Canters, a member of
the Philippine Bar and the husband of Angela Blondeau,
the principal plaintiff, searched the registration record, he
found them in due form including the power of attorney of
Vallajo in favor of Nano. If this had not been so and if
thereafter the proper notation of the encumbrance could
not have been made, Angela Blondeau would not have
sent P12,000.00 to the defendant Vallejo.' An executed
transfer of registered lands placed by the registered owner
thereof in the hands of another operates as a
representation to a third party that the holder of the transfer
is authorized to deal with the land.

As between two innocent persons, one of whom must


suffer the consequence of a breach of trust, the one who
made it possible by his act of coincidence bear the loss.
(pp. 19-21)

The Blondeau decision, however, is not on all fours with


the case before Us because here We are confronted with
one who admittedly was an agent of his sister and who
sold the property of the latter after her death with full
knowledge of such death. The situation is expressly
covered by a provision of law on agency the terms of which
are clear and unmistakable leaving no room for an
interpretation contrary to its tenor, in the same manner that
the ruling in Blondeau and the cases cited therein found a
basis in Section 55 of the Land Registration Law which in
part provides:

xxx xxx xxx

The production of the owner's duplicate certificate


whenever any voluntary instrument is presented for
registration shall be conclusive authority from the
registered owner to the register of deeds to enter a new
certificate or to make a memorandum of registration in
accordance with such instruments, and the new certificate
or memorandum Shall be binding upon the registered
owner and upon all persons claiming under him in favor of
every purchaser for value and in good faith:Provided
however, That in all cases of registration provided by fraud,
the owner may pursue all his legal and equitable remedies
against the parties to such fraud without prejudice,
however, to the right, of any innocent holder for value of a
certificate of title. ... (Act No. 496 as amended)
7. One last point raised by respondent corporation in
support of the appealed decision is an 1842 ruling of the
Supreme Court of Pennsylvania in Cassiday v.
McKenzie wherein payments made to an agent after the
death of the principal were held to be "good", "the parties
being ignorant of the death". Let us take note that the
Opinion of Justice Rogers was premised on the statement
that the parties were ignorant of the death of the
principal. We quote from that decision the following:

... Here the precise point is, whether a payment to an agent


when the Parties are ignorant of the death is a good
payment. in addition to the case in Campbell before cited,
the same judge Lord Ellenboruogh, has decided in 5 Esp.
117, the general question that a payment after the death of
principal is not good. Thus, a payment of sailor's wages to
a person having a power of attorney to receive them, has
been held void when the principal was dead at the time of
the payment. If, by this case, it is meant merely to decide
the general proposition that by operation of law the death
of the principal is a revocation of the powers of the attorney,
no objection can be taken to it. But if it intended to say that
his principle applies where there was 110 notice of death,
or opportunity of twice I must be permitted to dissent from
it.

... That a payment may be good today, or bad tomorrow,


from the accident circumstance of the death of the principal,
which he did not know, and which by no possibility could
he know? It would be unjust to the agent and unjust to the
debtor. In the civil law, the acts of the agent, done bona
fide in ignorance of the death of his principal are held valid
and binding upon the heirs of the latter. The same rule
holds in the Scottish law, and I cannot believe the common
law is so unreasonable... (39 Am. Dec. 76, 80, 81;
emphasis supplied)
To avoid any wrong impression which the Opinion
in Cassiday v. McKenzie may evoke, mention may be
made that the above represents the minority view in
American jurisprudence. Thus in Clayton v. Merrett, the
Court said.

There are several cases which seem to hold that although,


as a general principle, death revokes an agency and
renders null every act of the agent thereafter performed,
yet that where a payment has been made in ignorance of
the death, such payment will be good. The leading case so
holding is that of Cassiday v. McKenzie, 4 Watts & S. (Pa)
282, 39 Am. 76, where, in an elaborate opinion, this view ii
broadly announced. It is referred to, and seems to have
been followed, in the case ofDick v. Page, 17 Mo. 234, 57
AmD 267; but in this latter case it appeared that the estate
of the deceased principal had received the benefit of the
money paid, and therefore the representative of the estate
might well have been held to be estopped from suing for it
again. . . . These cases, in so far, at least, as they
announce the doctrine under discussion, are exceptional.
The Pennsylvania Case, supra (Cassiday v. McKenzie 4
Watts & S. 282, 39 AmD 76), is believed to stand almost, if
not quite, alone in announcing the principle in its broadest
scope. (52, Misc. 353, 357, cited in 2 C.J. 549)

So also in Travers v. Crane, speaking of Cassiday v.


McKenzie, and pointing out that the opinion, except so far
as it related to the particular facts, was a mere dictum,
Baldwin J. said:

The opinion, therefore, of the learned Judge may be


regarded more as an extrajudicial indication of his views on
the general subject, than as the adjudication of the Court
upon the point in question. But accordingly all power
weight to this opinion, as the judgment of a of great
respectability, it stands alone among common law
authorities and is opposed by an array too formidable to
permit us to following it. (15 Cal. 12,17, cited in 2 C.J. 549)

Whatever conflict of legal opinion was generated


by Cassiday v. McKenzie in American jurisprudence, no
such conflict exists in our own for the simple reason that
our statute, the Civil Code, expressly provides for two
exceptions to the general rule that death of the principal
revokes ipso jure the agency, to wit: (1) that the agency is
coupled with an interest (Art 1930), and (2) that the act of
the agent was executed without knowledge of the death of
the principal and the third person who contracted with the
agent acted also in good faith (Art. 1931). Exception No. 2
is the doctrine followed in Cassiday, and again We stress
the indispensable requirement that the agent acted without
knowledge or notice of the death of the principal In the
case before Us the agent Ramon Rallos executed the sale
notwithstanding notice of the death of his principal
Accordingly, the agent's act is unenforceable against the
estate of his principal.

IN VIEW OF ALL THE FOREGOING, We set aside the


ecision of respondent appellate court, and We affirm en
toto the judgment rendered by then Hon. Amador E.
Gomez of the Court of First Instance of Cebu, quoted in
pages 2 and 3 of this Opinion, with costs against
respondent realty corporation at all instances.

So Ordered.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC
G.R. No. L-21601 December 17, 1966

NIELSON & COMPANY, INC., plaintiff-appellant,


vs.
LEPANTO CONSOLIDATED MINING
COMPANY, defendant-appellee.

W. H. Quasha and Associates for plaintiff-appellant.


Ponce Enrile, Siguion-Reyna, Montecillo and Belo for
defendant-appellee.

ZALDIVAR, J.:

On February 6, 1958, plaintiff brought this action against


defendant before the Court of First Instance of Manila to
recover certain sums of money representing damages
allegedly suffered by the former in view of the refusal of the
latter to comply with the terms of a management contract
entered into between them on January 30, 1937, including
attorney's fees and costs.

Defendant in its answer denied the material allegations of


the complaint and set up certain special defenses, among
them, prescription and laches, as bars against the
institution of the present action.

After trial, during which the parties presented testimonial


and numerous documentary evidence, the court a
quorendered a decision dismissing the complaint with
costs. The court stated that it did not find sufficient
evidence to establish defendant's counterclaim and so it
likewise dismissed the same.

The present appeal was taken to this Court directly by the


plaintiff in view of the amount involved in the case.

The facts of this case, as stated in the decision appealed


from, are hereunder quoted for purposes of this decision:
It appears that the suit involves an operating agreement
executed before World War II between the plaintiff and the
defendant whereby the former operated and managed the
mining properties owned by the latter for a management
fee of P2,500.00 a month and a 10% participation in the
net profits resulting from the operation of the mining
properties. For brevity and convenience, hereafter the
plaintiff shall be referred to as NIELSON and the defendant,
LEPANTO.

The antecedents of the case are: The contract in question


(Exhibit `C') was made by the parties on January 30, 1937
for a period of five (5) years. In the latter part of 1941, the
parties agreed to renew the contract for another period of
five (5) years, but in the meantime, the Pacific War broke
out in December, 1941.

In January, 1942 operation of the mining properties was


disrupted on account of the war. In February of 1942, the
mill, power plant, supplies on hand, equipment,
concentrates on hand and mines, were destroyed upon
orders of the United States Army, to prevent their utilization
by the invading Japanese Army. The Japanese forces
thereafter occupied the mining properties, operated the
mines during the continuance of the war, and who were
ousted from the mining properties only in August of 1945.

After the mining properties were liberated from the


Japanese forces, LEPANTO took possession thereof and
embarked in rebuilding and reconstructing the mines and
mill; setting up new organization; clearing the mill site;
repairing the mines; erecting staff quarters and bodegas
and repairing existing structures; installing new machinery
and equipment; repairing roads and maintaining the same;
salvaging equipment and storing the same within the
bodegas; doing police work necessary to take care of the
materials and equipment recovered; repairing and
renewing the water system; and remembering (Exhibits "D"
and "E"). The rehabilitation and reconstruction of the mine
and mill was not completed until 1948 (Exhibit "F"). On
June 26, 1948 the mines resumed operation under the
exclusive management of LEPANTO (Exhibit "F-l").

Shortly after the mines were liberated from the Japanese


invaders in 1945, a disagreement arose between
NIELSON and LEPANTO over the status of the operating
contract in question which as renewed expired in 1947.
Under the terms thereof, the management contract shall
remain in suspense in case fortuitous event or force
majeure, such as war or civil commotion, adversely affects
the work of mining and milling.

"In the event of inundations, floodings of mine, typhoon,


earthquake or any other force majeure, war, insurrection,
civil commotion, organized strike, riot, injury to the
machinery or other event or cause reasonably beyond the
control of NIELSON and which adversely affects the work
of mining and milling; NIELSON shall report such fact to
LEPANTO and without liability or breach of the terms of
this Agreement, the same shall remain in suspense, wholly
or partially during the terms of such inability." (Clause II of
Exhibit "C").

NIELSON held the view that, on account of the war, the


contract was suspended during the war; hence the life of
the contract should be considered extended for such time
of the period of suspension. On the other hand, LEPANTO
contended that the contract should expire in 1947 as
originally agreed upon because the period of suspension
accorded by virtue of the war did not operate to extend
further the life of the contract.

No understanding appeared from the record to have been


bad by the parties to resolve the disagreement. In the
meantime, LEPANTO rebuilt and reconstructed the mines
and was able to bring the property into operation only in
June of 1948, . . . .

Appellant in its brief makes an alternative assignment of


errors depending on whether or not the management
contract basis of the action has been extended for a period
equivalent to the period of suspension. If the agreement is
suspended our attention should be focused on the first set
of errors claimed to have been committed by the court a
quo; but if the contrary is true, the discussion will then be
switched to the alternative set that is claimed to have been
committed. We will first take up the question whether the
management agreement has been extended as a result of
the supervening war, and after this question shall have
been determined in the sense sustained by appellant, then
the discussion of the defense of laches and prescription
will follow as a consequence.

The pertinent portion of the management contract (Exh. C)


which refers to suspension should any event
constituting force majeure happen appears in Clause II
thereof which we quote hereunder:

In the event of inundations, floodings of the mine, typhoon,


earthquake or any other force majeure, war, insurrection,
civil commotion, organized strike, riot, injury to the
machinery or other event or cause reasonably beyond the
control of NIELSON and which adversely affects the work
of mining and milling; NIELSON shall report such fact to
LEPANTO and without liability or breach of the terms of
this Agreement, the same shall remain in suspense, wholly
or partially during the terms of such inability.

A careful scrutiny of the clause above-quoted will at once


reveal that in order that the management contract may be
deemed suspended two events must take place which
must be brought in a satisfactory manner to the attention of
defendant within a reasonable time, to wit: (1) the event
constituting the force majeure must be reasonably beyond
the control of Nielson, and (2) it must adversely affect the
work of mining and milling the company is called upon to
undertake. As long as these two condition exist the
agreement is deem suspended.

Does the evidence on record show that these two


conditions had existed which may justify the conclusion
that the management agreement had been suspended in
the sense entertained by appellant? Let us go to the
evidence.

It is a matter that this Court can take judicial notice of that


war supervened in our country and that the mines in the
Philippines were either destroyed or taken over by the
occupation forces with a view to their operation. The
Lepanto mines were no exception for not was the mine
itself destroyed but the mill, power plant, supplies on hand,
equipment and the like that were being used there were
destroyed as well. Thus, the following is what appears in
the Lepanto Company Mining Report dated March 13,
1946 submitted by its President C. A. DeWitt to the
defendant:1 "In February of 1942, our mill, power plant,
supplies on hand, equipment, concentrates on hand, and
mine, were destroyed upon orders of the U.S. Army to
prevent their utilization by the enemy." The report also
mentions the report submitted by Mr. Blessing, an official
of Nielson, that "the original mill was destroyed in 1942"
and "the original power plant and all the installed
equipment were destroyed in 1942." It is then undeniable
that beginning February, 1942 the operation of the Lepanto
mines stopped or became suspended as a result of the
destruction of the mill, power plant and other important
equipment necessary for such operation in view of a cause
which was clearly beyond the control of Nielson and that
as a consequence such destruction adversely affected the
work of mining and milling which the latter was called upon
to undertake under the management contract.
Consequently, by virtue of the very terms of said contract
the same may be deemed suspended from February, 1942
and as of that month the contract still had 60 months to go.

On the other hand, the record shows that the defendant


admitted that the occupation forces operated its mining
properties subject of the management contract,2 and from
the very report submitted by President DeWitt it appears
that the date of the liberation of the mine was August 1,
1945 although at the time there were still many booby
traps.3 Similarly, in a report submitted by the defendant to
its stockholders dated August 25, 1948, the following
appears: "Your Directors take pleasure in reporting that
June 26, 1948 marked the official return to operations of
this Company of its properties in Mankayan, Mountain
Province, Philippines."4

It is, therefore, clear from the foregoing that the Lepanto


mines were liberated on August 1, 1945, but because of
the period of rehabilitation and reconstruction that had to
be made as a result of the destruction of the mill, power
plant and other necessary equipment for its operation it
cannot be said that the suspension of the contract ended
on that date. Hence, the contract must still be deemed
suspended during the succeeding years of reconstruction
and rehabilitation, and this period can only be said to have
ended on June 26, 1948 when, as reported by the
defendant, the company officially resumed the mining
operations of the Lepanto. It should here be stated that this
period of suspension from February, 1942 to June 26,
1948 is the one urged by plaintiff.5

It having been shown that the operation of the Lepanto


mines on the part of Nielson had been suspended during
the period set out above within the purview of the
management contract, the next question that needs to be
determined is the effect of such suspension. Stated in
another way, the question now to be determined is whether
such suspension had the effect of extending the period of
the management contract for the period of said suspension.
To elucidate this matter, we again need to resort to the
evidence.

For appellant Nielson two witnesses testified, declaring


that the suspension had the effect of extending the period
of the contract, namely, George T. Scholey and Mark
Nestle. Scholey was a mining engineer since 1929, an
incorporator, general manager and director of Nielson and
Company; and for some time he was also the
vice-president and director of the Lepanto Company during
the pre-war days and, as such, he was an officer of both
appellant and appellee companies. As vice-president of
Lepanto and general manager of Nielson, Scholey
participated in the negotiation of the management contract
to the extent that he initialed the same both as witness and
as an officer of both corporations. This witness testified in
this case to the effect that the standard force
majeure clause embodied in the management contract
was taken from similar mining contracts regarding mining
operations and the understanding regarding the nature and
effect of said clause was that when there is suspension of
the operation that suspension meant the extension of the
contract. Thus, to the question, "Before the war, what was
the understanding of the people in the particular trend of
business with respect to theforce majeure clause?",
Scholey answered: "That was our understanding that the
suspension meant the extension of time lost."6

Mark Nestle, the other witness, testified along similar line.


He had been connected with Nielson since 1937 until the
time he took the witness stand and had been a director,
manager, and president of the same company. When he
was propounded the question: "Do you know what was the
custom or usage at that time in connection with force
majeure clause?", Nestle answered, "In the mining world
the force majeure clause is generally considered. When a
calamity comes up and stops the work like in war, flood,
inundation or fire, etc., the work is suspended for the
duration of the calamity, and the period of the contract is
extended after the calamity is over to enable the person to
do the big work or recover his money which he has
invested, or accomplish what his obligation is to a third
person ."7

And the above testimonial evidence finds support in the


very minutes of the special meeting of the Board of
Directors of the Lepanto Company issued on March 10,
1945 which was then chairmaned by Atty. C. A. DeWitt.
We read the following from said report:

The Chairman also stated that the contract with Nielson


and Company would soon expire if the obligations were not
suspended, in which case we should have to pay them the
retaining fee of P2,500.00 a month. He believes however,
that there is a provision in the contract suspending the
effects thereof in cases like the present, and that even if it
were not there, the law itself would suspend the operations
of the contract on account of the war. Anyhow, he stated,
we shall have no difficulty in solving satisfactorily any
problem we may have with Nielson and Company.8

Thus, we can see from the above that even in the opinion
of Mr. DeWitt himself, who at the time was the chairman of
the Board of Directors of the Lepanto Company, the
management contract would then expire unless the period
therein rated is suspended but that, however, he
expressed the belief that the period was extended because
of the provision contained therein suspending the effects
thereof should any of the case of force majeure happen
like in the present case, and that even if such provision did
not exist the law would have the effect of suspending it on
account of the war. In substance, Atty. DeWitt expressed
the opinion that as a result of the suspension of the mining
operation because of the effects of the war the period of
the contract had been extended.

Contrary to what appellant's evidence reflects insofar as


the interpretation of the force majeure clause is concerned,
however, appellee gives Us an opposite interpretation
invoking in support thereof not only a letter Atty. DeWitt
sent to Nielson on October 20, 1945,9 wherein he
expressed for the first time an opinion contrary to what he
reported to the Board of Directors of Lepanto Company as
stated in the portion of the minutes of its Board of Directors
as quoted above, but also the ruling laid down by our
Supreme Court in some cases decided sometime ago, to
the effect that the war does not have the effect of
extending the term of a contract that the parties may enter
into regarding a particular transaction, citing in this
connection the cases of Victorias Planters Association v.
Victorias Milling Company, 51 O.G. 4010; Rosario S. Vda.
de Lacson, et al. v. Abelardo G. Diaz, 87 Phil. 150; and Lo
Ching y So Young Chong Co. v. Court of Appeals, et
al., 81 Phil. 601.

To bolster up its theory, appellee also contends that the


evidence regarding the alleged custom or usage in mining
contract that appellant's witnesses tried to introduce was
incompetent because (a) said custom was not specifically
pleaded; (b) Lepanto made timely and repeated objections
to the introduction of said evidence; (c) Nielson failed to
show the essential elements of usage which must be
shown to exist before any proof thereof can be given to
affect the contract; and (d) the testimony of its witnesses
cannot prevail over the very terms of the management
contract which, as a rule, is supposed to contain all the
terms and conditions by which the parties intended to be
bound.

It is here necessary to analyze the contradictory evidence


which the parties have presented regarding the
interpretation of the force majeure clause in the
management contract.

At the outset, it should be stated that, as a rule, in the


construction and interpretation of a document the intention
of the parties must be sought (Rule 130, Section 10, Rules
of Court). This is the basic rule in the interpretation of
contracts because all other rules are but ancilliary to the
ascertainment of the meaning intended by the parties. And
once this intention has been ascertained it becomes an
integral part of the contract as though it had been originally
expressed therein in unequivocal terms (Shoreline Oil
Corp. v. Guy, App. 189, So., 348, cited in 17A C.J.S., p.
47). How is this intention determined?

One pattern is to ascertain the contemporaneous and


subsequent acts of the contracting parties in relation to the
transaction under consideration (Article 1371, Civil Code).
In this particular case, it is worthy of note what Atty. C. A.
DeWitt has stated in the special meeting of the Board of
Directors of Lepanto in the portion of the minutes already
quoted above wherein, as already stated, he expressed
the opinion that the life of the contract, if not extended,
would last only until January, 1947 and yet he said that
there is a provision in the contract that the war had the
effect of suspending the agreement and that the effect of
that suspension was that the agreement would have to
continue with the result that Lepanto would have to pay the
monthly retaining fee of P2,500.00. And this belief that the
war suspended the agreement and that the suspension
meant its extension was so firm that he went to the extent
that even if there was no provision for suspension in the
agreement the law itself would suspend it.

It is true that Mr. DeWitt later sent a letter to Nielson dated


October 20, 1945 wherein apparently he changed his mind
because there he stated that the contract was merely
suspended, but not extended, by reason of the war,
contrary to the opinion he expressed in the meeting of the
Board of Directors already adverted to, but between the
two opinions of Atty. DeWitt We are inclined to give more
weight and validity to the former not only because such
was given by him against his own interest but also
because it was given before the Board of Directors of
Lepanto and in the presence, of some Nielson
officials 10 who, on that occasion were naturally led to
believe that that was the true meaning of the suspension
clause, while the second opinion was merely self-serving
and was given as a mere afterthought.

Appellee also claims that the issue of true intent of the


parties was not brought out in the complaint, but anent this
matter suffice it to state that in paragraph No. 19 of the
complaint appellant pleaded that the contract was
extended. 11 This is a sufficient allegation considering that
the rules on pleadings must as a rule be liberally
construed.

It is likewise noteworthy that in this issue of the intention of


the parties regarding the meaning and usage concerning
the force majeure clause, the testimony adduced by
appellant is uncontradicted. If such were not true, appellee
should have at least attempted to offer contradictory
evidence. This it did not do. Not even Lepanto's President,
Mr. V. E. Lednicky who took the witness stand,
contradicted said evidence.

In holding that the suspension of the agreement meant the


extension of the same for a period equivalent to the
suspension, We do not have the least intention of
overruling the cases cited by appellee. We simply want to
say that the ruling laid down in said cases does not apply
here because the material facts involved therein are not
the same as those obtaining in the present. The rule
of stare decisis cannot be invoked where there is no
analogy between the material facts of the decision relied
upon and those of the instant case.

Thus, in Victorias Planters Association vs. Victorias Milling


Company, 51 O.G. 4010, there was no evidence at all
regarding the intention of the parties to extend the contract
equivalent to the period of suspension caused by the war.
Neither was there evidence that the parties understood the
suspension to mean extension; nor was there evidence of
usage and custom in the industry that the suspension
meant the extension of the agreement. All these matters,
however, obtain in the instant case.

Again, in the case of Rosario S. Vda. de Lacson vs.


Abelardo G. Diaz, 87 Phil. 150, the issue referred to the
interpretation of a pre-war contract of lease of sugar cane
lands and the liability of the lessee to pay rent during and
immediately following the Japanese occupation and where
the defendant claimed the right of an extension of the
lease to make up for the time when no cane was planted.
This Court, in holding that the years which the lessee could
not use the land because of the war could not be
discounted from the period agreed upon, held that
"Nowhere is there any insinuation that the
defendant-lessee was to have possession of lands for
seven years excluding years on which he could not harvest
sugar." Clearly, this ratio decidendi is not applicable to the
case at bar wherein there is evidence that the parties
understood the "suspension clause by force majeure" to
mean the extension of the period of agreement.

Lastly, in the case of Lo Ching y So Young Chong Co. vs.


Court of Appeals, et al., 81 Phil. 601, appellant leased a
building from appellee beginning September 13, 1940 for
three years, renewable for two years. The lessee's
possession was interrupted in February, 1942 when he
was ousted by the Japanese who turned the same over to
German Otto Schulze, the latter occupying the same until
January, 1945 upon the arrival of the liberation forces.
Appellant contended that the period during which he did
not enjoy the leased premises because of his
dispossession by the Japanese had to be deducted from
the period of the lease, but this was overruled by this Court,
reasoning that such dispossession was merely a simple
"perturbacion de merohecho y de la cual no responde el
arrendador" under Article 1560 of the old Civil Code Art.
1664). This ruling is also not applicable in the instant case
because in that case there was no evidence of the
intention of the parties that any suspension of the lease
by force majeure would be understood to extend the period
of the agreement.

In resume, there is sufficient justification for Us to conclude


that the cases cited by appellee are inapplicable because
the facts therein involved do not run parallel to those
obtaining in the present case.

We shall now consider appellee's defense of laches.


Appellee is correct in its contention that the defense of
laches applies independently of prescription. Laches is
different from the statute of limitations. Prescription is
concerned with the fact of delay, whereas laches is
concerned with the effect of delay. Prescription is a matter
of time; laches is principally a question of inequity of
permitting a claim to be enforced, this inequity being
founded on some change in the condition of the property or
the relation of the parties. Prescription is statutory; laches
is not. Laches applies in equity, whereas prescription
applies at law. Prescription is based on fixed time, laches
is not. (30 C.J.S., p. 522; See also Pomeroy's Equity
Jurisprudence, Vol. 2, 5th ed., p. 177).

The question to determine is whether appellant Nielson is


guilty of laches within the meaning contemplated by the
authorities on the matter. In the leading case of Go Chi
Gun, et al. vs. Go Cho, et al., 96 Phil. 622, this Court
enumerated the essential elements of laches as follows:

(1) conduct on the part of the defendant, or of one under


whom he claims, giving rise to the situation of which
complaint is made and for which the complaint seeks a
remedy; (2) delay in asserting the complainant's rights, the
complainant having had knowledge or notice of the
defendant's conduct and having been afforded an
opportunity to institute a suit; (3) lack of knowledge or
notice on the part of the defendant that the complainant
would assert the right on which he bases his suit; and (4)
injury or prejudice to the defendant in the event relief is
accorded to the complainant, or the suit is not held barred.

Are these requisites present in the case at bar?

The first element is conceded by appellant Nielson when it


claimed that defendant refused to pay its management
fees, its percentage of profits and refused to allow it to
resume the management operation.

Anent the second element, while it is true that appellant


Nielson knew since 1945 that appellee Lepanto has
refused to permit it to resume management and that since
1948 appellee has resumed operation of the mines and it
filed its complaint only on February 6, 1958, there being
apparent delay in filing the present action, We find the
delay justified and as such cannot constitute laches. It
appears that appellant had not abandoned its right to
operate the mines for even before the termination of the
suspension of the agreement as early as January 20,
194612 and even before March 10, 1945, it already claimed
its right to the extension of the contract,13 and it pressed its
claim for the balance of its share in the profits from the
1941 operation14 by reason of which negotiations had
taken place for the settlement of the claim15 and it was only
on June 25, 1957 that appellee finally denied the claim.
There is, therefore, only a period of less than one year that
had elapsed from the date of the final denial of the claim to
the date of the filing of the complaint, which certainly
cannot be considered as unreasonable delay.

The third element of laches is absent in this case. It cannot


be said that appellee Lepanto did not know that appellant
would assert its rights on which it based suit. The evidence
shows that Nielson had been claiming for some time its
rights under the contract, as already shown above.

Neither is the fourth element present, for if there has been


some delay in bringing the case to court it was mainly due
to the attempts at arbitration and negotiation made by both
parties. If Lepanto's documents were lost, it was not
caused by the delay of the filing of the suit but because of
the war.

Another reason why appellant Nielson cannot be held


guilty of laches is that the delay in the filing of the
complaint in the present case was the inevitable of the
protracted negotiations between the parties concerning the
settlement of their differences. It appears that Nielson
asked for arbitration16 which was granted. A committee
consisting of Messrs. DeWitt, Farnell and Blessing was
appointed to act on said differences but Mr. DeWitt always
tried to evade the issue17 until he was taken ill and died. Mr.
Farnell offered to Nielson the sum of P13,000.58 by way of
compromise of all its claim arising from the management
contract18 but apparently the offer was refused.
Negotiations continued with the exchange of letters
between the parties but with no satisfactory result.19 It can
be said that the delay due to protracted negotiations was
caused by both parties. Lepanto, therefore, cannot be
permitted to take advantage of such delay or to question
the propriety of the action taken by Nielson. The defense of
laches is an equitable one and equity should be applied
with an even hand. A person will not be permitted to take
advantage of, or to question the validity, or propriety of,
any act or omission of another which was committed or
omitted upon his own request or was caused by his
conduct (R. H. Stearns Co. vs. United States, 291 U.S. 54,
78 L. Ed. 647, 54 S. Ct., 325; United States vs. Henry
Prentiss & Co., 288 U.S. 73, 77 L. Ed., 626, 53 S. Ct., 283).

Had the action of Nielson prescribed? The court a quo held


that the action of Nielson is already barred by the statute of
limitations, and that ruling is now assailed by the appellant
in this appeal. In urging that the court a quo erred in
reaching that conclusion the appellant has discussed the
issue with reference to particular claims.

The first claim is with regard to the 10% share in profits of


1941 operations. Inasmuch as appellee Lepanto alleges
that the correct basis of the computation of the sharing in
the net profits shall be as provided for in Clause V of the
Management Contract, while appellant Nielson maintains
that the basis should be what is contained in the minutes of
the special meeting of the Board of Directors of Lepanto on
August 21, 1940, this question must first be elucidated
before the main issue is discussed.

The facts relative to the matter of profit sharing follow: In


the management contract entered into between the parties
on January 30, 1937, which was renewed for another five
years, it was stipulated that Nielson would receive a
compensation of P2,500.00 a month plus 10% of the net
profits from the operation of the properties for the
preceding month. In 1940, a dispute arose regarding the
computation of the 10% share of Nielson in the profits. The
Board of Directors of Lepanto, realizing that the mechanics
of the contract was unfair to Nielson, authorized its
President to enter into an agreement with Nielson
modifying the pertinent provision of the contract effective
January 1, 1940 in such a way that Nielson shall receive (1)
10% of the dividends declared and paid, when and as paid,
during the period of the contract and at the end of each
year, (2) 10% of any depletion reserve that may be set up,
and (3) 10% of any amount expended during the year out
of surplus earnings for capital account. 20 Counsel for the
appellee admitted during the trial that the extract of the
minutes as found in Exhibit B is a faithful copy from the
original. 21 Mr. George Scholey testified that the foregoing
modification was agreed upon. 22

Lepanto claims that this new basis of computation should


be rejected (1) because the contract was clear on the point
of the 10% share and it was so alleged by Nielson in its
complaint, and (2) the minutes of the special meeting held
on August 21, 1940 was not signed.

It appearing that the issue concerning the sharing of the


profits had been raised in appellant's complaint and
evidence on the matter was introduced 23 the same can be
taken into account even if no amendment of the pleading
to make it conform to the evidence has been made, for the
same is authorized by Section 4, Rule 17, of the old Rules
of Court (now Section 5, Rule 10, of the new Rules of
Court).

Coming now to the question of prescription raised by


defendant Lepanto, it is contended by the latter that the
period to be considered for the prescription of the claim
regarding participation in the profits is only four years,
because the modification of the sharing embodied in the
management contract is merely verbal, no written
document to that effect having been presented. This
contention is untenable. The modification appears in the
minutes of the special meeting of the Board of Directors of
Lepanto held on August 21, 1940, it having been made
upon the authority of its President, and in said minutes the
terms of the modification had been specified. This is
sufficient to have the agreement considered, for the
purpose of applying the statute of limitations, as a written
contract even if the minutes were not signed by the parties
(3 A.L.R., 2d, p. 831). It has been held that a writing
containing the terms of a contract if adopted by two
persons may constitute a contract in writing even if the
same is not signed by either of the parties (3 A.L.R., 2d, pp.
812-813). Another authority says that an unsigned
agreement the terms of which are embodied in a document
unconditionally accepted by both parties is a written
contract (Corbin on Contracts, Vol. 1, p. 85)

The modification, therefore, made in the management


contract relative to the participation in the profits by
appellant, as contained in the minutes of the special
meeting of the Board of Directors of Lepanto held on
August 21, 1940, should be considered as a written
contract insofar as the application of the statutes of
limitations is concerned. Hence, the action thereon
prescribes within ten (10) years pursuant to Section 43 of
Act 190.

Coming now to the facts, We find that the right of Nielson


to its 10% participation in the 1941 operations accrued on
December 21, 1941 and the right to commence an action
thereon began on January 1, 1942 so that the action must
be brought within ten (10) years from the latter date. It is
true that the complaint was filed only on February 6, 1958,
that is sixteen (16) years, one (1) month and five (5) days
after the right of action accrued, but the action has not yet
prescribed for various reasons which We will hereafter
discuss.

The first reason is the operation of the Moratorium Law, for


appellant's claim is undeniably a claim for money. Said
claim accrued on December 31, 1941, and Lepanto is a
war sufferer. Hence the claim was covered by Executive
Order No. 32 of March 10, 1945. It is well settled that the
operation of the Moratorium Law suspends the running of
the statue of limitations (Pacific Commercial Co. vs. Aquino,
G.R. No. L-10274, February 27, 1957).

This Court has held that the Moratorium Law had been
enforced for eight (8) years, two (2) months and eight (8)
days (Tioseco vs. Day, et al., L-9944, April 30, 1957; Levy
Hermanos, Inc. vs. Perez, L-14487, April 29, 1960), and
deducting this period from the time that had elapsed since
the accrual of the right of action to the date of the filing of
the complaint, the extent of which is sixteen (16) years,
one (1) month and five (5) days, we would have less than
eight (8) years to be counted for purposes of prescription.
Hence appellant's action on its claim of 10% on the 1941
profits had not yet prescribed.

Another reason that may be taken into account in support


of the no-bar theory of appellant is the arbitration clause
embodied in the management contract which requires that
any disagreement as to any amount of profits before an
action may be taken to court shall be subject to
arbitration. 24 This agreement to arbitrate is valid and
binding. 25 It cannot be ignored by Lepanto. Hence Nielson
could not bring an action on its participation in the 1941
operations-profits until the condition relative to arbitration
had been first complied with. 26 The evidence shows that
an arbitration committee was constituted but it failed to
accomplish its purpose on June 25, 1957. 27From this date
to the filing of the complaint the required period for
prescription has not yet elapsed.

Nielson claims the following: (1) 10% share in the


dividends declared in 1941, exclusive of interest,
amounting to P17,500.00; (2) 10% in the depletion
reserves for 1941; and (3) 10% in the profits for years prior
to 1948 amounting to P19,764.70.

With regard to the first claim, the Lepanto's report for the
calendar year of 1954 28 shows that it declared a 10% cash
dividend in December, 1941, the amount of which is
P175,000.00. The evidence in this connection (Exhibits L
and O) was admitted without objection by counsel for
Lepanto. 29 Nielson claims 10% share in said amount with
interest thereon at 6% per annum. The document (Exhibit
L) was even recognized by Lepanto's President V. L.
Lednicky, 30 and this claim is predicated on the provision of
paragraph V of the management contract as modified
pursuant to the proposal of Lepanto at the special meeting
of the Board of Directors on August 21, 1940 (Exh. B),
whereby it was provided that Nielson would be entitled to
10% of any dividends to be declared and paid during the
period of the contract.

With regard to the second claim, Nielson admits that there


is no evidence regarding the amount set aside by Lepanto
for depletion reserve for 1941 31 and so the 10%
participation claimed thereon cannot be assessed.

Anent the third claim relative to the 10% participation of


Nielson on the sum of P197,647.08, which appears in
Lepanto's annual report for 1948 32 and entered as profit
for prior years in the statement of income and surplus,
which amount consisted "almost in its entirety of proceeds
of copper concentrates shipped to the United States during
1947," this claim should to denied because the amount is
not "dividend declared and paid" within the purview of the
management contract.

The fifth assignment of error of appellant refers to the


failure of the lower court to order Lepanto to pay its
management fees for January, 1942, and for the full period
of extension amounting to P150,000.00, or P2,500.00 a
month for sixty (60) months, a total of P152,500.00
with interest thereon from the date of judicial demand.

It is true that the claim of management fee for January,


1942 was not among the causes of action in the complaint,
but inasmuch as the contract was suspended in February,
1942 and the management fees asked for included that of
January, 1942, the fact that such claim was not included in
a specific manner in the complaint is of no moment
because an appellate court may treat the pleading as
amended to conform to the evidence where the facts show
that the plaintiff is entitled to relief other than what is asked
for in the complaint (Alonzo vs. Villamor, 16 Phil. 315). The
evidence shows that the last payment made by Lepanto for
management fee was for November and December,
1941. 33 If, as We have declared, the management
contract was suspended beginning February 1942, it
follows that Nielson is entitled to the management fee for
January, 1942.

Let us now come to the management fees claimed by


Nielson for the period of extension. In this respect, it has
been shown that the management contract was extended
from June 27, 1948 to June 26, 1953, or for a period of
sixty (60) months. During this period Nielson had a right to
continue in the management of the mining properties of
Lepanto and Lepanto was under obligation to let Nielson
do it and to pay the corresponding management fees.
Appellant Nielson insisted in performing its part of the
contract but Lepanto prevented it from doing so. Hence, by
virtue of Article 1186 of the Civil Code, there was a
constructive fulfillment an the part of Nielson of its
obligation to manage said mining properties in accordance
with the contract and Lepanto had the reciprocal obligation
to pay the corresponding management fees and other
benefits that would have accrued to Nielson if Lepanto
allowed it (Nielson) to continue in the management of the
mines during the extended period of five (5) years.

We find that the preponderance of evidence is to the effect


that Nielson had insisted in managing the mining
properties soon after liberation. In the report 34 of Lepanto,
submitted to its stockholders for the period from 1941 to
March 13, 1946, are stated the activities of Nielson's
officials in relation to Nielson's insistence in continuing the
management. This report was admitted in evidence without
objection. We find the following in the report:

Mr. Blessing, in May, 1945, accompanied Clark and


Stanford to San Fernando (La Union) to await the liberation
of the mines. (Mr. Blessing was the Treasurer and
Metallurgist of Nielson). Blessing with Clark and Stanford
went to the property on July 16 and found that while the
mill site had been cleared of the enemy the latter was still
holding the area around the staff houses and putting up a
strong defense. As a result, they returned to San Fernando
and later went back to the mines on July 26. Mr. Blessing
made the report, dated August 6, recommending a
program of operation. Mr. Nielson himself spent a day in
the mine early in December, 1945 and reiterated the
program which Mr. Blessing had outlined. Two or three
weeks before the date of the report, Mr. Coldren of the
Nielson organization also visited the mine and told
President C. A. DeWitt of Lepanto that he thought that the
mine could be put in condition for the delivery of the ore
within ten (10) days. And according to Mark Nestle, a
witness of appellant, Nielson had several men including
engineers to do the job in the mines and to resume the
work. These engineers were in fact sent to the mine site
and submitted reports of what they had done. 35

On the other hand, appellee claims that Nielson was not


ready and able to resume the work in the mines, relying
mainly on the testimony of Dr. Juan Nabong, former
secretary of both Nielson and Lepanto, given in the
separate case of Nancy Irving Romero vs. Lepanto
Consolidated Mining Company (Civil Case No. 652, CFI,
Baguio), to the effect that as far as he knew "Nielson and
Company had not attempted to operate the Lepanto
Consolidated Mining Company because Mr. Nielson was
not here in the Philippines after the last war. He came back
later," and that Nielson and Company had no money nor
stocks with which to start the operation. He was asked by
counsel for the appellee if he had testified that way in Civil
Case No. 652 of the Court of First Instance of Baguio, and
he answered that he did not confirm it fully. When this
witness was asked by the same counsel whether he
confirmed that testimony, he said that when he testified in
that case he was not fully aware of what happened and
that after he learned more about the officials of the
corporation it was only then that he became aware that
Nielson had really sent his men to the mines along with Mr.
Blessing and that he was aware of this fact personally. He
further said that Mr. Nielson was here in 1945 and "he was
going out and contacting his people." 36

Lepanto admits, in its own brief, that Nielson had really


insisted in taking over the management and operation of
the mines but that it (Lepanto) unequivocally refuse to
allow it. The following is what appears in the brief of the
appellee:

It was while defendant was in the midst of the rehabilitation


work which was fully described earlier, still reeling under
the terrible devastation and destruction wrought by war on
its mine that Nielson insisted in taking over the
management and operation of the mine. Nielson thus put
Lepanto in a position where defendant, under the
circumstances, had to refuse, as in fact it did, Nielson's
insistence in taking over the management and operation
because, as was obvious, it was impossible, as a result of
the destruction of the mine, for the plaintiff to manage and
operate the same and because, as provided in the
agreement, the contract was suspended by reason of the
war. The stand of Lepanto in disallowing Nielson to
assume again the management of the mine in 1945 was
unequivocal and cannot be misinterpreted, infra.37
Based on the foregoing facts and circumstances, and Our
conclusion that the management contract was extended,
We believe that Nielson is entitled to the management fees
for the period of extension. Nielson should be awarded on
this claim sixty times its monthly pay of P2,500.00, or a
total of P150,000.00.

In its sixth assignment of error Nielson contends that the


lower court erred in not ordering Lepanto to pay it (Nielson)
the 10% share in the profits of operation realized during
the period of five (5) years from the resumption of its
post-war operations of the Mankayan mines, in the total
sum of P2,403,053.20 with interest thereon at the rate of
6% per annum from February 6, 1958 until full payment. 38

The above claim of Nielson refers to four categories,


namely: (1) cash dividends; (2) stock dividends; (3)
depletion reserves; and (4) amount expended on capital
investment.

Anent the first category, Lepanto's report for the calendar


year 1954 39 contains a record of the cash dividends it paid
up to the date of said report, and the post-war dividends
paid by it corresponding to the years included in the period
of extension of the management contract are as follows:

POST-WAR

8 10% November 1949 P 200,000.00


9 10% July 1950 300,000.00
10 10% October 1950 500,000.00
11 20% December 1950 1,000,000.00
12 20% March 1951 1,000,000.00
13 20% June 1951 1,000,000.00
14 20% September 1951 1,000,000.00
15 40% December 1951 2,000,000.00
16 20% March 1952 1,000,000.00
17 20% May 1952 1,000,000.00
18 20% July 1952 1,000,000.00
19 20% September 1952 1,000,000.00
20 20% December 1952 1,000,000.00
21 20% March 1953 1,000,000.00
22 20% June 1953 1,000,000.00
TOTAL P14,000,000.00

According to the terms of the management contract as


modified, appellant is entitled to 10% of the
P14,000,000.00 cash dividends that had been distributed,
as stated in the above-mentioned report, or the sum of
P1,400,000.00.

With regard to the second category, the stock dividends


declared by Lepanto during the period of extension of the
contract are: On November 28, 1949, the stock dividend
declared was 50% of the outstanding authorized capital of
P2,000,000.00 of the company, or stock dividends worth
P1,000,000.00; and on August 22, 1950, the stock
dividends declared was 66-2/3% of the standing
authorized capital of P3,000,000.00 of the company, or
stock dividends worth P2,000,000.00. 40

Appellant's claim that it should be given 10% of the cash


value of said stock dividends with interest thereon at 6%
from February 6, 1958 cannot be granted for that would not
be in accordance with the management contract which
entitles Nielson to 10% of any dividends declared
paid, when and as paid. Nielson, therefore, is entitled to
10% of the stock dividends and to the fruits that may have
accrued to said stock dividends pursuant to Article 1164 of
the Civil Code. Hence to Nielson is due shares of stock
worth P100,000.00, as per stock dividends declared on
November 28, 1949 and all the fruits accruing to said
shares after said date; and also shares of stock worth
P200,000.00 as per stock dividends declared on August 20,
1950 and all fruits accruing thereto after said date.

Anent the third category, the depletion reserve appearing


in the statement of income and surplus submitted by
Lepanto corresponding to the years covered by the period
of extension of the contract, may be itemized as follows:

In 1948, as per Exh. F, p. 36 and Exh. Q, p. 5, the


depletion reserve set up was P11,602.80.

In 1949, as per Exh. G, p. 49 and Exh. Q, p. 5, the


depletion reserve set up was P33,556.07.

In 1950, as per Exh. H, p. 37, Exh. Q, p. 6 and Exh. I, p. 37,


the depletion reserve set up was P84,963.30.

In 1951, as per Exh. I, p. 45, Exh. Q, p. 6, and Exh. J, p. 45,


the depletion reserve set up was P129,089.88.

In 1952, as per Exh. J, p. 45, Exh. Q, p. 6 and Exh. K p. 41,


the depletion reserve was P147,141.54.

In 1953, as per Exh. K, p. 41, and Exh. Q, p. 6, the


depletion reserve set up as P277,493.25.

Regarding the depletion reserve set up in 1948 it should be


noted that the amount given was for the whole year.
Inasmuch as the contract was extended only for the last
half of the year 1948, said amount of P11,602.80 should
be divided by two, and so Nielson is only entitled to 10% of
the half amounting to P5,801.40.

Likewise, the amount of depletion reserve for the year


1953 was for the whole year and since the contract was
extended only until the first half of the year, said amount of
P277,493.25 should be divided by two, and so Nielson is
only entitled to 10% of the half amounting to P138,746.62.
Summing up the entire depletion reserves, from the middle
of 1948 to the middle of 1953, we would have a total of
P539,298.81, of which Nielson is entitled to 10%, or to the
sum of P53,928.88.

Finally, with regard to the fourth category, there is no figure


in the record representing the value of the fixed assets as
of the beginning of the period of extension on June 27,
1948. It is possible, however, to arrive at the amount
needed by adding to the value of the fixed assets as of
December 31, 1947 one-half of the amount spent for
capital account in the year 1948. As of December 31, 1947,
the value of the fixed assets was P1,061,878.88 41 and as
of December 31, 1948, the value of the fixed assets was
P3,270,408.07. 42 Hence, the increase in the value of the
fixed assets for the year 1948 was P2,208,529.19, one-half
of which is P1,104,264.59, which amount represents the
expenses for capital account for the first half of the year
1948. If to this amount we add the fixed assets as of
December 31, 1947 amounting to P1,061,878.88, we
would have a total of P2,166,143.47 which represents the
fixed assets at the beginning of the second half of the year
1948.

There is also no figure representing the value of the fixed


assets when the contract, as extended, ended on June 26,
1953; but this may be computed by getting one-half of the
expenses for capital account made in 1953 and adding the
same to the value of the fixed assets as of December 31,
1953 is P9,755,840.41 43 which the value of the fixed
assets as of December 31, 1952 is P8,463,741.82, the
difference being P1,292,098.69. One-half of this amount is
P646,049.34 which would represent the expenses for
capital account up to June, 1953. This amount added to
the value of the fixed assets as of December 31, 1952
would give a total of P9,109,791.16 which would be the
value of fixed assets at the end of June, 1953.

The increase, therefore, of the value of the fixed assets of


Lepanto from June, 1948 to June, 1953 is P6,943,647.69,
which amount represents the difference between the value
of the fixed assets of Lepanto in the year 1948 and in the
year 1953, as stated above. On this amount Nielson is
entitled to a share of 10% or to the amount of P694,364.76.

Considering that most of the claims of appellant have been


entertained, as pointed out in this decision, We believe that
appellant is entitled to be awarded attorney's fees,
especially when, according to the undisputed testimony of
Mr. Mark Nestle, Nielson obliged himself to pay attorney's
fees in connection with the institution of the present case.
In this respect, We believe, considering the intricate nature
of the case, an award of fifty thousand (P50,000.00) pesos
for attorney's fees would be reasonable.

IN VIEW OF THE FOREGOING CONSIDERATIONS, We


hereby reverse the decision of the court a quo and enter in
lieu thereof another, ordering the appellee Lepanto to pay
appellant Nielson the different amounts as specified
hereinbelow:

(1) 10% share of cash dividends of December, 1941 in the


amount of P17,500.00, with legal interest thereon from the
date of the filing of the complaint;

(2) management fee for January, 1942 in the amount of


P2,500.00, with legal interest thereon from the date of the
filing of the complaint;

(3) management fees for the sixty-month period of


extension of the management contract, amounting to
P150,000.00, with legal interest from the date of the filing
of the complaint;
(4) 10% share in the cash dividends during the period of
extension of the management contract, amounting to
P1,400,000.00, with legal interest thereon from the date of
the filing of the complaint;

(5) 10% of the depletion reserve set up during the period of


extension, amounting to P53,928.88, with legal interest
thereon from the date of the filing of the complaint;

(6) 10% of the expenses for capital account during the


period of extension, amounting to P694,364.76, with legal
interest thereon from the date of the filing of the complaint;

(7) to issue and deliver to Nielson and Co., Inc. shares of


stock of Lepanto Consolidated Mining Co. at par value
equivalent to the total of Nielson's l0% share in the stock
dividends declared on November 28, 1949 and August 22,
1950, together with all cash and stock dividends, if any, as
may have been declared and issued subsequent to
November 28, 1949 and August 22, 1950, as fruits that
accrued to said shares;

If sufficient shares of stock of Lepanto's are not available to


satisfy this judgment, defendant-appellee shall pay
plaintiff-appellant an amount in cash equivalent to the
market value of said shares at the time of default (12
C.J.S., p. 130), that is, all shares of the stock that should
have been delivered to Nielson before the filing of the
complaint must be paid at their market value as of the date
of the filing of the complaint; and all shares, if any, that
should have been delivered after the filing of the complaint
at the market value of the shares at the time Lepanto
disposed of all its available shares, for it is only then that
Lepanto placed itself in condition of not being able to
perform its obligation (Article 1160, Civil Code);

(8) the sum of P50,000.00 as attorney's fees; and

(9) the costs. It is so ordered.


Concepcion, C.J., Regala, Makalintal, Bengzon, J.P.,
Sanchez and Castro, JJ., concur.

Reyes, J.B.L. and Barrera, JJ., took no part.