LITONJUA VS LITONJUA

Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K. Litonjua, Sr. (Eduardo) are brothers.
The legal dispute between them started when Aurelio filed a suit against his brother Eduardo and herein
respondent Robert T. Yang (Yang) and several corporations for specific performance and accounting. Aurelio
alleged that, since June 1973, he and Eduardo are into a joint venture/partnership arrangement in the Odeon
Theater business which had expanded thru investment in Cineplex, Inc., LCM Theatrical Enterprises, Odeon Realty
Corporation (operator of Odeon I and II theatres), Avenue Realty, Inc., owner of lands and buildings, among other
corporations. Yang is described in the complaint as petitioners and Eduardos partner in their Odeon Theater
investment. The same complaint also contained the following material averments:

3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered into a joint venture/partnership for
the continuation of their family business and common family funds .

3.01.1 This joint venture/[partnership] agreement was contained in a memorandum addressed by

Eduardo to his siblings, parents and other relatives.

3.02 It was then agreed upon between [Aurelio] and Eduardo that in consideration of [Aurelios]
retaining his share in the remaining family businesses (mostly, movie theaters, shipping and land
development) and contributing his industry to the continued operation of these businesses,
[Aurelio] will be given P1 Million or 10% equity in all these businesses and those to be subsequently
acquired by them whichever is greater. . . .

4.01 from 22 June 1973 to about August 2001, or [in] a span of 28 years, [Aurelio] and Eduardo
had accumulated in their joint venture/partnership various assets including but not limited to the
corporate defendants and [their] respective assets.

4.02 In addition . . . the joint venture/partnership had also acquired [various other assets], but
Eduardo caused to be registered in the names of other parties.

4.04 The substantial assets of most of the corporate defendants consist of real properties .

5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo became sour so that
[Aurelio] requested for an accounting and liquidation of his share in the joint venture/partnership
[but these demands for complete accounting and liquidation were not heeded].

xxx xxx xxx

5.05 What is worse, [Aurelio] has reasonable cause to believe that Eduardo and/or the corporate
defendants as well as Bobby [Yang], are transferring . . . various real properties of the corporations
belonging to the joint venture/partnership to other parties in fraud of [Aurelio]. In consequence,
[Aurelio] is therefore causing at this time the annotation on the titles of these real properties a
notice of lis pendens .

Eduardo and the corporate respondents, as defendants a quo, filed a joint ANSWER With
Compulsory Counterclaim denying under oath the material allegations of the complaint, more
particularly that portion thereof depicting petitioner and Eduardo as having entered into a
contract of partnership. As affirmative defenses, Eduardo, et al., apart from raising a jurisdictional
matter, alleged that the complaint states no cause of action, since no cause of action may be
derived from the actionable document, i.e., Annex A-1, being void under the terms of Article 1767
in relation to Article 1773 of the Civil Code, infra. It is further alleged that whatever undertaking
Eduardo agreed to do, if any, under Annex A-1, are unenforceable under the provisions of the
Statute of Frauds.

On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative Defenses. the trial court, in an
Omnibus Order dated March 5, 2003, denied the affirmative defenses and, except for Yang, set the case for pre-
trial on April 10, 2003.
Earlier, Eduardo and the corporate defendants, on the contention that grave abuse of discretion and injudicious
haste attended the issuance of the trial courts aforementioned Omnibus Orders dated March 5, and April 2, 2003,
sought relief from the CA via similar recourse.

The appellate court came out with the herein assailed Decision dated March 31, 2004, finding for Eduardo and
Yang, as lead petitioners therein, disposing as follows:

WHEREFORE, judgment is hereby rendered granting the issuance of the writ of certiorari
in these consolidated cases annulling, reversing and setting aside the assailed orders of the court a
quo dated March 5, 2003, April 2, 2003 and July 4, 2003 and the complaint filed by private
respondent [now petitioner Aurelio] against all the petitioners [now herein respondents
Eduardo, et al.] with the court a quo is hereby dismissed.

Explaining its case disposition, the appellate court stated, inter alia, that the alleged partnership, as evidenced by
the actionable documents, Annex Aand A-1 attached to the complaint, and upon which petitioner solely
predicates his right/s allegedly violated by Eduardo, Yang and the corporate defendants a quo is void or legally
inexistent.

ISSUE:

Whether or not petitioner and respondent Eduardo are partners in the theatre, shipping and realty business, as
one claims but which the other denies.

HELD:

The petition lacks merit. A partnership exists when two or more persons agree to place their money, effects,
labor, and skill in lawful commerce or business, with the understanding that there shall be a proportionate sharing
of the profits and losses between them.[20] A contract of partnership is defined by the Civil Code as one where
two or more persons bound themselves to contribute money, property, or industry to a common fund with the
intention of dividing the profits among themselves.[21] A joint venture, on the other hand, is hardly distinguishable
from, and may be likened to, a partnership since their elements are similar, i.e., community of interests in the
business and sharing of profits and losses. Being a form of partnership, a joint venture is generally governed by
the law on partnership.

The underlying issue that necessarily comes to mind in this proceedings is whether or not petitioner and
respondent Eduardo are partners in the theatre, shipping and realty business, as one claims but which the other
denies. And the issue bearing on the first assigned error relates to the question of what legal provision is
applicable under the premises, petitioner seeking, as it were, to enforce the actionable document - Annex A-1 -
which he depicts in his complaint to be the contract of partnership/joint venture between himself and Eduardo.
Clearly, then, a look at the legal provisions determinative of the existence, or defining the formal requisites, of a
partnership is indicated. Foremost of these are the following provisions of the Civil Code:

Art. 1771. A partnership may be constituted in any form, except where immovable property or
real rights are contributed thereto, in which case a public instrument shall be necessary.

Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in
money or property, shall appear in a public instrument, which must be recorded in the Office of
the Securities and Exchange Commission.

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

Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto,
if an inventory of said property is not made, signed by the parties, and attached to the public
instrument.
 Annex A-1, on its face, contains typewritten entries, personal in tone, but is unsigned and undated. As an
unsigned document, there can be no quibbling that Annex A-1 does not meet the public instrumentation
requirements exacted under Article 1771 of the Civil Code. Moreover, being unsigned and doubtless referring to
a partnership involving more than P3,000.00 in money or property, Annex A-1 cannot be presented for
notarization, let alone registered with the Securities and Exchange Commission (SEC), as called for under the
Article 1772 of the Code. And inasmuch as the inventory requirement under the succeeding Article 1773 goes
into the matter of validity when immovable property is contributed to the partnership, the next logical point of
inquiry turns on the nature of petitioners contribution, if any, to the supposed partnership.

The CA, addressing the foregoing query, correctly stated that petitioners contribution consisted of
immovables and real rights. Wrote that court:

A further examination of the allegations in the complaint would show that [petitioners]
contribution to the so-called partnership/joint venture was his supposed share in the family
business that is consisting of movie theaters, shipping and land development under paragraph
3.02 of the complaint. In other words, his contribution as a partner in the alleged partnership/joint
venture consisted of immovable properties and real rights. .[23]

Significantly enough, petitioner matter-of-factly concurred with the appellate courts observation that,
prescinding from what he himself alleged in his basic complaint, his contribution to the partnership consisted of
his share in the Litonjua family businesses which owned variable immovable properties. Petitioners assertion in
his motion for reconsideration[24] of the CAs decision, that what was to be contributed to the business [of the
partnership] was [petitioners] industry and his share in the family [theatre and land development] business leaves
no room for speculation as to what petitioner contributed to the perceived partnership.

Lest it be overlooked, the contract-validating inventory requirement under Article 1773 of the Civil Code
applies as long real property or real rights are initially brought into the partnership. In short, it is really of no
moment which of the partners, or, in this case, who between petitioner and his brother Eduardo, contributed
immovables. In context, the more important consideration is that real property was contributed, in which case
an inventory of the contributed property duly signed by the parties should be attached to the public instrument,
else there is legally no partnership to speak of.

Petitioner, in an obvious bid to evade the application of Article 1773, argues that the immovables in
question were not contributed, but were acquired after the formation of the supposed partnership. Needless to
stress, the Court cannot accord cogency to this specious argument. For, as earlier stated, petitioner himself
admitted contributing his share in the supposed shipping, movie theatres and realty development family
businesses which already owned immovables even before Annex A-1 was allegedly executed.

Considering thus the value and nature of petitioners alleged contribution to the purported partnership,
the Court, even if so disposed, cannot plausibly extend Annex A-1 the legal effects that petitioner so desires and
pleads to be given. Annex A-1, in fine, cannot support the existence of the partnership sued upon and sought to
be enforced. The legal and factual milieu of the case calls for this disposition. A partnership may be constituted
in any form, save when immovable property or real rights are contributed thereto or when the partnership has a
capital of at least P3,000.00, in which case a public instrument shall be necessary.[25] And if only to stress what
has repeatedly been articulated, an inventory to be signed by the parties and attached to the public instrument
is also indispensable to the validity of the partnership whenever immovable property is contributed to it.

Given the foregoing perspective, what the appellate court wrote in its assailed Decision[26] about the
probative value and legal effect of Annex A-1 commends itself for concurrence:

Considering that the allegations in the complaint showed that [petitioner] contributed immovable
properties to the alleged partnership, the Memorandum (Annex A of the complaint) which purports to
establish the said partnership/joint venture is NOT a public instrument and there was NO inventory of the
immovable property duly signed by the parties. As such, the said Memorandum is null and void for
purposes of establishing the existence of a valid contract of partnership. Indeed, because of the failure to
comply with the essential formalities of a valid contract, the purported partnership/joint venture is legally
inexistent and it produces no effect whatsoever. Necessarily, a void or legally inexistent contract cannot
be the source of any contractual or legal right. Accordingly, the allegations in the complaint, including the
 actionable document attached thereto, clearly demonstrates that [petitioner] has NO valid contractual or
legal right which could be violated by the [individual respondents] herein. As a consequence, [petitioners]
complaint does NOT state a valid cause of action because NOT all the essential elements of a cause of
action are present. (Underscoring and words in bracket added.)

Likewise well-taken are the following complementary excerpts from the CAs equally assailed Resolution of
December 7, 2004[27] denying petitioners motion for reconsideration:

Further, We conclude that despite glaring defects in the allegations in the complaint as well as the
actionable document attached thereto (Rollo, p. 191), the [trial] court did not appreciate and apply
the legal provisions which were brought to its attention by herein [respondents] in the their
pleadings. In our evaluation of [petitioners] complaint, the latter alleged inter alia to have
contributed immovable properties to the alleged partnership but the actionable document is not
a public document and there was no inventory of immovable properties signed by the parties.
Both the allegations in the complaint and the actionable documents considered, it is crystal clear
that [petitioner] has no valid or legal right which could be violated by [respondents]. (Words in
bracket added.)

Under the second assigned error, it is petitioners posture that Annex A-1, assuming its inefficacy or nullity as a
partnership document, nevertheless created demandable rights in his favor. As petitioner succinctly puts
it in this petition:

43. Contrariwise, this actionable document, especially its above-quoted provisions, established an
actionable contract even though it may not be a partnership. This actionable contract is what is
known as an innominate contract (Civil Code, Article 1307).

44. It may not be a contract of loan, or a mortgage or whatever, but surely the contract does create rights
and obligations of the parties and which rights and obligations may be enforceable and
demandable. Just because the relationship created by the agreement cannot be specifically
labeled or pigeonholed into a category of nominate contract does not mean it is void or
unenforceable.

Petitioner has thus thrusted the notion of an innominate contract on this Court - and earlier on the CA after he
experienced a reversal of fortune thereat - as an afterthought. The appellate court, however, cannot really be
faulted for not yielding to petitioners dubious stratagem of altering his theory of joint venture/partnership to an
innominate contract. For, at bottom, the appellate courts certiorari jurisdiction was circumscribed by what was
alleged to have been the order/s issued by the trial court in grave abuse of discretion. As respondent Yang
pointedly observed,[28] since the parties basic position had been well-defined, that of petitioner being that the
actionable document established a partnership/joint venture, it is on those positions that the appellate court
exercised its certiorari jurisdiction. Petitioners act of changing his original theory is an impermissible practice and
constitutes, as the CA aptly declared, an admission of the untenability of such theory in the first place.

[Petitioner] is now humming a different tune . . . . In a sudden twist of stance, he has now contended that
the actionable instrument may be considered an innominate contract. xxx Verily, this now changes
[petitioners] theory of the case which is not only prohibited by the Rules but also is an implied
admission that the very theory he himself has adopted, filed and prosecuted before the
respondent court is erroneous.

Be that as it may . . We hold that this new theory contravenes [petitioners] theory of the actionable
document being a partnership document. If anything, it is so obvious we do have to test the
sufficiency of the cause of action on the basis of partnership law xxx.[29] (Emphasis in the original;
Words in bracket added).

But even assuming in gratia argumenti that Annex A-1 partakes of a perfected innominate contract, petitioners
complaint would still be dismissible as against Eduardo and, more so, against Yang. It cannot be over-emphasized
that petitioner points to Eduardo as the author of Annex A-1. Withal, even on this consideration alone, petitioners
claim against Yang is doomed from the very start.

As it were, the only portion of Annex A-1 which could perhaps be remotely regarded as vesting petitioner with a
right to demand from respondent Eduardo the observance of a determinate conduct, reads:

xxx You will be the only one left with the company, among us brothers and I will ask you to stay as I want
you to run this office everytime I am away. I want you to run it the way I am trying to run it because
I will be alone and I will depend entirely to you, My sons will not be ready to help me yet until
about maybe 15/20 years from now. Whatever is left in the corporation, I will make sure that you
get ONE MILLION PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is greater.
(Underscoring added)

It is at once apparent that what respondent Eduardo imposed upon himself under the above passage, if he indeed
wrote Annex A-1, is a promise which is not to be performed within one year from contract execution on
June 22, 1973. Accordingly, the agreement embodied in Annex A-1 is covered by the Statute of Frauds
and ergo unenforceable for non-compliance therewith.[30] By force of the statute of frauds, an agreement
that by its terms is not to be performed within a year from the making thereof shall be unenforceable by
action, unless the same, or some note or memorandum thereof, be in writing and subscribed by the party
charged. Corollarily, no action can be proved unless the requirement exacted by the statute of frauds is
complied with.[31]
Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10% equity of the family
businesses supposedly promised by Eduardo to give in the near future. Any suggestion that the stated
amount or the equity component of the promise was intended to go to a common fund would be to read
something not written in Annex A-1. Thus, even this angle alone argues against the very idea of a
partnership, the creation of which requires two or more contracting minds mutually agreeing to
contribute money, property or industry to a common fund with the intention of dividing the profits
between or among themselves.[32]
In sum then, the Court rules, as did the CA, that petitioners complaint for specific performance anchored on an
actionable document of partnership which is legally inexistent or void or, at best, unenforceable does not state a
cause of action as against respondent Eduardo and the corporate defendants. And if no of action can successfully
be maintained against respondent Eduardo because no valid partnership existed between him and petitioner,
the Court cannot see its way clear on how the same action could plausibly prosper against Yang. Surely, Yang
could not have become a partner in, or could not have had any form of business relationship with, an inexistent
partnership.

As may be noted, petitioner has not, in his complaint, provide the logical nexus that would tie Yang to him as his
partner. In fact, attendant circumstances would indicate the contrary. Consider:

1. Petitioner asserted in his complaint that his so-called joint venture/partnership with Eduardo was for
the continuation of their family business and common family funds which were theretofore being mainly
managed by Eduardo. [33] But Yang denies kinship with the Litonjua family and petitioner has not disputed
the disclaimer.

2. In some detail, petitioner mentioned what he had contributed to the joint venture/partnership with
Eduardo and what his share in the businesses will be. No allegation is made whatsoever about what Yang
contributed, if any, let alone his proportional share in the profits. But such allegation cannot, however, be
made because, as aptly observed by the CA, the actionable document did not contain such provision, let
alone mention the name of Yang. How, indeed, could a person be considered a partner when the
document purporting to establish the partnership contract did not even mention his name.

3. Petitioner states in par. 2.01 of the complaint that [he] and Eduardo are business partners in the
[respondent] corporations, while Bobby is his and Eduardos partner in their Odeon Theater investment
(par. 2.03). This means that the partnership between petitioner and Eduardo came first; Yang became
their partner in their Odeon Theater investment thereafter. Several paragraphs later, however, petitioner
would contradict himself by alleging that his investment and that of Eduardo and Yang in the Odeon
theater business has expanded through a reinvestment of profit income and direct investments in several
 corporation including but not limited to [six] corporate respondents This simply means that the Odeon
Theatre business came before the corporate respondents. Significantly enough, petitioner refers to the
corporate respondents as progeny of the Odeon Theatre business.[34]

Needless to stress, petitioner has not sufficiently established in his complaint the legal vinculum whence he
sourced his right to drag Yang into the fray. The Court of Appeals, in its assailed decision, captured and formulated
the legal situation in the following wise:

[Respondent] Yang, is impleaded because, as alleged in the complaint, he is a partner of [Eduardo]

and the [petitioner] in the Odeon Theater Investment which expanded through reinvestments of
profits and direct investments in several corporations, thus:

xxx xxx xxx

Clearly, [petitioners] claim against Yang arose from his alleged partnership with petitioner and the
respondent. However, there was NO allegation in the complaint which directly alleged how the
supposed contractual relation was created between [petitioner] and Yang. More importantly,
however, the foregoing ruling of this Court that the purported partnership between [Eduardo] is
void and legally inexistent directly affects said claim against Yang. Since [petitioner] is trying to
establish his claim against Yang by linking him to the legally inexistent partnership . . . such attempt
had become futile because there was NOTHING that would contractually connect [petitioner] and
Yang. To establish a valid cause of action, the complaint should have a statement of fact upon
which to connect [respondent] Yang to the alleged partnership between [petitioner] and
respondent [Eduardo], including their alleged investment in the Odeon Theater. A statement of
facts on those matters is pivotal to the complaint as they would constitute the ultimate facts
necessary to establish the elements of a cause of action against Yang. [35]

Pressing its point, the CA later stated in its resolution denying petitioners motion for reconsideration the
following:

xxx Whatever the complaint calls it, it is the actionable document attached to the
complaint that is controlling. Suffice it to state, We have not ignored the actionable document As
a matter of fact, We emphasized in our decision that insofar as [Yang] is concerned, he is not even
mentioned in the said actionable document. We are therefore puzzled how a person not
mentioned in a document purporting to establish a partnership could be considered a
partner.[36] (Words in bracket ours).
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 personaeallows 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.
G.R. No. L-9996 October 15, 1957
EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor
Felicisimo R. Rosete for Respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a
decision of the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer's
tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent's
assessment for the same in the total amount of P6,878.34, which is hereby affirmed and the petition for
review filed by petitioner is hereby dismissed with costs against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together with
their personal monies was used by them for the purpose of buying real properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq.
m. including improvements thereon from the sum of P100,000.00; this property has an assessed value of
P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area
of 3,718.40 sq. m. including improvements thereon for P130,000.00; this property has an assessed value
of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m. including
improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.34. This property has an assessed value of P59,140.00 as of 1948;
6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to 'manage
their properties with full power to lease; to collect and receive rents; to issue receipts therefor; in default
of such payment, to bring suits against the defaulting tenants; to sign all letters, contracts, etc., for and in
their behalf, and to endorse and deposit all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners had the same rented or
leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total amount collected as
rents on their real properties was P9,599.00 while the expenses amounted to P3,650.00 thereby leaving
them a net rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount
was deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental income of
P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was deducted
the sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded the payment
of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-
1949.
Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954,
whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the
respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved
from the payment of the taxes in question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the respondent, and
a petition for reconsideration and new trial having been subsequently denied, the case is now before Us for
review at the instance of the petitioners.
The issue in this case whether petitioners are subject to the tax on corporations provided for in section 24 of
Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence
tax for corporations and the real estate dealers fixed tax. With respect to the tax on corporations, the issue hinges
on the meaning of the terms "corporation" and "partnership," as used in section 24 and 84 of said Code, the
pertinent parts of which read:
 SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid annually upon
the total net income received in the preceding taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (compañias colectivas), a tax upon such income equal
to the sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not
include duly registered general copartnerships. (compañias colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money, properly, or
industry to a common fund, with the intention of dividing the profits among themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to contribute
money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties.
The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did,
contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as
they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that
their purpose was to engage in real estate transactions for monetary gain and then divide the same among
themselves, because:
1. Said common fund was not something they found already in existence. It was not property inherited by
them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion
thereof in order to establish said common fund.
2. They invested the same, not merely not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots
(24) acquired and transactions undertaken, as well as the brief interregnum between each, particularly
the last three purchases, is strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even of the property acquired by
the petitioners in February, 1943. In other words, one cannot but perceive a character of habitually
peculiar to business transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners
herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid
the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do
not even suggest that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one person, namely Simeon
Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have
been handled as if the same belonged to a corporation or business and enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15)
years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista became
the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up
already adverted to, or on the causes for its continued existence. They did not even try to offer an
explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the
collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in
petitioners herein. Only one or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts
performed by them, a legal entity, with a personality independent of that of its members, did not come into
existence, and some of the characteristics of partnerships are lacking in the case at bar. This pretense was
correctly rejected by the Court of Tax Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities
subject to the tax on "corporations", said Code must allude, therefore, to organizations which are not necessarily
"partnerships", in the technical sense of the term. Thus, for instance, section 24 of said Code exempts from the
aforementioned tax "duly registered general partnerships which constitute precisely one of the most typical
forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation
includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements
of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on
corporations. Again, pursuant to said section 84(b), the term "corporation" includes, among other, joint accounts,
(cuentas en participation)" and "associations," none of which has a legal personality of its own, independent of
that of its members. Accordingly, the lawmaker could not have regarded that personality as a condition essential
to the existence of the partnerships therein referred to. In fact, as above stated, "duly registered general
copartnerships" — which are possessed of the aforementioned personality — have been expressly excluded by
law (sections 24 and 84 [b] from the connotation of the term "corporation" It may not be amiss to add that
petitioners' allegation to the effect that their liability in connection with the leasing of the lots above referred to,
under the management of one person — even if true, on which we express no opinion — tends to increase the
similarity between the nature of their venture and that corporations, and is, therefore, an additional argument in
favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from "partnerships".
By specific provisions of said laws, such "corporations" include "associations, joint-stock companies and insurance
companies." However, the term "association" is not used in the aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the transaction of designed
affairs, or the attainment of some object, which like a corporation, continues notwithstanding that its
members or participants change, and the affairs of which, like corporate affairs, are conducted by a single
individual, a committee, a board, or some other group, acting in a representative capacity. It is immaterial
whether such organization is created by an agreement, a declaration of trust, a statute, or otherwise. It
includes a voluntary association, a joint-stock corporation or company, a 'business' trusts a
'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange operating through an attorney in fact, a partnership
association, and any other type of organization (by whatever name known) which is not, within the
meaning of the Code, a trust or an estate, or a partnership. (7A Mertens Law of Federal Income Taxation,
p. 788; emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a
partnership as known at common law but, as well, a syndicate, group, pool, joint venture or other
unincorporated organizations which carries on any business financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's Law of Federal
Income taxation, p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried on, . .
.. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis supplied.) .
For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships — with
the exception only of duly registered general copartnerships — within the purview of the term "corporation." It
is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned
and are subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic
or resident foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of
five pesos and an annual additional tax which in no case, shall exceed one thousand pesos, in accordance
with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account
(cuentas en participacion), association or insurance company, no matter how created or organized.
(emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our National
Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day
immediately after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms
"corporation" and "partnership" are used in both statutes with substantially the same meaning. Consequently,
petitioners are subject, also, to the residence tax for corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for
a period of over twelve years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged
from P9,599 to P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal
Revenue Code, for "real estate dealers," inasmuch as, pursuant to section 194 (s) thereof:
 'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing, or
renting property or his own account as principal and holding himself out as a full or part time dealer in real
estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount
of three thousand pesos or more a year. . . (emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners
herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.
ANTONIA TORRES, assisted by her husband, ANGELO TORRES; and EMETERIA BARING, petitioners, vs. COURT OF
APPEALS and MANUEL TORRES, respondents.
DECISION
PANGANIBAN, J.:
Courts may not extricate parties from the necessary consequences of their acts. That the terms of a contract
turn out to be financially disadvantageous to them will not relieve them of their obligations therein. The lack of
an inventory of real property will not ipso facto release the contracting partners from their respective
obligations to each other arising from acts executed in accordance with their agreement.
The Case

The Petition for Review on Certiorari before us assails the March 5, 1998 Decision[1] Second Division of the
Court of Appeals[2] (CA) in CA-GR CV No. 42378 and its June 25, 1998 Resolution denying reconsideration. The
assailed Decision affirmed the ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-21208, which
disposed as follows:
WHEREFORE, for all the foregoing considerations, the Court, finding for the defendant and against the plaintiffs,
orders the dismissal of the plaintiffs complaint. The counterclaims of the defendant are likewise ordered
dismissed. No pronouncement as to costs.[3]
The Facts

Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture agreement" with
Respondent Manuel Torres for the development of a parcel of land into a subdivision. Pursuant to the contract,
they executed a Deed of Sale covering the said parcel of land in favor of respondent, who then had it registered
in his name. By mortgaging the property, respondent obtained from Equitable Bank a loan of P40,000 which,
under the Joint Venture Agreement, was to be used for the development of the subdivision.[4] All three of them
also agreed to share the proceeds from the sale of the subdivided lots.
The project did not push through, and the land was subsequently foreclosed by the bank.
According to petitioners, the project failed because of respondents lack of funds or means and skills. They
add that respondent used the loan not for the development of the subdivision, but in furtherance of his own
company, Universal Umbrella Company.
On the other hand, respondent alleged that he used the loan to implement the Agreement. With the said
amount, he was able to effect the survey and the subdivision of the lots. He secured the Lapu Lapu City Councils
approval of the subdivision project which he advertised in a local newspaper. He also caused the construction of
roads, curbs and gutters. Likewise, he entered into a contract with an engineering firm for the building of sixty
low-cost housing units and actually even set up a model house on one of the subdivision lots. He did all of these
for a total expense of P85,000.
Respondent claimed that the subdivision project failed, however, because petitioners and their relatives had
separately caused the annotations of adverse claims on the title to the land, which eventually scared away
prospective buyers. Despite his requests, petitioners refused to cause the clearing of the claims, thereby forcing
him to give up on the project.[5]
Subsequently, petitioners filed a criminal case for estafa against respondent and his wife, who were however
acquitted. Thereafter, they filed the present civil case which, upon respondent's motion, was later dismissed by
the trial court in an Order dated September 6, 1982. On appeal, however, the appellate court remanded the case
for further proceedings. Thereafter, the RTC issued its assailed Decision, which, as earlier stated, was affirmed by
the CA.
Hence, this Petition.[6]
Ruling of the Court of Appeals

In affirming the trial court, the Court of Appeals held that petitioners and respondent had formed a
partnership for the development of the subdivision. Thus, they must bear the loss suffered by the partnership in
the same proportion as their share in the profits stipulated in the contract. Disagreeing with the trial courts
pronouncement that losses as well as profits in a joint venture should be distributed equally,[7] the CA invoked
Article 1797 of the Civil Code which provides:
Article 1797 - The losses and profits shall be distributed in conformity with the agreement. If only the share of
each partner in the profits has been agreed upon, the share of each in the losses shall be in the same
proportion.
The CA elucidated further:
In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what
he may have contributed, but the industrial partner shall not be liable for the losses.As for the profits, the
industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his
services he has contributed capital, he shall also receive a share in the profits in proportion to his capital.
 The Issue

Petitioners impute to the Court of Appeals the following error:

x x x [The] Court of Appeals erred in concluding that the transaction x x x between the petitioners and
respondent was that of a joint venture/partnership, ignoring outright the provision of Article 1769, and other
related provisions of the Civil Code of the Philippines.[8]
The Courts Ruling

The Petition is bereft of merit.

Main Issue: Existence of a Partnership

Petitioners deny having formed a partnership with respondent. They contend that the Joint Venture
Agreement and the earlier Deed of Sale, both of which were the bases of the appellate courts finding of a
partnership, were void.
In the same breath, however, they assert that under those very same contracts, respondent is liable for his
failure to implement the project. Because the agreement entitled them to receive 60 percent of the proceeds
from the sale of the subdivision lots, they pray that respondent pay them damages equivalent to 60 percent of
the value of the property.[9]
The pertinent portions of the Joint Venture Agreement read as follows:
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of March, 1969, by and
between MR. MANUEL R. TORRES, x x x the FIRST PARTY, likewise, MRS. ANTONIA B. TORRES, and MISS
EMETERIA BARING, x x x the SECOND PARTY:
W I T N E S S E T H:
That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property located at Lapu-Lapu City,
Island of Mactan, under Lot No. 1368 covering TCT No. T-0184 with a total area of 17,009 square meters, to be
sub-divided by the FIRST PARTY;
Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY THOUSAND (P20,000.00) Pesos,
Philippine Currency, upon the execution of this contract for the property entrusted by the SECOND PARTY, for
sub-division projects and development purposes;
NOW THEREFORE, for and in consideration of the above covenants and promises herein contained the
respective parties hereto do hereby stipulate and agree as follows:
ONE: That the SECOND PARTY signed an absolute Deed of Sale x x x dated March 5, 1969, in the amount of
TWENTY FIVE THOUSAND FIVE HUNDRED THIRTEEN & FIFTY CTVS. (P25,513.50) Philippine Currency, for 1,700
square meters at ONE [PESO] & FIFTY CTVS. (P1.50) Philippine Currency, in favor of the FIRST PARTY, but the
SECOND PARTY did not actually receive the payment.
SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the necessary amount of TWENTY
THOUSAND (P20,000.00) pesos, Philippine currency, for their personal obligations and this particular amount
will serve as an advance payment from the FIRST PARTY for the property mentioned to be sub-divided and to be
deducted from the sales.
THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY, the interest and the principal amount
involving the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, until the sub-division
project is terminated and ready for sale to any interested parties, and the amount of TWENTY THOUSAND
(P20,000.00) pesos, Philippine currency, will be deducted accordingly.
FOURTH: That all general expense[s] and all cost[s] involved in the sub-division project should be paid by the
FIRST PARTY, exclusively and all the expenses will not be deducted from the sales after the development of the
sub-division project.
FIFTH: That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM 60% for the SECOND PARTY
and FORTY PERCENTUM 40% for the FIRST PARTY, and additional profits or whatever income deriving from the
sales will be divided equally according to the x x x percentage [agreed upon] by both parties.
SIXTH: That the intended sub-division project of the property involved will start the work and all improvements
upon the adjacent lots will be negotiated in both parties['] favor and all sales shall [be] decided by both parties.
SEVENTH: That the SECOND PARTIES, should be given an option to get back the property mentioned provided
the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, borrowed by the SECOND PARTY,
will be paid in full to the FIRST PARTY, including all necessary improvements spent by the FIRST PARTY, and the
FIRST PARTY will be given a grace period to turnover the property mentioned above.
That this AGREEMENT shall be binding and obligatory to the parties who executed same freely and voluntarily
for the uses and purposes therein stated.[10]
A reading of the terms embodied in the Agreement indubitably shows the existence of a partnership pursuant
to Article 1767 of the Civil Code, which provides:
ART. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profits among themselves.
Under the above-quoted Agreement, petitioners would contribute property to the partnership in the form
of land which was to be developed into a subdivision; while respondent would give, in addition to his industry,
the amount needed for general expenses and other costs. Furthermore, the income from the said project would
be divided according to the stipulated percentage.Clearly, the contract manifested the intention of the parties to
form a partnership.[11]
It should be stressed that the parties implemented the contract. Thus, petitioners transferred the title to the
land to facilitate its use in the name of the respondent. On the other hand, respondent caused the subject land
to be mortgaged, the proceeds of which were used for the survey and the subdivision of the land. As noted earlier,
he developed the roads, the curbs and the gutters of the subdivision and entered into a contract to construct
low-cost housing units on the property.
Respondents actions clearly belie petitioners contention that he made no contribution to the
partnership. Under Article 1767 of the Civil Code, a partner may contribute not only money or property, but also
industry.
Petitioners Bound by Terms of Contract

Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been expressly
stipulated, but also to all necessary consequences thereof, as follows:
ART. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to
the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law.
It is undisputed that petitioners are educated and are thus presumed to have understood the terms of the
contract they voluntarily signed. If it was not in consonance with their expectations, they should have objected
to it and insisted on the provisions they wanted.
Courts are not authorized to extricate parties from the necessary consequences of their acts, and the fact
that the contractual stipulations may turn out to be financially disadvantageous will not relieve parties thereto of
their obligations. They cannot now disavow the relationship formed from such agreement due to their supposed
misunderstanding of its terms.
Alleged Nullity of the Partnership Agreement

Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code, which
provides:
ART. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an
inventory of said property is not made, signed by the parties, and attached to the public instrument.
They contend that since the parties did not make, sign or attach to the public instrument an inventory of the
real property contributed, the partnership is void.
We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo M.
Tolentino states that under the aforecited provision which is a complement of Article 1771,[12] the execution of a
public instrument would be useless if there is no inventory of the property contributed, because without its
designation and description, they cannot be subject to inscription in the Registry of Property, and their
contribution cannot prejudice third persons. This will result in fraud to those who contract with the partnership
in the belief [in] the efficacy of the guaranty in which the immovables may consist. Thus, the contract is declared
void by the law when no such inventory is made. The case at bar does not involve third parties who may be
prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis for their claim that respondent
should pay them 60 percent of the value of the property.[13] They cannot in one breath deny the contract and in
another recognize it, depending on what momentarily suits their purpose. Parties cannot adopt inconsistent
positions in regard to a contract and courts will not tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from considering the Joint Venture
Agreement an ordinary contract from which the parties rights and obligations to each other may be inferred and
enforced.
Partnership Agreement Not the Result of an Earlier Illegal Contract

Petitioners also contend that the Joint Venture Agreement is void under Article 1422 [14] of the Civil Code,
because it is the direct result of an earlier illegal contract, which was for the sale of the land without valid
consideration.
This argument is puerile. The Joint Venture Agreement clearly states that the consideration for the sale was
the expectation of profits from the subdivision project. Its first stipulation states that petitioners did not actually
receive payment for the parcel of land sold to respondent. Consideration, more properly denominated as cause,
can take different forms, such as the prestation or promise of a thing or service by another.[15]
 In this case, the cause of the contract of sale consisted not in the stated peso value of the land, but in the
expectation of profits from the subdivision project, for which the land was intended to be used. As explained by
the trial court, the land was in effect given to the partnership as [petitioners] participation therein. x x x There
was therefore a consideration for the sale, the [petitioners] acting in the expectation that, should the venture
come into fruition, they [would] get sixty percent of the net profits.
Liability of the Parties

Claiming that respondent was solely responsible for the failure of the subdivision project, petitioners
maintain that he should be made to pay damages equivalent to 60 percent of the value of the property, which
was their share in the profits under the Joint Venture Agreement.
We are not persuaded. True, the Court of Appeals held that petitioners acts were not the cause of the failure
of the project.[16] But it also ruled that neither was respondent responsible therefor.[17] In imputing the blame
solely to him, petitioners failed to give any reason why we should disregard the factual findings of the appellate
court relieving him of fault. Verily, factual issues cannot be resolved in a petition for review under Rule 45, as in
this case. Petitioners have not alleged, not to say shown, that their Petition constitutes one of the exceptions to
this doctrine.[18] Accordingly, we find no reversible error in the CA's ruling that petitioners are not entitled to
damages.
WHEREFORE, the Petition is hereby DENIED and the challenged Decision AFFIRMED. Costs against
petitioners.
SO ORDERED.
Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.
FERNANDO SANTOS, petitioner, vs. Spouses ARSENIO and NIEVES REYES, respondents.
DECISION
PANGANIBAN, J.:
As a general rule, the factual findings of the Court of Appeals affirming those of the trial court are binding on
the Supreme Court. However, there are several exceptions to this principle. In the present case, we find occasion
to apply both the rule and one of the exceptions.
The Case
Before us is a Petition for Review on Certiorari assailing the November 28, 1997 Decision, [1] as well as the
August 17, 1998 and the October 9, 1998 Resolutions,[2] issued by the Court of Appeals (CA) in CA-GR CV No.
34742. The Assailed Decision disposed as follows:
WHEREFORE, the decision appealed from is AFFIRMED save as for the counterclaim which is hereby
DISMISSED. Costs against [petitioner].[3]
Resolving respondents Motion for Reconsideration, the August 17, 1998 Resolution ruled as follows:
WHEREFORE, [respondents] motion for reconsideration is GRANTED. Accordingly, the courts decision dated
November 28, 1997 is hereby MODIFIED in that the decision appealed from is AFFIRMED in toto, with costs
against [petitioner].[4]
The October 9, 1998 Resolution denied for lack of merit petitioners Motion for Reconsideration of the August
17, 1998 Resolution.[5]
The Facts
The events that led to this case are summarized by the CA as follows:
Sometime in June, 1986, [Petitioner] Fernando Santos and [Respondent] Nieves Reyes were introduced to each
other by one Meliton Zabat regarding a lending business venture proposed by Nieves. It was verbally agreed
that [petitioner would] act as financier while [Nieves] and Zabat [would] take charge of solicitation of members
and collection of loan payments. The venture was launched on June 13, 1986, with the understanding that
[petitioner] would receive 70% of the profits while x x x Nieves and Zabat would earn 15% each.
In July, 1986, x x x Nieves introduced Cesar Gragera to [petitioner]. Gragera, as chairman of the Monte Maria
Development Corporation[6] (Monte Maria, for brevity), sought short-term loans for members of the
corporation. [Petitioner] and Gragera executed an agreement providing funds for Monte Marias
members. Under the agreement, Monte Maria, represented by Gragera, was entitled to P1.31 commission per
thousand paid daily to [petitioner] (Exh. A). x x x Nieves kept the books as representative of [petitioner] while
[Respondent] Arsenio, husband of Nieves, acted as credit investigator.
On August 6, 1986, [petitioner], x x x [Nieves] and Zabat executed the Article of Agreement which formalized
their earlier verbal arrangement.
[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in the same lending business in
competition with their partnership[.] Zabat was thereby expelled from the partnership.The operations with
Monte Maria continued.
On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money and damages. [Petitioner] charged
[respondents], allegedly in their capacities as employees of [petitioner], with having misappropriated funds
intended for Gragera for the period July 8, 1986 up to March 31, 1987. Upon Grageras complaint that his
commissions were inadequately remitted, [petitioner] entrusted P200,000.00 to x x x Nieves to be given to
Gragera. x x x Nieves allegedly failed to account for the amount. [Petitioner] asserted that after examination of
the records, he found that of the total amount of P4,623,201.90 entrusted to [respondents],
only P3,068,133.20 was remitted to Gragera, thereby leaving the balance of P1,555,065.70 unaccounted for.
In their answer, [respondents] asserted that they were partners and not mere employees of [petitioner]. The
complaint, they alleged, was filed to preempt and prevent them from claiming their rightful share to the profits
of the partnership.
x x x Arsenio alleged that he was enticed by [petitioner] to take the place of Zabat after [petitioner] learned of
Zabats activities. Arsenio resigned from his job at the Asian Development Bank to join the partnership.
For her part, x x x Nieves claimed that she participated in the business as a partner, as the lending activity with
Monte Maria originated from her initiative. Except for the limited period of July 8, 1986 through August 20,
1986, she did not handle sums intended for Gragera. Collections were turned over to Gragera because he
guaranteed 100% payment of all sums loaned by Monte Maria.Entries she made on worksheets were based on
this assumptive 100% collection of all loans. The loan releases were made less Grageras agreed
commission. Because of this arrangement, she neither received payments from borrowers nor remitted any
amount to Gragera. Her job was merely to make worksheets (Exhs. 15 to 15-DDDDDDDDDD) to convey to
[petitioner] how much he would earn if all the sums guaranteed by Gragera were collected.
[Petitioner] on the other hand insisted that [respondents] were his mere employees and not partners with
respect to the agreement with Gragera. He claimed that after he discovered Zabats activities, he ceased
infusing funds, thereby causing the extinguishment of the partnership. The agreement with Gragera was a
distinct partnership [from] that of [respondent] and Zabat.[Petitioner] asserted that [respondents] were hired
as salaried employees with respect to the partnership between [petitioner] and Gragera.
[Petitioner] further asserted that in Nieves capacity as bookkeeper, she received all payments from which
Nieves deducted Grageras commission. The commission would then be remitted to Gragera. She likewise
determined loan releases.
During the pre-trial, the parties narrowed the issues to the following points: whether [respondents] were
employees or partners of [petitioner], whether [petitioner] entrusted money to [respondents] for delivery to
Gragera, whether the P1,555,068.70 claimed under the complaint was actually remitted to Gragera and
whether [respondents] were entitled to their counterclaim for share in the profits.[7]
Ruling of the Trial Court
In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere employees, of
petitioner. It further ruled that Gragera was only a commission agent of petitioner, not his partner. Petitioner
moreover failed to prove that he had entrusted any money to Nieves. Thus, respondents counterclaim for their
share in the partnership and for damages was granted. The trial court disposed as follows:
39. WHEREFORE, the Court hereby renders judgment as follows:
39.1. THE SECOND AMENDED COMPLAINT dated July 26, 1989 is DISMISSED.
39.2. The [Petitioner] FERNANDO J. SANTOS is ordered to pay the [Respondent] NIEVES S. REYES, the
following:
39.2.1. P3,064,428.00 - The 15 percent share of the [respondent] NIEVES S. REYES in
the profits of her joint venture with the
[petitioner].
39.2.2. Six (6) percent of - As damages from P3,064,428.00 August 3, 1987 until
the P3,064,428.00 is fully paid.
39.2.3. P50,000.00 - As moral damages
39.2.4. P10,000.00 - As exemplary damages
39.3. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondent] ARSENIO REYES, the
following:
39.3.1. P2,899,739.50 - The balance of the 15 percent share of the [respondent]
ARSENIO REYES in the profits of his joint
venture with the [petitioner].
39.3.2. Six (6) percent of - As damages from P2,899,739.50 August 3, 1987 until
the P2,899,739.50 is fully paid.
39.3.3. P25,000.00 - As moral damages
39.3.4. P10,000.00 - As exemplary damages
39.4. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondents]:
39.4.1. P50,000.00 - As attorneys fees; and
39.4.2 The cost of the suit.[8]
Ruling of the Court of Appeals
On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents was
dismissed. Upon the latters Motion for Reconsideration, however, the trial courts Decision was reinstated in
toto. Subsequently, petitioners own Motion for Reconsideration was denied in the CA Resolution of October 9,
1998.
The CA ruled that the following circumstances indicated the existence of a partnership among the parties:
(1) it was Nieves who broached to petitioner the idea of starting a money-lending business and introduced him
to Gragera; (2) Arsenio received dividends or profit-shares covering the period July 15 to August 7, 1986 (Exh. 6);
and (3) the partnership contract was executed after the Agreement with Gragera and petitioner and thus showed
the parties intention to consider it as a transaction of the partnership. In their common venture, petitioner
invested capital while respondents contributed industry or services, with the intention of sharing in the profits of
the business.
The CA disbelieved petitioners claim that Nieves had misappropriated a total of P200,000 which was
supposed to be delivered to Gragera to cover unpaid commissions. It was his task to collect the amounts due,
while hers was merely to prepare the daily cash flow reports (Exhs. 15-15DDDDDDDDDD) to keep track of his
collections.
Hence, this Petition.[9]
Issue
 Petitioner asks this Court to rule on the following issues:[10]
Whether or not Respondent Court of Appeals acted with grave abuse of discretion tantamount to excess or lack
of jurisdiction in:
1. Holding that private respondents were partners/joint venturers and not employees of Santos in
connection with the agreement between Santos and Monte Maria/Gragera;
2. Affirming the findings of the trial court that the phrase Received by on documents signed by Nieves
Reyes signified receipt of copies of the documents and not of the sums shown thereon;
3. Affirming that the signature of Nieves Reyes on Exhibit E was a forgery;
4. Finding that Exhibit H [did] not establish receipt by Nieves Reyes of P200,000.00 for delivery to
Gragera;
5. Affirming the dismissal of Santos [Second] Amended Complaint;
6. Affirming the decision of the trial court, upholding private respondents counterclaim;
7. Denying Santos motion for reconsideration dated September 11, 1998.
Succinctly put, the following were the issues raised by petitioner: (1) whether the parties relationship was
one of partnership or of employer-employee; (2) whether Nieves misappropriated the sums of money allegedly
entrusted to her for delivery to Gragera as his commissions; and (3) whether respondents were entitled to the
partnership profits as determined by the trial court.
The Courts Ruling
The Petition is partly meritorious.
First Issue:
Business Relationship
Petitioner maintains that he employed the services of respondent spouses in the money-lending venture
with Gragera, with Nieves as bookkeeper and Arsenio as credit investigator. That Nieves introduced Gragera to
Santos did not make her a partner. She was only a witness to the Agreement between the two. Separate from
the partnership between petitioner and Gragera was that which existed among petitioner, Nieves and Zabat, a
partnership that was dissolved when Zabat was expelled.
On the other hand, both the CA and the trial court rejected petitioners contentions and ruled that the
business relationship was one of partnership. We quote from the CA Decision, as follows:
[Respondents] were industrial partners of [petitioner]. x x x Nieves herself provided the initiative in the lending
activities with Monte Maria. In consonance with the agreement between appellant, Nieves and Zabat (later
replaced by Arsenio), [respondents] contributed industry to the common fund with the intention of sharing in
the profits of the partnership. [Respondents] provided services without which the partnership would not have
[had] the wherewithal to carry on the purpose for which it was organized and as such [were] considered
industrial partners (Evangelista v. Abad Santos, 51 SCRA 416 [1973]).
While concededly, the partnership between [petitioner,] Nieves and Zabat was technically dissolved by the
expulsion of Zabat therefrom, the remaining partners simply continued the business of the partnership without
undergoing the procedure relative to dissolution. Instead, they invited Arsenio to participate as a partner in
their operations. There was therefore, no intent to dissolve the earlier partnership. The partnership between
[petitioner,] Nieves and Arsenio simply took over and continued the business of the former partnership with
Zabat, one of the incidents of which was the lending operations with Monte Maria.
xxxxxxxxx
Gragera and [petitioner] were not partners. The money-lending activities undertaken with Monte Maria was
done in pursuit of the business for which the partnership between [petitioner], Nieves and Zabat (later Arsenio)
was organized. Gragera who represented Monte Maria was merely paid commissions in exchange for the
collection of loans. The commissions were fixed on gross returns, regardless of the expenses incurred in the
operation of the business. The sharing of gross returns does not in itself establish a partnership.[11]
We agree with both courts on this point. By the contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a common fund, with the intention of dividing the profits
among themselves.[12] The Articles of Agreement stipulated that the signatories shall share the profits of the
business in a 70-15-15 manner, with petitioner getting the lions share.[13] This stipulation clearly proved the
establishment of a partnership.
We find no cogent reason to disagree with the lower courts that the partnership continued lending money
to the members of the Monte Maria Community Development Group, Inc., which later on changed its business
name to Private Association for Community Development, Inc. (PACDI). Nieves was not merely petitioners
employee. She discharged her bookkeeping duties in accordance with paragraphs 2 and 3 of the Agreement,
which states as follows:
2. That the SECOND PARTY and THIRD PARTY shall handle the solicitation and screening of prospective
borrowers, and shall x x x each be responsible in handling the collection of the loan payments of the borrowers
that they each solicited.
3. That the bookkeeping and daily balancing of account of the business operation shall be handled by the
SECOND PARTY.[14]
The Second Party named in the Agreement was none other than Nieves Reyes. On the other hand, Arsenios
duties as credit investigator are subsumed under the phrase screening of prospective borrowers. Because of this
Agreement and the disbursement of monthly allowances and profit shares or dividends (Exh. 6) to Arsenio, we
uphold the factual finding of both courts that he replaced Zabat in the partnership.
Indeed, the partnership was established to engage in a money-lending business, despite the fact that it was
formalized only after the Memorandum of Agreement had been signed by petitioner and Gragera. Contrary to
petitioners contention, there is no evidence to show that a different business venture is referred to in this
Agreement, which was executed on August 6, 1986, or about a month after the Memorandum had been signed
by petitioner and Gragera on July 14, 1986. The Agreement itself attests to this fact:
WHEREAS, the parties have decided to formalize the terms of their business relationship in order that their
respective interests may be properly defined and established for their mutual benefit and understanding.[15]
Second Issue:
No Proof of Misappropriation of Grageras Unpaid Commission
Petitioner faults the CA finding that Nieves did not misappropriate money intended for Grageras
commission. According to him, Gragera remitted his daily collection to Nieves. This is shown by Exhibit B (the
Schedule of Daily Payments), which bears her signature under the words received by. For the period July 1986 to
March 1987, Gragera should have earned a total commission of P4,282,429.30. However, only P3,068,133.20
was received by him. Thus, petitioner infers that she misappropriated the difference of P1,214,296.10, which
represented the unpaid commissions. Exhibit H is an untitled tabulation which, according to him, shows that
Gragera was also entitled to a commission of P200,000, an amount that was never delivered by Nieves.[16]
On this point, the CA ruled that Exhibits B, F, E and H did not show that Nieves received for delivery to Gragera
any amount from which the P1,214,296.10 unpaid commission was supposed to come, and that such exhibits
were insufficient proof that she had embezzled P200,000. Said the CA:
The presentation of Exhibit D vaguely denominated as members ledger does not clearly establish that Nieves
received amounts from Monte Marias members. The document does not clearly state what amounts the
entries thereon represent. More importantly, Nieves made the entries for the limited period of January 11,
1987 to February 17, 1987 only while the rest were made by Grageras own staff.
Neither can we give probative value to Exhibit E which allegedly shows acknowledgment of the remittance of
commissions to Verona Gonzales. The document is a private one and its due execution and authenticity have
not been duly proved as required in [S]ection 20, Rule 132 of the Rules of Court which states:
Sec. 20. Proof of Private Document Before any private document offered as authentic is received in evidence, its
due execution and authenticity must be proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or handwriting of the maker.
Any other private document need only be identified as that which it is claimed to be.
The court a quo even ruled that the signature thereon was a forgery, as it found that:
x x x. But NIEVES denied that Exh. E-1 is her signature; she claimed that it is a forgery. The initial stroke of Exh.
E-1 starts from up and goes downward. The initial stroke of the genuine signatures of NIEVES (Exhs. A-3, B-1, F-
1, among others) starts from below and goes upward. This difference in the start of the initial stroke of the
signatures Exhs. E-1 and of the genuine signatures lends credence to Nieves claim that the signature Exh. E-1 is
a forgery.
xxxxxxxxx
Nieves testimony that the schedules of daily payment (Exhs. B and F) were based on the predetermined 100%
collection as guaranteed by Gragera is credible and clearly in accord with the evidence. A perusal of Exhs. B and
F as well as Exhs. 15 to 15-DDDDDDDDDD reveal that the entries were indeed based on the 100% assumptive
collection guaranteed by Gragera. Thus, the total amount recorded on Exh. B is exactly the number of
borrowers multiplied by the projected collection of P150.00 per borrower. This holds true for Exh. F.
Corollarily, Nieves explanation that the documents were pro forma and that she signed them not to signify that
she collected the amounts but that she received the documents themselves is more believable than
[petitioners] assertion that she actually handled the amounts.
Contrary to [petitioners] assertion, Exhibit H does not unequivocally establish that x x x Nieves
received P200,000.00 as commission for Gragera. As correctly stated by the court a quo, the document showed
a liquidation of P240,000.00 and not P200,000.00.
Accordingly, we find Nieves testimony that after August 20, 1986, all collections were made by Gragera
believable and worthy of credence. Since Gragera guaranteed a daily 100% payment of the loans, he took
charge of the collections. As [petitioners] representative, Nieves merely prepared the daily cash flow reports
(Exh. 15 to 15 DDDDDDDDDD) to enable [petitioner] to keep track of Grageras operations. Gragera on the other
hand devised the schedule of daily payment (Exhs. B and F) to record the projected gross daily collections.
As aptly observed by the court a quo:
26.1. As between the versions of SANTOS and NIEVES on how the commissions of GRAGERA [were] paid to
him[,] that of NIEVES is more logical and practical and therefore, more believable. SANTOS version would have
given rise to this improbable situation: GRAGERA would collect the daily amortizations and then give them to
NIEVES; NIEVES would get GRAGERAs commissions from the amortizations and then give such commission to
GRAGERA.[17]
These findings are in harmony with the trial courts ruling, which we quote below:
21. Exh. H does not prove that SANTOS gave to NIEVES and the latter received P200,000.00 for delivery to
GRAGERA. Exh. H shows under its sixth column ADDITIONAL CASH that the additional cash was P240,000.00. If
Exh. H were the liquidation of the P200,000.00 as alleged by SANTOS, then his claim is not true. This is so
because it is a liquidation of the sum of P240,000.00.
21.1. SANTOS claimed that he learned of NIEVES failure to give the P200,000.00 to GRAGERA when he received
the latters letter complaining of its delayed release. Assuming as true SANTOS claim that he gave P200,000.00
to GRAGERA, there is no competent evidence that NIEVES did not give it to GRAGERA. The only proof that
NIEVES did not give it is the letter. But SANTOS did not even present the letter in evidence. He did not explain
why he did not.
21.2. The evidence shows that all money transactions of the money-lending business of SANTOS were covered
by petty cash vouchers. It is therefore strange why SANTOS did not present any voucher or receipt covering
the P200,000.00.[18]
In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70 from the
partnership. She did not remit P1,214,296.10 to Gragera, because he had deducted his commissions before
remitting his collections. Exhibits B and F are merely computations of what Gragera should collect for the day;
they do not show that Nieves received the amounts stated therein. Neither is there sufficient proof that she
misappropriated P200,000, because Exhibit H does not indicate that such amount was received by her; in fact, it
shows a different figure.
Petitioner has utterly failed to demonstrate why a review of these factual findings is warranted. Well-
entrenched is the basic rule that factual findings of the Court of Appeals affirming those of the trial court are
binding and conclusive on the Supreme Court.[19] Although there are exceptions to this rule, petitioner has not
satisfactorily shown that any of them is applicable to this issue.
Third Issue:
Accounting of Partnership
Petitioner refuses any liability for respondents claims on the profits of the partnership. He maintains that
both business propositions were flops, as his investments were consumed and eaten up by the commissions
orchestrated to be due Gragera a situation that could not have been rendered possible without complicity
between Nieves and Gragera.
Respondent spouses, on the other hand, postulate that petitioner instituted the action below to avoid
payment of the demands of Nieves, because sometime in March 1987, she signified to petitioner that it was
about time to get her share of the profits which had already accumulated to some P3 million. Respondents add
that while the partnership has not declared dividends or liquidated its earnings, the profits are already reflected
on paper. To prove the counterclaim of Nieves, the spouses show that from June 13, 1986 up to April 19, 1987,
the profit totaled P20,429,520 (Exhs. 10 et seq. and 15 et seq.). Based on that income, her 15 percent share under
the joint venture amounts to P3,064,428 (Exh. 10-I-3); and Arsenios, P2,026,000 minus the P30,000 which was
already advanced to him (Petty Cash Vouchers, Exhs. 6, 6-A to 6-B).
The CA originally held that respondents counterclaim was premature, pending an accounting of the
partnership. However, in its assailed Resolution of August 17, 1998, it turned volte face.Affirming the trial courts
ruling on the counterclaim, it held as follows:
We earlier ruled that there is still need for an accounting of the profits and losses of the partnership before we
can rule with certainty as to the respective shares of the partners. Upon a further review of the records of this
case, however, there appears to be sufficient basis to determine the amount of shares of the parties and
damages incurred by [respondents]. The fact is that the court a quo already made such a determination [in its]
decision dated August 13, 1991 on the basis of the facts on record.[20]
The trial courts ruling alluded to above is quoted below:
27. The defendants counterclaim for the payment of their share in the profits of their joint venture with
SANTOS is supported by the evidence.
27.1. NIEVES testified that: Her claim to a share in the profits is based on the agreement (Exhs. 5, 5-A and 5-
B). The profits are shown in the working papers (Exhs. 10 to 10-I, inclusive) which she prepared. Exhs. 10 to 10-I
(inclusive) were based on the daily cash flow reports of which Exh. 3 is a sample. The originals of the daily cash
flow reports (Exhs. 3 and 15 to 15-D (10) were given to SANTOS. The joint venture had a net profit
of P20,429,520.00 (Exh. 10-I-1), from its operations from June 13, 1986 to April 19, 1987 (Exh. 1-I-4). She had a
share of P3,064,428.00 (Exh. 10-I-3) and ARSENIO, about P2,926,000.00, in the profits.
27.1.1 SANTOS never denied NIEVES testimony that the money-lending business he was engaged in netted a
profit and that the originals of the daily case flow reports were furnished to him.SANTOS however alleged that
the money-lending operation of his joint venture with NIEVES and ZABAT resulted in a loss of about half a
million pesos to him. But such loss, even if true, does not negate NIEVES claim that overall, the joint venture
among them SANTOS, NIEVES and ARSENIO netted a profit. There is no reason for the Court to doubt the
veracity of [the testimony of] NIEVES.
27.2 The P26,260.50 which ARSENIO received as part of his share in the profits (Exhs. 6, 6-A and 6-B) should be
deducted from his total share.[21]
After a close examination of respondents exhibits, we find reason to disagree with the CA. Exhibit 10-
[22]
I shows that the partnership earned a total income of P20,429,520 for the period June 13, 1986 until April 19,
1987. This entry is derived from the sum of the amounts under the following column headings: 2-Day Advance
Collection, Service Fee, Notarial Fee, Application Fee, Net Interest Income and Interest Income on Investment.
Such entries represent the collections of the money-lending business or its gross income.
The total income shown on Exhibit 10-I did not consider the expenses sustained by the partnership. For
instance, it did not factor in the gross loan releases representing the money loaned to clients. Since the business
is money-lending, such releases are comparable with the inventory or supplies in other business enterprises.
Noticeably missing from the computation of the total income is the deduction of the weekly allowance
disbursed to respondents. Exhibits I et seq. and J et seq.[23] show that Arsenio received allowances from July 19,
1986 to March 27, 1987 in the aggregate amount of P25,500; and Nieves, from July 12, 1986 to March 27, 1987
in the total amount of P25,600. These allowances are different from the profit already received by Arsenio. They
represent expenses that should have been deducted from the business profits. The point is that all expenses
incurred by the money-lending enterprise of the parties must first be deducted from the total income in order to
arrive at the net profit of the partnership. The share of each one of them should be based on this net profit and
not from the gross income or total income reflected in Exhibit 10-I, which the two courts invariably referred to as
cash flow sheets.
Similarly, Exhibits 15 et seq.,[24] which are the Daily Cashflow Reports, do not reflect the business expenses
incurred by the parties, because they show only the daily cash collections.Contrary to the rulings of both the trial
and the appellate courts, respondents exhibits do not reflect the complete financial condition of the money-
lending business. The lower courts obviously labored over a mistaken notion that Exhibit 10-I-1 represented the
net profits earned by the partnership.
For the purpose of determining the profit that should go to an industrial partner (who shares in the profits
but is not liable for the losses), the gross income from all the transactions carried on by the firm must be added
together, and from this sum must be subtracted the expenses or the losses sustained in the business. Only in the
difference representing the net profits does the industrial partner share. But if, on the contrary, the losses exceed
the income, the industrial partner does not share in the losses.[25]
When the judgment of the CA is premised on a misapprehension of facts or a failure to notice certain relevant
facts that would otherwise justify a different conclusion, as in this particular issue, a review of its factual findings
may be conducted, as an exception to the general rule applied to the first two issues.[26]
The trial court has the advantage of observing the witnesses while they are testifying, an opportunity not
available to appellate courts. Thus, its assessment of the credibility of witnesses and their testimonies are
accorded great weight, even finality, when supported by substantial evidence; more so when such assessment is
affirmed by the CA. But when the issue involves the evaluation of exhibits or documents that are attached to the
case records, as in the third issue, the rule may be relaxed. Under that situation, this Court has a similar
opportunity to inspect, examine and evaluate those records, independently of the lower courts. Hence, we deem
the award of the partnership share, as computed by the trial court and adopted by the CA, to be incomplete and
not binding on this Court.
WHEREFORE, the Petition is partly GRANTED. The assailed November 28, 1997 Decision is AFFIRMED, but the
challenged Resolutions dated August 17, 1998 and October 9, 1998 are REVERSED and SET ASIDE. No costs.
SO ORDERED.
July 30, 1979
PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME "SYCIP, SALAZAR, FELICIANO, HERNANDEZ &
CASTILLO." LUCIANO E. SALAZAR, FLORENTINO P. FELICIANO, BENILDO G. HERNANDEZ. GREGORIO R. CASTILLO.
ALBERTO P. SAN JUAN, JUAN C. REYES. JR., ANDRES G. GATMAITAN, JUSTINO H. CACANINDIN, NOEL A. LAMAN,
ETHELWOLDO E. FERNANDEZ, ANGELITO C. IMPERIO, EDUARDO R. CENIZA, TRISTAN A. CATINDIG, ANCHETA K.
TAN, and ALICE V. PESIGAN, petitioners.
IN THE MATTER OF THE PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME "OZAETA, ROMULO, DE
LEON, MABANTA & REYES." RICARDO J. ROMULO, BENJAMIN M. DE LEON, ROMAN MABANTA, JR., JOSE MA,
REYES, JESUS S. J. SAYOC, EDUARDO DE LOS ANGELES, and JOSE F. BUENAVENTURA, petitioners.
RESOLUTION
MELENCIO-HERRERA, J.:ñé+.£ªwph!1
Two separate Petitions were filed before this Court 1) by the surviving partners of Atty. Alexander Sycip, who
died on May 5, 1975, and 2) by the surviving partners of Atty. Herminio Ozaeta, who died on February 14, 1976,
praying that they be allowed to continue using, in the names of their firms, the names of partners who had
passed away. In the Court's Resolution of September 2, 1976, both Petitions were ordered consolidated.
Petitioners base their petitions on the following arguments:
1. Under the law, a partnership is not prohibited from continuing its business under a firm name which includes
the name of a deceased partner; in fact, Article 1840 of the Civil Code explicitly sanctions the practice when it
provides in the last paragraph that: têñ.£îhqwâ£
The use by the person or partnership continuing the business of the partnership name, or the
name of a deceased partner as part thereof, shall not of itself make the individual property of the
deceased partner liable for any debts contracted by such person or partnership. 1
2. In regulating other professions, such as accountancy and engineering, the legislature has authorized the
adoption of firm names without any restriction as to the use, in such firm name, of the name of a deceased
partner; 2 the legislative authorization given to those engaged in the practice of accountancy — a profession
requiring the same degree of trust and confidence in respect of clients as that implicit in the relationship of
attorney and client — to acquire and use a trade name, strongly indicates that there is no fundamental policy
that is offended by the continued use by a firm of professionals of a firm name which includes the name of a
deceased partner, at least where such firm name has acquired the characteristics of a "trade name." 3
3. The Canons of Professional Ethics are not transgressed by the continued use of the name of a deceased
partner in the firm name of a law partnership because Canon 33 of the Canons of Professional Ethics adopted
by the American Bar Association declares that: têñ.£îhqwâ£
... The continued use of the name of a deceased or former partner when permissible by local
custom, is not unethical but care should be taken that no imposition or deception is practiced
through this use. ... 4
4. There is no possibility of imposition or deception because the deaths of their respective deceased partners
were well-publicized in all newspapers of general circulation for several days; the stationeries now being used
by them carry new letterheads indicating the years when their respective deceased partners were connected
with the firm; petitioners will notify all leading national and international law directories of the fact of their
respective deceased partners' deaths. 5
5. No local custom prohibits the continued use of a deceased partner's name in a professional firm's
name; 6 there is no custom or usage in the Philippines, or at least in the Greater Manila Area, which recognizes
that the name of a law firm necessarily Identifies the individual members of the firm. 7
6. The continued use of a deceased partner's name in the firm name of law partnerships has been consistently
allowed by U.S. Courts and is an accepted practice in the legal profession of most countries in the world.8
The question involved in these Petitions first came under consideration by this Court in 1953 when a law firm in
Cebu (the Deen case) continued its practice of including in its firm name that of a deceased partner, C.D.
Johnston. The matter was resolved with this Court advising the firm to desist from including in their firm
designation the name of C. D. Johnston, who has long been dead."
The same issue was raised before this Court in 1958 as an incident in G. R. No. L-11964, entitled Register of
Deeds of Manila vs. China Banking Corporation. The law firm of Perkins & Ponce Enrile moved to intervene
as amicus curiae. Before acting thereon, the Court, in a Resolution of April 15, 1957, stated that it "would like to
be informed why the name of Perkins is still being used although Atty. E. A. Perkins is already dead." In a
Manifestation dated May 21, 1957, the law firm of Perkins and Ponce Enrile, raising substantially the same
arguments as those now being raised by petitioners, prayed that the continued use of the firm name "Perkins &
Ponce Enrile" be held proper.
On June 16, 1958, this Court resolved: têñ.£îhqwâ£
After carefully considering the reasons given by Attorneys Alfonso Ponce Enrile and Associates
for their continued use of the name of the deceased E. G. Perkins, the Court found no reason to
depart from the policy it adopted in June 1953 when it required Attorneys Alfred P. Deen and
Eddy A. Deen of Cebu City to desist from including in their firm designation, the name of C. D.
Johnston, deceased. The Court believes that, in view of the personal and confidential nature of
the relations between attorney and client, and the high standards demanded in the canons of
professional ethics, no practice should be allowed which even in a remote degree could give rise
to the possibility of deception. Said attorneys are accordingly advised to drop the name
"PERKINS" from their firm name.
Petitioners herein now seek a re-examination of the policy thus far enunciated by the Court.
The Court finds no sufficient reason to depart from the rulings thus laid down.
A. Inasmuch as "Sycip, Salazar, Feliciano, Hernandez and Castillo" and "Ozaeta, Romulo, De Leon, Mabanta and
Reyes" are partnerships, the use in their partnership names of the names of deceased partners will run counter
to Article 1815 of the Civil Code which provides: têñ.£îhqwâ£
Art. 1815. Every partnership shall operate under a firm name, which may or may not include the
name of one or more of the partners.
Those who, not being members of the partnership, include their names in the firm name, shall
be subject to the liability, of a partner.
It is clearly tacit in the above provision that names in a firm name of a partnership must either be those of living
partners and. in the case of non-partners, should be living persons who can be subjected to liability. In fact,
Article 1825 of the Civil Code prohibits a third person from including his name in the firm name under pain of
assuming the liability of a partner. The heirs of a deceased partner in a law firm cannot be held liable as the old
members to the creditors of a firm particularly where they are non-lawyers. Thus, Canon 34 of the Canons of
Professional Ethics "prohibits an agreement for the payment to the widow and heirs of a deceased lawyer of a
percentage, either gross or net, of the fees received from the future business of the deceased lawyer's clients,
both because the recipients of such division are not lawyers and because such payments will not represent
service or responsibility on the part of the recipient. " Accordingly, neither the widow nor the heirs can be held
liable for transactions entered into after the death of their lawyer-predecessor. There being no benefits
accruing, there ran be no corresponding liability.
Prescinding the law, there could be practical objections to allowing the use by law firms of the names of
deceased partners. The public relations value of the use of an old firm name can tend to create undue
advantages and disadvantages in the practice of the profession. An able lawyer without connections will have to
make a name for himself starting from scratch. Another able lawyer, who can join an old firm, can initially ride
on that old firm's reputation established by deceased partners.
B. In regards to the last paragraph of Article 1840 of the Civil Code cited by petitioners, supra, the first factor to
consider is that it is within Chapter 3 of Title IX of the Code entitled "Dissolution and Winding Up." The Article
primarily deals with the exemption from liability in cases of a dissolved partnership, of the individual property of
the deceased partner for debts contracted by the person or partnership which continues the business using the
partnership name or the name of the deceased partner as part thereof. What the law contemplates therein is a
hold-over situation preparatory to formal reorganization.
Secondly, Article 1840 treats more of a commercial partnership with a good will to protect rather than of
a professional partnership, with no saleable good will but whose reputation depends on the personal
qualifications of its individual members. Thus, it has been held that a saleable goodwill can exist only in a
commercial partnership and cannot arise in a professional partnership consisting of lawyers. 9têñ.£îhqwâ£
As a general rule, upon the dissolution of a commercial partnership the succeeding partners or
parties have the right to carry on the business under the old name, in the absence of a
stipulation forbidding it, (s)ince the name of a commercial partnership is a partnership asset
inseparable from the good will of the firm. ... (60 Am Jur 2d, s 204, p. 115) (Emphasis supplied)
On the other hand, têñ.£îhqwâ£
... a professional partnership the reputation of which depends or; the individual skill of the
members, such as partnerships of attorneys or physicians, has no good win to be distributed as a
firm asset on its dissolution, however intrinsically valuable such skill and reputation may be,
especially where there is no provision in the partnership agreement relating to good will as an
asset. ... (ibid, s 203, p. 115) (Emphasis supplied)
C. A partnership for the practice of law cannot be likened to partnerships formed by other professionals or for
business. For one thing, the law on accountancy specifically allows the use of a trade name in connection with
the practice of accountancy.10 têñ.£îhqwâ£
A partnership for the practice of law is not a legal entity. It is a mere relationship or association
for a particular purpose. ... It is not a partnership formed for the purpose of carrying on trade or
business or of holding property." 11 Thus, it has been stated that "the use of a nom de plume,
assumed or trade name in law practice is improper. 12
The usual reason given for different standards of conduct being applicable to the practice of law
from those pertaining to business is that the law is a profession.
Dean Pound, in his recently published contribution to the Survey of the Legal Profession, (The
Lawyer from Antiquity to Modern Times, p. 5) defines a profession as "a group of men pursuing a
learned art as a common calling in the spirit of public service, — no less a public service because
it may incidentally be a means of livelihood."
xxx xxx xxx
Primary characteristics which distinguish the legal profession from business are:
1. A duty of public service, of which the emolument is a byproduct, and in which one may attain
the highest eminence without making much money.
2. A relation as an "officer of court" to the administration of justice involving thorough sincerity,
integrity, and reliability.
3. A relation to clients in the highest degree fiduciary.
4. A relation to colleagues at the bar characterized by candor, fairness, and unwillingness to
resort to current business methods of advertising and encroachment on their practice, or dealing
directly with their clients. 13
"The right to practice law is not a natural or constitutional right but is in the nature of a privilege or
franchise. 14 It is limited to persons of good moral character with special qualifications duly ascertained and
certified. 15 The right does not only presuppose in its possessor integrity, legal standing and attainment, but also
the exercise of a special privilege, highly personal and partaking of the nature of a public trust." 16
D. Petitioners cited Canon 33 of the Canons of Professional Ethics of the American Bar Association" in support
of their petitions.
It is true that Canon 33 does not consider as unethical the continued use of the name of a deceased or former
partner in the firm name of a law partnership when such a practice is permissible by local custom but the Canon
warns that care should be taken that no imposition or deception is practiced through this use.
It must be conceded that in the Philippines, no local custom permits or allows the continued use of a deceased
or former partner's name in the firm names of law partnerships. Firm names, under our custom, Identify the
more active and/or more senior members or partners of the law firm. A glimpse at the history of the firms of
petitioners and of other law firms in this country would show how their firm names have evolved and changed
from time to time as the composition of the partnership changed. têñ.£îhqwâ£
The continued use of a firm name after the death of one or more of the partners designated by it
is proper only where sustained by local custom and not where by custom this purports to Identify
the active members. ...
There would seem to be a question, under the working of the Canon, as to the propriety of
adding the name of a new partner and at the same time retaining that of a deceased
partner who was never a partner with the new one. (H.S. Drinker, op. cit., supra, at pp. 207208)
(Emphasis supplied).
The possibility of deception upon the public, real or consequential, where the name of a deceased partner
continues to be used cannot be ruled out. A person in search of legal counsel might be guided by the familiar
ring of a distinguished name appearing in a firm title.
E. Petitioners argue that U.S. Courts have consistently allowed the continued use of a deceased partner's name
in the firm name of law partnerships. But that is so because it is sanctioned by custom.
In the case of Mendelsohn v. Equitable Life Assurance Society (33 N.Y.S. 2d 733) which petitioners Salazar, et al.
quoted in their memorandum, the New York Supreme Court sustained the use of the firm name Alexander &
Green even if none of the present ten partners of the firm bears either name because the practice was
sanctioned by custom and did not offend any statutory provision or legislative policy and was adopted by
agreement of the parties. The Court stated therein: têñ.£îhqwâ£
The practice sought to be proscribed has the sanction of custom and offends no statutory
provision or legislative policy. Canon 33 of the Canons of Professional Ethics of both the
American Bar Association and the New York State Bar Association provides in part as follows:
"The continued use of the name of a deceased or former partner, when permissible by local
 custom is not unethical, but care should be taken that no imposition or deception is practiced
through this use." There is no question as to local custom. Many firms in the city use the names of
deceased members with the approval of other attorneys, bar associations and the courts. The
Appellate Division of the First Department has considered the matter and reached The
conclusion that such practice should not be prohibited. (Emphasis supplied)
xxx xxx xxx
Neither the Partnership Law nor the Penal Law prohibits the practice in question. The use of the
firm name herein is also sustainable by reason of agreement between the partners. 18
Not so in this jurisdiction where there is no local custom that sanctions the practice. Custom has been defined
as a rule of conduct formed by repetition of acts, uniformly observed (practiced) as a social rule, legally binding
and obligatory. 19 Courts take no judicial notice of custom. A custom must be proved as a fact, according to the
rules of evidence. 20 A local custom as a source of right cannot be considered by a court of justice unless such
custom is properly established by competent evidence like any other fact. 21 We find such proof of the
existence of a local custom, and of the elements requisite to constitute the same, wanting herein. Merely
because something is done as a matter of practice does not mean that Courts can rely on the same for
purposes of adjudication as a juridical custom. Juridical custom must be differentiated from social custom. The
former can supplement statutory law or be applied in the absence of such statute. Not so with the latter.
Moreover, judicial decisions applying or interpreting the laws form part of the legal system. 22 When the
Supreme Court in the Deen and Perkins cases issued its Resolutions directing lawyers to desist from including
the names of deceased partners in their firm designation, it laid down a legal rule against which no custom or
practice to the contrary, even if proven, can prevail. This is not to speak of our civil law which clearly ordains
that a partnership is dissolved by the death of any partner. 23 Custom which are contrary to law, public order or
public policy shall not be countenanced. 24
The practice of law is intimately and peculiarly related to the administration of justice and should not be
considered like an ordinary "money-making trade." têñ.£îhqwâ£
... It is of the essence of a profession that it is practiced in a spirit of public service. A trade ...
aims primarily at personal gain; a profession at the exercise of powers beneficial to mankind. If,
as in the era of wide free opportunity, we think of free competitive self assertion as the highest
good, lawyer and grocer and farmer may seem to be freely competing with their fellows in their
calling in order each to acquire as much of the world's good as he may within the allowed him by
law. But the member of a profession does not regard himself as in competition with his
professional brethren. He is not bartering his services as is the artisan nor exchanging the
products of his skill and learning as the farmer sells wheat or corn. There should be no such thing
as a lawyers' or physicians' strike. The best service of the professional man is often rendered for
no equivalent or for a trifling equivalent and it is his pride to do what he does in a way worthy of
his profession even if done with no expectation of reward, This spirit of public service in which
the profession of law is and ought to be exercised is a prerequisite of sound administration of
justice according to law. The other two elements of a profession, namely, organization and
pursuit of a learned art have their justification in that they secure and maintain that spirit. 25
In fine, petitioners' desire to preserve the Identity of their firms in the eyes of the public must bow to legal and
ethical impediment.
ACCORDINGLY, the petitions filed herein are denied and petitioners advised to drop the names "SYCIP" and
"OZAETA" from their respective firm names. Those names may, however, be included in the listing of individuals
who have been partners in their firms indicating the years during which they served as such.
SO ORDERED.
G.R. No. 109289 October 3, 1994
RUFINO R. TAN, petitioner,
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 109446 October 3, 1994
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO C.
JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as
COMMISSIONER OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.
VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality
of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"),
amending certain provisions of the National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents
pursuant to said law.
Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory
legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act
No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject
which shall be expressed in the title thereof.
Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
Article III, Section 1 — No person shall be deprived of . . . property without due process of law,
nor shall any person be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public
respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have
filed their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer
or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and
Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the
National Internal Revenue Code, as Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now
amended, provide:
Sec. 21. Tax on citizens or residents. —
xxx xxx xxx
(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice
of Profession. — A tax is hereby imposed upon the taxable net income as determined in Section
27 received during each taxable year from all sources, other than income covered by paragraphs
(b), (c), (d) and (e) of this section by every individual whether
a citizen of the Philippines or an alien residing in the Philippines who is self-employed or
practices his profession herein, determined in accordance with the following schedule:
Not over P10,000 3%
Over P10,000 P300 + 9%
but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%
but not over P120,00 of excess over P30,000
Over P120,000 P15,600 + 20%
but not over P350,000 of excess over P120,000
Over P350,000 P61,600 + 30%
of excess over P350,000
Sec. 29. Deductions from gross income. — In computing taxable income subject to tax under
Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items
specified in paragraphs (a) to (i) of this section: Provided, however, That in computing taxable
income subject to tax under Section 21 (f) in the case of individuals engaged in business or
practice of profession, only the following direct costs shall be allowed as deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in the course of or pursuant to the
business or practice of their profession;
(c) Telecommunications, electricity, fuel, light and water;
 (d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial
institutions which must be proven to have been incurred in connection with the conduct of a
taxpayer's profession, trade or business.
For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum
of forty per cent (40%) of their gross receipts shall be allowed as deductions to answer for
business or professional expenses as the case may be.
On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having still retained
the net income, taxation scheme. The allowance for deductible items, it is true, may have significantly been
reduced by the questioned law in comparison with that which has prevailed prior to the amendment; limiting,
however, allowable deductions from gross income is neither discordant with, nor opposed to, the net income
tax concept. The fact of the matter is still that various deductions, which are by no means inconsequential,
continue to be well provided under the new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation
intended to unite the members of the legislature who favor any one of unrelated subjects in support of the
whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through
such publications of its proceedings as are usually made, of the subjects of legislation.1 The above objectives of
the fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual
compendium of the law which could not have been the intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall
be uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals
differently from the manner it imposes the tax on corporations and partnerships. The contention clearly
forgets, however, that such a system of income taxation has long been the prevailing rule even prior to Republic
Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects
of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs.
Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used
therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose,
(3) the law applies, all things being equal, to both present and future conditions, and (4) the classification
applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs.
PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly
shift the income tax system towards the schedular approach2 in the income taxation of individual taxpayers and
to maintain, by and large, the present global treatment3 on taxable corporations. We certainly do not view this
classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he
believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who
are not. With the legislature primarily lies the discretion to determine the nature (kind), object (purpose),
extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters
which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so
unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down,
for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however,
has not been demonstrated to have been reached within any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being
violative of due process must perforce fail. The due process clause may correctly be invoked only when there is
a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such
transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question of whether or not public
respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry
out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership — The general professional partnership (GPP) and the
partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of
 the partnership, only the direct costs mentioned in said law are to be deducted from partnership
income. Also, the expenses paid or incurred by partners in their individual capacities in the
practice of their profession which are not reimbursed or paid by the partnership but are not
considered as direct cost, are not deductible from his gross income.
The real objection of petitioners is focused on the administrative interpretation of public respondents that
would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in
Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez,
minority floor leader of the House of Representatives, in the latter's privilege speech by way of commenting on
the questioned implementing regulation of public respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this
bill. Do we speak here of individuals who are earning, I mean, who earn through
business enterprises and therefore, should file an income tax return?
MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It
applies only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say
that this bill is intended to increase collections as far as individuals are concerned
and to make collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the
SNITS, it is categorically stated, thus:
This bill, Mr. President, is not applicable to business corporations or to
partnerships; it is only with respect to individuals and professionals. (Emphasis
ours)
The Court, first of all, should like to correct the apparent misconception that general professional partnerships
are subject to the payment of income tax or that there is a difference in the tax treatment between individuals
engaged in business or in the practice of their respective professions and partners in general professional
partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business
partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income
tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is
tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of
partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496, is
explicit:
Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons exercising a
common profession in general partnership shall be liable for income tax only in their individual
capacity, and the share in the net profits of the general professional partnership to which any
taxable partner would be entitled whether distributed or otherwise, shall be returned for
taxation and the tax paid in accordance with the provisions of this Title.
(b) In determining his distributive share in the net income of the partnership, each partner —
(1) Shall take into account separately his distributive share of the partnership's
income, gain, loss, deduction, or credit to the extent provided by the pertinent
provisions of this Code, and
(2) Shall be deemed to have elected the itemized deductions, unless he declares
his distributive share of the gross income undiminished by his share of the
deductions.
There is, then and now, no distinction in income tax liability between a person who practices his profession
alone or individually and one who does it through partnership (whether registered or not) with others in the
exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on
passive investment income, under the present income tax system all individuals deriving income from any
source whatsoever are treated in almost invariably the same manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496
as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become
myopic, however, when the law is understood, as it should be, as only forming part of, and subject to, the
whole income tax concept and precepts long obtaining under the National Internal Revenue Code. To elaborate
a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all
persons who derive taxable income. The law, in levying the tax, adopts the most comprehensive tax situs of
nationality and residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens
subject to income tax liability on their income from all sources) and of the generally accepted and
internationally recognized income taxable base (that can subject non-resident aliens and foreign corporations
to income tax on their income from Philippine sources). In the process, the Code classifies taxpayers into four
main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable
Trusts (irrevocable both as to corpus and as to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable
partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context
of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the
"constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical
persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in
Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships
which are independently subject to the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as
independent taxable entities for income tax purposes. A general professional partnership is such an
example.4 Here, the partners themselves, not the partnership (although it is still obligated to file an income tax
return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity
computed on their respective and distributive shares of profits. In the determination of the tax liability, a
partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income
taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-
through entity in the generation of income by, and the ultimate distribution of such income to, respectively,
each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now
so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their
non-compensation income. There is no evident intention of the law, either before or after the amendatory
legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals
who practice their respective professions individually and of those who do it through a general professional
partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.
.R. No. L-45425 April 29, 1939
JOSE GATCHALIAN, ET AL., plaintiffs-appellants,
vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.
Office of the Solicitor-General Tuason for appellee.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum of
P1,863.44, with legal interest thereon, which they paid under protest by way of income tax. They appealed from
the decision rendered in the case on October 23, 1936 by the Court of First Instance of the City of Manila, which
dismissed the action with the costs against them.
The case was submitted for decision upon the following stipulation of facts:
Come now the parties to the above-mentioned case, through their respective undersigned attorneys,
and hereby agree to respectfully submit to this Honorable Court the case upon the following statement
of facts:
1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that defendant is the
Collector of Internal Revenue of the Philippines;
2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one sweepstakes
ticket valued at two pesos (P2), subscribed and paid therefor the amounts as follows:
1. Jose Gatchalian .................................................................................................... P0.18
2. Gregoria Cristobal ............................................................................................... .18
3. Saturnina Silva .................................................................................................... .08
4. Guillermo Tapia ................................................................................................... .13
5. Jesus Legaspi ...................................................................................................... .15
6. Jose Silva ............................................................................................................. .07
7. Tomasa Mercado ................................................................................................ .08
8. Julio Gatchalian ................................................................................................... .13
9. Emiliana Santiago ................................................................................................ .13
10. Maria C. Legaspi ............................................................................................... .16
11. Francisco Cabral ............................................................................................... .13
12. Gonzalo Javier .................................................................................................... .14
13. Maria Santiago ................................................................................................... .17
14. Buenaventura Guzman ...................................................................................... .13
15. Mariano Santos ................................................................................................. .14

Total ........................................................................................................ 2.00

3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased, in the ordinary
course of business, from one of the duly authorized agents of the National Charity Sweepstakes Office
one ticket bearing No. 178637 for the sum of two pesos (P2) and that the said ticket was registered in
the name of Jose Gatchalian and Company;
4. That as a result of the drawing of the sweepstakes on December 15, 1934, the above-mentioned
ticket bearing No. 178637 won one of the third prizes in the amount of P50,000 and that the
corresponding check covering the above-mentioned prize of P50,000 was drawn by the National Charity
Sweepstakes Office in favor of Jose Gatchalian & Company against the Philippine National Bank, which
check was cashed during the latter part of December, 1934 by Jose Gatchalian & Company;
5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner Alfredo David to
file the corresponding income tax return covering the prize won by Jose Gatchalian & Company and that
 on December 29, 1934, the said return was signed by Jose Gatchalian, a copy of which return is enclosed
as Exhibit A and made a part hereof;
6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian & Company
requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan,
giving to said Jose Gatchalian & Company until January 20, 1935 within which to pay the said amount of
P1,499.94, a copy of which letter marked Exhibit B is enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a copy of
which marked Exhibit C is attached and made a part hereof, requesting exemption from payment of the
income tax to which reply there were enclosed fifteen (15) separate individual income tax returns filed
separately by each one of the plaintiffs, copies of which returns are attached and marked Exhibit D-1 to
D-15, respectively, in order of their names listed in the caption of this case and made parts hereof; a
statement of sale signed by Jose Gatchalian showing the amount put up by each of the plaintiffs to cover
up the attached and marked as Exhibit E and made a part hereof; and a copy of the affidavit signed by
Jose Gatchalian dated December 29, 1934 is attached and marked Exhibit F and made part thereof;
8. That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G is enclosed,
denied plaintiffs' request of January 20, 1935, for exemption from the payment of tax and reiterated his
demand for the payment of the sum of P1,499.94 as income tax and gave plaintiffs until February 10,
1935 within which to pay the said tax;
9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the defendant,
notwithstanding subsequent demand made by defendant upon the plaintiffs through their attorney on
March 23, 1935, a copy of which marked Exhibit H is enclosed, defendant on May 13, 1935 issued a
warrant of distraint and levy against the property of the plaintiffs, a copy of which warrant marked
Exhibit I is enclosed and made a part hereof;
10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs, the said
plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi, paid under
protest the sum of P601.51 as part of the tax and penalties to the municipal treasurer of Pulilan,
Bulacan, as evidenced by official receipt No. 7454879 which is attached and marked Exhibit J and made
a part hereof, and requested defendant that plaintiffs be allowed to pay under protest the balance of
the tax and penalties by monthly installments;
11. That plaintiff's request to pay the balance of the tax and penalties was granted by defendant subject
to the condition that plaintiffs file the usual bond secured by two solvent persons to guarantee prompt
payment of each installments as it becomes due;
12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is enclosed and made a
part hereof, to guarantee the payment of the balance of the alleged tax liability by monthly installments
at the rate of P118.70 a month, the first payment under protest to be effected on or before July 31,
1935;
13. That on July 16, 1935 the said plaintiffs formally protested against the payment of the sum of
P602.51, a copy of which protest is attached and marked Exhibit L, but that defendant in his letter dated
August 1, 1935 overruled the protest and denied the request for refund of the plaintiffs;
14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance with the
terms and conditions of bond filed by them, the defendant in his letter dated July 23, 1935, copy of
which is attached and marked Exhibit M, ordered the municipal treasurer of Pulilan, Bulacan to execute
within five days the warrant of distraint and levy issued against the plaintiffs on May 13, 1935;
15. That in order to avoid annoyance and embarrassment arising from the levy of their property, the
plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria Santiago and Emiliano
Santiago, paid under protest to the municipal treasurer of Pulilan, Bulacan the sum of P1,260.93
representing the unpaid balance of the income tax and penalties demanded by defendant as evidenced
by income tax receipt No. 35811 which is attached and marked Exhibit N and made a part hereof; and
that on September 3, 1936, the plaintiffs formally protested to the defendant against the payment of
said amount and requested the refund thereof, copy of which is attached and marked Exhibit O and
made part hereof; but that on September 4, 1936, the defendant overruled the protest and denied the
refund thereof; copy of which is attached and marked Exhibit P and made a part hereof; and
16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand eight
hundred and sixty three pesos and forty-four centavos (P1,863.44) paid under protest by them but that
defendant refused and still refuses to refund the said amount notwithstanding the plaintiffs' demands.
17. The parties hereto reserve the right to present other and additional evidence if necessary.
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:
 I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the 11th day of
August, 1934, I sold parts of my shares on ticket No. 178637 to the persons and for the amount
indicated below and the part of may share remaining is also shown to wit:
Purchaser Amount Address
1. Mariano Santos ........................................... P0.14 Pulilan, Bulacan.
2. Buenaventura Guzman ............................... .13 - Do -
3. Maria Santiago ............................................ .17 - Do -
4. Gonzalo Javier .............................................. .14 - Do -
5. Francisco Cabral .......................................... .13 - Do -
6. Maria C. Legaspi .......................................... .16 - Do -
7. Emiliana Santiago ......................................... .13 - Do -
8. Julio Gatchalian ............................................ .13 - Do -
9. Jose Silva ...................................................... .07 - Do -
10. Tomasa Mercado ....................................... .08 - Do -
11. Jesus Legaspi ............................................. .15 - Do -
12. Guillermo Tapia ........................................... .13 - Do -
13. Saturnina Silva ............................................ .08 - Do -
14. Gregoria Cristobal ....................................... .18 - Do -
15. Jose Gatchalian ............................................ .18 - Do -

2.00 Total cost of said

ticket; and that, therefore, the persons named above are entitled to the parts of whatever prize that
might be won by said ticket.
Pulilan, Bulacan, P.I.
(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED JANUARY 19, 1935
SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.
Exhibit Purchase Price Net
Name Expenses
No. Price Won prize
1. Jose Gatchalian
D-1 P0.18 P4,425 P 480 3,945
..........................................
2. Gregoria Cristobal
D-2 .18 4,575 2,000 2,575
......................................
3. Saturnina Silva
D-3 .08 1,875 360 1,515
.............................................
4. Guillermo Tapia
D-4 .13 3,325 360 2,965
..........................................
5. Jesus Legaspi by Maria Cristobal
D-5 .15 3,825 720 3,105
.........
6. Jose Silva
D-6 .08 1,875 360 1,515
....................................................
7. Tomasa Mercado
D-7 .07 1,875 360 1,515
.......................................
8. Julio Gatchalian by Beatriz
D-8 .13 3,150 240 2,910
Guzman .......
9. Emiliana Santiago
D-9 .13 3,325 360 2,965
......................................
10. Maria C. Legaspi
D-10 .16 4,100 960 3,140
......................................
11. Francisco Cabral
D-11 .13 3,325 360 2,965
......................................
12. Gonzalo Javier
D-12 .14 3,325 360 2,965
..........................................
13. Maria Santiago
D-13 .17 4,350 360 3,990
..........................................
14. Buenaventura Guzman
D-14 .13 3,325 360 2,965
...........................
15. Mariano Santos
D-15 .14 3,325 360 2,965
........................................
<="" td="" style="font-size: 14px; text-
decoration: none; color: rgb(0, 0,
2.00 50,000
128); font-family: arial, verdana;">
The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to the two
following: (1) Whether the plaintiffs formed a partnership, or merely a community of property without a
personality of its own; in the first case it is admitted that the partnership thus formed is liable for the payment
of income tax, whereas if there was merely a community of property, they are exempt from such payment; and
(2) whether they should pay the tax collectively or whether the latter should be prorated among them and paid
individually.
The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last amended by
section 2 of Act No. 3761, reading as follows:
SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net income
received in the preceding calendar year from all sources by every corporation, joint-stock company,
partnership, joint account (cuenta en participacion), association or insurance company, organized in the
Philippine Islands, no matter how created or organized, but not including duly registered general
copartnership (compañias colectivas), a tax of three per centum upon such income; and a like tax shall
be levied, assessed, collected, and paid annually upon the total net income received in the preceding
calendar year from all sources within the Philippine Islands by every corporation, joint-stock company,
partnership, joint account (cuenta en participacion), association, or insurance company organized,
authorized, or existing under the laws of any foreign country, including interest on bonds, notes, or
other interest-bearing obligations of residents, corporate or otherwise: Provided, however, That nothing
in this section shall be construed as permitting the taxation of the income derived from dividends or net
profits on which the normal tax has been paid.
The gain derived or loss sustained from the sale or other disposition by a corporation, joint-stock
company, partnership, joint account (cuenta en participacion), association, or insurance company, or
property, real, personal, or mixed, shall be ascertained in accordance with subsections (c) and (d) of
section two of Act Numbered Two thousand eight hundred and thirty-three, as amended by Act
Numbered Twenty-nine hundred and twenty-six.
The foregoing tax rate shall apply to the net income received by every taxable corporation, joint-stock
company, partnership, joint account (cuenta en participacion), association, or insurance company in the
calendar year nineteen hundred and twenty and in each year thereafter.
There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt from the
payment of income tax under the law. But according to the stipulation facts the plaintiffs organized a
partnership of a civil nature because each of them put up money to buy a sweepstakes ticket for the sole
purpose of dividing equally the prize which they may win, as they did in fact in the amount of P50,000 (article
1665, Civil Code). The partnership was not only formed, but upon the organization thereof and the winning of
the prize, Jose Gatchalian personally appeared in the office of the Philippines Charity Sweepstakes, in his
capacity as co-partner, as such collection the prize, the office issued the check for P50,000 in favor of Jose
Gatchalian and company, and the said partner, in the same capacity, collected the said check. All these
circumstances repel the idea that the plaintiffs organized and formed a community of property only.
Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay the
income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as amended by
section 2 of Act No. 3761. There is no merit in plaintiff's contention that the tax should be prorated among
them and paid individually, resulting in their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the plaintiffs
appellants. So ordered.
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR.,
ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE
FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM, CHARLES CHAMSAY
and LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR.,
ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and the COURT
OF APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-G.R. SP
Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then Intermediate
Appellate Court and directed that in all subsequent elections for directors of Sanitary Wares Manufacturing
Corporation (Saniwares), American Standard Inc. (ASI) cannot nominate more than three (3) directors; that the
Filipino stockholders shall not interfere in ASI's choice of its three (3) nominees; that, on the other hand, the
Filipino stockholders can nominate only six (6) candidates and in the event they cannot agree on the six (6)
nominees, they shall vote only among themselves to determine who the six (6) nominees will be, with
cumulative voting to be allowed but without interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and
marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign
partners, European or American who could help in its expansion plans. On August 15, 1962, ASI, a foreign
corporation domiciled in Delaware, United States entered into an Agreement with Saniwares and some Filipino
investors whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which
would engage primarily in the business of manufacturing in the Philippines and selling here and abroad vitreous
china and sanitary wares. The parties agreed that the business operations in the Philippines shall be carried on
by an incorporated enterprise and that the name of the corporation shall initially be "Sanitary Wares
Manufacturing Corporation."
The Agreement has the following provisions relevant to the issues in these cases on the nomination and
election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in the form annexed
hereto as Exhibit A and, insofar as permitted under Philippine law, shall specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of Directors, which shall
consist of nine individuals. As long as American-Standard shall own at least 30% of the
outstanding stock of the Corporation, three of the nine directors shall be designated by
American-Standard, and the other six shall be designated by the other stockholders of the
Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority group, including
the grant of veto powers over a number of corporate acts and the right to designate certain officers, such as a
member of the Executive Committee whose vote was required for important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the Board of
Investments for availment of incentives with the condition that at least 60% of the capital stock of the
corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation prospered.
Unfortunately, with the business successes, there came a deterioration of the initially harmonious relations
between the two groups. According to the Filipino group, a basic disagreement was due to their desire to
expand the export operations of the company to which ASI objected as it apparently had other subsidiaries of
joint joint venture groups in the countries where Philippine exports were contemplated. On March 8, 1983, the
annual stockholders' meeting was held. The meeting was presided by Baldwin Young. The minutes were taken
by the Secretary, Avelino Cruz. After disposing of the preliminary items in the agenda, the stockholders then
proceeded to the election of the members of the board of directors. The ASI group nominated three persons
namely; Wolfgang Aurbach, John Griffin and David P. Whittingham. The Philippine investors nominated six,
namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young.
Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay. The
chairman, Baldwin Young ruled the last two nominations out of order on the basis of section 5 (a) of the
Agreement, the consistent practice of the parties during the past annual stockholders' meetings to nominate
only nine persons as nominees for the nine-member board of directors, and the legal advice of Saniwares' legal
counsel. The following events then, transpired:
... There were protests against the action of the Chairman and heated arguments ensued. An
appeal was made by the ASI representative to the body of stockholders present that a vote be
taken on the ruling of the Chairman. The Chairman, Baldwin Young, declared the appeal out of
order and no vote on the ruling was taken. The Chairman then instructed the Corporate
Secretary to cast all the votes present and represented by proxy equally for the 6 nominees of
the Philippine Investors and the 3 nominees of ASI, thus effectively excluding the 2 additional
persons nominated, namely, Luciano E. Salazar and Charles Chamsay. The ASI representative,
Mr. Jaqua protested the decision of the Chairman and announced that all votes accruing to ASI
shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being cumulatively voted
for the three ASI nominees and Charles Chamsay, and instructed the Secretary to so vote.
Luciano E. Salazar and other proxy holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being voted
cumulatively in favor of Luciano E. Salazar. The Chairman, Baldwin Young, nevertheless
instructed the Secretary to cast all votes equally in favor of the three ASI nominees, namely,
Wolfgang Aurbach, John Griffin and David Whittingham and the six originally nominated by
Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, and Baldwin Young. The Secretary then certified for the election of the
following Wolfgang Aurbach, John Griffin, David Whittingham Ernesto Lagdameo, Sr., Ernesto
Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. The
representative of ASI then moved to recess the meeting which was duly seconded. There was
also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No. 05617). This motion to adjourn was
accepted by the Chairman, Baldwin Young, who announced that the motion was carried and
declared the meeting adjourned. Protests against the adjournment were registered and having
been ignored, Mr. Jaqua the ASI representative, stated that the meeting was not adjourned but
only recessed and that the meeting would be reconvened in the next room. The Chairman then
threatened to have the stockholders who did not agree to the decision of the Chairman on the
casting of votes bodily thrown out. The ASI Group, Luciano E. Salazar and other stockholders,
allegedly representing 53 or 54% of the shares of Saniwares, decided to continue the meeting at
the elevator lobby of the American Standard Building. The continued meeting was presided by
Luciano E. Salazar, while Andres Gatmaitan acted as Secretary. On the basis of the cumulative
votes cast earlier in the meeting, the ASI Group nominated its four nominees; Wolfgang Aurbach,
John Griffin, David Whittingham and Charles Chamsay. Luciano E. Salazar voted for himself, thus
the said five directors were certified as elected directors by the Acting Secretary, Andres
Gatmaitan, with the explanation that there was a tie among the other six (6) nominees for the
four (4) remaining positions of directors and that the body decided not to break the tie. (pp. 37-
39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities and Exchange
Commission (SEC). The first petition filed was for preliminary injunction by Saniwares, Emesto V. Lagdameo,
Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee against Luciano
Salazar and Charles Chamsay. The case was denominated as SEC Case No. 2417. The second petition was for
quo warranto and application for receivership by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano
E. Salazar and Charles Chamsay against the group of Young and Lagdameo (petitioners in SEC Case No. 2417)
and Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of parties except for Avelino Cruz
claimed to be the legitimate directors of the corporation.
The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision upholding
the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar and Chamsay. The ASI
Group and Salazar appealed the decision to the SEC en banc which affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by Wolfgang
Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604) and by
Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were consolidated and the appellate court
in its decision ordered the remand of the case to the Securities and Exchange Commission with the directive
that a new stockholders' meeting of Saniwares be ordered convoked as soon as possible, under the supervision
of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of
Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David P.
Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF PRIVATE
RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES WHEN IN FACT
THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING THEIR FULL
VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN SANIWARES, THUS DEPRIVING
PETITIONERS AND THE CORPORATION THEY REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO THE
AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH ACTION IT CANNOT LEGALLY
DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual agreements
entered into by stockholders and the replacement of the conditions of such agreements with
terms never contemplated by the stockholders but merely dictated by the CA .
11.2. The Amended decision would likewise sanction the deprivation of the property rights of
stockholders without due process of law in order that a favored group of stockholders may be
illegally benefitted and guaranteed a continuing monopoly of the control of a corporation. (pp.
14-15, Rollo-75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING THAT THE
STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO FULLY ENFORCE THE
BASIC INTENT OF THE AGREEMENT AND THE LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE PETITIONERS HEREIN
WERE THE DULY ELECTED DIRECTORS DURING THE 8 MARCH 1983 ANNUAL STOCKHOLDERS
MEETING OF SANTWARES. (P. 24, Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its annual
stockholders' meeting held on March 8, 1983. To answer this question the following factors should be
determined: (1) the nature of the business established by the parties whether it was a joint venture or a
corporation and (2) whether or not the ASI Group may vote their additional 10% equity during elections of
Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established among themselves a joint
venture or some other relation depends upon their actual intention which is determined in accordance with the
rules governing the interpretation and construction of contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R.
Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the parties
should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated that the parties'
intention was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
 c) nothing herein contained shall be construed to constitute any of the parties hereto partners or
joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that the parties' agreement was to
establish a joint venture presented by the Lagdameo and Young Group on the ground that it contravenes the
parol evidence rule under section 7, Rule 130 of the Revised Rules of Court. According to them, the Lagdameo
and Young Group never pleaded in their pleading that the "Agreement" failed to express the true intent of the
parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been reduced to writing,
it is to be considered as containing all such terms, and therefore, there can be, between the
parties and their successors in interest, no evidence of the terms of the agreement other than
the contents of the writing, except in the following cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the true intent and
agreement of the parties or the validity of the agreement is put in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear that the parties thereto
disclaim being partners or joint venturers such disclaimer is directed at third parties and is not
inconsistent with, and does not preclude, the existence of two distinct groups of stockholders in
Saniwares one of which (the Philippine Investors) shall constitute the majority, and the other ASI
shall constitute the minority stockholder. In any event, the evident intention of the Philippine
Investors and ASI in entering into the Agreement is to enter into ajoint venture enterprise, and if
some words in the Agreement appear to be contrary to the evident intention of the parties, the
latter shall prevail over the former (Art. 1370, New Civil Code). The various stipulations of a
contract shall be interpreted together attributing to the doubtful ones that sense which may
result from all of them taken jointly (Art. 1374, New Civil Code). Moreover, in order to judge the
intention of the contracting parties, their contemporaneous and subsequent acts shall be
principally considered. (Art. 1371, New Civil Code). (Part I, Original Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the parties joined their efforts
in furtherance of an enterprise for their joint profit, the question whether they intended by their
agreement to create a joint adventure, or to assume some other relation is a question of fact for
the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.) 238
SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as well as the testimonial
evidence presented by the Lagdameo and Young Group shows that the parties agreed to establish a joint
venture and not a corporation. The history of the organization of Saniwares and the unusual arrangements
which govern its policy making body are all consistent with a joint venture and not with an ordinary corporation.
As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the Agreement with
ASI in behalf of the Philippine nationals. He testified that ASI agreed to accept the role of
minority vis-a-vis the Philippine National group of investors, on the condition that the Agreement
should contain provisions to protect ASI as the minority.
An examination of the Agreement shows that certain provisions were included to protect the
interests of ASI as the minority. For example, the vote of 7 out of 9 directors is required in
certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is contractually
entitled to designate a member of the Executive Committee and the vote of this member is
required for certain transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for the amendment of the articles and
by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to designate the
president and plant manager [Sec. 5 (6)]. The Agreement further provides that the sales policy of
Saniwares shall be that which is normally followed by ASI [Sec. 13 (a)] and that Saniwares should
not export "Standard" products otherwise than through ASI's Export Marketing Services [Sec. 13
(6)]. Under the Agreement, ASI agreed to provide technology and know-how to Saniwares and
the latter paid royalties for the same. (At p. 2).
xxx xxx xxx
 It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of the
board of directors for certain actions, in effect gave ASI (which designates 3 directors under the
Agreement) an effective veto power. Furthermore, the grant to ASI of the right to designate
certain officers of the corporation; the super-majority voting requirements for amendments of
the articles and by-laws; and most significantly to the issues of tms case, the provision that ASI
shall designate 3 out of the 9 directors and the other stockholders shall designate the other 6,
clearly indicate that there are two distinct groups in Saniwares, namely ASI, which owns 40% of
the capital stock and the Philippine National stockholders who own the balance of 60%, and that
2) ASI is given certain protections as the minority stockholder.
Premises considered, we believe that under the Agreement there are two groups of stockholders
who established a corporation with provisions for a special contractual relationship between the
parties, i.e., ASI and the other stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the selection of
the nine directors on a six to three ratio. Each group is assured of a fixed number of directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also testified
that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to constitute any of the
parties hereto partners or joint venturers in respect of any transaction hereunder" was merely to obviate the
possibility of the enterprise being treated as partnership for tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of a
local firm are constrained to seek the technology and marketing assistance of huge multinational corporations
of the developed world. Arrangements are formalized where a foreign group becomes a minority owner of a
firm in exchange for its manufacturing expertise, use of its brand names, and other such assistance. However,
there is always a danger from such arrangements. The foreign group may, from the start, intend to establish its
own sole or monopolistic operations and merely uses the joint venture arrangement to gain a foothold or test
the Philippine waters, so to speak. Or the covetousness may come later. As the Philippine firm enlarges its
operations and becomes profitable, the foreign group undermines the local majority ownership and actively
tries to completely or predominantly take over the entire company. This undermining of joint ventures is not
consistent with fair dealing to say the least. To the extent that such subversive actions can be lawfully
prevented, the courts should extend protection especially in industries where constitutional and legal
requirements reserve controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of stockholders to enter into
agreements regarding the exercise of their voting rights.
Sec. 100. Agreements by stockholders.-
xxx xxx xxx
2. An agreement between two or more stockholders, if in writing and signed by the parties
thereto, may provide that in exercising any voting rights, the shares held by them shall be voted
as therein provided, or as they may agree, or as determined in accordance with a procedure
agreed upon by them.
Appellants contend that the above provision is included in the Corporation Code's chapter on
close corporations and Saniwares cannot be a close corporation because it has 95 stockholders.
Firstly, although Saniwares had 95 stockholders at the time of the disputed stockholders
meeting, these 95 stockholders are not separate from each other but are divisible into groups
representing a single Identifiable interest. For example, ASI, its nominees and lawyers count for
13 of the 95 stockholders. The YoungYutivo family count for another 13 stockholders, the
Chamsay family for 8 stockholders, the Santos family for 9 stockholders, the Dy family for 7
stockholders, etc. If the members of one family and/or business or interest group are considered
as one (which, it is respectfully submitted, they should be for purposes of determining how
closely held Saniwares is there were as of 8 March 1983, practically only 17 stockholders of
Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees' Rejoinder Memorandum dated
11 December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close corporation because it has
more than 20 stockholders, the undeniable fact is that it is a close-held corporation. Surely,
appellants cannot honestly claim that Saniwares is a public issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint venture corporations
and have not rigidly applied principles of corporation law designed primarily for public issue
corporations. These courts have indicated that express arrangements between corporate joint
ventures should be construed with less emphasis on the ordinary rules of law usually applied to
 corporate entities and with more consideration given to the nature of the agreement between
the joint venturers (Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335;
Chicago, M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v.
Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d 903;
Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138
U.S. 262; "The Legal Status of Joint Venture Corporations", 11 Vand Law Rev. p. 680,1958). These
American cases dealt with legal questions as to the extent to which the requirements arising
from the corporate form of joint venture corporations should control, and the courts ruled that
substantial justice lay with those litigants who relied on the joint venture agreement rather than
the litigants who relied on the orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint venture deviate from the
traditional pattern of corporation management. A noted authority has pointed out that just as in
close corporations, shareholders' agreements in joint venture corporations often contain
provisions which do one or more of the following: (1) require greater than majority vote for
shareholder and director action; (2) give certain shareholders or groups of shareholders power
to select a specified number of directors; (3) give to the shareholders control over the selection
and retention of employees; and (4) set up a procedure for the settlement of disputes by
arbitration (See I O' Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of
SEC Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that
agreements regarding the exercise of voting rights are allowed only in close corporations. As
Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this provision necessarily
imply that these agreements can be valid only in close corporations as defined by the Code?
Suppose that a corporation has twenty five stockholders, and therefore cannot qualify as a close
corporation under section 96, can some of them enter into an agreement to vote as a unit in the
election of directors? It is submitted that there is no reason for denying stockholders of
corporations other than close ones the right to enter into not voting or pooling agreements to
protect their interests, as long as they do not intend to commit any wrong, or fraud on the other
stockholders not parties to the agreement. Of course, voting or pooling agreements are perhaps
more useful and more often resorted to in close corporations. But they may also be found
necessary even in widely held corporations. Moreover, since the Code limits the legal meaning of
close corporations to those which comply with the requisites laid down by section 96, it is
entirely possible that a corporation which is in fact a close corporation will not come within the
definition. In such case, its stockholders should not be precluded from entering into contracts
like voting agreements if these are otherwise valid. (Campos & Lopez-Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the designation or
nomination of directors restricts the right of the Agreement's signatories to vote for directors,
such contractual provision, as correctly held by the SEC, is valid and binding upon the signatories
thereto, which include appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity during elections of
Saniwares' board of directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the management of the
corporation is spelled out in the Agreement. Section 5(a) hereof says that three of the nine
directors shall be designated by ASI and the remaining six by the other stockholders, i.e., the
Filipino stockholders. This allocation of board seats is obviously in consonance with the minority
position of ASI.
Having entered into a well-defined contractual relationship, it is imperative that the parties
should honor and adhere to their respective rights and obligations thereunder. Appellants seem
to contend that any allocation of board seats, even in joint venture corporations, are null and
void to the extent that such may interfere with the stockholder's rights to cumulative voting as
provided in Section 24 of the Corporation Code. This Court should not be prepared to hold that
any agreement which curtails in any way cumulative voting should be struck down, even if such
agreement has been freely entered into by experienced businessmen and do not prejudice those
who are not parties thereto. It may well be that it would be more cogent to hold, as the
Securities and Exchange Commission has held in the decision appealed from, that cumulative
voting rights may be voluntarily waived by stockholders who enter into special relationships with
 each other to pursue and implement specific purposes, as in joint venture relationships between
foreign and local stockholders, so long as such agreements do not adversely affect third parties.
In any event, it is believed that we are not here called upon to make a general rule on this
question. Rather, all that needs to be done is to give life and effect to the particular contractual
rights and obligations which the parties have assumed for themselves.
On the one hand, the clearly established minority position of ASI and the contractual allocation
of board seats Cannot be disregarded. On the other hand, the rights of the stockholders to
cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to uphold the second over the first. Upon
further reflection, we feel that the proper and just solution to give due consideration to both
factors suggests itself quite clearly. This Court should recognize and uphold the division of the
stockholders into two groups, and at the same time uphold the right of the stockholders within
each group to cumulative voting in the process of determining who the group's nominees would
be. In practical terms, as suggested by appellant Luciano E. Salazar himself, this means that if the
Filipino stockholders cannot agree who their six nominees will be, a vote would have to be taken
among the Filipino stockholders only. During this voting, each Filipino stockholder can cumulate
his votes. ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board seats, a
result which is clearly contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the stockholder's right
to cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by
the appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108,
as amended) and the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote their
additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a corporation
the right to cumulate their votes in electing directors. Petitioner Salazar adds that this right if granted to the ASI
Group would not necessarily mean a violation of the Anti-Dummy Act (Commonwealth Act 108, as amended).
He cites section 2-a thereof which provides:
And provided finally that the election of aliens as members of the board of directors or
governing body of corporations or associations engaging in partially nationalized activities shall
be allowed in proportion to their allowable participation or share in the capital of such entities.
(amendments introduced by Presidential Decree 715, section 1, promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point of
query, however, is whether or not that provision is applicable to a joint venture with clearly defined
agreements:
The legal concept of ajoint venture is of common law origin. It has no precise legal definition but
it has been generally understood to mean an organization formed for some temporary purpose.
(Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly distinguishable from the partnership,
since their elements are similar community of interest in the business, sharing of profits and
losses, and a mutual right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau
v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d.
242 [1955]). The main distinction cited by most opinions in common law jurisdictions is that the
partnership contemplates a general business with some degree of continuity, while the joint
venture is formed for the execution of a single transaction, and is thus of a temporary nature.
(Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d.
74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in
this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code). It
would seem therefore that under Philippine law, a joint venture is a form of partnership and
should thus be governed by the law of partnerships. The Supreme Court has however recognized
a distinction between these two business forms, and has held that although a corporation
cannot enter into a partnership contract, it may however engage in a joint venture with others.
(At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes
and Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts generally apply to a contract
of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the question of whether or
not the ASI Group may vote their additional equity lies in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the allocation
of director seats under Section 5 (a) of the "Agreement," and the right of each group of stockholders to
cumulative voting in the process of determining who the group's nominees would be under Section 3 (a) (1) of
the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement relates to the manner of nominating
the members of the board of directors while Section 3 (a) (1) relates to the manner of voting for these
nominees.
This is the proper interpretation of the Agreement of the parties as regards the election of members of the
board of directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be
beholden to them would obliterate their minority status as agreed upon by the parties. As aptly stated by the
appellate court:
... ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board seats, a
result which is clearly contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the stockholder's right
to cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by
the appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108,
as amended) and the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the consideration as regards
the possible domination by the foreign investors of the enterprise in violation of the nationalization
requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act. In this regard, petitioner
Salazar's position is that the Anti-Dummy Act allows the ASI group to elect board directors in proportion to
their share in the capital of the entity. It is to be noted, however, that the same law also limits the election of
aliens as members of the board of directors in proportion to their allowance participation of said entity. In the
instant case, the foreign Group ASI was limited to designate three directors. This is the allowable participation
of the ASI Group. Hence, in future dealings, this limitation of six to three board seats should always be
maintained as long as the joint venture agreement exists considering that in limiting 3 board seats in the 9-man
board of directors there are provisions already agreed upon and embodied in the parties' Agreement to protect
the interests arising from the minority status of the foreign investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed by the
appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V. Lagdameo,
Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly
elected directors of Saniwares at the March 8,1983 annual stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a cumulative
voting during the election of the board of directors of the enterprise as ruled by the appellate court and
submits that the six (6) directors allotted the Filipino stockholders should be selected by consensus pursuant to
section 5 (a) of the Agreement which uses the word "designate" meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot determined by the
majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors should not
be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the Agreement. As we
stated earlier, section 3(a) (1) relates to the manner of voting for these nominees which is cumulative
voting while section 5(a) relates to the manner of nominating the members of the board of directors. The
petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot, however, be ignored. The validity of the cumulative voting procedure is dependent on the
directors thus elected being genuine members of the Filipino group, not voters whose interest is to increase the
ASI share in the management of Saniwares. The joint venture character of the enterprise must always be taken
into account, so long as the company exists under its original agreement. Cumulative voting may not be used as
a device to enable ASI to achieve stealthily or indirectly what they cannot accomplish openly. There are
substantial safeguards in the Agreement which are intended to preserve the majority status of the Filipino
investors as well as to maintain the minority status of the foreign investors group as earlier discussed. They
should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in G.R. No.
75951 is partly GRANTED. The amended decision of the Court of Appeals is MODIFIED in that Messrs. Wolfgang
Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R.
Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the duly elected directors of Saniwares at
the March 8,1983 annual stockholders' meeting. In all other respects, the questioned decision is AFFIRMED.
Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
ALFREDO N. AGUILA, JR, petitioner, vs. HONORABLE COURT OF APPEALS and FELICIDAD S. VDA. DE
ABROGAR, respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision[1] of the Court of Appeals, dated November 29, 1990,
which reversed the decision of the Regional Trial Court, Branch 273, Marikina, Metro Manila, dated April 11,
1995. The trial court dismissed the petition for declaration of nullity of a deed of sale filed by private respondent
Felicidad S. Vda. de Abrogar against petitioner Alfredo N. Aguila, Jr.
The facts are as follows:
Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in lending activities. Private
respondent and her late husband, Ruben M. Abrogar, were the registered owners of a house and lot, covered by
Transfer Certificate of Title No. 195101, in Marikina, Metro Manila. On April 18, 1991, private respondent, with
the consent of her late husband, and A.C. Aguila & Sons, Co., represented by petitioner, entered into a
Memorandum of Agreement, which provided:
(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy the above-described property from the FIRST
PARTY [Felicidad S. Vda. de Abrogar], and pursuant to this agreement, a Deed of Absolute Sale shall be executed
by the FIRST PARTY conveying the property to the SECOND PARTY for and in consideration of the sum of Two
Hundred Thousand Pesos (P200,000.00), Philippine Currency;
(2) The FIRST PARTY is hereby given by the SECOND PARTY the option to repurchase the said property within a
period of ninety (90) days from the execution of this memorandum of agreement effective April 18, 1991, for
the amount of TWO HUNDRED THIRTY THOUSAND PESOS (P230,000.00);
(3) In the event that the FIRST PARTY fail to exercise her option to repurchase the said property within a period
of ninety (90) days, the FIRST PARTY is obliged to deliver peacefully the possession of the property to the
SECOND PARTY within fifteen (15) days after the expiration of the said 90 day grace period;
(4) During the said grace period, the FIRST PARTY obliges herself not to file any lis pendens or whatever claims
on the property nor shall be cause the annotation of say claim at the back of the title to the said property;
(5) With the execution of the deed of absolute sale, the FIRST PARTY warrants her ownership of the property
and shall defend the rights of the SECOND PARTY against any party whom may have any interests over the
property;
(6) All expenses for documentation and other incidental expenses shall be for the account of the FIRST PARTY;
(7) Should the FIRST PARTY fail to deliver peaceful possession of the property to the SECOND PARTY after the
expiration of the 15-day grace period given in paragraph 3 above, the FIRST PARTY shall pay an amount
equivalent to Five Percent of the principal amount of TWO HUNDRED PESOS (P200.00) or P10,000.00 per
month of delay as and for rentals and liquidated damages;
(8) Should the FIRST PARTY fail to exercise her option to repurchase the property within ninety (90) days period
above-mentioned, this memorandum of agreement shall be deemed cancelled and the Deed of Absolute Sale,
executed by the parties shall be the final contract considered as entered between the parties and the SECOND
PARTY shall proceed to transfer ownership of the property above described to its name free from lines and
encumbrances.[2]
On the same day, April 18, 1991, the parties likewise executed a deed of absolute sale,[3] dated June 11, 1991,
wherein private respondent, with the consent of her late husband, sold the subject property to A.C. Aguila &
Sons, Co., represented by petitioner, for P200,000.00. In a special power of attorney dated the same day, April
18, 1991, private respondent authorized petitioner to cause the cancellation of TCT No. 195101 and the issuance
of a new certificate of title in the name of A.C. Aguila and Sons, Co., in the event she failed to redeem the subject
property as provided in the Memorandum of Agreement.[4]
Private respondent failed to redeem the property within the 90-day period as provided in the Memorandum
of Agreement. Hence, pursuant to the special power of attorney mentioned above, petitioner caused the
cancellation of TCT No. 195101 and the issuance of a new certificate of title in the name of A.C. Aguila and Sons,
Co.[5]
Private respondent then received a letter dated August 10, 1991 from Atty. Lamberto C. Nanquil, counsel for
A.C. Aguila & Sons, Co., demanding that she vacate the premises within 15 days after receipt of the letter and
surrender its possession peacefully to A.C. Aguila & Sons, Co. Otherwise, the latter would bring the appropriate
action in court.[6]
Upon the refusal of private respondent to vacate the subject premises, A.C. Aguila & Sons, Co. filed an
ejectment case against her in the Metropolitan Trial Court, Branch 76, Marikina, Metro Manila. In a decision,
dated April 3, 1992, the Metropolitan Trial Court ruled in favor of A.C. Aguila & Sons, Co. on the ground that
private respondent did not redeem the subject property before the expiration of the 90-day period provided in
the Memorandum of Agreement. Private respondent appealed first to the Regional Trial Court, Branch 163, Pasig,
Metro Manila, then to the Court of Appeals, and later to this Court, but she lost in all the cases.
Private respondent then filed a petition for declaration of nullity of a deed of sale with the Regional Trial
Court, Branch 273, Marikina, Metro Manila on December 4, 1993. She alleged that the signature of her husband
on the deed of sale was a forgery because he was already dead when the deed was supposed to have been
executed on June 11, 1991.
It appears, however, that private respondent had filed a criminal complaint for falsification against petitioner
with the Office of the Prosecutor of Quezon City which was dismissed in a resolution, dated February 14, 1994.
On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:
Plaintiffs claim therefore that the Deed of Absolute Sale is a forgery because they could not personally appear
before Notary Public Lamberto C. Nanquil on June 11, 1991 because her husband, Ruben Abrogar, died on May
8, 1991 or one month and 2 days before the execution of the Deed of Absolute Sale, while the plaintiff was still
in the Quezon City Medical Center recuperating from wounds which she suffered at the same vehicular
accident on May 8, 1991, cannot be sustained. The Court is convinced that the three required documents, to
wit: the Memorandum of Agreement, the Special Power of Attorney, and the Deed of Absolute Sale were all
signed by the parties on the same date on April 18, 1991. It is a common and accepted business practice of
those engaged in money lending to prepare an undated absolute deed of sale in loans of money secured by real
estate for various reasons, foremost of which is the evasion of taxes and surcharges.The plaintiff never
questioned receiving the sum of P200,000.00 representing her loan from the defendant. Common sense
dictates that an established lending and realty firm like the Aguila & Sons, Co. would not part with P200,000.00
to the Abrogar spouses, who are virtual strangers to it, without the simultaneous accomplishment and signing
of all the required documents, more particularly the Deed of Absolute Sale, to protect its interest.
....
WHEREFORE, foregoing premises considered, the case in caption is hereby ORDERED DISMISSED, with costs
against the plaintiff.
On appeal, the Court of Appeals reversed. It held:
The facts and evidence show that the transaction between plaintiff-appellant and defendant-appellee is
indubitably an equitable mortgage. Article 1602 of the New Civil Code finds strong application in the case at bar
in the light of the following circumstances.
First: The purchase price for the alleged sale with right to repurchase is unusually inadequate. The property is a
two hundred forty (240) sq. m. lot. On said lot, the residential house of plaintiff-appellant stands. The property
is inside a subdivision/village. The property is situated in Marikina which is already part of Metro Manila. The
alleged sale took place in 1991 when the value of the land had considerably increased.
For this property, defendant-appellee pays only a measly P200,000.00 or P833.33 per square meter for both
the land and for the house.
Second: The disputed Memorandum of Agreement specifically provides that plaintiff-appellant is obliged to
deliver peacefully the possession of the property to the SECOND PARTY within fifteen (15) days after the
expiration of the said ninety (90) day grace period. Otherwise stated, plaintiff-appellant is to retain physical
possession of the thing allegedly sold.
In fact, plaintiff-appellant retained possession of the property sold as if they were still the absolute
owners. There was no provision for maintenance or expenses, much less for payment of rent.
Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the property sold. It is well-
known that payment of taxes accompanied by actual possession of the land covered by the tax declaration,
constitute evidence of great weight that a person under whose name the real taxes were declared has a claim
of right over the land.
It is well-settled that the presence of even one of the circumstances in Article 1602 of the New Civil Code is
sufficient to declare a contract of sale with right to repurchase an equitable mortgage.
Considering that plaintiff-appellant, as vendor, was paid a price which is unusually inadequate, has retained
possession of the subject property and has continued paying the realty taxes over the subject property,
(circumstances mentioned in par. (1) (2) and (5) of Article 1602 of the New Civil Code), it must be conclusively
presumed that the transaction the parties actually entered into is an equitable mortgage, not a sale with right
to repurchase. The factors cited are in support to the finding that the Deed of Sale/Memorandum of Agreement
with right to repurchase is in actuality an equitable mortgage.
Moreover, it is undisputed that the deed of sale with right of repurchase was executed by reason of the loan
extended by defendant-appellee to plaintiff-appellant. The amount of loan being the same with the amount of
the purchase price.
....
Since the real intention of the party is to secure the payment of debt, now deemed to be repurchase price: the
transaction shall then be considered to be an equitable mortgage.
Being a mortgage, the transaction entered into by the parties is in the nature of a pactum commissorium which
is clearly prohibited by Article 2088 of the New Civil Code. Article 2088 of the New Civil Code reads:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should
be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of
principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of
the thing pledged and mortgaged in the event of non-payment of the principal obligation within the stipulated
period.
In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiff-appellant secured by a
mortgage on the property of plaintiff-appellant. The loan was payable within ninety (90) days, the period within
which plaintiff-appellant can repurchase the property. Plaintiff-appellant will pay P230,000.00 and not
P200,000.00, the P30,000.00 excess is the interest for the loan extended. Failure of plaintiff-appellee to pay the
P230,000,00 within the ninety (90) days period, the property shall automatically belong to defendant-appellee
by virtue of the deed of sale executed.
Clearly, the agreement entered into by the parties is in the nature of pactum commissorium. Therefore, the
deed of sale should be declared void as we hereby so declare to be invalid, for being violative of law.
....
WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET ASIDE. The questioned
Deed of Sale and the cancellation of the TCT No. 195101 issued in favor of plaintiff-appellant and the issuance
of TCT No. 267073 issued in favor of defendant-appellee pursuant to the questioned Deed of Sale is hereby
declared VOID and is hereby ANNULLED.Transfer Certificate of Title No. 195101 of the Registry of Marikina is
hereby ordered REINSTATED. The loan in the amount of P230,000.00 shall be paid within ninety (90) days from
the finality of this decision. In case of failure to pay the amount of P230,000.00 from the period therein stated,
the property shall be sold at public auction to satisfy the mortgage debt and costs and if there is an excess, the
same is to be given to the owner.
Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila & Co., against which this
case should have been brought; (2) the judgment in the ejectment case is a bar to the filing of the complaint for
declaration of nullity of a deed of sale in this case; and (3) the contract between A.C. Aguila & Sons, Co. and
private respondent is a pacto de retro sale and not an equitable mortgage as held by the appellate court.
The petition is meritorious.
Rule 3, 2 of the Rules of Court of 1964, under which the complaint in this case was filed, provided that every
action must be prosecuted and defended in the name of the real party in interest. A real party in interest is one
who would be benefited or injured by the judgment, or who is entitled to the avails of the suit.[7] This ruling is
now embodied in Rule 3, 2 of the 1997 Revised Rules of Civil Procedure. Any decision rendered against a person
who is not a real party in interest in the case cannot be executed.[8] Hence, a complaint filed against such a person
should be dismissed for failure to state a cause of action.[9]
Under Art. 1768 of the Civil Code, a partnership has a juridical personality separate and distinct from that of
each of the partners. The partners cannot be held liable for the obligations of the partnership unless it is shown
that the legal fiction of a different juridical personality is being used for fraudulent, unfair, or illegal purposes.[10] In
this case, private respondent has not shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is being
used for fraudulent, unfair, or illegal purposes. Moreover, the title to the subject property is in the name of A.C.
Aguila & Sons, Co. and the Memorandum of Agreement was executed between private respondent, with the
consent of her late husband, and A. C. Aguila & Sons, Co., represented by petitioner. Hence, it is the partnership,
not its officers or agents, which should be impleaded in any litigation involving property registered in its name. A
violation of this rule will result in the dismissal of the complaint.[11] We cannot understand why both the Regional
Trial Court and the Court of Appeals sidestepped this issue when it was squarely raised before them by petitioner.
Our conclusion that petitioner is not the real party in interest against whom this action should be prosecuted
makes it unnecessary to discuss the other issues raised by him in this appeal.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the complaint against petitioner
is DISMISSED.
SO ORDERED.
LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners, vs. LAMBERTO T. CHUA, respondent.
DECISION
GONZAGA-REYES, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the Decision[1] of the
Court of Appeals dated January 31, 2000 in the case entitled Lamberto T. Chua vs.
Lilibeth Sunga Chan and Cecilia Sunga and of the Resolution dated May 23, 2000 denying the motion for
reconsideration of herein petitioners Lilibeth Sunga Chan and Cecilia Sunga (hereafter collectively referred to as
petitioners).
The pertinent facts of this case are as follows:
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth Sunga Chan
(hereafter petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia), daughter and wife, respectively of
the deceased Jacinto L. Sunga (hereafter Jacinto), for Winding Up of Partnership Affairs, Accounting, Appraisal
and Recovery of Shares and Damages with Writ of Preliminary Attachment with the Regional Trial Court, Branch
11, Sindangan, Zamboanga del Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the distribution of
Shellane Liquefied Petroleum Gas (LPG) in Manila. For business convenience, respondent and Jacinto allegedly
agreed to register the business name of their partnership, SHELLITE GAS APPLIANCE CENTER (hereafter Shellite),
under the name of Jacinto as a sole proprietorship. Respondent allegedly delivered his initial capital contribution
of P100,000.00 to Jacinto while the latter in turn produced P100,000.00 as his counterpart contribution, with the
intention that the profits would be equally divided between them. The partnership allegedly had Jacinto as
manager, assisted by Josephine Sy (hereafter Josephine), a sister of the wife of respondent, Erlinda Sy. As
compensation, Jacinto would receive a managers fee or remuneration of 10% of the gross profit and Josephine
would receive 10% of the net profits, in addition to her wages and other remuneration from the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation went quite
well and was profitable. Respondent claimed that he could attest to the success of their business because of the
volume of orders and deliveries of filled Shellane cylinder tanks supplied by Pilipinas Shell Petroleum
Corporation. While Jacinto furnished respondent with the merchandise inventories, balance sheets and net worth
of Shellite from 1977 to 1989, respondent however suspected that the amount indicated in these documents
were understated and undervalued by Jacinto and Josephine for their own selfish reasons and for tax avoidance.
Upon Jacintos death in the later part of 1989, his surviving wife, petitioner Cecilia and particularly his
daughter, petitioner Lilibeth, took over the operations, control, custody, disposition and management of Shellite
without respondents consent.
Despite respondents repeated demands upon petitioners for accounting, inventory, appraisal, winding up
and restitution of his net shares in the partnership, petitioners failed to comply.Petitioner Lilibeth allegedly
continued the operations of Shellite, converting to her own use and advantage its properties.
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out of alibis and reasons to evade
respondents demands, she disbursed out of the partnership funds the amount of P200,000.00 and partially paid
the same to respondent. Petitioner Lilibeth allegedly informed respondent that the P200,000.00 represented
partial payment of the latters share in the partnership, with a promise that the former would make the complete
inventory and winding up of the properties of the business establishment. Despite such commitment, petitioners
allegedly failed to comply with their duty to account, and continued to benefit from the assets and income of
Shellite to the damage and prejudice of respondent.
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities and Exchange
Commission (SEC) in Manila, not the Regional Trial Court in Zambaonga del Norte had jurisdiction over the
action. Respondent opposed the motion to dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in form and substance denied the motion
to dismiss.
On January 30, 1993, petitioners filed their Answer with Compulsory Counterclaims, contending that they
are not liable for partnership shares, unreceived income/profits, interests, damages and attorneys fees, that
respondent does not have a cause of action against them, and that the trial court has no jurisdiction over the
nature of the action, the SEC being the agency that has original and exclusive jurisdiction over the case. As
counterclaim, petitioner sought attorneys fees and expenses of litigation.
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the claim for
winding up of partnership affairs, accounting and recovery of shares in partnership affairs, accounting and
recovery of shares in partnership assets /properties should be dismissed and prosecuted against the estate of
deceased Jacinto in a probate or intestate proceeding.
On August 16, 1993, the trial court denied the second motion to dismiss for lack of merit.
 On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and Mandamus with the
Court of Appeals docketed as CA-G.R. SP No. 32499 questioning the denial of the motion to dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of merit.
On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner, as petitioners
failed to show that a reversible error was committed by the appellate court."[2]
On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was remanded to the
trial court on April 26, 1995.
On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of the case
on January 17, 1996. Respondent presented his evidence while petitioners were considered to have waived their
right to present evidence for their failure to attend the scheduled date for reception of evidence despite notice.
On October 7, 1997, the trial court rendered its Decision ruling for respondent. The dispositive portion of the
Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as follows:
(1) DIRECTING them to render an accounting in acceptable form under accounting procedures and standards of
the properties, assets, income and profits of the Shellite Gas Appliance Center since the time of death of Jacinto
L. Sunga, from whom they continued the business operations including all businesses derived from the Shellite
Gas Appliance Center; submit an inventory, and appraisal of all these properties, assets, income, profits, etc. to
the Court and to plaintiff for approval or disapproval;
(2) ORDERING them to return and restitute to the partnership any and all properties, assets, income and profits
they misapplied and converted to their own use and advantage that legally pertain to the plaintiff and account
for the properties mentioned in pars. A and B on pages 4-5 of this petition as basis;
(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the plaintiff in the partnership of
the listed properties, assets and good will (sic) in schedules A, B and C, on pages 4-5 of the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the partnership from
1988 to may 30, 1992, when the plaintiff learned of the closure of the store the sum of P35,000.00 per month,
with legal rate of interest until fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities pursuant to
law, after delivering to the plaintiff all the interest, shares, participation and equity in the partnership, or the
value thereof in money or moneys worth, if the properties are not physically divisible;
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and hold them liable
to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorneys (sic) and P25,00.00 as litigation
expenses.
NO special pronouncements as to COSTS.
SO ORDERED.[3]
On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case to the Court
of Appeals.
On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the Decision
reads:
WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all respects.[4]
On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner.
Hence, this petition wherein petitioner relies upon the following grounds:
1. The Court of Appeals erred in making a legal conclusion that there existed a partnership between
respondent Lamberto T. Chua and the late Jacinto L. Sunga upon the latters invitation and offer and
that upon his death the partnership assets and business were taken over by petitioners.
2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did not apply
in the instant case.
3. The Court of Appeals erred in making the legal conclusion that there was competent and credible
evidence to warrant the finding of a partnership, and assuming arguendo that indeed there was a
partnership, the finding of highly exaggerated amounts or values in the partnership assets and
profits.[5]
Petitioners question the correctness of the finding of the trial court and the Court of Appeals that a
partnership existed between respondent and Jacinto from 1977 until Jacintos death. In the absence of any written
document to show such partnership between respondent and Jacinto, petitioners argue that these courts were
proscribed from hearing the testimonies of respondent and his witness, Josephine, to prove the alleged
partnership three years after Jacintos death. To support this argument, petitioners invoke the Dead Mans Statute
or Survivorship Rule under Section 23, Rule 130 of the Rules of Court that provides:
SEC. 23. Disqualification by reason of death or insanity of adverse party.-- Parties or assignors of parties to a
case, or persons in whose behalf a case is prosecuted, against an executor or administrator or other
representative of a deceased person, or against a person of unsound mind, upon a claim or demand against the
estate of such deceased person, or against such person of unsound mind, cannot testify as to any matter of fact
occurring before the death of such deceased person or before such person became of unsound mind.
Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego, Josephine, should
not have been admitted to prove certain claims against a deceased person (Jacinto), now represented by
petitioners.
We are not persuaded.
A partnership may be constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary.[6] Hence, based on the intention of the
parties, as gathered from the facts and ascertained from their language and conduct, a verbal contract of
partnership may arise.[7] The essential points that must be proven to show that a partnership was agreed upon
are (1) mutual contribution to a common stock, and (2) a joint interest in the profits.[8] Understandably so, in view
of the absence of a written contract of partnership between respondent and Jacinto, respondent resorted to the
introduction of documentary and testimonial evidence to prove said partnership. The crucial issue to settle then
is whether or not the Dead Mans Statute applies to this case so as to render inadmissible respondents testimony
and that of his witness, Josephine.
The Dead Mans Statute provides that if one party to the alleged transaction is precluded from testifying by
death, insanity, or other mental disabilities, the surviving party is not entitled to the undue advantage of giving
his own uncontradicted and unexplained account of the transaction.[9] But before this rule can be successfully
invoked to bar the introduction of testimonial evidence, it is necessary that:
1. The witness is a party or assignor of a party to a case or persons in whose behalf a case is prosecuted.
2. The action is against an executor or administrator or other representative of a deceased person or a
person of unsound mind;
3. The subject-matter of the action is a claim or demand against the estate of such deceased person or
against person of unsound mind;
4. His testimony refers to any matter of fact which occurred before the death of such deceased person
or before such person became of unsound mind.[10]
Two reasons forestall the application of the Dead Mans Statute to this case.
First, petitioners filed a compulsory counterclaim[11] against respondent in their answer before the trial court,
and with the filing of their counterclaim, petitioners themselves effectively removed this case from the ambit of
the Dead Mans Statute.[12] Well entrenched is the rule that when it is the executor or administrator or
representatives of the estate that sets up the counterclaim, the plaintiff, herein respondent, may testify to
occurrences before the death of the deceased to defeat the counterclaim.[13] Moreover, as defendant in the
counterclaim, respondent is not disqualified from testifying as to matters of fact occurring before the death of
the deceased, said action not having been brought against but by the estate or representatives of the
deceased.[14]
Second, the testimony of Josephine is not covered by the Dead Mans Statute for the simple reason that she
is not a party or assignor of a party to a case or persons in whose behalf a case is prosecuted. Records show that
respondent offered the testimony of Josephine to establish the existence of the partnership between respondent
and Jacinto. Petitioners insistence that Josephine is the alter ego of respondent does not make her an assignor
because the term assignor of a party means assignor of a cause of action which has arisen, and not the assignor
of a right assigned before any cause of action has arisen.[15] Plainly then, Josephine is merely a witness of
respondent, the latter being the party plaintiff.
We are not convinced by petitioners allegation that Josephines testimony lacks probative value because she
was allegedly coerced by respondent, her brother-in-law, to testify in his favor. Josephine merely declared in
court that she was requested by respondent to testify and that if she were not requested to do so she would not
have testified. We fail to see how we can conclude from this candid admission that Josephines testimony is
involuntary when she did not in any way categorically say that she was forced to be a witness of respondent. Also,
the fact that Josephine is the sister of the wife of respondent does not diminish the value of her testimony since
relationship per se, without more, does not affect the credibility of witnesses.[16]
Petitioners reliance alone on the Dead Mans Statute to defeat respondents claim cannot prevail over the
factual findings of the trial court and the Court of Appeals that a partnership was established between respondent
and Jacinto. Based not only on the testimonial evidence, but the documentary evidence as well, the trial court
and the Court of Appeals considered the evidence for respondent as sufficient to prove the formation of a
partnership, albeit an informal one.
Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial
precedents, a factual matter like the finding of the existence of a partnership between respondent and Jacinto
cannot be inquired into by this Court on review.[17] This Court can no longer be tasked to go over the proofs
presented by the parties and analyze, assess and weigh them to ascertain if the trial court and the appellate court
were correct in according superior credit to this or that piece of evidence of one party or the other.[18] It must be
also pointed out that petitioners failed to attend the presentation of evidence of respondent. Petitioners cannot
now turn to this Court to question the admissibility and authenticity of the documentary evidence of respondent
when petitioners failed to object to the admissibility of the evidence at the time that such evidence was
offered.[19]
With regard to petitioners insistence that laches and/or prescription should have extinguished respondents
claim, we agree with the trial court and the Court of Appeals that the action for accounting filed by respondent
three (3) years after Jacintos death was well within the prescribed period. The Civil Code provides that an action
to enforce an oral contract prescribes in six (6) years[20] while the right to demand an accounting for a partners
interest as against the person continuing the business accrues at the date of dissolution, in the absence of any
contrary agreement.[21] Considering that the death of a partner results in the dissolution of the partnership[22], in
this case, it was after Jacintos death that respondent as the surviving partner had the right to an account of his
interest as against petitioners. It bears stressing that while Jacintos death dissolved the partnership, the
dissolution did not immediately terminate the partnership. The Civil Code[23]expressly provides that upon
dissolution, the partnership continues and its legal personality is retained until the complete winding up of its
business, culminating in its termination.[24]
In a desperate bid to cast doubt on the validity of the oral partnership between respondent and Jacinto,
petitioners maintain that said partnership that had an initial capital of P200,000.00 should have been registered
with the Securities and Exchange Commission (SEC) since registration is mandated by the Civil Code. True, Article
1772 of the Civil Code requires that partnerships with a capital of P3,000.00 or more must register with the SEC,
however, this registration requirement is not mandatory. Article 1768 of the Civil Code[25] explicitly provides that
the partnership retains its juridical personality even if it fails to register. The failure to register the contract of
partnership does not invalidate the same as among the partners, so long as the contract has the essential
requisites, because the main purpose of registration is to give notice to third parties, and it can be assumed that
the members themselves knew of the contents of their contract.[26] In the case at bar, non-compliance with this
directory provision of the law will not invalidate the partnership considering that the totality of the evidence
proves that respondent and Jacinto indeed forged the partnership in question.
WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is AFFIRMED.
SO ORDERED.
G.R. No. 206147
MICHAEL C. GUY, Petitioner,
vs.
ATTY. GLENN C. GACOTT, Respondent.
DECISION
MENDOZA, J.:
Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court filed by petitioner
Michael C. Guy (Guy), assailing the June 25, 2012 Decision1 and the March 5, 2013 Resolution2 of the Court of
Appeals (CA) in CA-G.R. CV No. 94816, which affirmed the June 28, 20093 and February 19, 20104 Orders of the
Regional Trial Court, Branch 52, Puerto Princesa City, Palawan (RTC), in Civil Case No. 3108, a case for damages.
The assailed RTC orders denied Guy's Motion to Lift Attachment Upon Personalty5 on the ground that he was
not a judgment debtor.
The Facts
It appears from the records that on March 3, 1997, Atty. Glenn Gacott (Gacott) from Palawan purchased two (2)
brand new transreceivers from Quantech Systems Corporation (QSC) in Manila through its employee Rey
Medestomas (Medestomas), amounting to a total of P18,000.00. On May 10, 1997, due to major defects,
Gacott personally returned the transreceivers to QSC and requested that they be replaced. Medestomas
received the returned transreceivers and promised to send him the replacement units within two (2) weeks
from May 10, 1997.
Time passed and Gacott did not receive the replacement units as promised. QSC informed him that there were
no available units and that it could not refund the purchased price. Despite several demands, both oral and
written, Gacott was never given a replacement or a refund. The demands caused Gacott to incur expenses in
the total amount of P40,936.44. Thus, Gacott filed a complaint for damages. Summons was served upon QSC
and Medestomas, afterwhich they filed their Answer, verified by Medestomas himself and a certain Elton
Ong (Ong). QSC and Medestomas did not present any evidence during the trial.6
In a Decision,7 dated March 16, 2007, the RTC found that the two (2) transreceivers were defective and that
QSC and Medestomas failed to replace the same or return Gacott's money. The dispositive portion of the
decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants to jointly and
severally pay plaintiff the following:
1. Purchase price plus 6%
per annum from March 3,
1997 up to and until fully P
paid ------------ 18,000.00
2. Actual Damages ------------
40,000.00
-----------------------
3. Moral Damages ------------
75,000.00
-----------------------
4. Corrective Damages -------
100,000.00
------------------------
5. Attorney’s Fees -------------
60,000.00
-----------------------
6. Costs.
SO ORDERED.
The decision became final as QSC and Medestomas did not interpose an appeal. Gacott then secured a Writ of
Execution,8 dated September 26, 2007.
During the execution stage, Gacott learned that QSC was not a corporation, but was in fact a general
partnership registered with the Securities and Exchange Commission (SEC). In the articles of partnership,9 Guy
was appointed as General Manager of QSC.
To execute the judgment, Branch Sheriff Ronnie L. Felizarte (Sheriff Felizarte) went to the main office of the
Department of Transportation and Communications, Land Transportation Office (DOTC-LTO), Quezon City, and
verified whether Medestomas, QSC and Guy had personal properties registered therein.10 Upon learning that
Guy had vehicles registered in his name, Gacott instructed the sheriff to proceed with the attachment of one of
the motor vehicles of Guy based on the certification issued by the DOTC-LTO.11
On March 3, 2009, Sheriff Felizarte attached Guy’s vehicle by virtue of the Notice of Attachment/Levy upon
Personalty12 served upon the record custodian of the DOTC-LTO of Mandaluyong City. A similar notice was
served to Guy through his housemaid at his residence.
Thereafter, Guy filed his Motion to Lift Attachment Upon Personalty, arguing that he was not a judgment
debtor and, therefore, his vehicle could not be attached.13 Gacott filed an opposition to the motion.
The RTC Order
On June 28, 2009, the RTC issued an order denying Guy’s motion. It explained that considering QSC was not a
corporation, but a registered partnership, Guy should be treated as a general partner pursuant to Section 21 of
the Corporation Code, and he may be held jointly and severally liable with QSC and Medestomas. The trial court
wrote:
All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as a result thereof x x x. Where, by any
wrongful act or omission of any partner acting in the ordinary course of the business of the partnership x x x,
loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the
partnership is liable therefore to the same extent as the partner so acting or omitting to act. All partners are
liable solidarily with the partnership for everything chargeable to the partnership under Article 1822 and
1823.14
Accordingly, it disposed:
WHEREFORE, with the ample discussion of the matter, this Court finds and so holds that the property of movant
Michael Guy may be validly attached in satisfaction of the liabilities adjudged by this Court against Quantech
Co., the latter being an ostensible Corporation and the movant being considered by this Court as a general
partner therein in accordance with the order of this court impressed in its decision to this case imposing joint
and several liability to the defendants. The Motion to Lift Attachment Upon Personalty submitted by the
movant is therefore DENIED for lack of merit.
SO ORDERED.15
Not satisfied, Guy moved for reconsideration of the denial of his motion. He argued that he was neither
impleaded as a defendant nor validly served with summons and, thus, the trial court did not acquire jurisdiction
over his person; that under Article 1824 of the Civil Code, the partners were only solidarily liable for the
partnership liability under exceptional circumstances; and that in order for a partner to be liable for the debts of
the partnership, it must be shown that all partnership assets had first been exhausted.16
On February 19, 2010, the RTC issued an order17denying his motion.
The denial prompted Guy to seek relief before the CA.
The CA Ruling
On June 25, 2012, the CA rendered the assailed decision dismissing Guy’s appeal for the same reasons given by
the trial court. In addition thereto, the appellate court stated:
We hold that Michael Guy, being listed as a general partner of QSC during that time, cannot feign ignorance of
the existence of the court summons. The verified Answer filed by one of the partners, Elton Ong, binds him as a
partner because the Rules of Court does not require that summons be served on all the partners. It is sufficient
that service be made on the "president, managing partner, general manager, corporate secretary, treasurer or
in-house counsel." To Our mind, it is immaterial whether the summons to QSC was served on the theory that it
was a corporation. What is important is that the summons was served on QSC’s authorized officer xxx.18
The CA stressed that Guy, being a partner in QSC, was bound by the summons served upon QSC based on
Article 1821 of the Civil Code. The CA further opined that the law did not require a partner to be actually
involved in a suit in order for him to be made liable. He remained “solidarily liable whether he participated or
not, whether he ratified it or not, or whether he had knowledge of the act or omission.”19
Aggrieved, Guy filed a motion for reconsideration but it was denied by the CA in its assailed resolution, dated
March 5, 2013.
Hence, the present petition raising the following
ISSUE
THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT PETITIONER GUY IS
SOLIDARILY LIABLE WITH THE PARTNERSHIP FOR DAMAGES ARISING FROM THE BREACH OF THE CONTRACT OF
SALE WITH RESPONDENT GACOTT.20
Guy argues that he is not solidarily liable with the partnership because the solidary liability of the partners
under Articles 1822, 1823 and 1824 of the Civil Code only applies when it stemmed from the act of a partner. In
this case, the alleged lapses were not attributable to any of the partners. Guy further invokes Article 1816 of the
Civil Code which states that the liability of the partners to the partnership is merely joint and subsidiary in
nature.
In his Comment,21 Gacott countered, among others, that because Guy was a general and managing partner of
QSC, he could not feign ignorance of the transactions undertaken by QSC. Gacott insisted that notice to one
partner must be considered as notice to the whole partnership, which included the pendency of the civil suit
against it.
In his Reply,22 Guy contended that jurisdiction over the person of the partnership was not acquired because the
summons was never served upon it or through any of its authorized office. He also reiterated that a partner’s
liability was joint and subsidiary, and not solidary.
The Court’s Ruling
The petition is meritorious.
The service of summons was flawed; voluntary appearance cured the defect
Jurisdiction over the person, or jurisdiction in personam – the power of the court to render a personal judgment
or to subject the parties in a particular action to the judgment and other rulings rendered in the action – is an
element of due process that is essential in all actions, civil as well as criminal, except in actions in rem or quasi in
rem.23Jurisdiction over the person of the plaintiff is acquired by the mere filing of the complaint in court. As the
initiating party, the plaintiff in a civil action voluntarily submits himself to the jurisdiction of the court. As to the
defendant, the court acquires jurisdiction over his person either by the proper service of the summons, or by
his voluntary appearance in the action.24
Under Section 11, Rule 14 of the 1997 Revised Rules of Civil Procedure, when the defendant is a corporation,
partnership or association organized under the laws of the Philippines with a juridical personality, the service of
summons may be made on the president, managing partner, general manager, corporate secretary, treasurer,
or in-house counsel. Jurisprudence is replete with pronouncements that such provision provides an exclusive
enumeration of the persons authorized to receive summons for juridical entities.25
The records of this case reveal that QSC was never shown to have been served with the summons through any
of the enumerated authorized persons to receive such, namely: president, managing partner, general manager,
corporate secretary, treasurer or in-house counsel. Service of summons upon persons other than those officers
enumerated in Section 11 is invalid. Even substantial compliance is not sufficient service of summons.26 The CA
was obviously mistaken when it opined that it was immaterial whether the summons to QSC was served on the
theory that it was a corporation.27
Nevertheless, while proper service of summons is necessary to vest the court jurisdiction over the defendant,
the same is merely procedural in nature and the lack of or defect in the service of summons may be cured by
the defendant’s subsequent voluntary submission to the court’s jurisdiction through his filing a responsive
pleading such as an answer. In this case, it is not disputed that QSC filed its Answer despite the defective
summons. Thus, jurisdiction over its person was acquired through voluntary appearance.
A partner must be separately and distinctly impleaded before he can be bound by a judgment
The next question posed is whether the trial court’s jurisdiction over QSC extended to the person of Guy insofar
as holding him solidarily liable with the partnership. After a thorough study of the relevant laws and
jurisprudence, the Court answers in the negative.
Although a partnership is based on delectus personae or mutual agency, whereby any partner can generally
represent the partnership in its business affairs, it is non sequitur that a suit against the partnership is
necessarily a suit impleading each and every partner. It must be remembered that a partnership is a juridical
entity that has a distinct and separate personality from the persons composing it.28
In relation to the rules of civil procedure, it is elementary that a judgment of a court is conclusive and binding
only upon the parties and their successors-in-interest after the commencement of the action in court.29 A
decision rendered on a complaint in a civil action or proceeding does not bind or prejudice a person not
impleaded therein, for no person shall be adversely affected by the outcome of a civil action or proceeding in
which he is not a party.30The principle that a person cannot be prejudiced by a ruling rendered in an action or
proceeding in which he has not been made a party conforms to the constitutional guarantee of due process of
law.31
In Muñoz v. Yabut, Jr.,32 the Court declared that a person not impleaded and given the opportunity to take part
in the proceedings was not bound by the decision declaring as null and void the title from which his title to the
property had been derived. The effect of a judgment could not be extended to non-parties by simply issuing an
alias writ of execution against them, for no man should be prejudiced by any proceeding to which he was a
stranger.
In Aguila v. Court of Appeals,33 the complainant had a cause of action against the partnership. Nevertheless, it
was the partners themselves that were impleaded in the complaint. The Court dismissed the complaint and
held that it was the partnership, not its partners, officers or agents, which should be impleaded for a cause of
action against the partnership itself. The Court added that the partners could not be held liable for the
obligations of the partnership unless it was shown that the legal fiction of a different juridical personality was
being used for fraudulent, unfair, or illegal purposes.34
Here, Guy was never made a party to the case. He did not have any participation in the entire proceeding until
his vehicle was levied upon and he suddenly became QSC’s “co-defendant debtor” during the judgment
execution stage. It is a basic principle of law that money judgments are enforceable only against the property
incontrovertibly belonging to the judgment debtor.35 Indeed, the power of the court in executing judgments
extends only to properties unquestionably belonging to the judgment debtor alone. An execution can be issued
only against a party and not against one who did not have his day in court. The duty of the sheriff is to levy the
property of the judgment debtor not that of a third person. For, as the saying goes, one man's goods shall not
be sold for another man's debts.36
In the spirit of fair play, it is a better rule that a partner must first be impleaded before he could be prejudiced
by the judgment against the partnership. As will be discussed later, a partner may raise several defenses during
the trial to avoid or mitigate his obligation to the partnership liability. Necessarily, before he could present
evidence during the trial, he must first be impleaded and informed of the case against him. It would be the
height of injustice to rob an innocent partner of his hard-earned personal belongings without giving him an
opportunity to be heard. Without any showing that Guy himself acted maliciously on behalf of the company,
causing damage or injury to the complainant, then he and his personal properties cannot be made directly and
solely accountable for the liability of QSC, the judgment debtor, because he was not a party to the case.
Further, Article 1821 of the Civil Code does not state that there is no need to implead a partner in order to be
bound by the partnership liability. It provides that:
Notice to any partner of any matter relating to partnership affairs, and the knowledge of the partner acting in the
particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner
who reasonably could and should have communicated it to the acting partner, operate as notice to or
knowledge of the partnership, except in the case of fraud on the partnership, committed by or with the consent
of that partner.
[Emphases and Underscoring Supplied]
A careful reading of the provision shows that notice to any partner, under certain circumstances, operates as
notice to or knowledge to the partnership only. Evidently, it does not provide for the reverse situation, or that
notice to the partnership is notice to the partners. Unless there is an unequivocal law which states that a
partner is automatically charged in a complaint against the partnership, the constitutional right to due process
takes precedence and a partner must first be impleaded before he can be considered as a judgment debtor. To
rule otherwise would be a dangerous precedent, harping in favor of the deprivation of property without ample
notice and hearing, which the Court certainly cannot countenance.
Partners’ liability is subsidiary and generally joint; immediate levy upon the property of a partner cannot be
made
Granting that Guy was properly impleaded in the complaint, the execution of judgment would be improper.
Article 1816 of the Civil Code governs the liability of the partners to third persons, which states that:
Article 1816. All partners, including industrial ones, shall be liable pro rata with all their property and after all the
partnership assets have been exhausted, for the contracts which may be entered into in the name and for the
account of the partnership, under its signature and by a person authorized to act for the partnership. However,
any partner may enter into a separate obligation to perform a partnership contract.
[Emphasis Supplied]
This provision clearly states that, first, the partners’ obligation with respect to the partnership liabilities is
subsidiary in nature. It provides that the partners shall only be liable with their property after all the partnership
assets have been exhausted. To say that one’s liability is subsidiary means that it merely becomes secondary
and only arises if the one primarily liable fails to sufficiently satisfy the obligation. Resort to the properties of a
partner may be made only after efforts in exhausting partnership assets have failed or that such partnership
assets are insufficient to cover the entire obligation. The subsidiary nature of the partners’ liability with the
partnership is one of the valid defenses against a premature execution of judgment directed to a partner.
In this case, had he been properly impleaded, Guy’s liability would only arise after the properties of QSC would
have been exhausted. The records, however, miserably failed to show that the partnership’s properties were
exhausted. The report37 of the sheriff showed that the latter went to the main office of the DOTC-LTO in
Quezon City and verified whether Medestomas, QSC and Guy had personal properties registered therein.
Gacott then instructed the sheriff to proceed with the attachment of one of the motor vehicles of Guy.38 The
sheriff then served the Notice of Attachment/Levy upon Personalty to the record custodian of the DOTC-LTO of
Mandaluyong City. A similar notice was served to Guy through his housemaid at his residence.
Clearly, no genuine efforts were made to locate the properties of QSC that could have been attached to satisfy
the judgment − contrary to the clear mandate of Article 1816. Being subsidiarily liable, Guy could only be held
personally liable if properly impleaded and after all partnership assets had been exhausted.
Second, Article 1816 provides that the partners’ obligation to third persons with respect to the partnership
liability is pro rata or joint.1âwphi1 Liability is joint when a debtor is liable only for the payment of only a
proportionate part of the debt. In contrast, a solidary liability makes a debtor liable for the payment of the
entire debt. In the same vein, Article 1207 does not presume solidary liability unless: 1) the obligation
expressly so states; or 2) the law or nature requires solidarity. With regard to partnerships, ordinarily, the
liability of the partners is not solidary.39 The joint liability of the partners is a defense that can be raised by a
partner impleaded in a complaint against the partnership.
In other words, only in exceptional circumstances shall the partners’ liability be solidary in nature. Articles 1822,
1823 and 1824 of the Civil Code provide for these exceptional conditions, to wit:
Article 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of the
business of the partnership or with the authority of his co-partners, loss or injury is caused to any person, not
being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same
extent as the partner so acting or omitting to act.
Article 1823. The partnership is bound to make good the loss:
(1) Where one partner acting within the scope of his apparent authority receives money or property of a
third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property of a third person and
the money or property so received is misapplied by any partner while it is in the custody of the
partnership.
Article 1824. All partners are liable solidarily with the partnership for everything chargeable to the
partnership under Articles 1822 and 1823.
[Emphases Supplied]
In essence, these provisions articulate that it is the act of a partner which caused loss or injury to a third person
that makes all other partners solidarily liable with the partnership because of the words "any wrongful act or
omission of any partner acting in the ordinary course of the business," "one partner acting within the scope of his
apparent authority" and "misapplied by any partner while it is in the custody of the partnership." The obligation
is solidary because the law protects the third person, who in good faith relied upon the authority of a partner,
whether such authority is real or apparent.40
In the case at bench, it was not shown that Guy or the other partners did a wrongful act or misapplied the
money or property he or the partnership received from Gacott. A third person who transacted with said
partnership can hold the partners solidarily liable for the whole obligation if the case of the third person falls
under Articles 1822 or 1823.41 Gacott’s claim stemmed from the alleged defective transreceivers he bought
from QSC, through the latter's employee, Medestomas. It was for a breach of warranty in a contractual
obligation entered into in the name and for the account of QSC, not due to the acts of any of the partners. For
said reason, it is the general rule under Article 1816 that governs the joint liability of such breach, and not the
exceptions under Articles 1822 to 1824. Thus, it was improper to hold Guy solidarily liable for the obligation of
the partnership.
Finally, Section 21 of the Corporation Code,42 as invoked by the RTC, cannot be applied to sustain Guy's liability.
The said provision states that a general partner shall be liable for all debts, liabilities and damages incurred by
an ostensible corporation. It must be read, however, in conjunction with Article 1816 of the Civil Code, which
governs the liabilities of partners against third persons. Accordingly, whether QSC was an alleged ostensible
corporation or a duly registered partnership, the liability of Guy, if any, would remain to be joint and subsidiary
because, as previously stated, all partners shall be liable pro rata with all their property and after all the
partnership assets have been exhausted for the contracts which may be entered into in the name and for the
account of the partnership.
WHEREFORE, the petition is GRANTED. The June 25, 2012 Decision and the March 5, 2013 Resolution of the
Court of Appeals in CA-G.R. CV No. 94816 are hereby REVERSED and SET ASIDE. Accordingly, the Regional Trial
Court, Branch 52, Puerto Princesa City, is ORDERED TO RELEASE Michael C. Guy's Suzuki Grand Vitara subject of
the Notice of Levy/ Attachment upon Personalty.
HEIRS OF TAN ENG KEE, petitioners, vs. COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its
President TAN ENG LAY, respondents.
DECISION
DE LEON, JR., J.:
In this petition for review on certiorari, petitioners pray for the reversal of the Decision[1] dated March 13,
1996 of the former Fifth Division[2] of the Court of Appeals in CA-G.R. CV No. 47937, the dispositive portion of
which states:
THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the complaint dismissed.
The facts are:
Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law spouse of the
decedent, joined by their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio, collectively known as herein
petitioners HEIRS OF TAN ENG KEE, filed suit against the decedents brother TAN ENG LAY on February 19,
1990.The complaint,[3] docketed as Civil Case No. 1983-R in the Regional Trial Court of Baguio City was for
accounting, liquidation and winding up of the alleged partnership formed after World War II between Tan Eng
Kee and Tan Eng Lay. On March 18, 1991, the petitioners filed an amended complaint[4] impleading private
respondent herein BENGUET LUMBER COMPANY, as represented by Tan Eng Lay. The amended complaint was
admitted by the trial court in its Order dated May 3, 1991.[5]
The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan Eng Lay,
pooling their resources and industry together, entered into a partnership engaged in the business of selling
lumber and hardware and construction supplies. They named their enterprise Benguet Lumber which they jointly
managed until Tan Eng Kees death. Petitioners herein averred that the business prospered due to the hard work
and thrift of the alleged partners. However, they claimed that in 1981, Tan Eng Lay and his children caused the
conversion of the partnership Benguet Lumber into a corporation called Benguet Lumber Company. The
incorporation was purportedly a ruse to deprive Tan Eng Kee and his heirs of their rightful participation in the
profits of the business. Petitioners prayed for accounting of the partnership assets, and the dissolution, winding
up and liquidation thereof, and the equal division of the net assets of Benguet Lumber.
After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment[6]on April 12, 1995, to wit:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
a) Declaring that Benguet Lumber is a joint adventure which is akin to a particular partnership;
b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or partners in a business
venture and/or particular partnership called Benguet Lumber and as such should share in the profits and/or
losses of the business venture or particular partnership;
c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet Lumber Co. Inc. and
as such the heirs or legal representatives of the deceased Tan Eng Kee have a legal right to share in said assets;
d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as partner in a
particular partnership have descended to the plaintiffs who are his legal heirs.
e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of Benguet Lumber
Company Inc. to render an accounting of all the assets of Benguet Lumber Company, Inc. so the plaintiffs know
their proper share in the business;
f) Ordering the appointment of a receiver to preserve and/or administer the assets of Benguet Lumber
Company, Inc. until such time that said corporation is finally liquidated are directed to submit the name of any
person they want to be appointed as receiver failing in which this Court will appoint the Branch Clerk of Court
or another one who is qualified to act as such.
g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in filing the instant case.
h) Dismissing the counter-claim of the defendant for lack of merit.
SO ORDERED.
Private respondent sought relief before the Court of Appeals which, on March 13, 1996, rendered the
assailed decision reversing the judgment of the trial court. Petitioners motion for reconsideration[7] was denied
by the Court of Appeals in a Resolution[8] dated October 11, 1996.
Hence, the present petition.
As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and Wilborn
Tan for the use of allegedly falsified documents in a judicial proceeding. Petitioners complained that Exhibits 4 to
4-U offered by the defendants before the trial court, consisting of payrolls indicating that Tan Eng Kee was a mere
employee of Benguet Lumber, were fake, based on the discrepancy in the signatures of Tan Eng Kee. They also
filed Criminal Cases Nos. 78857-78870 against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all
surnamed Tan, for alleged falsification of commercial documents by a private individual. On March 20, 1999, the
Municipal Trial Court of Baguio City, Branch 1, wherein the charges were filed, rendered judgment[9] dismissing
the cases for insufficiency of evidence.
 In their assignment of errors, petitioners claim that:
I
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP BETWEEN
THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS NO FIRM ACCOUNT; (B)
THERE WAS NO FIRM LETTERHEADS SUBMITTED AS EVIDENCE; (C) THERE WAS NO CERTIFICATE OF
PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO PROFITS AND LOSSES; AND (E) THERE WAS NO TIME
FIXED FOR THE DURATION OF THE PARTNERSHIP (PAGE 13, DECISION).
II
THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING TESTIMONY OF
RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A SOLE PROPRIETORSHIP AND THAT TAN ENG
KEE WAS ONLY AN EMPLOYEE THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING FACTS WHICH WERE
DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT SUPPORT THE EXISTENCE OF A PARTNERSHIP
JUST BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP DULY RECORDED BEFORE THE SECURITIES AND
EXCHANGE COMMISSION:
a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE BENGUET LUMBER
COMPOUND;
b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE EMPLOYEES OF BENGUET
LUMBER;
c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE EMPLOYEES THEREIN;
d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING THE PRICES OF STOCKS TO BE
SOLD TO THE PUBLIC; AND
e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS TO THE SUPPLIERS (PAGE
18, DECISION).
IV
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP JUST
BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO TAN AND VERONICA CHOI, TOGETHER WITH
THEIR WITNESS BEATRIZ TANDOC, ADMITTED THAT THEY DO NOT KNOW WHEN THE ESTABLISHMENT
KNOWN IN BAUGIO CITY AS BENGUET LUMBER WAS STARTED AS A PARTNERSHIP (PAGE 16-17, DECISION).
V
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP BETWEEN
THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE THE PRESENT CAPITAL OR ASSETS OF
BENGUET LUMBER IS DEFINITELY MORE THAN P3,000.00 AND AS SUCH THE EXECUTION OF A PUBLIC
INSTRUMENT CREATING A PARTNERSHIP SHOULD HAVE BEEN MADE AND NO SUCH PUBLIC INSTRUMENT
ESTABLISHED BY THE APPELLEES (PAGE 17, DECISION).
As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not be
disturbed on appeal if such are supported by the evidence.[10] Our jurisdiction, it must be emphasized, does not
include review of factual issues. Thus:
Filing of petition with Supreme Court.-A party desiring to appeal by certiorari from a judgment or final order or
resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever
authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The petition shall
raise only questions of law which must be distinctly set forth.[11] [italics supplied]
Admitted exceptions have been recognized, though, and when present, may compel us to analyze the
evidentiary basis on which the lower court rendered judgment.Review of factual issues is therefore warranted:
(1) when the factual findings of the Court of Appeals and the trial court are contradictory;
(2) when the findings are grounded entirely on speculation, surmises, or conjectures;
(3) when the inference made by the Court of Appeals from its findings of fact is manifestly mistaken, absurd, or
impossible;
(4) when there is grave abuse of discretion in the appreciation of facts;
(5) when the appellate court, in making its findings, goes beyond the issues of the case, and such findings are
contrary to the admissions of both appellant and appellee;
(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;
(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered, will justify a
different conclusion;
(8) when the findings of fact are themselves conflicting;
(9) when the findings of fact are conclusions without citation of the specific evidence on which they are based;
and
(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence but such
findings are contradicted by the evidence on record.[12]
In reversing the trial court, the Court of Appeals ruled, to wit:
We note that the Court a quo over extended the issue because while the plaintiffs mentioned only the
existence of a partnership, the Court in turn went beyond that by justifying the existence of a joint adventure.
When mention is made of a joint adventure, it would presuppose parity of standing between the parties, equal
proprietary interest and the exercise by the parties equally of the conduct of the business, thus:
xxx xxx xxx xxx
We have the admission that the father of the plaintiffs was not a partner of the Benguet Lumber before the
war. The appellees however argued that (Rollo, p. 104; Brief, p. 6) this is because during the war, the entire
stocks of the pre-war Benguet Lumber were confiscated if not burned by the Japanese. After the war, because
of the absence of capital to start a lumber and hardware business, Lay and Kee pooled the proceeds of their
individual businesses earned from buying and selling military supplies, so that the common fund would be
enough to form a partnership, both in the lumber and hardware business. That Lay and Kee actually established
the Benguet Lumber in Baguio City, was even testified to by witnesses. Because of the pooling of resources, the
post-war Benguet Lumber was eventually established. That the father of the plaintiffs and Lay were partners, is
obvious from the fact that: (1) they conducted the affairs of the business during Kees lifetime, jointly, (2) they
were the ones giving orders to the employees, (3) they were the ones preparing orders from the suppliers, (4)
their families stayed together at the Benguet Lumber compound, and (5) all their children were employed in the
business in different capacities.
xxx xxx xxx xxx
It is obvious that there was no partnership whatsoever. Except for a firm name, there was no firm account, no
firm letterheads submitted as evidence, no certificate of partnership, no agreement as to profits and losses, and
no time fixed for the duration of the partnership. There was even no attempt to submit an accounting
corresponding to the period after the war until Kees death in 1984.It had no business book, no written account
nor any memorandum for that matter and no license mentioning the existence of a partnership [citation
omitted].
Also, the exhibits support the establishment of only a proprietorship. The certification dated March 4, 1971,
Exhibit 2, mentioned co-defendant Lay as the only registered owner of the Benguet Lumber and Hardware. His
application for registration, effective 1954, in fact mentioned that his business started in 1945 until 1985
(thereafter, the incorporation). The deceased, Kee, on the other hand, was merely an employee of the Benguet
Lumber Company, on the basis of his SSS coverage effective 1958, Exhibit 3. In the Payrolls, Exhibits 4 to 4-U,
inclusive, for the years 1982 to 1983, Kee was similarly listed only as an employee; precisely, he was on the
payroll listing. In the Termination Notice, Exhibit 5, Lay was mentioned also as the proprietor.
xxx xxx xxx xxx
We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in any form, but when
an immovable is constituted, the execution of a public instrument becomes necessary. This is equally true if the
capitalization exceeds P3,000.00, in which case a public instrument is also necessary, and which is to be
recorded with the Securities and Exchange Commission. In this case at bar, we can easily assume that the
business establishment, which from the language of the appellees, prospered (pars. 5 & 9, Complaint),
definitely exceeded P3,000.00, in addition to the accumulation of real properties and to the fact that it is now a
compound. The execution of a public instrument, on the other hand, was never established by the appellees.
And then in 1981, the business was incorporated and the incorporators were only Lay and the members of his
family. There is no proof either that the capital assets of the partnership, assuming them to be in existence,
were maliciously assigned or transferred by Lay, supposedly to the corporation and since then have been
treated as a part of the latters capital assets, contrary to the allegations in pars. 6, 7 and 8 of the complaint.
These are not evidences supporting the existence of a partnership:
1) That Kee was living in a bunk house just across the lumber store, and then in a room in the bunk house in
Trinidad, but within the compound of the lumber establishment, as testified to by Tandoc; 2) that both Lay and
Kee were seated on a table and were commanding people as testified to by the son, Elpidio Tan; 3) that both
were supervising the laborers, as testified to by Victoria Choi; and 4) that Dionisio Peralta was supposedly being
told by Kee that the proceeds of the 80 pieces of the G.I. sheets were added to the business.
Partnership presupposes the following elements [citation omitted]: 1) a contract, either oral or
written. However, if it involves real property or where the capital is P3,000.00 or more, the execution of a
contract is necessary; 2) the capacity of the parties to execute the contract; 3) money property or industry
contribution; 4) community of funds and interest, mentioning equality of the partners or one having a
proportionate share in the benefits; and 5) intention to divide the profits, being the true test of the
partnership. The intention to join in the business venture for the purpose of obtaining profits thereafter to be
divided, must be established. We cannot see these elements from the testimonial evidence of the appellees.
As can be seen, the appellate court disputed and differed from the trial court which had adjudged that TAN
ENG KEE and TAN ENG LAY had allegedly entered into a joint adventure. In this connection, we have held that
whether a partnership exists is a factual matter; consequently, since the appeal is brought to us under Rule 45,
we cannot entertain inquiries relative to the correctness of the assessment of the evidence by the court a
quo.[13] Inasmuch as the Court of Appeals and the trial court had reached conflicting conclusions, perforce we
must examine the record to determine if the reversal was justified.
The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet Lumber. A
contract of partnership is defined by law as one where:
xxx two or more persons bind themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.[14]
Thus, in order to constitute a partnership, it must be established that (1) two or more persons bound themselves
to contribute money, property, or industry to a common fund, and (2) they intend to divide the profits among
themselves.[15] The agreement need not be formally reduced into writing, since statute allows the oral
constitution of a partnership, save in two instances: (1) when immovable property or real rights are
contributed,[16] and (2) when the partnership has a capital of three thousand pesos or more.[17] In both cases, a
public instrument is required.[18] An inventory to be signed by the parties and attached to the public instrument
is also indispensable to the validity of the partnership whenever immovable property is contributed to the
partnership.[19]
The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint adventure, which it
said is akin to a particular partnership.[20] A particular partnership is distinguished from a joint adventure, to wit:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal partnership,
with no firm name and no legal personality. In a joint account, the participating merchants can
transact business under their own name, and can be individually liable therefor.
(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the
business of pursuing to a successful termination may continue for a number of years; a partnership
generally relates to a continuing business of various transactions of a certain kind.[21]
A joint adventure presupposes generally a parity of standing between the joint co-ventures or partners, in
which each party has an equal proprietary interest in the capital or property contributed, and where each party
exercises equal rights in the conduct of the business.[22] Nonetheless, in Aurbach, et. al. v. Sanitary Wares
Manufacturing Corporation, et. al.,[23] we expressed the view that a joint adventure may be likened to a particular
partnership, thus:
The legal concept of a joint adventure is of common law origin. It has no precise legal definition, but it has been
generally understood to mean an organization formed for some temporary purpose. (Gates v. Megargel, 266
Fed. 811 [1920]) It is hardly distinguishable from the partnership, since their elements are similar-community of
interest in the business, sharing of profits and losses, and a mutual right of control. (Blackner v. McDermott,
176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P.2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288
P.2d. 12 289 P.2d. 242 [1955]). The main distinction cited by most opinions in common law jurisdiction is that
the partnership contemplates a general business with some degree of continuity, while the joint adventure is
formed for the execution of a single transaction, and is thus of a temporary nature. (Tufts v. Mann. 116 Cal.
App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed.
811 [1920]). This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would seem therefore that under Philippine law, a joint adventure is a
form of partnership and should thus be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that although a corporation cannot
enter into a partnership contract, it may however engage in a joint adventure with others. (At p. 12, Tuazon v.
Bolaos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and Selected Cases, Corporation
Code 1981).
Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of
partnership but there is none. The alleged partnership, though, was never formally organized. In addition,
petitioners point out that the New Civil Code was not yet in effect when the partnership was allegedly formed
sometime in 1945, although the contrary may well be argued that nothing prevented the parties from complying
with the provisions of the New Civil Code when it took effect on August 30, 1950. But all that is in the past. The
net effect, however, is that we are asked to determine whether a partnership existed based purely on
circumstantial evidence. A review of the record persuades us that the Court of Appeals correctly reversed the
decision of the trial court. The evidence presented by petitioners falls short of the quantum of proof required to
establish a partnership.
Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could have
expounded on the precise nature of the business relationship between them. In the absence of evidence, we
cannot accept as an established fact that Tan Eng Kee allegedly contributed his resources to a common fund for
the purpose of establishing a partnership. The testimonies to that effect of petitioners witnesses is directly
controverted by Tan Eng Lay. It should be noted that it is not with the number of witnesses wherein
preponderance lies;[24] the quality of their testimonies is to be considered. None of petitioners witnesses could
suitably account for the beginnings of Benguet Lumber Company, except perhaps for Dionisio Peralta whose
deceased wife was related to Matilde Abubo.[25] He stated that when he met Tan Eng Kee after the liberation, the
latter asked the former to accompany him to get 80 pieces of G.I. sheets supposedly owned by both
brothers.[26] Tan Eng Lay, however, denied knowledge of this meeting or of the conversation between Peralta and
his brother.[27] Tan Eng Lay consistently testified that he had his business and his brother had his, that it was only
later on that his said brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or co-possession
(specifically here, of the G.I. sheets) is not an indicium of the existence of a partnership.[28]
Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in
existence, Tan Eng Kee never asked for an accounting. The essence of a partnership is that the partners share in
the profits and losses.[29] Each has the right to demand an accounting as long as the partnership exists.[30] We
have allowed a scenario wherein [i]f excellent relations exist among the partners at the start of the business and
all the partners are more interested in seeing the firm grow rather than get immediate returns, a deferment of
sharing in the profits is perfectly plausible.[31] But in the situation in the case at bar, the deferment, if any, had
gone on too long to be plausible. A person is presumed to take ordinary care of his concerns.[32] As we explained
in another case:
In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second place, she did not
furnish any help or intervention in the management of the theatre. In the third place, it does not appear that
she has even demanded from defendant any accounting of the expenses and earnings of the business. Were she
really a partner, her first concern should have been to find out how the business was progressing, whether the
expenses were legitimate, whether the earnings were correct, etc. She was absolutely silent with respect to any
of the acts that a partner should have done; all that she did was to receive her share of P3,000.00 a month,
which cannot be interpreted in any manner than a payment for the use of the premises which she had leased
from the owners. Clearly, plaintiff had always acted in accordance with the original letter of defendant of June
17, 1945 (Exh. A), which shows that both parties considered this offer as the real contract between
them.[33] [italics supplied]
A demand for periodic accounting is evidence of a partnership.[34] During his lifetime, Tan Eng Kee appeared never
to have made any such demand for accounting from his brother, Tang Eng Lay.
This brings us to the matter of Exhibits 4 to 4-U for private respondents, consisting of payrolls purporting to
show that Tan Eng Kee was an ordinary employee of Benguet Lumber, as it was then called. The authenticity of
these documents was questioned by petitioners, to the extent that they filed criminal charges against Tan Eng
Lay and his wife and children. As aforesaid, the criminal cases were dismissed for insufficiency of
evidence. Exhibits 4 to 4-U in fact shows that Tan Eng Kee received sums as wages of an employee. In connection
therewith, Article 1769 of the Civil Code provides:
In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to
third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any property which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in
the business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by installment or otherwise;
(b) As wages of an employee or rent to a landlord;
(b) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a business or other property by installments or
otherwise.
In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an employee, not a
partner. Even if the payrolls as evidence were discarded, petitioners would still be back to square one, so to speak,
since they did not present and offer evidence that would show that Tan Eng Kee received amounts of money
allegedly representing his share in the profits of the enterprise. Petitioners failed to show how much their father,
Tan Eng Kee, received, if any, as his share in the profits of Benguet Lumber Company for any particular
period. Hence, they failed to prove that Tan Eng Kee and Tan Eng Lay intended to divide the profits of the business
between themselves, which is one of the essential features of a partnership.
Nevertheless, petitioners would still want us to infer or believe the alleged existence of a partnership from
this set of circumstances: that Tan Eng Lay and Tan Eng Kee were commanding the employees; that both were
supervising the employees; that both were the ones who determined the price at which the stocks were to be
sold; and that both placed orders to the suppliers of the Benguet Lumber Company. They also point out that the
families of the brothers Tan Eng Kee and Tan Eng Lay lived at the Benguet Lumber Company compound, a privilege
not extended to its ordinary employees.
However, private respondent counters that:
Petitioners seem to have missed the point in asserting that the above enumerated powers and privileges
granted in favor of Tan Eng Kee, were indicative of his being a partner in Benguet Lumber for the following
reasons:
(i) even a mere supervisor in a company, factory or store gives orders and directions to his subordinates. So
long, therefore, that an employees position is higher in rank, it is not unusual that he orders around those lower
in rank.
(ii) even a messenger or other trusted employee, over whom confidence is reposed by the owner, can order
materials from suppliers for and in behalf of Benguet Lumber. Furthermore, even a partner does not necessarily
have to perform this particular task. It is, thus, not an indication that Tan Eng Kee was a partner.
(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this privilege was not
accorded to other employees, the undisputed fact remains that Tan Eng Kee is the brother of Tan Eng
Lay. Naturally, close personal relations existed between them. Whatever privileges Tan Eng Lay gave his
brother, and which were not given the other employees, only proves the kindness and generosity of Tan Eng
Lay towards a blood relative.
(iv) and even if it is assumed that Tan Eng Kee was quarrelling with Tan Eng Lay in connection with the pricing of
stocks, this does not adequately prove the existence of a partnership relation between them. Even highly
confidential employees and the owners of a company sometimes argue with respect to certain matters which,
in no way indicates that they are partners as to each other.[35]
In the instant case, we find private respondents arguments to be well-taken. Where circumstances taken
singly may be inadequate to prove the intent to form a partnership, nevertheless, the collective effect of these
circumstances may be such as to support a finding of the existence of the parties intent.[36] Yet, in the case at
bench, even the aforesaid circumstances when taken together are not persuasive indicia of a partnership. They
only tend to show that Tan Eng Kee was involved in the operations of Benguet Lumber, but in what capacity is
unclear. We cannot discount the likelihood that as a member of the family, he occupied a niche above the rank-
and-file employees. He would have enjoyed liberties otherwise unavailable were he not kin, such as his residence
in the Benguet Lumber Company compound. He would have moral, if not actual, superiority over his fellow
employees, thereby entitling him to exercise powers of supervision. It may even be that among his duties is to
place orders with suppliers. Again, the circumstances proffered by petitioners do not provide a logical nexus to
the conclusion desired; these are not inconsistent with the powers and duties of a manager, even in a business
organized and run as informally as Benguet Lumber Company.
There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak
of. Hence, the petition must fail.
WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is hereby
AFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.
G.R. No. L-19342 May 25, 1972
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B. OÑA,
VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and Special
Attorney Purificacion Ureta for respondent.

BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above,
holding that petitioners have constituted an unregistered partnership and are, therefore, subject to the
payment of the deficiency corporate income taxes assessed against them by respondent Commissioner of
Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1%
monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal
Revenue Code, as amended by Section 8 of Republic Act No. 2343 and the costs of the suit,1 as well as the
resolution of said court denying petitioners' motion for reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and
her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of
Manila for the settlement of her estate. Later, Lorenzo T. Oña the surviving spouse was
appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April
14, 1949, the administrator submitted the project of partition, which was approved by the Court
on May 16, 1949 (See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr.,
all surnamed Oña, were still minors when the project of partition was approved, Lorenzo T. Oña,
their father and administrator of the estate, filed a petition in Civil Case No. 9637 of the Court of
First Instance of Manila for appointment as guardian of said minors. On November 14, 1949, the
Court appointed him guardian of the persons and property of the aforenamed minors (See p. 3,
BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have
undivided one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00,
six houses with a total assessed value of P17,590.00 and an undetermined amount to be
collected from the War Damage Commission. Later, they received from said Commission the
amount of P50,000.00, more or less. This amount was not divided among them but was used in
the rehabilitation of properties owned by them in common (t.s.n., p. 46). Of the ten parcels of
land aforementioned, two were acquired after the death of the decedent with money borrowed
from the Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34
BIR rec.).
The project of partition also shows that the estate shares equally with Lorenzo T. Oña, the
administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the
latter with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no attempt was
made to divide the properties therein listed. Instead, the properties remained under the
management of Lorenzo T. Oña who used said properties in business by leasing or selling them
and investing the income derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners' properties and investments gradually increased
from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned from the following year-end
balances:
Year Investment Land Building
Account Account Account
1949 — P87,860.00 P17,590.00
1950 P24,657.65 128,566.72 96,076.26
1951 51,301.31 120,349.28 110,605.11
1952 67,927.52 87,065.28 152,674.39
1953 61,258.27 84,925.68 161,463.83
 1954 63,623.37 99,001.20 167,962.04
1955 100,786.00 120,249.78 169,262.52
1956 175,028.68 135,714.68 169,262.52
(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits from
installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests
(see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the
books of account kept by Lorenzo T. Oña where the corresponding shares of the petitioners in
the net income for the year are also known. Every year, petitioners returned for income tax
purposes their shares in the net income derived from said properties and securities and/or from
transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not
actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income was
always left in the hands of Lorenzo T. Oña who, as heretofore pointed out, invested them in real
properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership and therefore, subject to the corporate income
tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he
assessed against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income
taxes for 1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR
rec.). Petitioners protested against the assessment and asked for reconsideration of the ruling of
respondent that they have formed an unregistered partnership. Finding no merit in petitioners'
request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling
of the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958,
so that the questioned assessment refers solely to the income tax proper for the years 1955 and
1956 and the "Compromise for non-filing," the latter item obviously referring to the compromise
in lieu of the criminal liability for failure of petitioners to file the corporate income tax returns for
said years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-
OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS
THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR
CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;
IV.
 ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED PARTNERSHIP,
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN
UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM
THE PROPERTIES OWNED IN COMMON AND THE LOANS RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX
APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS
INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE
PROPERTIES OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the
Court of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from
the deceased Julia Buñales and the profits derived from transactions involving the same, or, must they be
deemed to have formed an unregistered partnership subject to tax under Sections 24 and 84(b) of the National
Internal Revenue Code? (2) Assuming they have formed an unregistered partnership, should this not be only in
the sense that they invested as a common fund the profits earned by the properties owned by them in common
and the loans granted to them upon the security of the said properties, with the result that as far as their
respective shares in the inheritance are concerned, the total income thereof should be considered as that of co-
owners and not of the unregistered partnership? And (3) assuming again that they are taxable as an
unregistered partnership, should not the various amounts already paid by them for the same years 1955 and
1956 as individual income taxes on their respective shares of the profits accruing from the properties they
owned in common be deducted from the deficiency corporate taxes, herein involved, assessed against such
unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor
in interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as
early as May 16, 1949, and presumably petitioners have been holding their respective shares in their
inheritance since those dates admittedly under the administration or management of the head of the family,
the widower and father Lorenzo T. Oña, the assessment in question refers to the later years 1955 and 1956. We
believe this point to be important because, apparently, at the start, or in the years 1944 to 1954, the
respondent Commissioner of Internal Revenue did treat petitioners as co-owners, not liable to corporate tax,
and it was only from 1955 that he considered them as having formed an unregistered partnership. At least,
there is nothing in the record indicating that an earlier assessment had already been made. Such being the case,
and We see no reason how it could be otherwise, it is easily understandable why petitioners' position that they
are co-owners and not unregistered co-partners, for the purposes of the impugned assessment, cannot be
upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed earlier by
the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant
to the project of partition approved in 1949, "the properties remained under the management of Lorenzo T.
Oña who used said properties in business by leasing or selling them and investing the income derived therefrom
and the proceed from the sales thereof in real properties and securities," as a result of which said properties
and investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building
account" in 1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in
"building account" in 1956. And all these became possible because, admittedly, petitioners never actually
received any share of the income or profits from Lorenzo T. Oña and instead, they allowed him to continue
using said shares as part of the common fund for their ventures, even as they paid the corresponding income
taxes on the basis of their respective shares of the profits of their common business as reported by the said
Lorenzo T. Oña.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to
holding the properties inherited by them. Indeed, it is admitted that during the material years herein involved,
some of the said properties were sold at considerable profit, and that with said profit, petitioners engaged, thru
Lorenzo T. Oña, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from
these ventures were divided among petitioners proportionately in accordance with their respective shares in
the inheritance. In these circumstances, it is Our considered view that from the moment petitioners allowed not
only the incomes from their respective shares of the inheritance but even the inherited properties themselves
to be used by Lorenzo T. Oña as a common fund in undertaking several transactions or in business, with the
intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually
contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership
within the purview of the above-mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-
owners rather than unregistered co-partners within the contemplation of our corporate tax laws
aforementioned. Before the partition and distribution of the estate of the deceased, all the income thereof
does belong commonly to all the heirs, obviously, without them becoming thereby unregistered co-partners,
but it does not necessarily follow that such status as co-owners continues until the inheritance is actually and
physically distributed among the heirs, for it is easily conceivable that after knowing their respective shares in
the partition, they might decide to continue holding said shares under the common management of the
administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if this
were to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render
meaningless Sections 24 and 84(b) of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the
appellants therein to be unregistered co-partners for tax purposes, that their common fund "was not something
they found already in existence" and that "it was not a property inherited by them pro indiviso," but it is
certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in all instances where an
inheritance is not actually divided, there can be no unregistered co-partnership. As already indicated, for tax
purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership
the moment the said common properties and/or the incomes derived therefrom are used as a common fund
with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as
determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in
the corresponding testate or intestate proceeding. The reason for this is simple. From the moment of such
partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof,
for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs,
and, accordingly he becomes liable individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single management to be used with the intent
of making profit thereby in proportion to his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed.
This is exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The
sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have
a joint or common right or interest in any property from which the returns are derived," and, for that matter, on
any other provision of said code on partnerships is unavailing. In Evangelista, supra, this Court clearly
differentiated the concept of partnerships under the Civil Code from that of unregistered partnerships which
are considered as "corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr.
Justice Roberto Concepcion, now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking,
are distinct and different from "partnerships". When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on "corporations", said Code must allude,
therefore, to organizations which are not necessarily "partnerships", in the technical sense of the
term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships," which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or organized." This qualifying
expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in confirmity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporation. Again, pursuant to said
section 84(b),the term "corporation" includes, among others, "joint accounts,(cuentas en
participacion)" and "associations", none of which has a legal personality of its own, independent
of that of its members. Accordingly, the lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein referred to. In fact, as above
stated, "duly registered general co-partnerships" — which are possessed of the aforementioned
personality — have been expressly excluded by law (sections 24 and 84[b]) from the connotation
of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it
includes not only a partnership as known in common law but, as well, a syndicate,
 group, pool, joint venture, or other unincorporated organization which carries on
any business, financial operation, or venture, and which is not, within the meaning
of the Code, a trust, estate, or a corporation. ... . (7A Merten's Law of Federal
Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on. ... . (8 Merten's Law of Federal Income
Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships — with the exception only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L-
24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by
appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the corporate
taxes in question, of their inherited properties from those acquired by them subsequently, We consider as
justified the following ratiocination of the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered partnership,
the holding should be limited to the business engaged in apart from the properties inherited by
petitioners. In other words, the taxable income of the partnership should be limited to the
income derived from the acquisition and sale of real properties and corporate securities and
should not include the income derived from the inherited properties. It is admitted that the
inherited properties and the income derived therefrom were used in the business of buying and
selling other real properties and corporate securities. Accordingly, the partnership income must
include not only the income derived from the purchase and sale of other properties but also the
income of the inherited properties.
Besides, as already observed earlier, the income derived from inherited properties may be considered as
individual income of the respective heirs only so long as the inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares are used as part of the common assets of the heirs
to be used in making profits, it is but proper that the income of such shares should be considered as the part of
the taxable income of an unregistered partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court.
Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the herein
petitioners have formed an unregistered partnership and, therefore, have to be
taxed as such, it might be recalled that the petitioners in their individual income
tax returns reported their shares of the profits of the unregistered partnership.
We think it only fair and equitable that the various amounts paid by the individual
petitioners as income tax on their respective shares of the unregistered
partnership should be deducted from the deficiency income tax found by this
Honorable Court against the unregistered partnership. (page 7, Memorandum for
the Petitioner in Support of Their Motion for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the partnership must
be reduced by the amounts of income tax paid by each petitioner on his share of partnership
profits. This is not correct; rather, it should be the other way around. The partnership profits
distributable to the partners (petitioners herein) should be reduced by the amounts of income
tax assessed against the partnership. Consequently, each of the petitioners in his individual
capacity overpaid his income tax for the years in question, but the income tax due from the
partnership has been correctly assessed. Since the individual income tax liabilities of petitioners
are not in issue in this proceeding, it is not proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as
individual income tax cannot be credited as part payment of the taxes herein in question. It is argued that to
sanction the view of the Tax Court is to oblige petitioners to pay double income tax on the same income, and,
worse, considering the time that has lapsed since they paid their individual income taxes, they may already be
barred by prescription from recovering their overpayments in a separate action. We do not agree. As We see it,
the case of petitioners as regards the point under discussion is simply that of a taxpayer who has paid the
wrong tax, assuming that the failure to pay the corporate taxes in question was not deliberate. Of course, such
taxpayer has the right to be reimbursed what he has erroneously paid, but the law is very clear that the claim
and action for such reimbursement are subject to the bar of prescription. And since the period for the recovery
of the excess income taxes in the case of herein petitioners has already lapsed, it would not seem right to
virtually disregard prescription merely upon the ground that the reason for the delay is precisely because the
taxpayers failed to make the proper return and payment of the corporate taxes legally due from them. In
principle, it is but proper not to allow any relaxation of the tax laws in favor of persons who are not exactly
above suspicion in their conduct vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with costs
against petitioners.
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and
sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.

AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they
had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and
963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four
children, the petitioners, to enable them to build their residences. The company sold the two lots to petitioners
for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would
show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City
Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the
sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid
an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of
Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in
addition to individual income tax on their shares thereof He assessed P37,018 as corporate income tax, P18,509
as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in
full (not a mere capital gain of which ½ is taxable) and required them to pay deficiency income taxes
aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on
their profit of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or
joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs.
Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin
dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil
Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided
the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should
be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider
them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners
were not engaged in any joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to
build their residences on the lots because of the high cost of construction, then they had no choice but to resell
the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the
co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later.
Castan Tobeñas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la
sociedad presupone necesariamente la convencion, mentras que la comunidad puede existir y
existe ordinariamente sin ela; y por razon del fin objecto, en que el objeto de la sociedad es
obtener lucro, mientras que el de la indivision es solo mantener en su integridad la cosa comun y
favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en
nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre
comunidad de bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica
señala como nota fundamental de diferenciacion aparte del origen de fuente de que surgen, no
siempre uniforme, la finalidad perseguida por los interesados: lucro comun partible en la
 sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol.
2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived". There must be an unmistakable intention to form a partnership or joint
venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons
contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would
divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an
unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in
Oña vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.—We find that the case at bar is fundamentally
similar to the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda'
in question pro-indiviso from their deceased parents; they did not contribute or invest additional
' capital to increase or expand the inherited properties; they merely continued dedicating the
property to the use to which it had been put by their forebears; they individually reported in
their tax returns their corresponding shares in the income and expenses of the 'hacienda', and
they continued for many years the status of co-ownership in order, as conceded by respondent,
'to preserve its (the 'hacienda') value and to continue the existing contractual relations with the
Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653, July 31,
1963).
All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own properties
which produce income should not automatically be considered partners of an unregistered
partnership, or a corporation, within the purview of the income tax law. To hold otherwise,
would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does
not produce an income at all, it is not subject to any kind of income tax, whether the income tax
on individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738, September
11, 1961, cited in Arañas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement
the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for
themselves, it was held that they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son
purchased a lot and building, entrusted the administration of the building to an administrator and divided
equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three
Evangelista sisters bought four pieces of real property which they leased to various tenants and derived rentals
therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated the two
lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging
this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.
SO ORDERED.
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents

GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint venture for income tax
purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28,
1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by
petitioners in 1968 toMarenir Development Corporation, while the three parcels of land were sold by
petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale
made in 1968 in the amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in
1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax
amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were
assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for
the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax
amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture
taxable as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section
24, both of the National Internal Revenue Code 1 that the unregistered partnership was subject to corporate
income tax as distinguished from profits derived from the partnership by them which is subject to individual
income tax; and that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not relieve them from the tax liability of the
unregistered partnership. Hence, the petitioners were required to pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045.
In due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the decision and
action taken by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact
formed by petitioners which like a corporation was subject to corporate income tax distinct from that imposed
on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances
of this case, although there might in fact be a co-ownership between the petitioners, there was no adequate
basis for the conclusion that they thereby formed an unregistered partnership which made "hem liable for
corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent
court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT
COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP
SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN
OPPOSITION THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN
UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY
LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE
SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF
OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with their own personal
funds they used in buying several real properties. They appointed their brother to manage their properties with
full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various
tenants for several years and they gained net profits from the rental income. Thus, the Collector of Internal
Revenue demanded the payment of income tax on a corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue
Code, as well as to the residence tax for corporations and the real estate dealers' fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the terms corporation
and partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (companies
collectives), a tax upon such income equal to the sum of the following: ...
 Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participation), associations or insurance
companies, but does not include duly registered general co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves.
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent to divide
the profits among the contracting parties. The first element is undoubtedly present in the case at
bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a
common fund. Hence, the issue narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding the case, we are fully satisfied that
their purpose was to engage in real estate transactions for monetary gain and then divide the
same among themselves, because:
1. Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real estate
for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The
number of lots (24) acquired and transcations undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and preservation of the aforementioned common
fund or even of the property acquired by petitioners in February, 1943. In other words, one
cannot but perceive a character of habituality peculiar to business transactions engaged in for
purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof.
4. Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the same belonged to a corporation or business
enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
(15) years, since the first property was acquired, and over twelve (12) years, since Simeon
Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating
the set up already adverted to, or on the causes for its continued existence. They did not even
try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on
the existence of said intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and, hence, those cases are
not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute money,
property or industry to a common fund, and that they intended to divide the profits among themselves.
Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis
of the fact that petitioners purchased certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that
the purpose was not limited to the conservation or preservation of the common fund or even the properties
acquired by them. The character of habituality peculiar to business transactions engaged in for the purpose of
gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968
when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The
remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of
habituality peculiar to business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the
circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code lays down
the rule for determining when a transaction should be deemed a partnership or a co-ownership.
Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-
owners or co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived;
From the above it appears that the fact that those who agree to form a co- ownership share or do
not share any profits made by the use of the property held in common does not convert their
venture into a partnership. Or the sharing of the gross returns does not of itself establish a
partnership whether or not the persons sharing therein have a joint or common right or interest
in the property. This only means that, aside from the circumstance of profit, the presence of other
elements constituting partnership is necessary, such as the clear intent to form a partnership, the
existence of a juridical personality different from that of the individual partners, and the freedom
to transfer or assign any interest in the property by one with the consent of the others (Padilla,
Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons contribute funds to buy
certain real estate for profit in the absence of other circumstances showing a contrary intention
cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to
their respective contribution, are not thereby rendered partners. They have no common stock or
capital, and no community of interest as principal proprietors in the business itself which the
proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83,
p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor
does an agreement to share the profits and losses on the sale of land create a partnership; the
parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of realty,
holding as tenants in common, and to divide the profits of disposing of it, the brother and the
other not being entitled to share in plaintiffs commission, no partnership existed as between the
three parties, whatever their relation may have been as to third parties. (Magee vs. Magee 123
N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c) and such a community of interest, as far as
third persons are concerned as enables each party to make contract, manage the business, and
dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between the owners,
though they may use it for the purpose of making gains; and they may, without becoming
partners, agree among themselves as to the management, and use of such property and the
application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have
a joint or common right or interest in the property. There must be a clear intent to form a partnership, the
existence of a juridical personality different from the individual partners, and the freedom of each party to
transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate
basis to support the proposition that they thereby formed an unregistered partnership. The two isolated
transactions whereby they purchased properties and sold the same a few years thereafter did not thereby
make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their
net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have
formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent
commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have been formed,
since there is no such existing unregistered partnership with a distinct personality nor with assets that can be
held liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners
for this unpaid obligation of the partnership p. 7 However, as petitioners have availed of the benefits of tax
amnesty as individual taxpayers in these transactions, they are thereby relieved of any further tax liability
arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of
March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving
petitioners of the corporate income tax liability in this case, without pronouncement as to costs.
SO ORDERED.
 G.R. No. 172690

Present:
HEIRS OF JOSE LIM,
represented by ELENITO LIM, CORONA, J.,
Petitioners, Chairperson,
VELASCO, JR.,
NACHURA,
DEL CASTILLO,* and
MENDOZA, JJ.
- versus -
Promulgated:

March 3, 2010

JULIET VILLA LIM,

Respondent.

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil Procedure, assailing
the Court of Appeals (CA) Decision[2] dated June 29, 2005, which reversed and set aside the decision[3] of the
Regional Trial Court (RTC) of Lucena City, dated April 12, 2004.

The facts of the case are as follows:

Petitioners are the heirs of the late Jose Lim (Jose), namely: Jose's widow Cresencia Palad (Cresencia); and their
children Elenito, Evelia, Imelda, Edelyna and Edison, all surnamed Lim (petitioners), represented by Elenito Lim
(Elenito). They filed a Complaint[4] for Partition, Accounting and Damages against respondent Juliet Villa Lim
(respondent), widow of the late Elfledo Lim (Elfledo), who was the eldest son of Jose and Cresencia.

Petitioners alleged that Jose was the liaison officer of Interwood Sawmill in Cagsiay, Mauban, Quezon. Sometime
in 1980, Jose, together with his friends Jimmy Yu (Jimmy) and Norberto Uy (Norberto), formed a partnership to
engage in the trucking business. Initially, with a contribution of P50,000.00 each, they purchased a truck to be
used in the hauling and transport of lumber of the sawmill. Jose managed the operations of this trucking business
until his death on August 15, 1981.Thereafter, Jose's heirs, including Elfledo, and partners agreed to continue the
business under the management of Elfledo. The shares in the partnership profits and income that formed part
of the estate of Jose were held in trust by Elfledo, with petitioners' authority for Elfledo to use, purchase or
acquire properties using said funds.

Petitioners also alleged that, at that time, Elfledo was a fresh commerce graduate serving as his fathers driver in
the trucking business. He was never a partner or an investor in the business and merely supervised the purchase
of additional trucks using the income from the trucking business of the partners. By the time the partnership
ceased, it had nine trucks, which were all registered in Elfledo's name. Petitioners asseverated that it was also
through Elfledos management of the partnership that he was able to purchase numerous real properties by using
the profits derived therefrom, all of which were registered in his name and that of respondent. In addition to the
nine trucks, Elfledo also acquired five other motor vehicles.

On May 18, 1995, Elfledo died, leaving respondent as his sole surviving heir. Petitioners claimed that respondent
took over the administration of the aforementioned properties, which belonged to the estate of Jose, without
their consent and approval. Claiming that they are co-owners of the properties, petitioners required respondent
to submit an accounting of all income, profits and rentals received from the estate of Elfledo, and to surrender
the administration thereof. Respondent refused; thus, the filing of this case.

Respondent traversed petitioners' allegations and claimed that Elfledo was himself a partner of Norberto and
Jimmy. Respondent also claimed that per testimony of Cresencia, sometime in 1980, Jose gave
Elfledo P50,000.00 as the latter's capital in an informal partnership with Jimmy and Norberto. When Elfledo and
respondent got married in 1981, the partnership only had one truck; but through the efforts of Elfledo, the
business flourished. Other than this trucking business, Elfledo, together with respondent, engaged in other
business ventures. Thus, they were able to buy real properties and to put up their own car assembly and repair
business. When Norberto was ambushed and killed on July 16, 1993, the trucking business started to falter. When
Elfledo died on May 18, 1995 due to a heart attack, respondent talked to Jimmy and to the heirs of Norberto, as
she could no longer run the business. Jimmy suggested that three out of the nine trucks be given to him as his
share, while the other three trucks be given to the heirs of Norberto. However, Norberto's wife, Paquita Uy, was
not interested in the vehicles. Thus, she sold the same to respondent, who paid for them in installments.
Respondent also alleged that when Jose died in 1981, he left no known assets, and the partnership with Jimmy
and Norberto ceased upon his demise. Respondent also stressed that Jose left no properties that Elfledo could
have held in trust. Respondent maintained that all the properties involved in this case were purchased and
acquired through her and her husbands joint efforts and hard work, and without any participation or contribution
from petitioners or from Jose. Respondent submitted that these are conjugal partnership properties; and thus,
she had the right to refuse to render an accounting for the income or profits of their own business.

Trial on the merits ensued. On April 12, 2004, the RTC rendered its decision in favor of petitioners, thus:
WHEREFORE, premises considered, judgment is hereby rendered:

1) Ordering the partition of the above-mentioned properties equally between the plaintiffs and
heirs of Jose Lim and the defendant Juliet Villa-Lim; and

2) Ordering the defendant to submit an accounting of all incomes, profits and rentals received by
her from said properties.

SO ORDERED.

Aggrieved, respondent appealed to the CA.

On June 29, 2005, the CA reversed and set aside the RTC's decision, dismissing petitioners' complaint for lack of
merit. Undaunted, petitioners filed their Motion for Reconsideration,[5] which the CA, however, denied in its
Resolution[6] dated May 8, 2006.

Hence, this Petition, raising the sole question, viz.:

IN THE APPRECIATION BY THE COURT OF THE EVIDENCE SUBMITTED BY THE PARTIES, CAN THE
TESTIMONY OF ONE OF THE PETITIONERS BE GIVEN GREATER WEIGHT THAN THAT BY A FORMER
PARTNER ON THE ISSUE OF THE IDENTITY OF THE OTHER PARTNERS IN THE PARTNERSHIP?[7]

In essence, petitioners argue that according to the testimony of Jimmy, the sole surviving partner, Elfledo was
not a partner; and that he and Norberto entered into a partnership with Jose. Thus, the CA erred in not giving
that testimony greater weight than that of Cresencia, who was merely the spouse of Jose and not a party to the
partnership.[8]

Respondent counters that the issue raised by petitioners is not proper in a petition for review on certiorari under
Rule 45 of the Rules of Civil Procedure, as it would entail the review, evaluation, calibration, and re-weighing of
the factual findings of the CA. Moreover, respondent invokes the rationale of the CA decision that, in light of the
admissions of Cresencia and Edison and the testimony of respondent, the testimony of Jimmy was effectively
refuted; accordingly, the CA's reversal of the RTC's findings was fully justified.[9]
We resolve first the procedural matter regarding the propriety of the instant Petition.
Verily, the evaluation and calibration of the evidence necessarily involves consideration of factual issues an
exercise that is not appropriate for a petition for review on certiorari under Rule 45. This rule provides that the
parties may raise only questions of law, because the Supreme Court is not a trier of facts. Generally, we are not
duty-bound to analyze again and weigh the evidence introduced in and considered by the tribunals
below.[10] When supported by substantial evidence, the findings of fact of the CA are conclusive and binding on
the parties and are not reviewable by this Court, unless the case falls under any of the following recognized
exceptions:

(1) When the conclusion is a finding grounded entirely on speculation, surmises and conjectures;

(2) When the inference made is manifestly mistaken, absurd or impossible;

(3) Where there is a grave abuse of discretion;

(4) When the judgment is based on a misapprehension of facts;

(5) When the findings of fact are conflicting;

(6) When the Court of Appeals, in making its findings, went beyond the issues of the case and the
same is contrary to the admissions of both appellant and appellee;

(7) When the findings are contrary to those of the trial court;

(8) When the findings of fact are conclusions without citation of specific evidence on which they
are based;

(9) When the facts set forth in the petition as well as in the petitioners' main and reply briefs are
not disputed by the respondents; and

(10) When the findings of fact of the Court of Appeals are premised on the supposed absence of
evidence and contradicted by the evidence on record.[11]

We note, however, that the findings of fact of the RTC are contrary to those of the CA. Thus, our review of such
findings is warranted.

On the merits of the case, we find that the instant Petition is bereft of merit.

A partnership exists when two or more persons agree to place their money, effects, labor, and skill in lawful
commerce or business, with the understanding that there shall be a proportionate sharing of the profits and
losses among them. A contract of partnership is defined by the Civil Code as one where two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.[12]

Undoubtedly, the best evidence would have been the contract of partnership or the articles of partnership.
Unfortunately, there is none in this case, because the alleged partnership was never formally organized.
Nonetheless, we are asked to determine who between Jose and Elfledo was the partner in the trucking business.

A careful review of the records persuades us to affirm the CA decision. The evidence presented by petitioners
falls short of the quantum of proof required to establish that: (1) Jose was the partner and not Elfledo; and (2) all
the properties acquired by Elfledo and respondent form part of the estate of Jose, having been derived from the
alleged partnership.
Petitioners heavily rely on Jimmy's testimony. But that testimony is just one piece of evidence against
respondent. It must be considered and weighed along with petitioners' other evidence vis--vis respondent's
contrary evidence. In civil cases, the party having the burden of proof must establish his case by a preponderance
of evidence. "Preponderance of evidence" is the weight, credit, and value of the aggregate evidence on either
side and is usually considered synonymous with the term "greater weight of the evidence" or "greater weight of
the credible evidence." "Preponderance of evidence" is a phrase that, in the last analysis, means probability of
the truth. It is evidence that is more convincing to the court as worthy of belief than that which is offered in
opposition thereto.[13] Rule 133, Section 1 of the Rules of Court provides the guidelines in determining
preponderance of evidence, thus:

SECTION I. Preponderance of evidence, how determined. In civil cases, the party having burden of
proof must establish his case by a preponderance of evidence. In determining where the
preponderance or superior weight of evidence on the issues involved lies, the court may consider
all the facts and circumstances of the case, the witnesses' manner of testifying, their intelligence,
their means and opportunity of knowing the facts to which they are testifying, the nature of the
facts to which they testify, the probability or improbability of their testimony, their interest or
want of interest, and also their personal credibility so far as the same may legitimately appear
upon the trial. The court may also consider the number of witnesses, though the preponderance
is not necessarily with the greater number.

At this juncture, our ruling in Heirs of Tan Eng Kee v. Court of Appeals[14] is enlightening. Therein, we cited Article
1769 of the Civil Code, which provides:

Art. 1769. In determining whether a partnership exists, these rules shall apply:

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

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

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived;

(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he
is a partner in the business, but no such inference shall be drawn if such profits were received in
payment:

(a) As a debt by installments or otherwise;

(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the
business;
(e) As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise.

Applying the legal provision to the facts of this case, the following circumstances tend to prove that Elfledo was
himself the partner of Jimmy and Norberto: 1) Cresencia testified that Jose gave Elfledo P50,000.00, as share in
the partnership, on a date that coincided with the payment of the initial capital in the partnership;[15](2) Elfledo
ran the affairs of the partnership, wielding absolute control, power and authority, without any intervention or
opposition whatsoever from any of petitioners herein;[16] (3) all of the properties, particularly the nine trucks of
the partnership, were registered in the name of Elfledo; (4) Jimmy testified that Elfledo did not receive wages or
salaries from the partnership, indicating that what he actually received were shares of the profits of the
business;[17] and (5) none of the petitioners, as heirs of Jose, the alleged partner, demanded periodic accounting
from Elfledo during his lifetime. As repeatedly stressed in Heirs of Tan Eng Kee,[18] a demand for periodic
accounting is evidence of a partnership.
Furthermore, petitioners failed to adduce any evidence to show that the real and personal properties acquired
and registered in the names of Elfledo and respondent formed part of the estate of Jose, having been derived
from Jose's alleged partnership with Jimmy and Norberto. They failed to refute respondent's claim that Elfledo
and respondent engaged in other businesses. Edison even admitted that Elfledo also sold Interwood lumber as a
sideline.[19] Petitioners could not offer any credible evidence other than their bare assertions. Thus, we apply the
basic rule of evidence that between documentary and oral evidence, the former carries more weight.[20]

Finally, we agree with the judicious findings of the CA, to wit:

The above testimonies prove that Elfledo was not just a hired help but one of the partners in the
trucking business, active and visible in the running of its affairs from day one until this ceased
operations upon his demise. The extent of his control, administration and management of the
partnership and its business, the fact that its properties were placed in his name, and that he was
not paid salary or other compensation by the partners, are indicative of the fact that Elfledo was
a partner and a controlling one at that. It is apparent that the other partners only contributed in
the initial capital but had no say thereafter on how the business was ran. Evidently it was through
Elfredos efforts and hard work that the partnership was able to acquire more trucks and otherwise
prosper. Even the appellant participated in the affairs of the partnership by acting as the
bookkeeper sans salary.

It is notable too that Jose Lim died when the partnership was barely a year old, and the
partnership and its business not only continued but also flourished. If it were true that it was Jose
Lim and not Elfledo who was the partner, then upon his death the partnership should have
been dissolved and its assets liquidated. On the contrary, these were not done but instead its
operation continued under the helm of Elfledo and without any participation from the heirs of
Jose Lim.

Whatever properties appellant and her husband had acquired, this was through their own
concerted efforts and hard work. Elfledo did not limit himself to the business of their partnership
but engaged in other lines of businesses as well.

In sum, we find no cogent reason to disturb the findings and the ruling of the CA as they are amply supported by
the law and by the evidence on record.
WHEREFORE, the instant Petition is DENIED. The assailed Court of Appeals Decision dated June 29, 2005
is AFFIRMED. Costs against petitioners.
SO ORDERED.
G.R. No. 31057 September 7, 1929
ADRIANO ARBES, ET AL., plaintiffs-appellees,
vs.
VICENTE POLISTICO, ET AL., defendants-appellants.
Marcelino Lontok and Manuel dela Rosa for appellants.
Sumulong & Lavides for appellees.
VILLAMOR, J.:
This is an action to bring about liquidation of the funds and property of the association called "Turnuhan
Polistico & Co." The plaintiffs were members or shareholders, and the defendants were designated as
president-treasurer, directors and secretary of said association.
It is well to remember that this case is now brought before the consideration of this court for the second time.
The first one was when the same plaintiffs appeared from the order of the court below sustaining the
defendant's demurrer, and requiring the former to amend their complaint within a period, so as to include all
the members of "Turnuhan Polistico & Co.," either as plaintiffs or as a defendants. This court held then that in
an action against the officers of a voluntary association to wind up its affairs and enforce an accounting for
money and property in their possessions, it is not necessary that all members of the association be made
parties to the action. (Borlasa vs. Polistico, 47 Phil., 345.) The case having been remanded to the court of origin,
both parties amend, respectively, their complaint and their answer, and by agreement of the parties, the court
appointed Amadeo R. Quintos, of the Insular Auditor's Office, commissioner to examine all the books,
documents, and accounts of "Turnuhan Polistico & Co.," and to receive whatever evidence the parties might
desire to present.
The commissioner rendered his report, which is attached to the record, with the following resume:
Income:
Member's 97,263.70
shares............................
Credits paid................................ 6,196.55
Interest 4,569.45
received...........................
Miscellaneous............................... 1,891.00
P109,620.70
Expenses:
Premiums to 68,146.25
members.......................
Loans on real- 9,827.00
estate.......................
Loans on promissory 4,258.55
notes..............
Salaries.................................... 1,095.00
Miscellaneous............................... 1,686.10
85,012.90
Cash on 24,607.80
hand........................................
The defendants objected to the commissioner's report, but the trial court, having examined the reasons for the
objection, found the same sufficiently explained in the report and the evidence, and accepting it, rendered
judgment, holding that the association "Turnuhan Polistico & Co." is unlawful, and sentencing the defendants
jointly and severally to return the amount of P24,607.80, as well as the documents showing the uncollected
credits of the association, to the plaintiffs in this case, and to the rest of the members of the said association
represented by said plaintiffs, with costs against the defendants.
The defendants assigned several errors as grounds for their appeal, but we believe they can all be reduced to
two points, to wit: (1) That not all persons having an interest in this association are included as plaintiffs or
defendants; (2) that the objection to the commissioner's report should have been admitted by the court below.
As to the first point, the decision on the case of Borlasa vs. Polistico, supra, must be followed.
With regard to the second point, despite the praiseworthy efforts of the attorney of the defendants, we are of
opinion that, the trial court having examined all the evidence touching the grounds for the objection and having
found that they had been explained away in the commissioner's report, the conclusion reached by the court
below, accepting and adopting the findings of fact contained in said report, and especially those referring to the
disposition of the association's money, should not be disturbed.
In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil., 516), it was held that the findings of facts made by a
referee appointed under the provisions of section 135 of the Code of Civil Procedure stand upon the same
basis, when approved by the Court, as findings made by the judge himself. And in Kriedt vs. E. C. McCullogh &
Co.(37 Phil., 474), the court held: "Under section 140 of the Code of Civil Procedure it is made the duty of the
court to render judgment in accordance with the report of the referee unless the court shall unless for cause
shown set aside the report or recommit it to the referee. This provision places upon the litigant parties of the
duty of discovering and exhibiting to the court any error that may be contained therein." The appellants stated
the grounds for their objection. The trial examined the evidence and the commissioner's report, and accepted
the findings of fact made in the report. We find no convincing arguments on the appellant's brief to justify a
reversal of the trial court's conclusion admitting the commissioner's findings.
There is no question that "Turnuhan Polistico & Co." is an unlawful partnership (U.S. vs. Baguio, 39 Phil., 962),
but the appellants allege that because it is so, some charitable institution to whom the partnership funds may
be ordered to be turned over, should be included, as a party defendant. The appellants refer to article 1666 of
the Civil Code, which provides:
A partnership must have a lawful object, and must be established for the common benefit of the
partners.
When the dissolution of an unlawful partnership is decreed, the profits shall be given to charitable
institutions of the domicile of the partnership, or, in default of such, to those of the province.
Appellant's contention on this point is untenable. According to said article, no charitable institution is a
necessary party in the present case of determination of the rights of the parties. The action which may arise
from said article, in the case of unlawful partnership, is that for the recovery of the amounts paid by the
member from those in charge of the administration of said partnership, and it is not necessary for the said
parties to base their action to the existence of the partnership, but on the fact that of having contributed some
money to the partnership capital. And hence, the charitable institution of the domicile of the partnership, and
in the default thereof, those of the province are not necessary parties in this case. The article cited above
permits no action for the purpose of obtaining the earnings made by the unlawful partnership, during its
existence as result of the business in which it was engaged, because for the purpose, as Manresa remarks, the
partner will have to base his action upon the partnership contract, which is to annul and without legal existence
by reason of its unlawful object; and it is self evident that what does not exist cannot be a cause of action.
Hence, paragraph 2 of the same article provides that when the dissolution of the unlawful partnership is
decreed, the profits cannot inure to the benefit of the partners, but must be given to some charitable
institution.
We deem in pertinent to quote Manresa's commentaries on article 1666 at length, as a clear explanation of the
scope and spirit of the provision of the Civil Code which we are concerned. Commenting on said article
Manresa, among other things says:
When the subscriptions of the members have been paid to the management of the partnership, and
employed by the latter in transactions consistent with the purposes of the partnership may the former
demand the return of the reimbursement thereof from the manager or administrator withholding
them?
Apropos of this, it is asserted: If the partnership has no valid existence, if it is considered juridically non-
existent, the contract entered into can have no legal effect; and in that case, how can it give rise to an
action in favor of the partners to judicially demand from the manager or the administrator of the
partnership capital, each one's contribution?
The authors discuss this point at great length, but Ricci decides the matter quite clearly, dispelling all
doubts thereon. He holds that the partner who limits himself to demanding only the amount
contributed by him need not resort to the partnership contract on which to base his action. And he adds
in explanation that the partner makes his contribution, which passes to the managing partner for the
purpose of carrying on the business or industry which is the object of the partnership; or in other words,
to breathe the breath of life into a partnership contract with an objection forbidden by law. And as said
contrast does not exist in the eyes of the law, the purpose from which the contribution was made has
not come into existence, and the administrator of the partnership holding said contribution retains what
 belongs to others, without any consideration; for which reason he is not bound to return it and he who
has paid in his share is entitled to recover it.
But this is not the case with regard to profits earned in the course of the partnership, because they do
not constitute or represent the partner's contribution but are the result of the industry, business or
speculation which is the object of the partnership, and therefor, in order to demand the proportional
part of the said profits, the partner would have to base his action on the contract which is null and void,
since this partition or distribution of the profits is one of the juridical effects thereof. Wherefore
considering this contract as non-existent, by reason of its illicit object, it cannot give rise to the necessary
action, which must be the basis of the judicial complaint. Furthermore, it would be immoral and unjust
for the law to permit a profit from an industry prohibited by it.
Hence the distinction made in the second paragraph of this article of this Code, providing that the
profits obtained by unlawful means shall not enrich the partners, but shall upon the dissolution of the
partnership, be given to the charitable institutions of the domicile of the partnership, or, in default of
such, to those of the province.
This is a new rule, unprecedented by our law, introduced to supply an obvious deficiency of the former
law, which did not describe the purpose to which those profits denied the partners were to be applied,
nor state what to be done with them.
The profits are so applied, and not the contributions, because this would be an excessive and unjust
sanction for, as we have seen, there is no reason, in such a case, for depriving the partner of the portion
of the capital that he contributed, the circumstances of the two cases being entirely different.
Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts
contributed are to be returned by the partners, because it only deals with the disposition of the profits;
but the fact that said contributions are not included in the disposal prescribed profits, shows that in
consequences of said exclusion, the general law must be followed, and hence the partners should
reimburse the amount of their respective contributions. Any other solution is immoral, and the law will
not consent to the latter remaining in the possession of the manager or administrator who has refused
to return them, by denying to the partners the action to demand them. (Manresa, Commentaries on the
Spanish Civil Code, vol. XI, pp. 262-264)
The judgment appealed from, being in accordance with law, should be, as it is hereby, affirmed with costs
against the appellants; provided, however, the defendants shall pay the legal interest on the sum of P24,607.80
from the date of the decision of the court, and provided, further, that the defendants shall deposit this sum of
money and other documents evidencing uncollected credits in the office of the clerk of the trial court, in order
that said court may distribute them among the members of said association, upon being duly identified in the
manner that it may deem proper. So ordered.
G.R. No. L-21906 December 24, 1968
INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees,
vs.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, defendant-appellant.
Aportadera and Palabrica and Pelaez, Jalandoni and Jamir plaintiffs-appellees.
Ruiz Law Offices for defendant-appellant.
CASTRO, J.:
This is an appeal from the order of May 2, 1956, the decision of May 4, 1956 and the order of May 21, 1956, all
of the Court of First Instance of Davao, in civil case 629. The basic action is for specific performance, and
damages resulting from an alleged breach of contract.
In 1940 Nicanor Casteel filed a fishpond application for a big tract of swampy land in the then Sitio of Malalag
(now the Municipality of Malalag), Municipality of Padada, Davao. No action was taken thereon by the
authorities concerned. During the Japanese occupation, he filed another fishpond application for the same
area, but because of the conditions then prevailing, it was not acted upon either. On December 12, 1945 he
filed a third fishpond application for the same area, which, after a survey, was found to contain 178.76
hectares. Upon investigation conducted by a representative of the Bureau of Forestry, it was discovered that
the area applied for was still needed for firewood production. Hence on May 13, 1946 this third application was
disapproved.
Despite the said rejection, Casteel did not lose interest. He filed a motion for reconsideration. While this motion
was pending resolution, he was advised by the district forester of Davao City that no further action would be
taken on his motion, unless he filed a new application for the area concerned. So he filed on May 27, 1947 his
fishpond application 1717.
Meanwhile, several applications were submitted by other persons for portions of the area covered by Casteel's
application.
On May 20, 1946 Leoncio Aradillos filed his fishpond application 1202 covering 10 hectares of land found inside
the area applied for by Casteel; he was later granted fishpond permit F-289-C covering 9.3 hectares certified as
available for fishpond purposes by the Bureau of Forestry.
Victor D. Carpio filed on August 8, 1946 his fishpond application 762 over a portion of the land applied for by
Casteel. Alejandro Cacam's fishpond application 1276, filed on December 26, 1946, was given due course on
December 9, 1947 with the issuance to him of fishpond permit F-539-C to develop 30 hectares of land
comprising a portion of the area applied for by Casteel, upon certification of the Bureau of Forestry that the
area was likewise available for fishpond purposes. On November 17, 1948 Felipe Deluao filed his own fishpond
application for the area covered by Casteel's application.
Because of the threat poised upon his position by the above applicants who entered upon and spread
themselves within the area, Casteel realized the urgent necessity of expanding his occupation thereof by
constructing dikes and cultivating marketable fishes, in order to prevent old and new squatters from usurping
the land. But lacking financial resources at that time, he sought financial aid from his uncle Felipe Deluao who
then extended loans totalling more or less P27,000 with which to finance the needed improvements on the
fishpond. Hence, a wide productive fishpond was built.
Moreover, upon learning that portions of the area applied for by him were already occupied by rival applicants,
Casteel immediately filed the corresponding protests. Consequently, two administrative cases ensued involving
the area in question, to wit: DANR Case 353, entitled "Fp. Ap. No. 661 (now Fp. A. No. 1717), Nicanor Casteel,
applicant-appellant versus Fp. A. No. 763, Victorio D. Carpio, applicant-appellant"; and DANR Case 353-B,
entitled "Fp. A. No. 661 (now Fp. A. No. 1717), Nicanor Casteel, applicant-protestant versus Fp. Permit No. 289-
C, Leoncio Aradillos, Fp. Permit No. 539-C, Alejandro Cacam, Permittees-Respondents."
However, despite the finding made in the investigation of the above administrative cases that Casteel had
already introduced improvements on portions of the area applied for by him in the form of dikes, fishpond
gates, clearings, etc., the Director of Fisheries nevertheless rejected Casteel's application on October 25, 1949,
required him to remove all the improvements which he had introduced on the land, and ordered that the land
be leased through public auction. Failing to secure a favorable resolution of his motion for reconsideration of
the Director's order, Casteel appealed to the Secretary of Agriculture and Natural Resources.
In the interregnum, some more incidents occurred. To avoid repetition, they will be taken up in our discussion
of the appellant's third assignment of error.
On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as party of the first part, and Nicanor Casteel
as party of the second part, executed a contract — denominated a "contract of service" — the salient provisions
of which are as follows:
 That the Party of the First Part in consideration of the mutual covenants and agreements made herein
to the Party of the Second Part, hereby enter into a contract of service, whereby the Party of the First
Part hires and employs the Party of the Second Part on the following terms and conditions, to wit:
That the Party of the First Part will finance as she has hereby financed the sum of TWENTY SEVEN
THOUSAND PESOS (P27,000.00), Philippine Currency, to the Party of the Second Part who renders only
his services for the construction and improvements of a fishpond at Barrio Malalag, Municipality of
Padada, Province of Davao, Philippines;
That the Party of the Second Part will be the Manager and sole buyer of all the produce of the fish that
will be produced from said fishpond;
That the Party of the First Part will be the administrator of the same she having financed the
construction and improvement of said fishpond;
That this contract was the result of a verbal agreement entered into between the Parties sometime in
the month of November, 1947, with all the above-mentioned conditions enumerated; ...
On the same date the above contract was entered into, Inocencia Deluao executed a special power of attorney
in favor of Jesus Donesa, extending to the latter the authority "To represent me in the administration of the
fishpond at Malalag, Municipality of Padada, Province of Davao, Philippines, which has been applied for
fishpond permit by Nicanor Casteel, but rejected by the Bureau of Fisheries, and to supervise, demand, receive,
and collect the value of the fish that is being periodically realized from it...."
On November 29, 1949 the Director of Fisheries rejected the application filed by Felipe Deluao on November
17, 1948. Unfazed by this rejection, Deluao reiterated his claim over the same area in the two administrative
cases (DANR Cases 353 and 353-B) and asked for reinvestigation of the application of Nicanor Casteel over the
subject fishpond. However, by letter dated March 15, 1950 sent to the Secretary of Commerce and Agriculture
and Natural Resources (now Secretary of Agriculture and Natural Resources), Deluao withdrew his petition for
reinvestigation.
On September 15, 1950 the Secretary of Agriculture and Natural Resources issued a decision in DANR Case 353,
the dispositive portion of which reads as follows:
In view of all the foregoing considerations, Fp. A. No. 661 (now Fp. A. No. 1717) of Nicanor Casteel
should be, as hereby it is, reinstated and given due course for the area indicated in the sketch drawn at
the back of the last page hereof; and Fp. A. No. 762 of Victorio D. Carpio shall remain rejected.
On the same date, the same official issued a decision in DANR Case 353-B, the dispositive portion stating as
follows:
WHEREFORE, Fishpond Permit No. F-289-C of Leoncio Aradillos and Fishpond Permit No. F-539-C of
Alejandro Cacam, should be, as they are hereby cancelled and revoked; Nicanor Casteel is required to
pay the improvements introduced thereon by said permittees in accordance with the terms and
dispositions contained elsewhere in this decision....
Sometime in January 1951 Nicanor Casteel forbade Inocencia Deluao from further administering the fishpond,
and ejected the latter's representative (encargado), Jesus Donesa, from the premises.
Alleging violation of the contract of service (exhibit A) entered into between Inocencia Deluao and Nicanor
Casteel, Felipe Deluao and Inocencia Deluao on April 3, 1951 filed an action in the Court of First Instance of
Davao for specific performance and damages against Nicanor Casteel and Juan Depra (who, they alleged,
instigated Casteel to violate his contract), praying inter alia, (a) that Casteel be ordered to respect and abide by
the terms and conditions of said contract and that Inocencia Deluao be allowed to continue administering the
said fishpond and collecting the proceeds from the sale of the fishes caught from time to time; and (b) that the
defendants be ordered to pay jointly and severally to plaintiffs the sum of P20,000 in damages.
On April 18, 1951 the plaintiffs filed an ex parte motion for the issuance of a preliminary injunction, praying
among other things, that during the pendency of the case and upon their filling the requisite bond as may be
fixed by the court, a preliminary injunction be issued to restrain Casteel from doing the acts complained of, and
that after trial the said injunction be made permanent. The lower court on April 26, 1951 granted the motion,
and, two days later, it issued a preliminary mandatory injunction addressed to Casteel, the dispositive portion of
which reads as follows:
POR EL PRESENTE, queda usted ordenado que, hasta nueva orden, usted, el demandado y todos usu
abogados, agentes, mandatarios y demas personas que obren en su ayuda, desista de impedir a la
demandante Inocencia R. Deluao que continue administrando personalmente la pesqueria objeto de
esta causa y que la misma continue recibiendo los productos de la venta de los pescados provenientes
de dicha pesqueria, y que, asimismo, se prohibe a dicho demandado Nicanor Casteel a desahuciar
mediante fuerza al encargado de los demandantes llamado Jesus Donesa de la pesqueria objeto de la
demanda de autos.
On May 10, 1951 Casteel filed a motion to dissolve the injunction, alleging among others, that he was the
owner, lawful applicant and occupant of the fishpond in question. This motion, opposed by the plaintiffs on
June 15, 1951, was denied by the lower court in its order of June 26, 1961.
The defendants on May 14, 1951 filed their answer with counterclaim, amended on January 8, 1952, denying
the material averments of the plaintiffs' complaint. A reply to the defendants' amended answer was filed by the
plaintiffs on January 31, 1952.
The defendant Juan Depra moved on May 22, 1951 to dismiss the complaint as to him. On June 4, 1951 the
plaintiffs opposed his motion.
The defendants filed on October 3, 1951 a joint motion to dismiss on the ground that the plaintiffs' complaint
failed to state a claim upon which relief may be granted. The motion, opposed by the plaintiffs on October 12,
1951, was denied for lack of merit by the lower court in its order of October 22, 1951. The defendants' motion
for reconsideration filed on October 31, 1951 suffered the same fate when it was likewise denied by the lower
court in its order of November 12, 1951.
After the issues were joined, the case was set for trial. Then came a series of postponements. The lower court
(Branch I, presided by Judge Enrique A. Fernandez) finally issued on March 21, 1956 an order in open court,
reading as follows: .
Upon petition of plaintiffs, without any objection on the part of defendants, the hearing of this case is
hereby transferred to May 2 and 3, 1956 at 8:30 o'clock in the morning.
This case was filed on April 3, 1951 and under any circumstance this Court will not entertain any other
transfer of hearing of this case and if the parties will not be ready on that day set for hearing, the court
will take the necessary steps for the final determination of this case. (emphasis supplied)
On April 25, 1956 the defendants' counsel received a notice of hearing dated April 21, 1956, issued by the office
of the Clerk of Court (thru the special deputy Clerk of Court) of the Court of First Instance of Davao, setting the
hearing of the case for May 2 and 3, 1956 before Judge Amador Gomez of Branch II. The defendants, thru
counsel, on April 26, 1956 filed a motion for postponement. Acting on this motion, the lower court (Branch II,
presided by Judge Gomez) issued an order dated April 27, 1956, quoted as follows:
This is a motion for postponement of the hearing of this case set for May 2 and 3, 1956. The motion is
filed by the counsel for the defendants and has the conformity of the counsel for the plaintiffs.
An examination of the records of this case shows that this case was initiated as early as April 1951 and
that the same has been under advisement of the Honorable Enrique A. Fernandez, Presiding Judge of
Branch No. I, since September 24, 1953, and that various incidents have already been considered and
resolved by Judge Fernandez on various occasions. The last order issued by Judge Fernandez on this
case was issued on March 21, 1956, wherein he definitely states that the Court will not entertain any
further postponement of the hearing of this case.
CONSIDERING ALL THE FOREGOING, the Court believes that the consideration and termination of any
incident referring to this case should be referred back to Branch I, so that the same may be disposed of
therein. (emphasis supplied)
A copy of the abovequoted order was served on the defendants' counsel on May 4, 1956.
On the scheduled date of hearing, that is, on May 2, 1956, the lower court (Branch I, with Judge Fernandez
presiding), when informed about the defendants' motion for postponement filed on April 26, 1956, issued an
order reiterating its previous order handed down in open court on March 21, 1956 and directing the plaintiffs
to introduce their evidence ex parte, there being no appearance on the part of the defendants or their counsel.
On the basis of the plaintiffs' evidence, a decision was rendered on May 4, 1956 the dispositive portion of which
reads as follows:
EN SU VIRTUD, el Juzgado dicta de decision a favor de los demandantes y en contra del demandado
Nicanor Casteel:
(a) Declara permanente el interdicto prohibitorio expedido contra el demandado;
(b) Ordena al demandado entregue la demandante la posesion y administracion de la mitad (½) del
"fishpond" en cuestion con todas las mejoras existentes dentro de la misma;
(c) Condena al demandado a pagar a la demandante la suma de P200.00 mensualmente en concepto de
danos a contar de la fecha de la expiracion de los 30 dias de la promulgacion de esta decision hasta que
entregue la posesion y administracion de la porcion del "fishpond" en conflicto;
(d) Condena al demandado a pagar a la demandante la suma de P2,000.00 valor de los pescado
beneficiados, mas los intereses legales de la fecha de la incoacion de la demanda de autos hasta el
completo pago de la obligacion principal;
(e) Condena al demandado a pagar a la demandante la suma de P2,000.00, por gastos incurridos por
aquella durante la pendencia de esta causa;
(f) Condena al demandado a pagar a la demandante, en concepto de honorarios, la suma de P2,000.00;
 (g) Ordena el sobreseimiento de esta demanda, por insuficiencia de pruebas, en tanto en cuanto se
refiere al demandado Juan Depra;
(h) Ordena el sobreseimiento de la reconvencion de los demandados por falta de pruebas;
(i) Con las costas contra del demandado, Casteel.
The defendant Casteel filed a petition for relief from the foregoing decision, alleging, inter alia, lack of
knowledge of the order of the court a quo setting the case for trial. The petition, however, was denied by the
lower court in its order of May 21, 1956, the pertinent portion of which reads as follows:
The duty of Atty. Ruiz, was not to inquire from the Clerk of Court whether the trial of this case has been
transferred or not, but to inquire from the presiding Judge, particularly because his motion asking the
transfer of this case was not set for hearing and was not also acted upon.
Atty. Ruiz knows the nature of the order of this Court dated March 21, 1956, which reads as follows:
Upon petition of the plaintiff without any objection on the part of the defendants, the hearing of
this case is hereby transferred to May 2 and 3, 1956, at 8:30 o'clock in the morning.
This case was filed on April 3, 1951, and under any circumstance this Court will not entertain any
other transfer of the hearing of this case, and if the parties will not be ready on the day set for
hearing, the Court will take necessary steps for the final disposition of this case.
In view of the order above-quoted, the Court will not accede to any transfer of this case and the duty of
Atty. Ruiz is no other than to be present in the Sala of this Court and to call the attention of the same to
the existence of his motion for transfer.
Petition for relief from judgment filed by Atty. Ruiz in behalf of the defendant, not well taken, the same
is hereby denied.
Dissatisfied with the said ruling, Casteel appealed to the Court of Appeals which certified the case to us for final
determination on the ground that it involves only questions of law.
Casteel raises the following issues:
(1) Whether the lower court committed gross abuse of discretion when it ordered reception of the
appellees' evidence in the absence of the appellant at the trial on May 2, 1956, thus depriving the
appellant of his day in court and of his property without due process of law;
(2) Whether the lower court committed grave abuse of discretion when it denied the verified petition
for relief from judgment filed by the appellant on May 11, 1956 in accordance with Rule 38, Rules of
Court; and
(3) Whether the lower court erred in ordering the issuance ex parte of a writ of preliminary injunction
against defendant-appellant, and in not dismissing appellees' complaint.
1. The first and second issues must be resolved against the appellant.
The record indisputably shows that in the order given in open court on March 21, 1956, the lower court set the
case for hearing on May 2 and 3, 1956 at 8:30 o'clock in the morning and empathically stated that, since the
case had been pending since April 3, 1951, it would not entertain any further motion for transfer of the
scheduled hearing.
An order given in open court is presumed received by the parties on the very date and time of
promulgation,1 and amounts to a legal notification for all legal purposes.2 The order of March 21, 1956, given in
open court, was a valid notice to the parties, and the notice of hearing dated April 21, 1956 or one month
thereafter, was a superfluity. Moreover, as between the order of March 21, 1956, duly promulgated by the
lower court, thru Judge Fernandez, and the notice of hearing signed by a "special deputy clerk of court" setting
the hearing in another branch of the same court, the former's order was the one legally binding. This is because
the incidents of postponements and adjournments are controlled by the court and not by the clerk of court,
pursuant to section 4, Rule 31 (now sec. 3, Rule 22) of the Rules of Court.
Much less had the clerk of court the authority to interfere with the order of the court or to transfer the cage
from one sala to another without authority or order from the court where the case originated and was being
tried. He had neither the duty nor prerogative to re-assign the trial of the case to a different branch of the same
court. His duty as such clerk of court, in so far as the incident in question was concerned, was simply to prepare
the trial calendar. And this duty devolved upon the clerk of court and not upon the "special deputy clerk of
court" who purportedly signed the notice of hearing.
It is of no moment that the motion for postponement had the conformity of the appellees' counsel. The
postponement of hearings does not depend upon agreement of the parties, but upon the court's discretion.3
The record further discloses that Casteel was represented by a total of 12 lawyers, none of whom had ever
withdrawn as counsel. Notice to Atty. Ruiz of the order dated March 21, 1956 intransferably setting the case for
hearing for May 2 and 3, 1956, was sufficient notice to all the appellant's eleven other counsel of record. This is
a well-settled rule in our jurisdiction.4
It was the duty of Atty. Ruiz, or of the other lawyers of record, not excluding the appellant himself, to appear
before Judge Fernandez on the scheduled dates of hearing Parties and their lawyers have no right to presume
that their motions for postponement will be granted.5 For indeed, the appellant and his 12 lawyers cannot
pretend ignorance of the recorded fact that since September 24, 1953 until the trial held on May 2, 1956, the
case was under the advisement of Judge Fernandez who presided over Branch I. There was, therefore, no
necessity to "re-assign" the same to Branch II because Judge Fernandez had exclusive control of said case,
unless he was legally inhibited to try the case — and he was not.
There is truth in the appellant's contention that it is the duty of the clerk of court — not of the Court — to
prepare the trial calendar. But the assignment or reassignment of cases already pending in one sala to another
sala, and the setting of the date of trial after the trial calendar has been prepared, fall within the exclusive
control of the presiding judge.
The appellant does not deny the appellees' claim that on May 2 and 3, 1956, the office of the clerk of court of
the Court of First Instance of Davao was located directly below Branch I. If the appellant and his counsel had
exercised due diligence, there was no impediment to their going upstairs to the second storey of the Court of
First Instance building in Davao on May 2, 1956 and checking if the case was scheduled for hearing in the
said sala. The appellant after all admits that on May 2, 1956 his counsel went to the office of the clerk of court.
The appellant's statement that parties as a matter of right are entitled to notice of trial, is correct. But he was
properly accorded this right. He was notified in open court on March 21, 1956 that the case was definitely and
intransferably set for hearing on May 2 and 3, 1956 before Branch I. He cannot argue that, pursuant to the
doctrine in Siochi vs. Tirona,6 his counsel was entitled to a timely notice of the denial of his motion for
postponement. In the cited case the motion for postponement was the first one filed by the defendant; in the
case at bar, there had already been a series of postponements. Unlike the case at bar, the Siochi case was not
intransferably set for hearing. Finally, whereas the cited case did not spend for a long time, the case at bar was
only finally and intransferably set for hearing on March 21, 1956 — after almost five years had elapsed from the
filing of the complaint on April 3, 1951.
The pretension of the appellant and his 12 counsel of record that they lacked ample time to prepare for trial is
unacceptable because between March 21, 1956 and May 2, 1956, they had one month and ten days to do so. In
effect, the appellant had waived his right to appear at the trial and therefore he cannot be heard to complain
that he has been deprived of his property without due process of law.7 Verily, the constitutional requirements
of due process have been fulfilled in this case: the lower court is a competent court; it lawfully acquired
jurisdiction over the person of the defendant (appellant) and the subject matter of the action; the defendant
(appellant) was given an opportunity to be heard; and judgment was rendered upon lawful hearing.8
2. Finally, the appellant contends that the lower court incurred an error in ordering the issuance ex parte of a
writ of preliminary injunction against him, and in not dismissing the appellee's complaint. We find this
contention meritorious.
Apparently, the court a quo relied on exhibit A — the so-called "contract of service" — and the appellees'
contention that it created a contract of co-ownership and partnership between Inocencia Deluao and the
appellant over the fishpond in question.
Too well-settled to require any citation of authority is the rule that everyone is conclusively presumed to know
the law. It must be assumed, conformably to such rule, that the parties entered into the so-called "contract of
service" cognizant of the mandatory and prohibitory laws governing the filing of applications for fishpond
permits. And since they were aware of the said laws, it must likewise be assumed — in fairness to the parties —
that they did not intend to violate them. This view must perforce negate the appellees' allegation that exhibit A
created a contract of co-ownership between the parties over the disputed fishpond. Were we to admit the
establishment of a co-ownership violative of the prohibitory laws which will hereafter be discussed, we shall be
compelled to declare altogether the nullity of the contract. This would certainly not serve the cause of equity
and justice, considering that rights and obligations have already arisen between the parties. We shall therefore
construe the contract as one of partnership, divided into two parts — namely, a contract of partnership to
exploit the fishpond pending its award to either Felipe Deluao or Nicanor Casteel, and a contract of partnership
to divide the fishpond between them after such award. The first is valid, the second illegal.
It is well to note that when the appellee Inocencia Deluao and the appellant entered into the so-called "contract
of service" on November 25, 1949, there were two pending applications over the fishpond. One was Casteel's
which was appealed by him to the Secretary of Agriculture and Natural Resources after it was disallowed by the
Director of Fisheries on October 25, 1949. The other was Felipe Deluao's application over the same area which
was likewise rejected by the Director of Fisheries on November 29, 1949, refiled by Deluao and later on
withdrawn by him by letter dated March 15, 1950 to the Secretary of Agriculture and Natural Resources.
Clearly, although the fishpond was then in the possession of Casteel, neither he nor, Felipe Deluao was the
holder of a fishpond permit over the area. But be that as it may, they were not however precluded from
exploiting the fishpond pending resolution of Casteel's appeal or the approval of Deluao's application over the
same area — whichever event happened first. No law, rule or regulation prohibited them from doing so. Thus,
rather than let the fishpond remain idle they cultivated it.
The evidence preponderates in favor of the view that the initial intention of the parties was not to form a co-
ownership but to establish a partnership — Inocencia Deluao as capitalist partner and Casteel as industrial
partner — the ultimate undertaking of which was to divide into two equal parts such portion of the fishpond as
might have been developed by the amount extended by the plaintiffs-appellees, with the further provision that
Casteel should reimburse the expenses incurred by the appellees over one-half of the fishpond that would
pertain to him. This can be gleaned, among others, from the letter of Casteel to Felipe Deluao on November 15,
1949, which states, inter alia:
... [W]ith respect to your allowing me to use your money, same will redound to your benefit because you
are the ones interested in half of the work we have done so far, besides I did not insist on our being
partners in my fishpond permit, but it was you "Tatay" Eping the one who wanted that we be partners
and it so happened that we became partners because I am poor, but in the midst of my poverty it never
occurred to me to be unfair to you. Therefore so that each of us may be secured, let us have a document
prepared to the effect that we are partners in the fishpond that we caused to be made here in Balasinon,
but it does not mean that you will treat me as one of your "Bantay" (caretaker) on wage basis but not
earning wages at all, while the truth is that we are partners. In the event that you are not amenable to
my proposition and consider me as "Bantay" (caretaker) instead, do not blame me if I withdraw all my
cases and be left without even a little and you likewise.
(emphasis supplied)9
Pursuant to the foregoing suggestion of the appellant that a document be drawn evidencing their partnership,
the appellee Inocencia Deluao and the appellant executed exhibit A which, although denominated a "contract
of service," was actually the memorandum of their partnership agreement. That it was not a contract of the
services of the appellant, was admitted by the appellees themselves in their letter10 to Casteel dated December
19, 1949 wherein they stated that they did not employ him in his (Casteel's) claim but because he used their
money in developing and improving the fishpond, his right must be divided between them. Of course, although
exhibit A did not specify any wage or share appertaining to the appellant as industrial partner, he was so
entitled — this being one of the conditions he specified for the execution of the document of partnership.11
Further exchanges of letters between the parties reveal the continuing intent to divide the fishpond. In a
letter,12dated March 24, 1950, the appellant suggested that they divide the fishpond and the remaining capital,
and offered to pay the Deluaos a yearly installment of P3,000 — presumably as reimbursement for the
expenses of the appellees for the development and improvement of the one-half that would pertain to the
appellant. Two days later, the appellee Felipe Deluao replied,13expressing his concurrence in the appellant's
suggestion and advising the latter to ask for a reconsideration of the order of the Director of Fisheries
disapproving his (appellant's) application, so that if a favorable decision was secured, then they would divide
the area.
Apparently relying on the partnership agreement, the appellee Felipe Deluao saw no further need to maintain
his petition for the reinvestigation of Casteel's application. Thus by letter14 dated March 15, 1950 addressed to
the Secretary of Agriculture and Natural Resources, he withdrew his petition on the alleged ground that he was
no longer interested in the area, but stated however that he wanted his interest to be protected and his capital
to be reimbursed by the highest bidder.
The arrangement under the so-called "contract of service" continued until the decisions both dated September
15, 1950 were issued by the Secretary of Agriculture and Natural Resources in DANR Cases 353 and 353-B. This
development, by itself, brought about the dissolution of the partnership. Moreover, subsequent events likewise
reveal the intent of both parties to terminate the partnership because each refused to share the fishpond with
the other.
Art. 1830(3) of the Civil Code enumerates, as one of the causes for the dissolution of a partnership, "... any
event which makes it unlawful for the business of the partnership to be carried on or for the members to carry
it on in partnership." The approval of the appellant's fishpond application by the decisions in DANR Cases 353
and 353-B brought to the fore several provisions of law which made the continuation of the partnership
unlawful and therefore caused its ipso facto dissolution.
Act 4003, known as the Fisheries Act, prohibits the holder of a fishpond permit (the permittee) from
transferring or subletting the fishpond granted to him, without the previous consent or approval of the
Secretary of Agriculture and Natural Resources.15 To the same effect is Condition No. 3 of the fishpond permit
which states that "The permittee shall not transfer or sublet all or any area herein granted or any rights
acquired therein without the previous consent and approval of this Office." Parenthetically, we must observe
that in DANR Case 353-B, the permit granted to one of the parties therein, Leoncio Aradillos, was cancelled not
solely for the reason that his permit covered a portion of the area included in the appellant's prior fishpond
application, but also because, upon investigation, it was ascertained thru the admission of Aradillos himself that
due to lack of capital, he allowed one Lino Estepa to develop with the latter's capital the area covered by his
fishpond permit F-289-C with the understanding that he (Aradillos) would be given a share in the produce
thereof.16
Sec. 40 of Commonwealth Act 141, otherwise known as the Public Land Act, likewise provides that
The lessee shall not assign, encumber, or sublet his rights without the consent of the Secretary of
Agriculture and Commerce, and the violation of this condition shall avoid the contract; Provided, That
assignment, encumbrance, or subletting for purposes of speculation shall not be permitted in any
case: Provided, further, That nothing contained in this section shall be understood or construed to
permit the assignment, encumbrance, or subletting of lands leased under this Act, or under any previous
Act, to persons, corporations, or associations which under this Act, are not authorized to lease public
lands.
Finally, section 37 of Administrative Order No. 14 of the Secretary of Agriculture and Natural Resources issued
in August 1937, prohibits a transfer or sublease unless first approved by the Director of Lands and under such
terms and conditions as he may prescribe. Thus, it states:
When a transfer or sub-lease of area and improvement may be allowed. — If the permittee or lessee
had, unless otherwise specifically provided, held the permit or lease and actually operated and made
improvements on the area for at least one year, he/she may request permission to sub-lease or transfer
the area and improvements under certain conditions.
(a) Transfer subject to approval. — A sub-lease or transfer shall only be valid when first approved by the
Director under such terms and conditions as may be prescribed, otherwise it shall be null and void. A
transfer not previously approved or reported shall be considered sufficient cause for the cancellation of
the permit or lease and forfeiture of the bond and for granting the area to a qualified applicant or
bidder, as provided in subsection (r) of Sec. 33 of this Order.
Since the partnership had for its object the division into two equal parts of the fishpond between the appellees
and the appellant after it shall have been awarded to the latter, and therefore it envisaged the unauthorized
transfer of one-half thereof to parties other than the applicant Casteel, it was dissolved by the approval of his
application and the award to him of the fishpond. The approval was an event which made it unlawful for the
business of the partnership to be carried on or for the members to carry it on in partnership.
The appellees, however, argue that in approving the appellant's application, the Secretary of Agriculture and
Natural Resources likewise recognized and/or confirmed their property right to one-half of the fishpond by
virtue of the contract of service, exhibit A. But the untenability of this argument would readily surface if one
were to consider that the Secretary of Agriculture and Natural Resources did not do so for the simple reason
that he does not possess the authority to violate the aforementioned prohibitory laws nor to exempt anyone
from their operation.
However, assuming in gratia argumenti that the approval of Casteel's application, coupled with the foregoing
prohibitory laws, was not enough to cause the dissolution ipso facto of their partnership, succeeding events
reveal the intent of both parties to terminate the partnership by refusing to share the fishpond with the other.
On December 27, 1950 Casteel wrote17 the appellee Inocencia Deluao, expressing his desire to divide the
fishpond so that he could administer his own share, such division to be subject to the approval of the Secretary
of Agriculture and Natural Resources. By letter dated December 29, 1950,18 the appellee Felipe Deluao
demurred to Casteel's proposition because there were allegedly no appropriate grounds to support the same
and, moreover, the conflict over the fishpond had not been finally resolved.
The appellant wrote on January 4, 1951 a last letter19 to the appellee Felipe Deluao wherein the former
expressed his determination to administer the fishpond himself because the decision of the Government was in
his favor and the only reason why administration had been granted to the Deluaos was because he was
indebted to them. In the same letter, the appellant forbade Felipe Deluao from sending the couple's encargado,
Jesus Donesa, to the fishpond. In reply thereto, Felipe Deluao wrote a letter20 dated January 5, 1951 in which he
reiterated his refusal to grant the administration of the fishpond to the appellant, stating as a ground his belief
"that only the competent agencies of the government are in a better position to render any equitable
arrangement relative to the present case; hence, any action we may privately take may not meet the procedure
of legal order."
Inasmuch as the erstwhile partners articulated in the aforecited letters their respective resolutions not to share
the fishpond with each other — in direct violation of the undertaking for which they have established their
partnership — each must be deemed to have expressly withdrawn from the partnership, thereby causing its
dissolution pursuant to art. 1830(2) of the Civil Code which provides, inter alia, that dissolution is caused "by
the express will of any partner at any time."
In this jurisdiction, the Secretary of Agriculture and Natural Resources possesses executive and administrative
powers with regard to the survey, classification, lease, sale or any other form of concession or disposition and
management of the lands of the public domain, and, more specifically, with regard to the grant or withholding
of licenses, permits, leases and contracts over portions of the public domain to be utilized as fishponds.21, Thus,
we held in Pajo, et al. vs. Ago, et al. (L-15414, June 30, 1960), and reiterated in Ganitano vs. Secretary of
Agriculture and Natural Resources, et al.
(L-21167, March 31, 1966), that
... [T]he powers granted to the Secretary of Agriculture and Commerce (Natural Resources) by law
regarding the disposition of public lands such as granting of licenses, permits, leases, and contracts, or
approving, rejecting, reinstating, or cancelling applications, or deciding conflicting applications, are all
executive and administrative in nature. It is a well-recognized principle that purely administrative and
discretionary functions may not be interfered with by the courts (Coloso v. Board of Accountancy, G.R.
No. L-5750, April 20, 1953). In general, courts have no supervising power over the proceedings and
action of the administrative departments of the government. This is generally true with respect to acts
involving the exercise of judgment or discretion, and findings of fact. (54 Am. Jur. 558-559) Findings of
fact by an administrative board or official, following a hearing, are binding upon the courts and will not
be disturbed except where the board or official has gone beyond his statutory authority, exercised
unconstitutional powers or clearly acted arbitrarily and without regard to his duty or with grave abuse of
discretion... (emphasis supplied)
In the case at bar, the Secretary of Agriculture and Natural Resources gave due course to the appellant's
fishpond application 1717 and awarded to him the possession of the area in question. In view of the finality of
the Secretary's decision in DANR Cases 353 and 353-B, and considering the absence of any proof that the said
official exceeded his statutory authority, exercised unconstitutional powers, or acted with arbitrariness and in
disregard of his duty, or with grave abuse of discretion, we can do no less than respect and maintain unfettered
his official acts in the premises. It is a salutary rule that the judicial department should not dictate to the
executive department what to do with regard to the administration and disposition of the public domain which
the law has entrusted to its care and administration. Indeed, courts cannot superimpose their discretion on that
of the land department and compel the latter to do an act which involves the exercise of judgment and
discretion.22
Therefore, with the view that we take of this case, and even assuming that the injunction was properly issued
because present all the requisite grounds for its issuance, its continuation, and, worse, its declaration as
permanent, was improper in the face of the knowledge later acquired by the lower court that it was the
appellant's application over the fishpond which was given due course. After the Secretary of Agriculture and
Natural Resources approved the appellant's application, he became to all intents and purposes the legal
permittee of the area with the corresponding right to possess, occupy and enjoy the same. Consequently, the
lower court erred in issuing the preliminary mandatory injunction. We cannot overemphasize that an injunction
should not be granted to take property out of the possession and control of one party and place it in the hands
of another whose title has not been clearly established by law.23
However, pursuant to our holding that there was a partnership between the parties for the exploitation of the
fishpond before it was awarded to Casteel, this case should be remanded to the lower court for the reception
of evidence relative to an accounting from November 25, 1949 to September 15, 1950, in order for the court to
determine (a) the profits realized by the partnership, (b) the share (in the profits) of Casteel as industrial
partner, (e) the share (in the profits) of Deluao as capitalist partner, and (d) whether the amounts totalling
about P27,000 advanced by Deluao to Casteel for the development and improvement of the fishpond have
already been liquidated. Besides, since the appellee Inocencia Deluao continued in possession and enjoyment
of the fishpond even after it was awarded to Casteel, she did so no longer in the concept of a capitalist partner
but merely as creditor of the appellant, and therefore, she must likewise submit in the lower court an
accounting of the proceeds of the sales of all the fishes harvested from the fishpond from September 16, 1950
until Casteel shall have been finally given the possession and enjoyment of the same. In the event that the
appellee Deluao has received more than her lawful credit of P27,000 (or whatever amounts have been
advanced to Casteel), plus 6% interest thereon per annum, then she should reimburse the excess to the
appellant.
ACCORDINGLY, the judgment of the lower court is set aside. Another judgment is hereby rendered: (1)
dissolving the injunction issued against the appellant, (2) placing the latter back in possession of the fishpond in
litigation, and (3) remanding this case to the court of origin for the reception of evidence relative to the
accounting that the parties must perforce render in the premises, at the termination of which the court shall
render judgment accordingly. The appellant's counterclaim is dismissed. No pronouncement as to costs.
 [G.R. No. 142612. July 29, 2005]
OSCAR ANGELES and EMERITA ANGELES, petitioners, vs. THE HON. SECRETARY OF JUSTICE and FELINO
MERCADO, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari[1] to annul the letter-resolution[2] dated 1 February 2000 of the Secretary of
Justice in Resolution No. 155.[3] The Secretary of Justice affirmed the resolution[4] in I.S. No. 96-939 dated 28
February 1997 rendered by the Provincial Prosecution Office of the Department of Justice in Santa Cruz, Laguna
(Provincial Prosecution Office). The Provincial Prosecution Office resolved to dismiss the complaint for estafa filed
by petitioners Oscar and Emerita Angeles (Angeles spouses) against respondent Felino Mercado (Mercado).
Antecedent Facts
On 19 November 1996, the Angeles spouses filed a criminal complaint for estafa under Article 315 of the
Revised Penal Code against Mercado before the Provincial Prosecution Office. Mercado is the brother-in-law of
the Angeles spouses, being married to Emerita Angeles sister Laura.
In their affidavits, the Angeles spouses claimed that in November 1992, Mercado convinced them to enter
into a contract of antichresis,[5] colloquially known as sanglaang-perde, covering eight parcels of land (subject
land) planted with fruit-bearing lanzones trees located in Nagcarlan, Laguna and owned by Juana Suazo. The
contract of antichresis was to last for five years with P210,000 as consideration. As the Angeles spouses stay in
Manila during weekdays and go to Laguna only on weekends, the parties agreed that Mercado would administer
the lands and complete the necessary paperwork.[6]
After three years, the Angeles spouses asked for an accounting from Mercado. Mercado explained that the
subject land earned P46,210 in 1993, which he used to buy more lanzones trees. Mercado also reported that the
trees bore no fruit in 1994. Mercado gave no accounting for 1995. The Angeles spouses claim that only after this
demand for an accounting did they discover that Mercado had put the contract of sanglaang-perde over the
subject land under Mercado and his spouses names.[7] The relevant portions of the contract of sanglaang-perde,
signed by Juana Suazo alone, read:
xxx
Na alang-alang sa halagang DALAWANG DAAN AT SAMPUNG LIBONG PISO (P210,000), salaping gastahin, na
aking tinanggap sa mag[-]asawa nila G. AT GNG. FELINO MERCADO, mga nasa hustong gulang, Filipino, tumitira
at may pahatirang sulat sa Bgy. Maravilla, bayan ng Nagcarlan, lalawigan ng Laguna, ay aking ipinagbili, iniliwat
at isinalin sa naulit na halaga, sa nabanggit na mag[-] asawa nila G. AT GNG. FELINO MERCADO[,] sa kanila ay
magmamana, kahalili at ibang dapat pagliwatan ng kanilang karapatan, ang lahat na ibubunga ng lahat na puno
ng lanzones, hindi kasama ang ibang halaman na napapalooban nito, ng nabanggit na WALONG (8) Lagay na
Lupang Cocal-Lanzonal, sa takdang LIMA (5) NA [sic] TAON, magpapasimula sa taong 1993, at magtatapos sa
taong 1997, kayat pagkatapos ng lansonesan sa taong 1997, ang pamomosision at pakikinabang sa lahat na
puno ng lanzones sa nabanggit na WALONG (8) Lagay na Lupang Cocal-Lanzonal ay manunumbalik sa akin, sa
akin ay magmamana, kahalili at ibang dapat pagliwatan ng aking karapatan na ako ay walang ibabalik na ano pa
mang halaga, sa mag[-] asawa nila G. AT GNG. FELINO MERCADO.
Na ako at ang mag[-]asawa nila G. AT GNG. FELINO MERCADO ay nagkasundo na ako ay bibigyan nila ng LIMA
(5) na [sic] kaing na lanzones taon-taon sa loob ng LIMA (5) na [sic] taon ng aming kasunduang ito.
Na ako at ang mag[-]asawa nila G. AT GNG. FELINO MERCADO ay nagkasundo na silang mag[-]asawa nila G. AT
GNG. FELINO MERCADO ang magpapaalis ng dapo sa puno ng lansones taon-taon [sic] sa loob ng LIMA (5) [sic]
taonng [sic] aming kasunduang ito.[8]
In his counter-affidavit, Mercado denied the Angeles spouses allegations. Mercado claimed that there exists
an industrial partnership, colloquially known as sosyo industrial, between him and his spouse as industrial
partners and the Angeles spouses as the financiers. This industrial partnership had existed since 1991, before the
contract of antichresis over the subject land. As the years passed, Mercado used his and his spouses earnings as
part of the capital in the business transactions which he entered into in behalf of the Angeles spouses. It was their
practice to enter into business transactions with other people under the name of Mercado because the Angeles
spouses did not want to be identified as the financiers.
Mercado attached bank receipts showing deposits in behalf of Emerita Angeles and contracts under his name
for the Angeles spouses. Mercado also attached the minutes of the barangay conciliation proceedings held on 7
September 1996. During the barangay conciliation proceedings, Oscar Angeles stated that there was a
written sosyo industrial agreement: capital would come from the Angeles spouses while the profit would be
divided evenly between Mercado and the Angeles spouses.[9]
The Ruling of the Provincial Prosecution Office
 On 3 January 1997, the Provincial Prosecution Office issued a resolution recommending the filing of criminal
information for estafa against Mercado. This resolution, however, was issued without Mercados counter-
affidavit.
Meanwhile, Mercado filed his counter-affidavit on 2 January 1997. On receiving the 3 January 1997
resolution, Mercado moved for its reconsideration. Hence, on 26 February 1997, the Provincial Prosecution Office
issued an amended resolution dismissing the Angeles spouses complaint for estafa against Mercado.
The Provincial Prosecution Office stated thus:
The subject of the complaint hinges on a partnership gone sour. The partnership was initially unsaddled [with]
problems. Management became the source of misunderstanding including the accounting of profits, which led
to further misunderstanding until it was revealed that the contract with the orchard owner was only with the
name of the respondent, without the names of the complainants.
The accusation of estafa here lacks enough credible evidentiary support to sustain a prima facie finding.
Premises considered, it is respectfully recommended that the complaint for estafa be dismissed.
RESPECTFULLY SUBMITTED.[10]
The Angeles spouses filed a motion for reconsideration, which the Provincial Prosecution Office denied in a
resolution dated 4 August 1997.
The Ruling of the Secretary of Justice
On appeal to the Secretary of Justice, the Angeles spouses emphasized that the document evidencing the
contract of sanglaang-perde with Juana Suazo was executed in the name of the Mercado spouses, instead of the
Angeles spouses. The Angeles spouses allege that this document alone proves Mercados misappropriation of
their P210,000.
The Secretary of Justice found otherwise. Thus:
Reviewing the records of the case, we are of the opinion that the indictment of [Mercado] for the crime of
estafa cannot be sustained. [The Angeles spouses] failed to show sufficient proof that [Mercado] deliberately
deceived them in the sanglaang perde transaction. The document alone, which was in the name of [Mercado
and his spouse], failed to convince us that there was deceit or false representation on the part of [Mercado]
that induced the [Angeles spouses] to part with their money. [Mercado] satisfactorily explained that the
[Angeles spouses] do not want to be revealed as the financiers. Indeed, it is difficult to believe that the [Angeles
spouses] would readily part with their money without holding on to some document to evidence the receipt of
money, or at least to inspect the document involved in the said transaction. Under the circumstances, we are
inclined to believe that [the Angeles spouses] knew from the very start that the questioned document was not
really in their names.
In addition, we are convinced that a partnership truly existed between the [Angeles spouses] and [Mercado].
The formation of a partnership was clear from the fact that they contributed money to a common fund and
divided the profits among themselves. Records would show that [Mercado] was able to make deposits for the
account of the [Angeles spouses]. These deposits represented their share in the profits of their business
venture. Although the [Angeles spouses] deny the existence of a partnership, they, however, never disputed
that the deposits made by [Mercado] were indeed for their account.
The transcript of notes on the dialogue between the [Angeles spouses] and [Mercado] during the hearing of
their barangay conciliation case reveals that the [Angeles spouses] acknowledged their joint business ventures
with [Mercado] although they assailed the manner by which [Mercado] conducted the business and handled
and distributed the funds. The veracity of this transcript was not raised in issued [sic] by [the Angeles spouses].
Although the legal formalities for the formation of a partnership were not adhered to, the partnership
relationship of the [Angeles spouses] and [Mercado] is evident in this case. Consequently, there is no estafa
where money is delivered by a partner to his co-partner on the latters representation that the amount shall be
applied to the business of their partnership. In case of misapplication or conversion of the money received, the
co-partners liability is civil in nature (People v. Clarin, 7 Phil. 504)
WHEREFORE, the appeal is hereby DISMISSED.[11]
Hence, this petition.
Issues
The Angeles spouses ask us to consider the following issues:
1. Whether the Secretary of Justice committed grave abuse of discretion amounting to lack of jurisdiction
in dismissing the appeal of the Angeles spouses;
2. Whether a partnership existed between the Angeles spouses and Mercado even without any
documentary proof to sustain its existence;
3. Assuming that there was a partnership, whether there was misappropriation by Mercado of the
proceeds of the lanzones after the Angeles spouses demanded an accounting from him of the income
 at the office of the barangay authorities on 7 September 1996, and Mercado failed to do so and also
failed to deliver the proceeds to the Angeles spouses;
4. Whether the Secretary of Justice should order the filing of the information for estafa against
Mercado.[12]
The Ruling of the Court
The petition has no merit.
Whether the Secretary of Justice Committed
Grave Abuse of Discretion
An act of a court or tribunal may constitute grave abuse of discretion when the same is performed in a
capricious or whimsical exercise of judgment amounting to lack of jurisdiction. The abuse of discretion must be
so patent and gross as to amount to an evasion of positive duty, or to a virtual refusal to perform a duty enjoined
by law, as where the power is exercised in an arbitrary and despotic manner because of passion or personal
hostility.[13]
The Angeles spouses fail to convince us that the Secretary of Justice committed grave abuse of discretion
when he dismissed their appeal. Moreover, the Angeles spouses committed an error in procedure when they
failed to file a motion for reconsideration of the Secretary of Justices resolution. A previous motion for
reconsideration before the filing of a petition for certiorari is necessary unless: (1) the issue raised is one purely
of law; (2) public interest is involved; (3) there is urgency; (4) a question of jurisdiction is squarely raised before
and decided by the lower court; and (5) the order is a patent nullity.[14] The Angeles spouses failed to show that
their case falls under any of the exceptions. In fact, this present petition for certiorari is dismissible for this reason
alone.
Whether a Partnership Existed
Between Mercado and the Angeles Spouses
The Angeles spouses allege that they had no partnership with Mercado. The Angeles spouses rely on Articles
1771 to 1773 of the Civil Code, which state that:
Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary.
Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which must be recorded in the Office of the Securities and
Exchange Commission.
Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the
partnership and the members thereof to third persons.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an
inventory of said property is not made, signed by the parties, and attached to the public instrument.
The Angeles spouses position that there is no partnership because of the lack of a public instrument
indicating the same and a lack of registration with the Securities and Exchange Commission (SEC) holds no water.
First, the Angeles spouses contributed money to the partnership and not immovable property. Second, mere
failure to register the contract of partnership with the SEC does not invalidate a contract that has the essential
requisites of a partnership. The purpose of registration of the contract of partnership is to give notice to third
parties. Failure to register the contract of partnership does not affect the liability of the partnership and of the
partners to third persons. Neither does such failure to register affect the partnerships juridical personality. A
partnership may exist even if the partners do not use the words partner or partnership.
Indeed, the Angeles spouses admit to facts that prove the existence of a partnership: a contract showing
a sosyo industrial or industrial partnership, contribution of money and industry to a common fund, and division
of profits between the Angeles spouses and Mercado.
Whether there was
Misappropriation by Mercado
The Secretary of Justice adequately explained the alleged misappropriation by Mercado: The document
alone, which was in the name of [Mercado and his spouse], failed to convince us that there was deceit or false
representation on the part of [Mercado] that induced the [Angeles spouses] to part with their money. [Mercado]
satisfactorily explained that the [Angeles spouses] do not want to be revealed as the financiers.[15]
Even Branch 26 of the Regional Trial Court of Santa Cruz, Laguna which decided the civil case for damages,
injunction and restraining order filed by the Angeles spouses against Mercado and Leo Cerayban, stated:
xxx [I]t was the practice to have all the contracts of antichresis of their partnership secured in [Mercados] name
as [the Angeles spouses] are apprehensive that, if they come out into the open as financiers of said contracts,
they might be kidnapped by the New Peoples Army or their business deals be questioned by the Bureau of
Internal Revenue or worse, their assets and unexplained income be sequestered, as xxx Oscar Angeles was then
working with the government.[16]
Furthermore, accounting of the proceeds is not a proper subject for the present case.
For these reasons, we hold that the Secretary of Justice did not abuse his discretion in dismissing the appeal
of the Angeles spouses.
WHEREFORE, we AFFIRM the decision of the Secretary of Justice. The present petition for certiorari is
DISMISSED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ., concur.
G.R. No. L-24193 June 28, 1968
MAURICIO AGAD, plaintiff-appellant,
vs.
SEVERINO MABATO and MABATO and AGAD COMPANY, defendants-appellees.
Angeles, Maskarino and Associates for plaintiff-appellant.
Victorio S. Advincula for defendants-appellees.
CONCEPCION, C.J.:
In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of the Court of First Instance of
Davao, we are called upon to determine the applicability of Article 1773 of our Civil Code to the contract of
partnership on which the complaint herein is based.
Alleging that he and defendant Severino Mabato are — pursuant to a public instrument dated August 29, 1952,
copy of which is attached to the complaint as Annex "A" — partners in a fishpond business, to the capital of
which Agad contributed P1,000, with the right to receive 50% of the profits; that from 1952 up to and including
1956, Mabato who handled the partnership funds, had yearly rendered accounts of the operations of the
partnership; and that, despite repeated demands, Mabato had failed and refused to render accounts for the
years 1957 to 1963, Agad prayed in his complaint against Mabato and Mabato & Agad Company, filed on June
9, 1964, that judgment be rendered sentencing Mabato to pay him (Agad) the sum of P14,000, as his share in
the profits of the partnership for the period from 1957 to 1963, in addition to P1,000 as attorney's fees, and
ordering the dissolution of the partnership, as well as the winding up of its affairs by a receiver to be appointed
therefor.
In his answer, Mabato admitted the formal allegations of the complaint and denied the existence of said
partnership, upon the ground that the contract therefor had not been perfected, despite the execution of
Annex "A", because Agad had allegedly failed to give his P1,000 contribution to the partnership capital. Mabato
prayed, therefore, that the complaint be dismissed; that Annex "A" be declared void ab initio; and that Agad be
sentenced to pay actual, moral and exemplary damages, as well as attorney's fees.
Subsequently, Mabato filed a motion to dismiss, upon the ground that the complaint states no cause of action
and that the lower court had no jurisdiction over the subject matter of the case, because it involves principally
the determination of rights over public lands. After due hearing, the court issued the order appealed from,
granting the motion to dismiss the complaint for failure to state a cause of action. This conclusion was
predicated upon the theory that the contract of partnership, Annex "A", is null and void, pursuant to Art. 1773
of our Civil Code, because an inventory of the fishpond referred in said instrument had not been attached
thereto. A reconsideration of this order having been denied, Agad brought the matter to us for review by record
on appeal.
Articles 1771 and 1773 of said Code provide:
Art. 1771. A partnership may be constituted in any form, except where immovable property or real
rights are contributed thereto, in which case a public instrument shall be necessary.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if
inventory of said property is not made, signed by the parties; and attached to the public instrument.
The issue before us hinges on whether or not "immovable property or real rights" have been contributed to the
partnership under consideration. Mabato alleged and the lower court held that the answer should be in the
affirmative, because "it is really inconceivable how a partnership engaged in the fishpond business could exist
without said fishpond property (being) contributed to the partnership." It should be noted, however, that, as
stated in Annex "A" the partnership was established "to operate a fishpond", not to "engage in a fishpond
business". Moreover, none of the partners contributed either a fishpond or a real right to any fishpond. Their
contributions were limited to the sum of P1,000 each. Indeed, Paragraph 4 of Annex "A" provides:
That the capital of the said partnership is Two Thousand (P2,000.00) Pesos Philippine Currency, of which
One Thousand (P1,000.00) pesos has been contributed by Severino Mabato and One Thousand
(P1,000.00) Pesos has been contributed by Mauricio Agad.
xxx xxx xxx
The operation of the fishpond mentioned in Annex "A" was the purpose of the partnership. Neither said
fishpond nor a real right thereto was contributed to the partnership or became part of the capital thereof, even
if a fishpond or a real right thereto could become part of its assets.
WHEREFORE, we find that said Article 1773 of the Civil Code is not in point and that, the order appealed from
should be, as it is hereby set aside and the case remanded to the lower court for further proceedings, with the
costs of this instance against defendant-appellee, Severino Mabato. It is so ordered.
G.R. No. L-25532 February 28, 1969
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special
Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.
REYES, J.B.L., J.:
A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947 by
herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the limited
partners. The partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership. On
1 October 1947, the limited partnership was registered with the Securities and Exchange Commission. The firm
engaged, among other activities, in the importation, marketing, distribution and operation of automatic
phonographs, radios, television sets and amusement machines, their parts and accessories. It had an office and
held itself out as a limited partnership, handling and carrying merchandise, using invoices, bills and letterheads
bearing its trade-name, maintaining its own books of accounts and bank accounts, and had a quota allocation
with the Central Bank.
In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18 December
1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The sale was duly recorded
with the Securities and Exchange Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a corporation, without objection by the herein
petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an assessment, consolidated the
income of the firm and the individual incomes of the partners-spouses Suter and Spirig resulting in a
determination of a deficiency income tax against respondent Suter in the amount of P2,678.06 for 1954 and
P4,567.00 for 1955.
Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not in
accordance with law, but his request was denied. Unable to secure a reconsideration, he appealed to the Court
of Tax Appeals, which court, after trial, rendered a decision, on 11 November 1965, reversing that of the
Commissioner of Internal Revenue.
The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax court's
aforesaid decision. It raises these issues:
(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be disregarded
for income tax purposes, considering that respondent William J. Suter and his wife, Julia Spirig Suter actually
formed a single taxable unit; and
(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent William J.
Suter and Julia Spirig Suter and the subsequent sale to them by the remaining partner, Gustav Carlson, of his
participation of P2,000.00 in the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig and
their subsequent acquisition of the interests of remaining partner Carlson in the partnership dissolved the
limited partnership, and if they did not, the fiction of juridical personality of the partnership should be
disregarded for income tax purposes because the spouses have exclusive ownership and control of the
business; consequently the income tax return of respondent Suter for the years in question should have
included his and his wife's individual incomes and that of the limited partnership, in accordance with Section 45
(d) of the National Internal Revenue Code, which provides as follows:
(d) Husband and wife. — In the case of married persons, whether citizens, residents or non-residents,
only one consolidated return for the taxable year shall be filed by either spouse to cover the income of
both spouses; ....
In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his marriage
with limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948 is not a ground
for dissolution of the partnership, either in the Code of Commerce or in the New Civil Code, and that since its
juridical personality had not been affected and since, as a limited partnership, as contra distinguished from a
duly registered general partnership, it is taxable on its income similarly with corporations, Suter was not bound
to include in his individual return the income of the limited partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by operation of
law because of the marriage of the only general partner, William J. Suter to the originally limited partner, Julia
Spirig one year after the partnership was organized is rested by the appellant upon the opinion of now Senator
Tolentino in Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th Ed., page 58,
that reads as follows:
A husband and a wife may not enter into a contract of general copartnership, because under the Civil
Code, which applies in the absence of express provision in the Code of Commerce, persons prohibited
from making donations to each other are prohibited from entering into universal partnerships. (2
Echaverri 196) It follows that the marriage of partners necessarily brings about the dissolution of a pre-
existing partnership. (1 Guy de Montella 58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd.
was not a universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the Spanish
Civil Code, of 1889 (which was the law in force when the subject firm was organized in 1947),
a universal partnership requires either that the object of the association be all the present property of the
partners, as contributed by them to the common fund, or else "all that the partners may acquire by
their industry or work during the existence of the partnership". William J. Suter "Morcoin" Co., Ltd. was not such
a universal partnership, since the contributions of the partners were fixed sums of money, P20,000.00 by
William Suter and P18,000.00 by Julia Spirig and neither one of them was an industrial partner. It follows that
William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses were forbidden to enter by Article 1677
of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th Edition, 1952,
Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero o podran
constituir sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos a la tesis
permisiva de los contratos de sociedad particular entre esposos, ya que ningun precepto de nuestro
Codigo los prohibe, y hay que estar a la norma general segun la que toda persona es capaz para
contratar mientras no sea declarado incapaz por la ley. La jurisprudencia de la Direccion de los Registros
fue favorable a esta misma tesis en su resolution de 3 de febrero de 1936, mas parece cambiar de
rumbo en la de 9 de marzo de 1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one of the
causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce.
The appellant's view, that by the marriage of both partners the company became a single proprietorship, is
equally erroneous. The capital contributions of partners William J. Suter and Julia Spirig were separately owned
and contributed by them before their marriage; and after they were joined in wedlock, such contributions
remained their respective separate property under the Spanish Civil Code (Article 1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become common
property of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its own,
distinct and separate from that of its partners (unlike American and English law that does not recognize such
separate juridical personality), the bypassing of the existence of the limited partnership as a taxpayer can only
be done by ignoring or disregarding clear statutory mandates and basic principles of our law. The limited
partnership's separate individuality makes it impossible to equate its income with that of the component
members. True, section 24 of the Internal Revenue Code merges registered general co-partnerships (compañias
colectivas) with the personality of the individual partners for income tax purposes. But this rule is exceptional in
its disregard of a cardinal tenet of our partnership laws, and can not be extended by mere implication to limited
partnerships.
The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-13554,
Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for disregarding the
fiction of legal personality of the corporations involved therein are not applicable to the present case. In the
cited cases, the corporations were already subject to tax when the fiction of their corporate personality was
pierced; in the present case, to do so would exempt the limited partnership from income taxation but would
throw the tax burden upon the partners-spouses in their individual capacities. The corporations, in the cases
cited, merely served as business conduits or alter egos of the stockholders, a factor that justified a disregard of
their corporate personalities for tax purposes. This is not true in the present case. Here, the limited partnership
is not a mere business conduit of the partner-spouses; it was organized for legitimate business purposes; it
conducted its own dealings with its customers prior to appellee's marriage, and had been filing its own income
tax returns as such independent entity. The change in its membership, brought about by the marriage of the
partners and their subsequent acquisition of all interest therein, is no ground for withdrawing the partnership
from the coverage of Section 24 of the tax code, requiring it to pay income tax. As far as the records show, the
partners did not enter into matrimony and thereafter buy the interests of the remaining partner with the
premeditated scheme or design to use the partnership as a business conduit to dodge the tax laws. Regularity,
not otherwise, is presumed.
As the limited partnership under consideration is taxable on its income, to require that income to be included in
the individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would
even conflict with what it specifically provides in its Section 24: for the appellant Commissioner's stand results
in equal treatment, tax wise, of a general copartnership (compañia colectiva) and a limited partnership, when
the code plainly differentiates the two. Thus, the code taxes the latter on its income, but not the former,
because it is in the case of compañias colectivas that the members, and not the firm, are taxable in their
individual capacities for any dividend or share of the profit derived from the duly registered general partnership
(Section 26, N.I.R.C.; Arañas, Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 88-89).lawphi1.nêt
But it is argued that the income of the limited partnership is actually or constructively the income of the
spouses and forms part of the conjugal partnership of gains. This is not wholly correct. As pointed out in Agapito
vs. Molo 50 Phil. 779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the fruits of the wife's
parapherna become conjugal only when no longer needed to defray the expenses for the administration and
preservation of the paraphernal capital of the wife. Then again, the appellant's argument erroneously confines
itself to the question of the legal personality of the limited partnership, which is not essential to the income
taxability of the partnership since the law taxes the income of even joint accounts that have no personality of
their own. 1 Appellant is, likewise, mistaken in that it assumes that the conjugal partnership of gains is a taxable
unit, which it is not. What is taxable is the "income of both spouses" (Section 45 [d] in their individual capacities.
Though the amount of income (income of the conjugal partnership vis-a-vis the joint income of husband and
wife) may be the same for a given taxable year, their consequences would be different, as their contributions in
the business partnership are not the same.
The difference in tax rates between the income of the limited partnership being consolidated with, and when
split from the income of the spouses, is not a justification for requiring consolidation; the revenue code, as it
presently stands, does not authorize it, and even bars it by requiring the limited partnership to pay tax on its
own income.
FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.