G.R. No.
154486               December 1, 2010 exception of the real property adjudicated to Pacita Jarantilla, the
FEDERICO JARANTILLA, JR., Petitioner,
vs.
ANTONIETA JARANTILLA, BUENAVENTURA REMOTIGUE,
substituted by CYNTHIA REMOTIGUE, DOROTEO JARANTILLA
and TOMAS JARANTILLA, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:
This petition for review on certiorari1 seeks to modify the Decision2 of
the Court of Appeals dated July 30, 2002 in CA-G.R. CV No. 40887,
which set aside the Decision3 dated December 18, 1992 of the
Regional Trial Court (RTC) of Quezon City, Branch 98 in Civil Case
No. Q-50464.
The pertinent facts are as follows:
The spouses Andres Jarantilla and Felisa Jaleco were survived by
eight children: Federico, Delfin, Benjamin, Conchita, Rosita, Pacita,
Rafael and Antonieta.4 Petitioner Federico Jarantilla, Jr. is the
grandchild of the late Jarantilla spouses by their son Federico
Jarantilla, Sr. and his wife Leda Jamili.5 Petitioner also has two other
brothers: Doroteo and Tomas Jarantilla.
Petitioner was one of the defendants in the complaint before the RTC
while Antonieta Jarantilla, his aunt, was the plaintiff therein. His co-
respondents before he joined his aunt Antonieta in her complaint,
were his late aunt Conchita Jarantilla’s husband Buenaventura
Remotigue, who died during the pendency of the case, his cousin
Cynthia Remotigue, the adopted daughter of Conchita Jarantilla and
Buenaventura Remotigue, and his brothers Doroteo and Tomas
Jarantilla.6
In 1948, the Jarantilla heirs extrajudicially partitioned amongst
themselves the real properties of their deceased parents.7 With the
heirs also agreed to allot the produce of the said real properties for
the years 1947-1949 for the studies of Rafael and Antonieta
Jarantilla.8
In the same year, the spouses Rosita Jarantilla and Vivencio
Deocampo entered into an agreement with the spouses
Buenaventura Remotigue and Conchita Jarantilla to provide mutual
assistance to each other by way of financial support to any
commercial and agricultural activity on a joint business arrangement.
This business relationship proved to be successful as they were able
to establish a manufacturing and trading business, acquire real
properties, and construct buildings, among other things.9 This
partnership ended in 1973 when the parties, in an
"Agreement,"10 voluntarily agreed to completely dissolve their "joint
business relationship/arrangement."11
On April 29, 1957, the spouses Buenaventura and Conchita
Remotigue executed a document wherein they acknowledged that
while registered only in Buenaventura Remotigue’s name, they were
not the only owners of the capital of the businesses Manila Athletic
Supply (712 Raon Street, Manila), Remotigue Trading (Calle Real,
Iloilo City) and Remotigue Trading (Cotabato City). In this same
"Acknowledgement of Participating Capital," they stated the
participating capital of their co-owners as of the year 1952, with
Antonieta Jarantilla’s stated as eight thousand pesos (₱8,000.00)
and Federico Jarantilla, Jr.’s as five thousand pesos (₱5,000.00).12
The present case stems from the amended complaint13 dated April
22, 1987 filed by Antonieta Jarantilla against Buenaventura
Remotigue, Cynthia Remotigue, Federico Jarantilla, Jr., Doroteo
Jarantilla and Tomas Jarantilla, for the accounting of the assets and
income of the co-ownership, for its partition and the delivery of her
share corresponding to eight percent (8%), and for damages.
Antonieta claimed that in 1946, she had entered into an agreement
with Conchita and Buenaventura Remotigue, Rafael Jarantilla, and
Rosita and Vivencio Deocampo to engage in business. Antonieta
alleged that the initial contribution of property and money came from
the heirs’ inheritance, and her subsequent annual investment of
seven thousand five hundred pesos (₱7,500.00) as additional capital
came from the proceeds of her farm. Antonieta also alleged that from
1946-1969, she had helped in the management of the business they
co-owned without receiving any salary. Her salary was supposedly
rolled back into the business as additional investments in her behalf.
Antonieta further claimed co-ownership of certain properties14 (the
subject real properties) in the name of the defendants since the only
way the defendants could have purchased these properties were
through the partnership as they had no other source of income.
The respondents, including petitioner herein, in their
Answer,15 denied having formed a partnership with Antonieta in
1946. They claimed that she was in no position to do so as she was
still in school at that time. In fact, the proceeds of the lands they
partitioned were devoted to her studies. They also averred that while
she may have helped in the businesses that her older sister Conchita
had formed with Buenaventura Remotigue, she was paid her due
salary. They did not deny the existence and validity of the
"Acknowledgement of Participating Capital" and in fact used this as
evidence to support their claim that Antonieta’s 8% share was limited
to the businesses enumerated therein. With regard to Antonieta’s
claim in their other corporations and businesses, the respondents
said these should also be limited to the number of her shares as
specified in the respective articles of incorporation. The respondents
denied using the partnership’s income to purchase the subject real
properties and said that the certificates of title should be binding on
her.16
During the course of the trial at the RTC, petitioner Federico
Jarantilla, Jr., who was one of the original defendants, entered into a
compromise agreement17 with Antonieta Jarantilla wherein he
supported Antonieta’s claims and asserted that he too was entitled to
six percent (6%) of the supposed partnership in the same manner as
Antonieta was. He prayed for a favorable judgment in this wise:
Defendant Federico Jarantilla, Jr., hereby joins in plaintiff’s prayer for
an accounting from the other defendants, and the partition of the
properties of the co-ownership and the delivery to the plaintiff and to
defendant Federico Jarantilla, Jr. of their rightful share of the assets
and properties in the co-ownership.181avvphi1
The RTC, in an Order19 dated March 25, 1992, approved the Joint
Motion to Approve Compromise Agreement20 and on December 18,
1992, decided in favor of Antonieta, to wit:
WHEREFORE, premises above-considered, the Court renders
judgment in favor of the plaintiff Antonieta Jarantilla and against
defendants Cynthia Remotigue, Doroteo Jarantilla and Tomas
Jarantilla ordering the latter:
1. to deliver to the plaintiff her 8% share or its equivalent
amount on the real properties covered by TCT Nos. 35655,
338398, 338399 & 335395, all of the Registry of Deeds of
Quezon City; TCT Nos. (18303)23341, 142882 &
490007(4615), all of the Registry of Deeds of Rizal; and TCT
No. T-6309 of the Registry of Deeds of Cotabato based on
their present market value;
2. to deliver to the plaintiff her 8% share or its equivalent
amount on the Remotigue Agro-Industrial Corporation,
Manila Athletic Supply, Inc., MAS Rubber Products, Inc. and
Buendia Recapping Corporation based on the shares of
stocks present book value;
3. to account for the assets and income of the co-ownership
and deliver to plaintiff her rightful share thereof equivalent to
8%;
4. to pay plaintiff, jointly and severally, the sum of
₱50,000.00 as moral damages;
5. to pay, jointly and severally, the sum of ₱50,000.00 as
attorney’s fees; and
6. to pay, jointly and severally, the costs of the suit.21
Both the petitioner and the respondents appealed this decision to the
Court of Appeals. The petitioner claimed that the RTC "erred in not
rendering a complete judgment and ordering the partition of the co-
ownership and giving to [him] six per centum (6%) of the
properties."22
While the Court of Appeals agreed to some of the RTC’s factual
findings, it also established that Antonieta Jarantilla was not part of
the partnership formed in 1946, and that her 8% share was limited to
the businesses enumerated in the Acknowledgement of Participating
Capital. On July 30, 2002, the Court of Appeals rendered the herein
challenged decision setting aside the RTC’s decision, as follows:
WHEREFORE, the decision of the trial court, dated 18 December
1992 is SET ASIDE and a new one is hereby entered ordering that:
(1) after accounting, plaintiff Antonieta Jarantilla be given her
share of 8% in the assets and profits of Manila Athletic
Supply, Remotigue Trading in Iloilo City and Remotigue
Trading in Cotabato City;
(2) after accounting, defendant Federico Jarantilla, Jr. be
given his share of 6% of the assets and profits of the above-
mentioned enterprises; and, holding that
(3) plaintiff Antonieta Jarantilla is a stockholder in the
following corporations to the extent stated in their Articles of
Incorporation:
(a) Rural Bank of Barotac Nuevo, Inc.;
(b) MAS Rubber Products, Inc.;
(c) Manila Athletic Supply, Inc.; and
(d) B. Remotigue Agro-Industrial Development Corp.
(4) No costs.23
The respondents, on August 20, 2002, filed a Motion for Partial
Reconsideration but the Court of Appeals denied this in a
Resolution24 dated March 21, 2003.
Antonieta Jarantilla filed before this Court her own petition for review
on certiorari25 dated September 16, 2002, assailing the Court of
Appeals’ decision on "similar grounds and similar assignments of
errors as this present case"26 but it was dismissed on November 20,
2002 for failure to file the appeal within the reglementary period of
fifteen (15) days in accordance with Section 2, Rule 45 of the Rules
of Court.27
Petitioner filed before us this petition for review on the sole ground
that:
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN
NOT RULING THAT PETITIONER FEDERICO JARANTILLA, JR. IS
ENTITLED TO A SIX PER CENTUM (6%) SHARE OF THE
OWNERSHIP OF THE REAL PROPERTIES ACQUIRED BY THE
OTHER DEFENDANTS USING COMMON FUNDS FROM THE
BUSINESSES WHERE HE HAD OWNED SUCH SHARE.28
Petitioner asserts that he was in a partnership with the Remotigue
spouses, the Deocampo spouses, Rosita Jarantilla, Rafael Jarantilla,
Antonieta Jarantilla and Quintin Vismanos, as evidenced by the
Acknowledgement of Participating Capital the Remotigue spouses
executed in 1957. He contends that from this partnership, several
other corporations and businesses were established and several real
properties were acquired. In this petition, he is essentially asking for
his 6% share in the subject real properties. He is relying on the
Acknowledgement of Participating Capital, on his own testimony, and
Antonieta Jarantilla’s testimony to support this contention.
The core issue is whether or not the partnership subject of the
Acknowledgement of Participating Capital funded the subject real
properties. In other words, what is the petitioner’s right over these
real properties?
It is a settled rule that in a petition for review on certiorari under Rule
45 of the Rules of Civil Procedure, only questions of law may be
raised by the parties and passed upon by this Court.29
A question of law arises when there is doubt as to what the law is on
a certain state of facts, while there is a question of fact when the
doubt arises as to the truth or falsity of the alleged facts. For a
question to be one of law, the same must not involve an examination
of the probative value of the evidence presented by the litigants or
any of them. The resolution of the issue must rest solely on what the
law provides on the given set of circumstances. Once it is clear that
the issue invites a review of the evidence presented, the question
posed is one of fact. Thus, the test of whether a question is one of
law or of fact is not the appellation given to such question by the
party raising the same; rather, it is whether the appellate court can
determine the issue raised without reviewing or evaluating the
evidence, in which case, it is a question of law; otherwise it is a
question of fact.30
Since the Court of Appeals did not fully adopt the factual findings of
the RTC, this Court, in resolving the questions of law that are now in
issue, shall look into the facts only in so far as the two courts a quo
differed in their appreciation thereof.
The RTC found that an unregistered partnership existed since 1946
which was affirmed in the 1957 document, the "Acknowledgement of
Participating Capital." The RTC used this as its basis for giving
Antonieta Jarantilla an 8% share in the three businesses listed
therein and in the other businesses and real properties of the
respondents as they had supposedly acquired these through funds
from the partnership.31
The Court of Appeals, on the other hand, agreed with the RTC as to
Antonieta’s 8% share in the business enumerated in the
Acknowledgement of Participating Capital, but not as to her share in
the other corporations and real properties. The Court of Appeals
ruled that Antonieta’s claim of 8% is based on the
"Acknowledgement of Participating Capital," a duly notarized
document which was specific as to the subject of its coverage.
Hence, there was no reason to pattern her share in the other
corporations from her share in the partnership’s businesses. The
Court of Appeals also said that her claim in the respondents’ real
properties was more "precarious" as these were all covered by
certificates of title which served as the best evidence as to all the
matters contained therein.32 Since petitioner’s claim was essentially
the same as Antonieta’s, the Court of Appeals also ruled that
petitioner be given his 6% share in the same businesses listed in the
Acknowledgement of Participating Capital.
Factual findings of the trial court, when confirmed by the Court of
Appeals, are final and conclusive except in the following cases: (1)
when the inference made is manifestly mistaken, absurd or
impossible; (2) when there is a grave abuse of discretion; (3) when
the finding is grounded entirely on speculations, surmises or
conjectures; (4) when the judgment of the Court of Appeals is based
on 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 of
the Court of Appeals 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 Court of Appeals
manifestly overlooked certain relevant facts not disputed by the
parties and which, if properly considered, would justify a different
conclusion; and (10) when the findings of fact of the Court of Appeals
are premised on the absence of evidence and are contradicted by
the evidence on record.33
In this case, we find no error in the ruling of the Court of Appeals.
Both the petitioner and Antonieta Jarantilla characterize their
relationship with the respondents as a co-ownership, but in the same
breath, assert that a verbal partnership was formed in 1946 and was
affirmed in the 1957 Acknowledgement of Participating Capital.
There is a co-ownership when an undivided thing or right belongs to
different persons.34 It is a partnership when 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.35 The Court, in Pascual v. The Commissioner of Internal
Revenue,36 quoted the concurring opinion of Mr. Justice Angelo
Bautista in Evangelista v. The Collector of Internal Revenue37 to
further elucidate on the distinctions between a co-ownership and a
partnership, to wit:
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.
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.
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.
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 plaintiff’s commission, no partnership existed as
between the three parties, whatever their relation may have been as
to third parties.
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. x x x.
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.38 (Citations
omitted.)
Under Article 1767 of the Civil Code, there are two essential
elements in a contract of partnership: (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, all the parties
in this case 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.39 It is not denied that all the parties in this case
have agreed to contribute capital to a common fund to be able to
later on share its profits. They have admitted this fact, agreed to its
veracity, and even submitted one common documentary evidence to
prove such partnership - the Acknowledgement of Participating
Capital.
As this case revolves around the legal effects of the
Acknowledgement of Participating Capital, it would be instructive to
examine the pertinent portions of this document:
ACKNOWLEDGEMENT OF
PARTICIPATING CAPITAL
KNOW ALL MEN BY THESE PRESENTS:
That we, the spouses Buenaventura Remotigue and Conchita
Jarantilla de Remotigue, both of legal age, Filipinos and residents of
Loyola Heights, Quezon City, P.I. hereby state:
That the Manila Athletic Supply at 712 Raon, Manila, the Remotigue
Trading of Calle Real, Iloilo City and the Remotigue Trading,
Cotabato Branch, Cotabato, P.I., all dealing in athletic goods and
equipments, and general merchandise are recorded in their
respective books with Buenaventura Remotigue as the registered
owner and are being operated by them as such:
That they are not the only owners of the capital of the three
establishments and their participation in the capital of the three
establishments together with the other co-owners as of the year 1952
are stated as follows:
1. Buenaventura Remotigue (TWENTY-FIVE THOUSAND)
₱25,000.00
2. Conchita Jarantilla de Remotigue (TWENTY-FIVE THOUSAND)…
25,000.00
3. Vicencio Deocampo (FIFTEEN THOUSAND)…… 15,000.00
4. Rosita J. Deocampo (FIFTEEN THOUSAND)….... 15,000.00
5. Antonieta Jarantilla (EIGHT THOUSAND)……….. 8,000.00
6. Rafael Jarantilla (SIX THOUSAND)…………….. ... 6,000.00
7. Federico Jarantilla, Jr. (FIVE THOUSAND)……….. 5,000.00
8. Quintin Vismanos (TWO THOUSAND)…………... 2,000.00
That aside from the persons mentioned in the next preceding
paragraph, no other person has any interest in the above-mentioned
three establishments.
IN WITNESS WHEREOF, they sign this instrument in the City of
Manila, P.I., this 29th day of April, 1957.
[Sgd.]
BUENAVENTURA REMOTIGUE
[Sgd.]
CONCHITA JARANTILLA DE REMOTIGUE40
The Acknowledgement of Participating Capital is a duly notarized
document voluntarily executed by Conchita Jarantilla-Remotigue and
Buenaventura Remotigue in 1957. Petitioner does not dispute its
contents and is actually relying on it to prove his participation in the
partnership. Article 1797 of the Civil Code provides:
Art. 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.
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. (Emphases supplied.)
It is clear from the foregoing that a partner is entitled only to his
share as agreed upon, or in the absence of any such stipulations,
then to his share in proportion to his contribution to the partnership.
The petitioner himself claims his share to be 6%, as stated in the
Acknowledgement of Participating Capital. However, petitioner fails
to realize that this document specifically enumerated the businesses
covered by the partnership: Manila Athletic Supply, Remotigue
Trading in Iloilo City and Remotigue Trading in Cotabato City. Since
there was a clear agreement that the capital the partners contributed
went to the three businesses, then there is no reason to deviate from
such agreement and go beyond the stipulations in the document.
Therefore, the Court of Appeals did not err in limiting petitioner’s
share to the assets of the businesses enumerated in the
Acknowledgement of Participating Capital.
In Villareal v. Ramirez,41 the Court held that since a partnership is a
separate juridical entity, the shares to be paid out to the partners is
necessarily limited only to its total resources, to wit:
Since it is the partnership, as a separate and distinct entity, that must
refund the shares of the partners, the amount to be refunded is
necessarily limited to its total resources. In other words, it can only
pay out what it has in its coffers, which consists of all its assets.
However, before the partners can be paid their shares, the creditors
of the partnership must first be compensated. After all the creditors
have been paid, whatever is left of the partnership assets becomes
available for the payment of the partners’ shares.42
There is no evidence that the subject real properties were assets of
the partnership referred to in the Acknowledgement of Participating
Capital.
The petitioner further asserts that he is entitled to respondents’
properties based on the concept of trust. He claims that since the
subject real properties were purchased using funds of the
partnership, wherein he has a 6% share, then "law and equity
mandates that he should be considered as a co-owner of those
properties in such proportion."43 In Pigao v. Rabanillo,44 this Court
explained the concept of trusts, to wit:
Express trusts are created by the intention of the trustor or of the
parties, while implied trusts come into being by operation of law,
either through implication of an intention to create a trust as a matter
of law or through the imposition of the trust irrespective of, and even
contrary to, any such intention. In turn, implied trusts are either
resulting or constructive trusts. Resulting trusts are based on the
equitable doctrine that valuable consideration and not legal title
determines the equitable title or interest and are presumed always to
have been contemplated by the parties. They arise from the nature
or circumstances of the consideration involved in a transaction
whereby one person thereby becomes invested with legal title but is
obligated in equity to hold his legal title for the benefit of another.45
On proving the existence of a trust, this Court held that:
Respondent has presented only bare assertions that a trust was
created. Noting the need to prove the existence of a trust, this Court
has held thus:
"As a rule, the burden of proving the existence of a trust is on the
party asserting its existence, and such proof must be clear and
satisfactorily show the existence of the trust and its elements. While
implied trusts may be proved by oral evidence, the evidence must be
trustworthy and received by the courts with extreme caution, and
should not be made to rest on loose, equivocal or indefinite
declarations. Trustworthy evidence is required because oral
evidence can easily be fabricated." 46
The petitioner has failed to prove that there exists a trust over the
subject real properties. Aside from his bare allegations, he has failed
to show that the respondents used the partnership’s money to
purchase the said properties. Even assuming arguendo that some
partnership income was used to acquire these properties, the
petitioner should have successfully shown that these funds came
from his share in the partnership profits. After all, by his own
admission, and as stated in the Acknowledgement of Participating
Capital, he owned a mere 6% equity in the partnership.
In essence, the petitioner is claiming his 6% share in the subject real
properties, by relying on his own self-serving testimony and the
equally biased testimony of Antonieta Jarantilla. Petitioner has not
presented evidence, other than these unsubstantiated testimonies, to
prove that the respondents did not have the means to fund their
other businesses and real properties without the partnership’s
income. On the other hand, the respondents have not only, by
testimonial evidence, proven their case against the petitioner, but
have also presented sufficient documentary evidence to substantiate
their claims, allegations and defenses. They presented preponderant
proof on how they acquired and funded such properties in addition to
tax receipts and tax declarations.47 It has been held that "while tax
declarations and realty tax receipts do not conclusively prove
ownership, they may constitute strong evidence of ownership when
accompanied by possession for a period sufficient for
prescription."48 Moreover, it is a rule in this jurisdiction that
testimonial evidence cannot prevail over documentary
evidence.49 This Court had on several occasions, expressed our
disapproval on using mere self-serving testimonies to support one’s
claim. In Ocampo v. Ocampo,50 a case on partition of a co-
ownership, we held that:
Petitioners assert that their claim of co-ownership of the property was
sufficiently proved by their witnesses -- Luisa Ocampo-Llorin and
Melita Ocampo. We disagree. Their testimonies cannot prevail over
the array of documents presented by Belen. A claim of ownership
cannot be based simply on the testimonies of witnesses; much less
on those of interested parties, self-serving as they are.51
It is true that a certificate of title is merely an evidence of ownership
or title over the particular property described therein. Registration in
the Torrens system does not create or vest title as registration is not
a mode of acquiring ownership; hence, this cannot deprive an
aggrieved party of a remedy in law.52 However, petitioner asserts
ownership over portions of the subject real properties on the strength
of his own admissions and on the testimony of Antonieta
Jarantilla.1avvphi1 As held by this Court in Republic of the
Philippines v. Orfinada, Sr.53:
Indeed, a Torrens title is generally conclusive evidence of ownership
of the land referred to therein, and a strong presumption exists that a
Torrens title was regularly issued and valid. A Torrens title is
incontrovertible against any informacion possessoria, of other title
existing prior to the issuance thereof not annotated on the Torrens
title. Moreover, persons dealing with property covered by a Torrens
certificate of title are not required to go beyond what appears on its
face.54
As we have settled that this action never really was for partition of a
co-ownership, to permit petitioner’s claim on these properties is to
allow a collateral, indirect attack on respondents’ admitted titles. In
the words of the Court of Appeals, "such evidence cannot overpower
the conclusiveness of these certificates of title, more so since
plaintiff’s [petitioner’s] claims amount to a collateral attack, which is
prohibited under Section 48 of Presidential Decree No. 1529, the
Property Registration Decree."55
SEC. 48. Certificate not subject to collateral attack. – A certificate of
title shall not be subject to collateral attack. It cannot be altered,
modified, or cancelled except in a direct proceeding in accordance
with law.
This Court has deemed an action or proceeding to be "an attack on a
title when its objective is to nullify the title, thereby challenging the
judgment pursuant to which the title was decreed."56 In Aguilar v.
Alfaro,57 this Court further distinguished between a direct and an
indirect or collateral attack, as follows:
A collateral attack transpires when, in another action to obtain a
different relief and as an incident to the present action, an attack is
made against the judgment granting the title. This manner of attack is
to be distinguished from a direct attack against a judgment granting
the title, through an action whose main objective is to annul, set
aside, or enjoin the enforcement of such judgment if not yet
implemented, or to seek recovery if the property titled under the
judgment had been disposed of. x x x.

Petitioner’s only piece of documentary evidence is the

Acknowledgement of Participating Capital, which as discussed
above, failed to prove that the real properties he is claiming co-
ownership of were acquired out of the proceeds of the businesses
covered by such document. Therefore, petitioner’s theory has no
factual or legal leg to stand on.

WHEREFORE, the Petition is hereby DENIED and the Decision of

the Court of Appeals in CA-G.R. CV No. 40887, dated July 30, 2002
is AFFIRMED.

SO ORDERED.
G.R. No. 142293             February 27, 2003
VICENTE SY, TRINIDAD PAULINO, 6B’S TRUCKING
CORPORATION, and SBT1 TRUCKING
CORPORATION, petitioners,
vs.
HON. COURT OF APPEALS and JAIME SAHOT, respondents.
DECISION
QUISUMBING, J.:
This petition for review seeks the reversal of the decision2 of the
Court of Appeals dated February 29, 2000, in CA-G.R. SP No.
52671, affirming with modification the decision3 of the National Labor
Relations Commission promulgated on June 20, 1996 in NLRC NCR
CA No. 010526-96. Petitioners also pray for the reinstatement of the
decision4 of the Labor Arbiter in NLRC NCR Case No. 00-09-06717-
94.
Culled from the records are the following facts of this case:
Sometime in 1958, private respondent Jaime Sahot5 started working
as a truck helper for petitioners’ family-owned trucking business
named Vicente Sy Trucking. In 1965, he became a truck driver of the
same family business, renamed T. Paulino Trucking Service, later
6B’s Trucking Corporation in 1985, and thereafter known as SBT
Trucking Corporation since 1994. Throughout all these changes in
names and for 36 years, private respondent continuously served the
trucking business of petitioners.
In April 1994, Sahot was already 59 years old. He had been incurring
absences as he was suffering from various ailments. Particularly
causing him pain was his left thigh, which greatly affected the
performance of his task as a driver. He inquired about his medical
and retirement benefits with the Social Security System (SSS) on
April 25, 1994, but discovered that his premium payments had not
been remitted by his employer.
Sahot had filed a week-long leave sometime in May 1994. On May
27th, he was medically examined and treated for EOR, presleyopia,
hypertensive retinopathy G II (Annexes "G-5" and "G-3", pp. 48, 104,
respectively),6 HPM, UTI, Osteoarthritis (Annex "G-4", p. 105),7 and
heart enlargement (Annex G, p. 107).8 On said grounds, Belen
Paulino of the SBT Trucking Service management told him to file a
formal request for extension of his leave. At the end of his week-long
absence, Sahot applied for extension of his leave for the whole
month of June, 1994. It was at this time when petitioners allegedly
threatened to terminate his employment should he refuse to go back
to work.
At this point, Sahot found himself in a dilemma. He was facing
dismissal if he refused to work, But he could not retire on pension
because petitioners never paid his correct SSS premiums. The fact
remained he could no longer work as his left thigh hurt abominably.
Petitioners ended his dilemma. They carried out their threat and
dismissed him from work, effective June 30, 1994. He ended up sick,
jobless and penniless.
On September 13, 1994, Sahot filed with the NLRC NCR Arbitration
Branch, a complaint for illegal dismissal, docketed as NLRC NCR
Case No. 00-09-06717-94. He prayed for the recovery of separation
pay and attorneys fees against Vicente Sy and Trinidad Paulino-Sy,
Belen Paulino, Vicente Sy Trucking, T. Paulino Trucking Service,
6B’s Trucking and SBT Trucking, herein petitioners.
For their part, petitioners admitted they had a trucking business in
the 1950s but denied employing helpers and drivers. They contend
that private respondent was not illegally dismissed as a driver
because he was in fact petitioner’s industrial partner. They add that it
was not until the year 1994, when SBT Trucking Corporation was
established, and only then did respondent Sahot become an
employee of the company, with a monthly salary that reached
P4,160.00 at the time of his separation.
Petitioners further claimed that sometime prior to June 1, 1994,
Sahot went on leave and was not able to report for work for almost
seven days. On June 1, 1994, Sahot asked permission to extend his
leave of absence until June 30, 1994. It appeared that from the
expiration of his leave, private respondent never reported back to
work nor did he file an extension of his leave. Instead, he filed the
complaint for illegal dismissal against the trucking company and its
owners.
Petitioners add that due to Sahot’s refusal to work after the expiration
of his authorized leave of absence, he should be deemed to have
voluntarily resigned from his work. They contended that Sahot had all
the time to extend his leave or at least inform petitioners of his health
condition. Lastly, they cited NLRC Case No. RE-4997-76, entitled
"Manuelito Jimenez et al. vs. T. Paulino Trucking Service," as a
defense in view of the alleged similarity in the factual milieu and
issues of said case to that of Sahot’s, hence they are in pari
material and Sahot’s complaint ought also to be dismissed.
The NLRC NCR Arbitration Branch, through Labor Arbiter Ariel
Cadiente Santos, ruled that there was no illegal dismissal in Sahot’s
case. Private respondent had failed to report to work. Moreover, said
the Labor Arbiter, petitioners and private respondent were industrial
partners before January 1994. The Labor Arbiter concluded by
ordering petitioners to pay "financial assistance" of P15,000 to Sahot
for having served the company as a regular employee since January
1994 only.
On appeal, the National Labor Relations Commission modified the
judgment of the Labor Arbiter. It declared that private respondent
was an employee, not an industrial partner, since the start. Private
respondent Sahot did not abandon his job but his employment was
terminated on account of his illness, pursuant to Article 2849 of the
Labor Code. Accordingly, the NLRC ordered petitioners to pay
private respondent separation pay in the amount of P60,320.00, at
the rate of P2,080.00 per year for 29 years of service.
Petitioners assailed the decision of the NLRC before the Court of
Appeals. In its decision dated February 29, 2000, the appellate court
affirmed with modification the judgment of the NLRC. It held that
private respondent was indeed an employee of petitioners since
1958. It also increased the amount of separation pay awarded to
private respondent to P74,880, computed at the rate of P2,080 per
year for 36 years of service from 1958 to 1994. It decreed:
WHEREFORE, the assailed decision is hereby AFFIRMED with
MODIFICATION. SB Trucking Corporation is hereby directed to pay
complainant Jaime Sahot the sum of SEVENTY-FOUR THOUSAND
EIGHT HUNDRED EIGHTY (P74,880.00) PESOS as and for his
separation pay.10
Hence, the instant petition anchored on the following contentions:
I
RESPONDENT COURT OF APPEALS IN PROMULGATING THE
QUESTION[ED] DECISION AFFIRMING WITH MODIFICATION
THE DECISION OF NATIONAL LABOR RELATIONS COMMISSION
DECIDED NOT IN ACCORD WITH LAW AND PUT AT NAUGHT
ARTICLE 402 OF THE CIVIL CODE.11
II
RESPONDENT COURT OF APPEALS VIOLATED SUPREME
COURT RULING THAT THE NATIONAL LABOR RELATIONS
COMMISSION IS BOUND BY THE FACTUAL FINDINGS OF THE
LABOR ARBITER AS THE LATTER WAS IN A BETTER POSITION
TO OBSERVE THE DEMEANOR AND DEPORTMENT OF THE
WITNESSES IN THE CASE OF ASSOCIATION OF INDEPENDENT
UNIONS IN THE PHILIPPINES VERSUS NATIONAL CAPITAL
REGION (305 SCRA 233).12
III
PRIVATE RESPONDENT WAS NOT DISMISS[ED] BY
RESPONDENT SBT TRUCKING CORPORATION.13
Three issues are to be resolved: (1) Whether or not an employer-
employee relationship existed between petitioners and respondent
Sahot; (2) Whether or not there was valid dismissal; and (3) Whether
or not respondent Sahot is entitled to separation pay.
Crucial to the resolution of this case is the determination of the first
issue. Before a case for illegal dismissal can prosper, an employer-
employee relationship must first be established.14
Petitioners invoke the decision of the Labor Arbiter Ariel Cadiente
Santos which found that respondent Sahot was not an employee but
was in fact, petitioners’ industrial partner.15 It is contended that it was
the Labor Arbiter who heard the case and had the opportunity to
observe the demeanor and deportment of the parties. The same
conclusion, aver petitioners, is supported by substantial
evidence.16 Moreover, it is argued that the findings of fact of the
Labor Arbiter was wrongly overturned by the NLRC when the latter
made the following pronouncement:
We agree with complainant that there was error committed by the
Labor Arbiter when he concluded that complainant was an industrial
partner prior to 1994. A computation of the age of complainant shows
that he was only twenty-three (23) years when he started working
with respondent as truck helper. How can we entertain in our mind
that a twenty-three (23) year old man, working as a truck helper, be
considered an industrial partner. Hence we rule that complainant was
only an employee, not a partner of respondents from the time
complainant started working for respondent.17
Because the Court of Appeals also found that an employer-employee
relationship existed, petitioners aver that the appellate court’s
decision gives an "imprimatur" to the "illegal" finding and conclusion
of the NLRC.
Private respondent, for his part, denies that he was ever an industrial
partner of petitioners. There was no written agreement, no proof that
he received a share in petitioners’ profits, nor was there anything to
show he had any participation with respect to the running of the
business.18
The elements to determine the existence of an employment
relationship are: (a) the selection and engagement of the employee;
(b) the payment of wages; (c) the power of dismissal; and (d) the
employer’s power to control the employee’s conduct. The most
important element is the employer’s control of the employee’s
conduct, not only as to the result of the work to be done, but also as
to the means and methods to accomplish it.19
As found by the appellate court, petitioners owned and operated a
trucking business since the 1950s and by their own allegations, they
determined private respondent’s wages and rest day.20 Records of
the case show that private respondent actually engaged in work as
an employee. During the entire course of his employment he did not
have the freedom to determine where he would go, what he would
do, and how he would do it. He merely followed instructions of
petitioners and was content to do so, as long as he was paid his
wages. Indeed, said the CA, private respondent had worked as a
truck helper and driver of petitioners not for his own pleasure but
under the latter’s control.
Article 176721 of the Civil Code states that in a contract of partnership
two or more persons bind themselves to contribute money, property
or industry to a common fund, with the intention of dividing the profits
among themselves.22 Not one of these circumstances is present in
this case. No written agreement exists to prove the partnership
between the parties. Private respondent did not contribute money,
property or industry for the purpose of engaging in the supposed
business. There is no proof that he was receiving a share in the
profits as a matter of course, during the period when the trucking
business was under operation. Neither is there any proof that he had
actively participated in the management, administration and adoption
of policies of the business. Thus, the NLRC and the CA did not err in
reversing the finding of the Labor Arbiter that private respondent was
an industrial partner from 1958 to 1994.
On this point, we affirm the findings of the appellate court and the
NLRC. Private respondent Jaime Sahot was not an industrial partner
but an employee of petitioners from 1958 to 1994. The existence of
an employer-employee relationship is ultimately a question of
fact23 and the findings thereon by the NLRC, as affirmed by the Court
of Appeals, deserve not only respect but finality when supported by
substantial evidence. Substantial evidence is such amount of
relevant evidence which a reasonable mind might accept as
adequate to justify a conclusion.24
Time and again this Court has said that "if doubt exists between the
evidence presented by the employer and the employee, the scales of
justice must be tilted in favor of the latter."25 Here, we entertain no
doubt. Private respondent since the beginning was an employee of,
not an industrial partner in, the trucking business.
Coming now to the second issue, was private respondent validly
dismissed by petitioners?
Petitioners contend that it was private respondent who refused to go
back to work. The decision of the Labor Arbiter pointed out that
during the conciliation proceedings, petitioners requested respondent
Sahot to report back for work. However, in the same proceedings,
Sahot stated that he was no longer fit to continue working, and
instead he demanded separation pay. Petitioners then retorted that if
Sahot did not like to work as a driver anymore, then he could be
given a job that was less strenuous, such as working as a checker.
However, Sahot declined that suggestion. Based on the foregoing
recitals, petitioners assert that it is clear that Sahot was not
dismissed but it was of his own volition that he did not report for work
anymore.
In his decision, the Labor Arbiter concluded that:
While it may be true that respondents insisted that complainant
continue working with respondents despite his alleged illness, there
is no direct evidence that will prove that complainant’s illness
prevents or incapacitates him from performing the function of a
driver. The fact remains that complainant suddenly stopped working
due to boredom or otherwise when he refused to work as a checker
which certainly is a much less strenuous job than a driver.26
But dealing the Labor Arbiter a reversal on this score the NLRC,
concurred in by the Court of Appeals, held that:
While it was very obvious that complainant did not have any intention
to report back to work due to his illness which incapacitated him to
perform his job, such intention cannot be construed to be an
abandonment. Instead, the same should have been considered as
one of those falling under the just causes of terminating an
employment. The insistence of respondent in making complainant
work did not change the scenario.
It is worthy to note that respondent is engaged in the trucking
business where physical strength is of utmost requirement (sic).
Complainant started working with respondent as truck helper at age
twenty-three (23), then as truck driver since 1965. Complainant was
already fifty-nine (59) when the complaint was filed and suffering
from various illness triggered by his work and age.
x x x27
In termination cases, the burden is upon the employer to show by
substantial evidence that the termination was for lawful cause and
validly made.28 Article 277(b) of the Labor Code puts the burden of
proving that the dismissal of an employee was for a valid or
authorized cause on the employer, without distinction whether the
employer admits or does not admit the dismissal.29 For an
employee’s dismissal to be valid, (a) the dismissal must be for a valid
cause and (b) the employee must be afforded due process.30
Article 284 of the Labor Code authorizes an employer to terminate an
employee on the ground of disease, viz:
Art. 284. Disease as a ground for termination- An employer may
terminate the services of an employee who has been found to be
suffering from any disease and whose continued employment is
prohibited by law or prejudicial to his health as well as the health of
his co-employees: xxx
However, in order to validly terminate employment on this ground,
Book VI, Rule I, Section 8 of the Omnibus Implementing Rules of the
Labor Code requires:
Sec. 8. Disease as a ground for dismissal- Where the employee
suffers from a disease and his continued employment is prohibited
by law or prejudicial to his health or to the health of his co-
employees, the employer shall not terminate his employment unless
there is a certification by competent public health authority that the
disease is of such nature or at such a stage that it cannot be cured
within a period of six (6) months even with proper medical treatment.
If the disease or ailment can be cured within the period, the employer
shall not terminate the employee but shall ask the employee to take
a leave. The employer shall reinstate such employee to his former
position immediately upon the restoration of his normal health.
(Italics supplied).
As this Court stated in Triple Eight integrated Services, Inc. vs.
NLRC,31 the requirement for a medical certificate under Article 284 of
the Labor Code cannot be dispensed with; otherwise, it would
sanction the unilateral and arbitrary determination by the employer of
the gravity or extent of the employee’s illness and thus defeat the
public policy in the protection of labor.
In the case at bar, the employer clearly did not comply with the
medical certificate requirement before Sahot’s dismissal was
effected. In the same case of Sevillana vs. I.T. (International) Corp.,
we ruled:
Since the burden of proving the validity of the dismissal of the
employee rests on the employer, the latter should likewise bear the
burden of showing that the requisites for a valid dismissal due to a
disease have been complied with. In the absence of the required
certification by a competent public health authority, this Court has
ruled against the validity of the employee’s dismissal. It is therefore
incumbent upon the private respondents to prove by the quantum of
evidence required by law that petitioner was not dismissed, or if
dismissed, that the dismissal was not illegal; otherwise, the dismissal
would be unjustified. This Court will not sanction a dismissal
premised on mere conjectures and suspicions, the evidence must be
substantial and not arbitrary and must be founded on clearly
established facts sufficient to warrant his separation from work.32
In addition, we must likewise determine if the procedural aspect of
due process had been complied with by the employer.
From the records, it clearly appears that procedural due process was
not observed in the separation of private respondent by the
management of the trucking company. The employer is required to
furnish an employee with two written notices before the latter is
dismissed: (1) the notice to apprise the employee of the particular
acts or omissions for which his dismissal is sought, which is the
equivalent of a charge; and (2) the notice informing the employee of
his dismissal, to be issued after the employee has been given
reasonable opportunity to answer and to be heard on his
defense.33 These, the petitioners failed to do, even only for record
purposes. What management did was to threaten the employee with
dismissal, then actually implement the threat when the occasion
presented itself because of private respondent’s painful left thigh.
All told, both the substantive and procedural aspects of due process
were violated. Clearly, therefore, Sahot’s dismissal is tainted with
invalidity.
On the last issue, as held by the Court of Appeals, respondent Jaime
Sahot is entitled to separation pay. The law is clear on the matter. An
employee who is terminated because of disease is entitled to
"separation pay equivalent to at least one month salary or to one-half
month salary for every year of service, whichever is greater
xxx."34 Following the formula set in Art. 284 of the Labor Code, his
separation pay was computed by the appellate court at P2,080 times
36 years (1958 to 1994) or P74,880. We agree with the computation,
after noting that his last monthly salary was P4,160.00 so that one-
half thereof is P2,080.00. Finding no reversible error nor grave abuse
of discretion on the part of appellate court, we are constrained to
sustain its decision. To avoid further delay in the payment due the
separated worker, whose claim was filed way back in 1994, this
decision is immediately executory. Otherwise, six percent (6%)
interest per annum should be charged thereon, for any delay,
pursuant to provisions of the Civil Code.
WHEREFORE, the petition is DENIED and the decision of the Court
of Appeals dated February 29, 2000 is AFFIRMED. Petitioners must
pay private respondent Jaime Sahot his separation pay for 36 years
of service at the rate of one-half monthly pay for every year of
service, amounting to P74,880.00, with interest of six per centum
(6%) per annum from finality of this decision until fully paid.

Costs against petitioners.

SO ORDERED.
 ANTONIA. TORRES assisted by her husband, ANGELO
TORRES; and EMETERIA BARING, Petitioners, v. 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.chanrobles virtual lawlibrary
The Case
The Petition for Review on Certiorari before us assails the March 5,
1998 Decision 1 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:jgc:chanrobles.com.ph
"WHEREFORE, for all the foregoing considerations, the Court,
finding for the defendant and against the plaintiffs, orders the
dismissal of the plaintiff’s 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 "respondent’s
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 Council’s 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.chanrobles virtual
lawlibrary
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 court’s
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:jgc:chanrobles.com.ph
"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."cralaw virtua1aw library
The CA elucidated further:jgc:chanrobles.com.ph
"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." chanrobles.com : virtual law library
The Issue
Petitioners impute to the Court of Appeals the following
error:jgc:chanrobles.com.ph
". . . [The] Court of Appeals erred in concluding that the
transaction . . . 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 Court’s Ruling
The Petition is bereft of merit.
Main Issue:chanrob1es virtual 1aw library
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 court’s 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:jgc:chanrobles.com.ph
"KNOW ALL MEN BY THESE PRESENTS:jgc:chanrobles.com.ph
"This AGREEMENT, is made and entered into at Cebu City,
Philippines, this 5th day of March, 1969, by and between MR.
MANUEL R. TORRES, . . . the FIRST PARTY, likewise, MRS.
ANTONIA B. TORRES, and MISS EMETERIA BARING, the
SECOND PARTY:chanrob1es virtual 1aw library
WITNESSETH:jgc:chanrobles.com.ph
"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:chanrobles virtual
lawlibrary
"ONE: That the SECOND PARTY signed an absolute Deed of
Sale . . . 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 . . . 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.chanroblesvirtual|awlibrary
"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:jgc:chanrobles.com.ph
"ARTICLE 1767. By the contract of partnership two or more persons
bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves."cralaw virtua1aw library
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.chanrobles lawlibrary : rednad
Respondent’s 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:jgc:chanrobles.com.ph
"ARTICLE 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."cralaw virtua1aw library
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:jgc:chanrobles.com.ph
"ARTICLE 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."cralaw virtua1aw library
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.chanrobles lawlibrary : rednad
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.
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.chanroblesvirtual|awlibrary
WHEREFORE, the Petition is hereby DENIED and the challenged
Decision AFFIRMED. Costs against petitioners.

This argument is puerile. The Joint Venture Agreement clearly states SO ORDERED.
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 [petitioner’s] participation therein. . . . 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."cralaw virtua1aw library

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
 THIRD DIVISION
[G.R. No. 136448. November 3, 1999.]
LIM TONG LIM, Petitioner, v. PHILIPPINE FISHING GEAR
INDUSTRIES, INC, Respondent.
DECISION
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to
borrow money to pursue a business and to divide the profits or
losses that may arise therefrom, even if it is shown that they have not
contributed any capital of their own to a "common fund." Their
contribution may be in the form of credit or industry, not necessarily
cash or fixed assets. Being partners, they are all liable for debts
incurred by or on behalf of the partnership. The liability for a contract
entered into on behalf of an unincorporated association or ostensible
corporation may lie in a person who may not have directly transacted
on its behalf, but reaped benefits from that
contract.chanroblesvirtuallawlibrary:red
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim
assails the November 26, 1998 Decision of the Court of Appeals in
CA-GR CV 41477, 1 which disposed as
follows:jgc:chanrobles.com.ph
"WHEREFORE, [there being] no reversible error in the appealed
decision, the same is hereby affirmed." 2
The decretal portion of the Quezon City Regional Trial Court (RTC)
ruling, which was affirmed by the CA, reads as
follows:jgc:chanrobles.com.ph
"WHEREFORE, the Court rules:chanrob1es virtual 1aw library
1. That plaintiff is entitled to the writ of preliminary attachment issued
by this Court on September 20, 1990;chanrobles virtual lawlibrary
2. That defendants are jointly liable to plaintiff for the following
amounts, subject to the modifications as hereinafter made by reason
of the special and unique facts and circumstances and the
proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the
fishing nets covered by the Agreement plus P68,000.00 representing
the unpaid price of the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiff’s invoices
and computed on their respective amounts as follows:chanrob1es
virtual 1aw library
i. Accrued interest of P73,221.00 on Invoice No. 14407 for
P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for
P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for
P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorney’s fees, plus P8,500.00
representing P500.00 per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage
charges on the nets counted from September 20, 1990 (date of
attachment) to September 12, 1991 (date of auction
sale);chanroblesvirtuallawlibrary
e. Cost of suit.
"With respect to the joint liability of defendants for the principal
obligation or for the unpaid price of nets and floats in the amount of
P532,045.00 and P68,000.00, respectively, or for the total amount of
P600,045.00, this Court noted that these items were attached to
guarantee any judgment that may be rendered in favor of the plaintiff
but, upon agreement of the parties, and, to avoid further deterioration
of the nets during the pendency of this case, it was ordered sold at
public auction for not less than P900,000.00 for which the plaintiff
was the sole and winning bidder. The proceeds of the sale paid for
by plaintiff was deposited in court. In effect, the amount of
P900,000.00 replaced the attached property as a guaranty for any
judgment that plaintiff may be able to secure in this case with the
ownership and possession of the nets and floats awarded and
delivered by the sheriff to plaintiff as the highest bidder in the public
auction sale. It has also been noted that ownership of the nets [was]
retained by the plaintiff until full payment [was] made as stipulated in
the invoices; hence, in effect, the plaintiff attached its own properties.
It [was] for this reason also that this Court earlier ordered the
attachment bond filed by plaintiff to guaranty damages to defendants
to be cancelled and for the P900,000.00 cash bidded and paid for by
plaintiff to serve as its bond in favor of defendants.
"From the foregoing, it would appear therefore that whatever
judgment the plaintiff may be entitled to in this case will have to be
satisfied from the amount of P900,000.00 as this amount replaced
the attached nets and floats. Considering, however, that the total
judgment obligation as computed above would amount to only
P840,216.92, it would be inequitable, unfair and unjust to award the
excess to the defendants who are not entitled to damages and who
did not put up a single centavo to raise the amount of P900,000.00
aside from the fact that they are not the owners of the nets and
floats. For this reason, the defendants are hereby relieved from any
and all liabilities arising from the monetary judgment obligation
enumerated above and for plaintiff to retain possession and
ownership of the nets and floats and for the reimbursement of the
P900,000.00 deposited by it with the Clerk of Court.
SO ORDERED." 3chanroblesvirtuallawlibrary
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and
Peter Yao entered into a Contract dated February 7, 1990, for the
purchase of fishing nets of various sizes from the Philippine Fishing
Gear Industries, Inc. (herein respondent). They claimed that they
were engaged in a business venture with Petitioner Lim Tong Lim,
who however was not a signatory to the agreement. The total price of
the nets amounted to P532,045. Four hundred pieces of floats worth
P68,000 were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats;
hence, private respondent filed a collection suit against Chua, Yao
and Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities
as general partners, on the allegation that "Ocean Quest Fishing
Corporation" was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission. 5 On
September 20, 1990, the lower court issued a Writ of Preliminary
Attachment, which the sheriff enforced by attaching the fishing nets
on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.chanrobles law library : red
Instead of answering the Complaint, Chua filed a Manifestation
admitting his liability and requesting a reasonable time within which
to pay. He also turned over to respondent some of the nets which
were in his possession. Peter Yao filed an Answer, after which he
was deemed to have waived his right to cross-examine witnesses
and to present evidence on his behalf, because of his failure to
appear in subsequent hearings. Lim Tong Lim, on the other hand,
filed an Answer with Counterclaim and Crossclaim and moved for the
lifting of the Writ of Attachment. 6 The trial court maintained the Writ,
and upon motion of private respondent, ordered the sale of the
fishing nets at a public auction. Philippine Fishing Gear Industries
won the bidding and deposited with the said court the sales proceeds
of P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling
that Philippine Fishing Gear Industries was entitled to the Writ of
Attachment and that Chua, Yao and Lim, as general partners, were
jointly liable to pay Respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao
existed based (1) on the testimonies of the witnesses presented and
(2) on a Compromise Agreement executed by the three 9 in Civil
Case No. 1492-MN which Chua and Yao had brought against Lim in
the RTC of Malabon, Branch 72, for (a) a declaration of nullity of
commercial documents; (b) a reformation of contracts; (c) a
declaration of ownership of fishing boats; (d) an injunction and (e)
damages. 10 The Compromise Agreement
provided:chanroblesvirtualawlibrary
"a) That the parties plaintiffs & Lim Tong Lim agree to have the four
(4) vessels sold in the amount of P5,750,000.00 including the fishing
net. This P5,750,000.00 shall be applied as full payment for
P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong
Lim;
"b) If the four (4) vessel[s] and the fishing net will be sold at a higher
price than P5,750,000.00 whatever will be the excess will be divided
into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
"c) If the proceeds of the sale the vessels will be less than
P5,750,000.00 whatever the deficiency shall be shouldered and paid
to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua;
1/3 Peter Yao." 11
The trial court noted that the Compromise Agreement was silent as
to the nature of their obligations, but that joint liability could be
presumed from the equal distribution of the profit and loss. 12
Lim appealed to the Court of Appeals (CA) which, as already stated,
affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of
Chua and Yao in a fishing business and may thus be held liable as
such for the fishing nets and floats purchased by and for the use of
the partnership. The appellate court ruled:jgc:chanrobles.com.ph
"The evidence establishes that all the defendants including herein
appellant Lim Tong Lim undertook a partnership for a specific
undertaking, that is for commercial fishing . . . . Obviously, the
ultimate undertaking of the defendants was to divide the profits
among themselves which is what a partnership essentially is . . . . By
a contract of partnership, two or more persons bind themselves to
contribute money, property or industry to a common fund with the
intention of dividing the profits among themselves (Article 1767, New
Civil Code)." 13chanroblesvirtual|awlibrary
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the
assailed Decision on the following grounds:jgc:chanrobles.com.ph
"I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A
COMPROMISE AGREEMENT THAT CHUA, YAO AND
PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A
PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
"II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE
WAS ACTING FOR OCEAN QUEST FISHING CORPORATION
WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE
COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING
LIABILITY TO PETITIONER LIM AS WELL.
"III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE
AND ATTACHMENT OF PETITIONER LIM’S GOODS."cralaw
virtua1aw library
In determining whether petitioner may be held liable for the fishing
nets and floats purchased from respondent, the Court must resolve
this key issue: whether by their acts, Lim, Chua and Yao could be
deemed to have entered into a
partnership.chanroblesvirtuallawlibrary
This Court’s Ruling

The Petition is devoid of merit.
First and Second Issues:chanrob1es virtual 1aw library
Existence of a Partnership and Petitioner’s Liability
In arguing that he should not be held liable for the equipment
purchased from respondent, petitioner controverts the CA finding that
a partnership existed between him, Peter Yao and Antonio Chua. He
asserts that the CA based its finding on the Compromise Agreement
alone. Furthermore, he disclaims any direct participation in the
purchase of the nets, alleging that the negotiations were conducted
by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues
that he was a lessor, not a partner, of Chua and Yao, for the
"Contract of Lease" dated February 1, 1990, showed that he had
merely leased to the two the main asset of the purported partnership
— the fishing boat F/B Lourdes. The lease was for six months, with a
monthly rental of P37,500 plus 25 percent of the gross catch of the
boat.
We are not persuaded by the arguments of petitioner. The facts as
found by the two lower courts clearly showed that there existed a
partnership among Chua, Yao and him, pursuant to Article 1767 of
the Civil Code which provides:jgc:chanrobles.com.ph
"ARTICLE 1767. By the contract of partnership, two or more persons
bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves." chanrobles lawlibrary : rednad
Specifically, both lower courts ruled that a partnership among the
three existed based on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was
engaged in commercial fishing to join him, while Antonio Chua was
already Yao’s partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally
agreed to acquire two fishing boats, the FB Lourdes and the FB
Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of
Petitioner Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which
executed a Deed of Sale over these two (2) boats in favor of
Petitioner Lim Tong Lim only to serve as security for the loan
extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-
equipping, repairing, dry docking and other expenses for the boats
would be shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again
extended a loan to the partnership in the amount of P1 million
secured by a check, because of which, Yao and Chua entrusted the
ownership papers of two other boats, Chua’s FB Lady Anne Mel and
Yao’s FB Tracy to Lim Tong Lim.chanroblesvirtual|awlibrary
(7) That in pursuance of the business agreement, Peter Yao and
Antonio Chua bought nets from Respondent Philippine Fishing Gear,
in behalf of "Ocean Quest Fishing Corporation," their purported
business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the
Malabon RTC, Branch 72 by Antonio Chua and Peter Yao against
Lim Tong Lim for (a) declaration of nullity of commercial documents;
(b) reformation of contracts; (c) declaration of ownership of fishing
boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise
Agreement executed between the parties-litigants the terms of which
are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua,
Yao and Lim had decided to engage in a fishing business, which they
started by buying boats worth P3.35 million, financed by a loan
secured from Jesus Lim who was petitioner’s brother. In their
Compromise Agreement, they subsequently revealed their intention
to pay the loan with the proceeds of the sale of the boats, and to
divide equally among them the excess or loss. These boats, the
purchase and the repair of which were financed with borrowed
money, fell under the term "common fund" under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could
be an intangible like credit or industry. That the parties agreed that
any loss or profit from the sale and operation of the boats would be
divided equally among them also shows that they had indeed formed
a partnership.
Moreover, it is clear that the partnership extended not only to the
purchase of the boat, but also to that of the nets and the floats. The
fishing nets and the floats, both essential to fishing, were obviously
acquired in furtherance of their business. It would have been
inconceivable for Lim to involve himself so much in buying the boat
but not in the acquisition of the aforesaid equipment, without which
the business could not have proceeded.chanroblesvirtual|awlibrary
Given the preceding facts, it is clear that there was, among
petitioner, Chua and Yao, a partnership engaged in the fishing
business. They purchased the boats, which constituted the main
assets of the partnership, and they agreed that the proceeds from
the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present
case should involve only questions of law. Thus, the foregoing
factual findings of the RTC and the CA are binding on this Court,
absent any cogent proof that the present action is embraced by one
of the exceptions to the rule. 16 In assailing the factual findings of the
two lower courts, petitioner effectively goes beyond the bounds of a
petition for review under Rule 45.
Compromise Agreement Not the Sole Basis of Partnership
Petitioner argues that the appellate court’s sole basis for assuming
the existence of a partnership was the Compromise Agreement. He
also claims that the settlement was entered into only to end the
dispute among them, but not to adjudicate their preexisting rights and
obligations. His arguments are baseless. The Agreement was but an
embodiment of the relationship extant among the parties prior to its
execution.
A proper adjudication of claimants’ rights mandates that courts must
review and thoroughly appraise all relevant facts. Both lower courts
have done so and have found, correctly, a preexisting partnership
among the parties. In implying that the lower courts have decided on
the basis of one piece of document alone, petitioner fails to
appreciate that the CA and the RTC delved into the history of the
document and explored all the possible consequential combinations
in harmony with law, logic and fairness. Verily, the two lower courts’
factual findings mentioned above nullified petitioner’s argument that
the existence of a partnership was based only on the Compromise
Agreement.chanrobles law library
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioner’s argument that he was merely
the lessor of the boats to Chua and Yao, not a partner in the fishing
venture. His argument allegedly finds support in the Contract of
Lease and the registration papers showing that he was the owner of
the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to
believe that he consented to the sale of his own boats to pay a debt
of Chua and Yao, with the excess of the proceeds to be divided
among the three of them. No lessor would do what petitioner did.
Indeed, his consent to the sale proved that there was a preexisting
partnership among all three.
Verily, as found by the lower courts, petitioner entered into a
business agreement with Chua and Yao, in which debts were
undertaken in order to finance the acquisition and the upgrading of
the vessels which would be used in their fishing business. The sale
of the boats, as well as the division among the three of the balance
remaining after the payment of their loans, proves beyond cavil that
F/B Lourdes, though registered in his name, was not his own
property but an asset of the partnership. It is not uncommon to
register the properties acquired from a loan in the name of the
person the lender trusts, who in this case is the petitioner himself.
After all, he is the brother of the creditor, Jesus
Lim.chanrobles.com.ph : virtual law library
We stress that it is unreasonable — indeed, it is absurd — for
petitioner to sell his property to pay a debt he did not incur, if the
relationship among the three of them was merely that of lessor-
lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel,
liability can be imputed only to Chua and Yao, and not to him. Again,
we disagree.
Section 21 of the Corporation Code of the Philippines
provides:jgc:chanrobles.com.ph
"SECTION 21. Corporation by estoppel. — All persons who assume
to act as a corporation knowing it to be without authority to do so
shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided however,
That when any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any tort committed by
it as such, it shall not be allowed to use as a defense its lack of
corporate personality.
"One who assumes an obligation to an ostensible corporation as
such, cannot resist performance thereof on the ground that there was
in fact no corporation." chanrobles.com:cralaw:red
Thus, even if the ostensible corporate entity is proven to be legally
nonexistent, a party may be estopped from denying its corporate
existence. "The reason behind this doctrine is obvious — an
unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes
of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority
and at their own risk. And as it is an elementary principle of law that
a person who acts as an agent without authority or without a principal
is himself regarded as the principal, possessed of all the right and
subject to all the liabilities of a principal, a person acting or purporting
to act on behalf of a corporation which has no valid existence
assumes such privileges and obligations and becomes personally
liable for contracts entered into or for other acts performed as such
agent." 17
The doctrine of corporation by estoppel may apply to the alleged
corporation and to a third party. In the first instance, an
unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a
suit against it by a third person who relied in good faith on such
representation. It cannot allege lack of personality to be sued to
evade its responsibility for a contract it entered into and by virtue of
which it received advantages and benefits.
On the other hand, a third party who, knowing an association to be
unincorporated, nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its corporate existence
in a suit brought against the alleged corporation. In such case, all
those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held
liable for contracts they impliedly assented to or took advantage
of.chanrobles virtual lawlibrary
There is no dispute that the respondent, Philippine Fishing Gear
Industries, is entitled to be paid for the nets it sold. The only question
here is whether petitioner should be held jointly 18 liable with Chua
and Yao. Petitioner contests such liability, insisting that only those
who dealt in the name of the ostensible corporation should be held
liable. Since his name does not appear on any of the contracts and
since he never directly transacted with the respondent corporation,
ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found
inside F/B Lourdes, the boat which has earlier been proven to be an
asset of the partnership. He in fact questions the attachment of the
nets, because the Writ has effectively stopped his use of the fishing
vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and
Yao decided to form a corporation. Although it was never legally
formed for unknown reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in representation of it.
Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid
existence, are held liable as general partners.
were bought and used in the fishing venture they agreed upon.
Hence, the issuance of the Writ to assure the payment of the price
stipulated in the invoices is proper. Besides, by specific agreement,
ownership of the nets remained with Respondent Philippine Fishing
Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.chanrobles virtual lawlibrary

Technically, it is true that petitioner did not directly act on behalf of SO ORDERED.
the corporation. However, having reaped the benefits of the contract
entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is
covered by the scope of the doctrine of corporation by estoppel. We
reiterate the ruling of the Court in Alonso v. Villamor:
19chanrobles.com.ph : virtual law library

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

schooled and skilled in the subtle art of movement and position,
entraps and destroys the other. It is, rather, a contest in which each
contending party fully and fairly lays before the court the facts in
issue and then, brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that
justice be done upon the merits. Lawsuits, unlike duels, are not to be
won by a rapier’s thrust. Technicality, when it deserts its proper office
as an aid to justice and becomes its great hindrance and chief
enemy, deserves scant consideration from courts. There should be
no vested rights in technicalities."cralaw virtua1aw library

Third Issue:chanrob1es virtual 1aw library

Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly

issued against the nets. We agree with the Court of Appeals that this
issue is now moot and academic. As previously discussed, F/B
Lourdes was an asset of the partnership and that it was placed in the
name of petitioner, only to assure payment of the debt he and his
partners owed. The nets and the floats were specifically
manufactured and tailor-made according to their own design, and
 AFISCO INSURANCE CORPORATION; CCC INSURANCE
CORPORATION; CHARTER INSURANCE CO., INC.; CIBELES
INSURANCE CORPORATION; COMMONWEALTH INSURANCE
COMPANY; CONSOLIDATED INSURANCE CO., INC.;
DEVELOPMENT INSURANCE & SURETY CORPORATION;
DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES;
EASTERN ASSURANCE COMPANY & SURETY CORP.; EMPIRE
INSURANCE COMPANY; EQUITABLE INSURANCE
CORPORATION; FEDERAL INSURANCE CORPORATION INC.;
FGU INSURANCE CORPORATION; FIDELITY & SURETY
COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS
INSURANCE CO., INC.; GOVERNMENT SERVICE INSURANCE
SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH
INSURANCE CO., INC.; MERCANTILE INSURANCE CO., INC.;
METROPOLITAN INSURANCE COMPANY; METRO-TAISHO
INSURANCE CORPORATION; NEW ZEALAND INSURANCE CO.,
LTD.; PAN-MALAYAN INSURANCE CORPORATION;
PARAMOUNT INSURANCE CORPORATION; PEOPLES TRANS-
EAST ASIA INSURANCE CORPORATION; PERLA COMPANIA
DE SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO.,
INC.; PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER
INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL
INSURANCE CORPORATION; PROVIDENT INSURANCE
COMPANY OF THE PHILIPPINES; PYRAMID INSURANCE CO.,
INC.; RELIANCE SURETY & INSURANCE COMPANY; RIZAL
SURETY & INSURANCE COMPANY; SANPIRO INSURANCE
CORPORATION; SEABOARD-EASTERN INSURANCE CO., INC.;
SOLID GUARANTY, INC.; SOUTH SEA SURETY & INSURANCE
CO., INC.; STATE BONDING & INSURANCE CO., INC.; SUMMA
INSURANCE CORPORATION; TABACALERA INSURANCE CO.,
INC.all assessed as POOL OF MACHINERY
INSURERS, petitioners, vs. COURT OF APPEALS, COURT OF
TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION
PANGANIBAN, J.:
Pursuant to reinsurance treaties, a number of local insurance firms
formed themselves into a pool in order to facilitate the handling of
business contracted with a nonresident foreign reinsurance
company. May the clearing house or insurance pool so formed be
deemed a partnership or an association that is taxable as a
corporation under the National Internal Revenue Code (NIRC)?
Should the pools remittances to the member companies and to the
said foreign firm be taxable as dividends? Under the facts of this
case, has the governments right to assess and collect said tax
prescribed?
The Case
These are the main questions raised in the Petition for Review
on Certiorari before us, assailing the October 11, 1993 Decision1 of
the Court of Appeals2in CA-GR SP 29502, which dismissed
petitioners appeal of the October 19, 1992 Decision3 of the Court of
Tax Appeals4 (CTA) which had previously sustained petitioners
liability for deficiency income tax, interest and withholding tax. The
Court of Appeals ruled:
WHEREFORE, the petition is DISMISSED, with costs against
petitioners.5
The petition also challenges the November 15, 1993 Court of
Appeals (CA) Resolution6 denying reconsideration.
The Facts
The antecedent facts,7 as found by the Court of Appeals, are as
follows:
The petitioners are 41 non-life insurance corporations, organized and
existing under the laws of the Philippines. Upon issuance by them of
Erection, Machinery Breakdown, Boiler Explosion and Contractors All
Risk insurance policies, the petitioners on August 1, 1965 entered
into a Quota Share Reinsurance Treaty and a Surplus Reinsurance
Treaty with the Munchener Ruckversicherungs-Gesselschaft Reinsurance Company P3,728,412.00
(hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a ===========
[p]ool. Accordingly, a pool composed of the petitioners was formed
on the same day. 35% withholding tax at

On April 14, 1976, the pool of machinery insurers submitted a source due thereon P1,304,944.20
financial statement and filed an Information Return of Organization
Exempt from Income Tax for the year ending in 1975, on the basis of
which it was assessed by the Commissioner of Internal Revenue Add: 25% surcharge 326,236.05
deficiency corporate taxes in the amount of P1,843,273.60, and
withholding taxes in the amount of P1,768,799.39 and P89,438.68 on 14% interest from
dividends paid to Munich and to the petitioners, respectively. These
assessments were protested by the petitioners through its auditors 1/25/76 to 1/25/79 137,019.14
Sycip, Gorres, Velayo and Co.
Compromise penalty-
On January 27, 1986, the Commissioner of Internal Revenue denied
the protest and ordered the petitioners, assessed as Pool of non-filing of return 300.00
Machinery Insurers, to pay deficiency income tax, interest, and
with[h]olding tax, itemized as follows:
late payment 300.00
Net income per information
TOTAL AMOUNT DUE & P1,768,799.39
return P3,737,370.00
COLLECTIBLE ===========
===========
Dividend paid to Pool Members P 655,636.00
Income tax due thereon P1,298,080.00
===========
Add: 14% Int. fr. 4/15/76
10% withholding tax at
to 4/15/79 545,193.60
source due thereon P 65,563.60
TOTAL AMOUNT DUE & P1,843,273.60
Add: 25% surcharge 16,390.90
COLLECTIBLE ===========
14% interest from
Dividend paid to Munich
1/25/76 to 1/25/79 6,884.18
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P 89,438.68
8 pool or clearing house was an informal partnership, which was
COLLECTIBLE ===========
The CA ruled in the main that the pool of machinery insurers was a
partnership taxable as a corporation, and that the latters collection of
premiums on behalf of its members, the ceding companies, was
taxable income. It added that prescription did not bar the Bureau of
Internal Revenue (BIR) from collecting the taxes due, because the
taxpayer cannot be located at the address given in the information
return filed. Hence, this Petition for Review before us.9
The Issues
Before this Court, petitioners raise the following issues:
1.Whether or not the Clearing House, acting as a mere agent and
performing strictly administrative functions, and which did not insure
or assume any risk in its own name, was a partnership or association
subject to tax as a corporation;
2.Whether or not the remittances to petitioners and MUNICHRE of
their respective shares of reinsurance premiums, pertaining to their
individual and separate contracts of reinsurance, were dividends
subject to tax; and
3.Whether or not the respondent Commissioners right to assess the
Clearing House had already prescribed.10
The Courts Ruling
The petition is devoid of merit. We sustain the ruling of the Court of
Appeals that the pool is taxable as a corporation, and that the
governments right to assess and collect the taxes had not
prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the
taxable as a corporation under the NIRC. They point out that the
reinsurance policies were written by them individually and separately,
and that their liability was limited to the extent of their allocated share
in the original risks thus reinsured.11 Hence, the pool did not act or
earn income as a reinsurer.12 Its role was limited to its principal
function of allocating and distributing the risk(s) arising from the
original insurance among the signatories to the treaty or the
members of the pool based on their ability to absorb the risk(s)
ceded[;] as well as the performance of incidental functions, such as
records, maintenance, collection and custody of funds,
etc.13cräläwvirtualibräry
Petitioners belie the existence of a partnership in this case, because
(1) they, the reinsurers, did not share the same risk or solidary
liability;14 (2) there was no common fund;15 (3) the executive board of
the pool did not exercise control and management of its funds, unlike
the board of directors of a corporation;16 and (4) the pool or clearing
house was not and could not possibly have engaged in the business
of reinsurance from which it could have derived income for
itself.17cräläwvirtualibräry
The Court is not persuaded. The opinion or ruling of the Commission
of Internal Revenue, the agency tasked with the enforcement of tax
laws, is accorded much weight and even finality, when there is no
showing that it is patently wrong,18 particularly in this case where the
findings and conclusions of the internal revenue commissioner were
subsequently affirmed by the CTA, a specialized body created for the
exclusive purpose of reviewing tax cases, and the Court of
Appeals.19 Indeed,
[I]t has been the long standing policy and practice of this Court to
respect the conclusions of quasi-judicial agencies, such as the Court
of Tax Appeals which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has
been an abuse or improvident exercise of its authority.20
This Court rules that the Court of Appeals, in affirming the CTA which
had previously sustained the internal revenue commissioner,
committed no reversible error. Section 24 of the NIRC, as worded in
the year ending 1975, provides:
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic
corporations. -- A tax is hereby imposed upon the taxable net income
received during each 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-partnership (compaias colectivas), general
professional partnerships, private educational institutions, and
building and loan associations xxx.
Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as unregistered
partnerships and associations. Parenthetically, the NLRCs inclusion
of such entities in the tax on corporations was made even clearer by
the Tax Reform Act of 1997,21 which amended the Tax Code.
Pertinent provisions of the new law read as follows:
SEC. 27. Rates of Income Tax on Domestic Corporations. --
(A) In General. -- Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed upon the
taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined in
Section 22 (B) of this Code, and taxable under this Title as a
corporation xxx.
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term corporation shall include partnerships, no
matter how created or organized, joint-stock companies,
joint accounts (cuentas en participacion), associations, or
insurance companies, but does not include general
professional partnerships [or] a joint venture or consortium
formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating or
consortium agreement under a service contract without the
Government. General professional partnerships are
partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income
of which is derived from engaging in any trade or business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue22 held
that Section 24 covered these unregistered partnerships and even
associations or joint accounts, which had no legal personalities apart
from their individual members.23 The Court of Appeals astutely
applied Evangelista:24cräläwvirtualibräry
xxx Accordingly, a pool of individual real property owners dealing in
real estate business was considered a corporation for purposes of
the tax in sec. 24 of the Tax Code in Evangelista v. Collector of
Internal Revenue, supra. The Supreme Court said:
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 Mertens Law of Federal Income Taxation, p.
562 Note 63)
Article 1767 of the Civil Code recognizes the creation of a contract of
partnership when 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.25 Its requisites are: (1) mutual
contribution to a common stock, and (2) a joint interest in the
profits.26 In other words, a partnership is formed when persons
contract to devote to a common purpose either money, property, or
labor with the intention of dividing the profits between
themselves.27 Meanwhile, an association implies associates who
enter into a joint enterprise x x x for the transaction of
business.28cräläwvirtualibräry
In the case before us, the ceding companies entered into a Pool
Agreement29 or an association30 that would handle all the insurance
businesses covered under their quota-share reinsurance treaty31 and
surplus reinsurance treaty32with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of
the NIRC:
(1) The pool has a common fund, consisting of money and other
valuables that are deposited in the name and credit of the
pool.33 This common fund pays for the administration and operation
expenses of the pool.34cräläwvirtualibräry
(2) The pool functions through an executive board, which resembles
the board of directors of a corporation, composed of one
representative for each of the ceding companies.35cräläwvirtualibräry
(3) True, the pool itself is not a reinsurer and does not issue any
insurance policy; however, its work is indispensable, beneficial and
economically useful to the business of the ceding companies and
Munich, because without it they would not have received their
premiums. The ceding companies share in the business ceded to the
pool and in the expenses according to a Rules of Distribution
annexed to the Pool Agreement.36 Profit motive or business is,
therefore, the primordial reason for the pools formation. As aptly
found by the CTA:
xxx The fact that the pool does not retain any profit or
income does not obliterate an antecedent fact, that of the
pool being used in the transaction of business for profit. It
is apparent, and petitioners admit, that their association or
coaction was indispensable [to] the transaction of the
business. x x x If together they have conducted business,
profit must have been the object as, indeed, profit was
earned. Though the profit was apportioned among the
members, this is only a matter of consequence, as it
implies that profit actually resulted.37
The petitioners reliance on Pascual v. Commissioner38 is misplaced,
because the facts obtaining therein are not on all fours with the
present case. In Pascual, there was no unregistered partnership, but
merely a co-ownership which took up only two isolated
transactions.39 The Court of Appeals did not err in
applying Evangelista,  which involved a partnership that engaged in a
series of transactions spanning more than ten years, as in the case
before us.
Second Issue:
Pools Remittances Are Taxable
Petitioners further contend that the remittances of the pool to the
ceding companies and Munich are not dividends subject to tax. They
insist that taxing such remittances contravene Sections 24 (b) (I) and
263 of the 1977 NIRC and would be tantamount to an illegal double
taxation, as it would result in taxing the same premium income twice
in the hands of the same taxpayer.40 Moreover, petitioners argue that
since Munich was not a signatory to the Pool Agreement, the
remittances it received from the pool cannot be deemed
dividends.41 They add that even if such remittances were treated as
dividends, they would have been exempt under the previously
mentioned sections of the 1977 NIRC,42 as well as Article 7 of
paragraph 143 and Article 5 of paragraph 544 of the RP-West German
Tax Treaty.45cräläwvirtualibräry
Petitioners are clutching at straws. Double taxation means taxing the
same property twice when it should be taxed only once. That is, xxx
taxing the same person twice by the same jurisdiction for the same
thing.46 In the instant case, the pool is a taxable entity distinct from
the individual corporate entities of the ceding companies. The tax on
its income is obviously different from the tax on
the dividends received by the said companies. Clearly, there is no
double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since
their entitlement thereto remains unproven and unsubstantiated. It is
axiomatic in the law of taxation that taxes are the lifeblood of the
nation. Hence, exemptions therefrom are highly disfavored in law
and he who claims tax exemption must be able to justify his claim or
right.47 Petitioners have failed to discharge this burden of proof. The
sections of the 1977 NIRC which they cite are inapplicable, because
these were not yet in effect when the income was earned and when
the subject information return for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of the
NIRC, the Court still cannot justify the exemptions claimed. Section
255 provides that no tax shall xxx be paid upon reinsurance by any
company that has already paid the tax xxx. This cannot be applied to
the present case because, as previously discussed, the pool is a
taxable entity distinct from the ceding companies; therefore, the latter
cannot individually claim the income tax paid by the former as their
own.
On the other hand, Section 24 (b) (1)48 pertains to tax on foreign
corporations; hence, it cannot be claimed by the ceding companies
which are domestic corporations. Nor can Munich, a foreign
corporation, be granted exemption based solely on this provision of
the Tax Code, because the same subsection specifically
taxes dividends,  the type of remittances forwarded to it by the pool.
Although not a signatory to the Pool Agreement, Munich is patently
an associate of the ceding companies in the entity formed, pursuant
to their reinsurance treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies, Munich
shared in their income and loss. This is manifest from a reading of
Articles 349 and 1050 of the Quota Share Reinsurance Treaty and
Articles 351 and 1052 of the Surplus Reinsurance Treaty. The
foregoing interpretation of Section 24 (b) (1) is in line with the
doctrine that a tax exemption must be construed strictissimi
juris,  and the statutory exemption claimed must be expressed in a
language too plain to be mistaken.53cräläwvirtualibräry
Finally, the petitioners claim that Munich is tax-exempt based on the
RP-West German Tax Treaty is likewise unpersuasive, because the
internal revenue commissioner assessed the pool for corporate taxes
on the basis of the information return it had submitted for the year
ending 1975, a taxable year when said treaty was not yet in
effect.54 Although petitioners omitted in their pleadings the date of
effectivity of the treaty, the Court takes judicial notice that it took
effect only later, on December 14, 1984.55
Third Issue: Prescription
Petitioners also argue that the governments right to assess and
collect the subject tax had prescribed. They claim that the subject
information return was filed by the pool on April 14, 1976. On the
basis of this return, the BIR telephoned petitioners on November 11,
1981, to give them notice of its letter of assessment dated March 27,
1981. Thus, the petitioners contend that the five-year statute of
limitations then provided in the NIRC had already lapsed, and that
the internal revenue commissioner was already barred by
prescription from making an assessment.56cräläwvirtualibräry
We cannot sustain the petitioners. The CA and the CTA categorically
found that the prescriptive period was tolled under then Section 333
of the NIRC,57 because the taxpayer cannot be located at the
address given in the information return filed and for which reason
there was delay in sending the assessment.58 Indeed, whether the
governments right to collect and assess the tax has prescribed
involves facts which have been ruled upon by the lower courts. It is
axiomatic that in the absence of a clear showing of palpable error or
grave abuse of discretion, as in this case, this Court must not
overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration
before the Court of Appeals that the pool changed its address, for
they stated that the pools information return filed in 1980 indicated
therein its present address. The Court finds that this falls short of the
requirement of Section 333 of the NIRC for the suspension of the
prescriptive period. The law clearly states that the said period will be
suspended only if the taxpayer informs the Commissioner of Internal
Revenue of any change in the address.

WHEREFORE, the petition is DENIED. The Resolutions of the Court

of Appeals dated October 11, 1993 and November 15, 1993 are
hereby AFFIRMED. Costs against petitioners.

SO ORDERED.
G.R. No. 148187             April 16, 2008
PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the June 30, 2000
Decision1 of the Court of Appeals in CA-G.R. SP No. 49385, which
affirmed the Decision2 of the Court of Tax Appeals in C.T.A. Case
No. 5200. Also assailed is the April 3, 2001 Resolution3 denying the
motion for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex
Mining), entered into an agreement4 with Baguio Gold Mining
Company ("Baguio Gold") for the former to manage and operate the
latter’s mining claim, known as the Sto. Nino mine, located in Atok
and Tublay, Benguet Province. The parties’ agreement was
denominated as "Power of Attorney" and provided for the following
terms:
4. Within three (3) years from date thereof, the PRINCIPAL
(Baguio Gold) shall make available to the MANAGERS
(Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may
be required by the MANAGERS within the said 3-year
period, for use in the MANAGEMENT of the STO. NINO
MINE. The said ELEVEN MILLION PESOS
(P11,000,000.00) shall be deemed, for internal audit
purposes, as the owner’s account in the Sto. Nino
PROJECT. Any part of any income of the PRINCIPAL from
the STO. NINO MINE, which is left with the Sto. Nino
PROJECT, shall be added to such owner’s account.
5. Whenever the MANAGERS shall deem it necessary and
convenient in connection with the MANAGEMENT of the
STO. NINO MINE, they may transfer their own funds or
property to the Sto. Nino PROJECT, in accordance with the
following arrangements:
(a) The properties shall be appraised and, together
with the cash, shall be carried by the Sto. Nino
PROJECT as a special fund to be known as the
MANAGERS’ account.
(b) The total of the MANAGERS’ account shall not
exceed P11,000,000.00, except with prior approval
of the PRINCIPAL; provided, however, that if the
compensation of the MANAGERS as herein
provided cannot be paid in cash from the Sto. Nino
PROJECT, the amount not so paid in cash shall be
added to the MANAGERS’ account.
(c) The cash and property shall not thereafter be
withdrawn from the Sto. Nino PROJECT until
termination of this Agency.
(d) The MANAGERS’ account shall not accrue
interest. Since it is the desire of the PRINCIPAL to
extend to the MANAGERS the benefit of subsequent
appreciation of property, upon a projected
termination of this Agency, the ratio which the
MANAGERS’ account has to the owner’s account
will be determined, and the corresponding proportion
of the entire assets of the STO. NINO MINE,
excluding the claims, shall be transferred to the
MANAGERS, except that such transferred assets
shall not include mine development, roads,
buildings, and similar property which will be
 valueless, or of slight value, to the MANAGERS. The
MANAGERS can, on the other hand, require at their
option that property originally transferred by them to
the Sto. Nino PROJECT be re-transferred to them.
Until such assets are transferred to the
MANAGERS, this Agency shall remain subsisting.
xxxx
12. The compensation of the MANAGER shall be fifty per
cent (50%) of the net profit of the Sto. Nino PROJECT before
income tax. It is understood that the MANAGERS shall pay
income tax on their compensation, while the PRINCIPAL
shall pay income tax on the net profit of the Sto. Nino
PROJECT after deduction therefrom of the MANAGERS’
compensation.
xxxx
16. The PRINCIPAL has current pecuniary obligation in favor
of the MANAGERS and, in the future, may incur other
obligations in favor of the MANAGERS. This Power of
Attorney has been executed as security for the payment and
satisfaction of all such obligations of the PRINCIPAL in favor
of the MANAGERS and as a means to fulfill the same.
Therefore, this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS’ account. After all
obligations of the PRINCIPAL in favor of the MANAGERS
have been paid and satisfied in full, this Agency shall be
revocable by the PRINCIPAL upon 36-month notice to the
MANAGERS.
17. Notwithstanding any agreement or understanding
between the PRINCIPAL and the MANAGERS to the
contrary, the MANAGERS may withdraw from this Agency by
giving 6-month notice to the PRINCIPAL. The MANAGERS
shall not in any manner be held liable to the PRINCIPAL by
reason alone of such withdrawal. Paragraph 5(d) hereof shall
be operative in case of the MANAGERS’ withdrawal.
x x x x5
In the course of managing and operating the project, Philex Mining
made advances of cash and property in accordance with paragraph
5 of the agreement. However, the mine suffered continuing losses
over the years which resulted to petitioner’s withdrawal as manager
of the mine on January 28, 1982 and in the eventual cessation of
mine operations on February 20, 1982.6
Thereafter, on September 27, 1982, the parties executed a
"Compromise with Dation in Payment"7 wherein Baguio Gold
admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three segments by
first assigning Baguio Gold’s tangible assets to petitioner,
transferring to the latter Baguio Gold’s equitable title in its Philodrill
assets and finally settling the remaining liability through properties
that Baguio Gold may acquire in the future.
On December 31, 1982, the parties executed an "Amendment to
Compromise with Dation in Payment"8 where the parties determined
that Baguio Gold’s indebtedness to petitioner actually amounted to
P259,137,245.00, which sum included liabilities of Baguio Gold to
other creditors that petitioner had assumed as guarantor. These
liabilities pertained to long-term loans amounting to
US$11,000,000.00 contracted by Baguio Gold from the Bank of
America NT & SA and Citibank N.A. This time, Baguio Gold
undertook to pay petitioner in two segments by first assigning its
tangible assets for P127,838,051.00 and then transferring its
equitable title in its Philodrill assets for P16,302,426.00. The parties
then ascertained that Baguio Gold had a remaining outstanding
indebtedness to petitioner in the amount of P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the
remaining outstanding indebtedness of Baguio Gold by charging
P112,136,000.00 to allowances and reserves that were set up in
1981 and P2,860,768.00 to the 1982 operations.
In its 1982 annual income tax return, petitioner deducted from its
gross income the amount of P112,136,000.00 as "loss on settlement
of receivables from Baguio Gold against reserves and
allowances."9 However, the Bureau of Internal Revenue (BIR)
disallowed the amount as deduction for bad debt and assessed
petitioner a deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must
be allowed since all requisites for a bad debt deduction were
satisfied, to wit: (a) there was a valid and existing debt; (b) the debt
was ascertained to be worthless; and (c) it was charged off within the
taxable year when it was determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management
contract it entered into with Baguio Gold. The bad debt deduction
represented advances made by petitioner which, pursuant to the
management contract, formed part of Baguio Gold’s "pecuniary
obligations" to petitioner. It also included payments made by
petitioner as guarantor of Baguio Gold’s long-term loans which
legally entitled petitioner to be subrogated to the rights of the original
creditor.
Petitioner also asserted that due to Baguio Gold’s irreversible losses,
it became evident that it would not be able to recover the advances
and payments it had made in behalf of Baguio Gold. For a debt to be
considered worthless, petitioner claimed that it was neither required
to institute a judicial action for collection against the debtor nor to sell
or dispose of collateral assets in satisfaction of the debt. It is enough
that a taxpayer exerted diligent efforts to enforce collection and
exhausted all reasonable means to collect.
On October 28, 1994, the BIR denied petitioner’s protest for lack of
legal and factual basis. It held that the alleged debt was not
ascertained to be worthless since Baguio Gold remained existing and
had not filed a petition for bankruptcy; and that the deduction did not
consist of a valid and subsisting debt considering that, under the
management contract, petitioner was to be paid fifty percent (50%) of
the project’s net profit.10
Petitioner appealed before the Court of Tax Appeals (CTA) which
rendered judgment, as follows:
WHEREFORE, in view of the foregoing, the instant Petition
for Review is hereby DENIED for lack of merit. The
assessment in question, viz: FAS-1-82-88-003067 for
deficiency income tax in the amount of P62,811,161.39 is
hereby AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is
hereby ORDERED to PAY respondent Commissioner of
Internal Revenue the amount of P62,811,161.39, plus, 20%
delinquency interest due computed from February 10, 1995,
which is the date after the 20-day grace period given by the
respondent within which petitioner has to pay the deficiency
amount x x x up to actual date of payment.
SO ORDERED.11
The CTA rejected petitioner’s assertion that the advances it made for
the Sto. Nino mine were in the nature of a loan. It instead
characterized the advances as petitioner’s investment in a
partnership with Baguio Gold for the development and exploitation of
the Sto. Nino mine. The CTA held that the "Power of Attorney"
executed by petitioner and Baguio Gold was actually a partnership
agreement. Since the advanced amount partook of the nature of an
investment, it could not be deducted as a bad debt from petitioner’s
gross income.
The CTA likewise held that the amount paid by petitioner for the
long-term loan obligations of Baguio Gold could not be allowed as a
bad debt deduction. At the time the payments were made, Baguio
Gold was not in default since its loans were not yet due and
demandable. What petitioner did was to pre-pay the loans as
evidenced by the notice sent by Bank of America showing that it was
merely demanding payment of the installment and interests due.
Moreover, Citibank imposed and collected a "pre-termination
penalty" for the pre-payment.
The Court of Appeals affirmed the decision of the CTA.12 Hence,
upon denial of its motion for reconsideration,13 petitioner took this
recourse under Rule 45 of the Rules of Court, alleging that:
I.
The Court of Appeals erred in construing that the advances
made by Philex in the management of the Sto. Nino Mine
pursuant to the Power of Attorney partook of the nature of an
investment rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50%
sharing in the net profits of the Sto. Nino Mine indicates that
Philex is a partner of Baguio Gold in the development of the
Sto. Nino Mine notwithstanding the clear absence of any
intent on the part of Philex and Baguio Gold to form a
partnership.
III.
The Court of Appeals erred in relying only on the Power of
Attorney and in completely disregarding the Compromise
Agreement and the Amended Compromise Agreement when
it construed the nature of the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the
issue of the propriety of the bad debts write-off.14
Petitioner insists that in determining the nature of its business
relationship with Baguio Gold, we should not only rely on the "Power
of Attorney", but also on the subsequent "Compromise with Dation in
Payment" and "Amended Compromise with Dation in Payment" that
the parties executed in 1982. These documents, allegedly evinced
the parties’ intent to treat the advances and payments as a loan and
establish a creditor-debtor relationship between them.
The petition lacks merit.
The lower courts correctly held that the "Power of Attorney" is the
instrument that is material in determining the true nature of the
business relationship between petitioner and Baguio Gold. Before
resort may be had to the two compromise agreements, the parties’
contractual intent must first be discovered from the expressed
language of the primary contract under which the parties’ business
relations were founded. It should be noted that the compromise
agreements were mere collateral documents executed by the parties
pursuant to the termination of their business relationship created
under the "Power of Attorney". On the other hand, it is the latter
which established the juridical relation of the parties and defined the
parameters of their dealings with one another.
The execution of the two compromise agreements can hardly be
considered as a subsequent or contemporaneous act that is
reflective of the parties’ true intent. The compromise agreements
were executed eleven years after the "Power of Attorney" and merely
laid out a plan or procedure by which petitioner could recover the
advances and payments it made under the "Power of Attorney". The
parties entered into the compromise agreements as a consequence
of the dissolution of their business relationship. It did not define that
relationship or indicate its real character.
An examination of the "Power of Attorney" reveals that a partnership
or joint venture was indeed intended by the parties. Under a contract
of partnership, two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.15 While a corporation, like
petitioner, cannot generally enter into a contract of partnership
unless authorized by law or its charter, it has been held that it may
enter into a joint venture which is akin to a particular partnership:
The legal concept of a joint venture is of common law origin.
It has no precise legal definition, but it has been generally
 understood to mean an organization formed for some
temporary purpose. x x x 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. x x x 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. x x x 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. x x x It would seem therefore that under
Philippine law, a joint venture is a form of partnership and
should 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. x x x (Citations omitted) 16
Perusal of the agreement denominated as the "Power of Attorney"
indicates that the parties had intended to create a partnership and
establish a common fund for the purpose. They also had a joint
interest in the profits of the business as shown by a 50-50 sharing in
the income of the mine.
Under the "Power of Attorney", petitioner and Baguio Gold undertook
to contribute money, property and industry to the common fund
known as the Sto. Niño mine.17 In this regard, we note that there is a
substantive equivalence in the respective contributions of the parties
to the development and operation of the mine. Pursuant to
paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold
were to contribute equally to the joint venture assets under their
respective accounts. Baguio Gold would contribute P11M under its
owner’s account plus any of its income that is left in the project, in
addition to its actual mining claim. Meanwhile, petitioner’s
contribution would consist of its expertise in the management and
operation of mines, as well as the manager’s account which is
comprised of P11M in funds and property and
petitioner’s "compensation" as manager that cannot be paid in
cash.
However, petitioner asserts that it could not have entered into a
partnership agreement with Baguio Gold because it did not "bind"
itself to contribute money or property to the project; that under
paragraph 5 of the agreement, it was only optional for petitioner to
transfer funds or property to the Sto. Niño project "(w)henever the
MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NIÑO MINE."18
The wording of the parties’ agreement as to petitioner’s contribution
to the common fund does not detract from the fact that petitioner
transferred its funds and property to the project as specified in
paragraph 5, thus rendering effective the other stipulations of the
contract, particularly paragraph 5(c) which prohibits petitioner from
withdrawing the advances until termination of the parties’ business
relations. As can be seen, petitioner became bound by its
contributions once the transfers were made. The contributions
acquired an obligatory nature as soon as petitioner had chosen to
exercise its option under paragraph 5.
There is no merit to petitioner’s claim that the prohibition in
paragraph 5(c) against withdrawal of advances should not be taken
as an indication that it had entered into a partnership with Baguio
Gold; that the stipulation only showed that what the parties entered
into was actually a contract of agency coupled with an interest which
is not revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that cannot be
revoked or withdrawn by the principal due to an interest of a third
party that depends upon it, or the mutual interest of both principal
and agent.19 In this case, the non-revocation or non-withdrawal under
paragraph 5(c) applies to the advances made by petitioner who is
supposedly the agent and not the principal under the contract. Thus,
it cannot be inferred from the stipulation that the parties’ relation
under the agreement is one of agency coupled with an interest and
not a partnership.
Neither can paragraph 16 of the agreement be taken as an indication
that the relationship of the parties was one of agency and not a
partnership. Although the said provision states that "this Agency shall
be irrevocable while any obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the MANAGERS’ account,"
it does not necessarily follow that the parties entered into an agency
contract coupled with an interest that cannot be withdrawn by Baguio
Gold.
It should be stressed that the main object of the "Power of Attorney"
was not to confer a power in favor of petitioner to contract with third
persons on behalf of Baguio Gold but to create a business
relationship between petitioner and Baguio Gold, in which the former
was to manage and operate the latter’s mine through the parties’
mutual contribution of material resources and industry. The essence
of an agency, even one that is coupled with interest, is the agent’s
ability to represent his principal and bring about business relations
between the latter and third persons.20 Where representation for and
in behalf of the principal is merely incidental or necessary for the
proper discharge of one’s paramount undertaking under a contract,
the latter may not necessarily be a contract of agency, but some
other agreement depending on the ultimate undertaking of the
parties.21
In this case, the totality of the circumstances and the stipulations in
the parties’ agreement indubitably lead to the conclusion that a
partnership was formed between petitioner and Baguio Gold.
First, it does not appear that Baguio Gold was unconditionally
obligated to return the advances made by petitioner under the
agreement. Paragraph 5 (d) thereof provides that upon termination of
the parties’ business relations, "the ratio which the MANAGER’S
account has to the owner’s account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO
MINE, excluding the claims" shall be transferred to petitioner.22 As
pointed out by the Court of Tax Appeals, petitioner was merely
entitled to a proportionate return of the mine’s assets upon
dissolution of the parties’ business relations. There was nothing in
the agreement that would require Baguio Gold to make payments of
the advances to petitioner as would be recognized as an item of
obligation or "accounts payable" for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided
for a distribution of assets of the Sto. Niño mine upon termination, a
provision that is more consistent with a partnership than a creditor-
debtor relationship. It should be pointed out that in a contract of loan,
a person who receives a loan or money or any fungible thing
acquires ownership thereof and is bound to pay the creditor an
equal amount of the same kind and quality.23 In this case, however,
there was no stipulation for Baguio Gold to actually repay petitioner
the cash and property that it had advanced, but only the return of an
amount pegged at a ratio which the manager’s account had to the
owner’s account.
In this connection, we find no contractual basis for the execution of
the two compromise agreements in which Baguio Gold recognized a
debt in favor of petitioner, which supposedly arose from the
termination of their business relations over the Sto. Nino mine. The
"Power of Attorney" clearly provides that petitioner would only be
entitled to the return of a proportionate share of the mine assets to
be computed at a ratio that the manager’s account had to the
owner’s account. Except to provide a basis for claiming the advances
as a bad debt deduction, there is no reason for Baguio Gold to hold
itself liable to petitioner under the compromise agreements, for any
amount over and above the proportion agreed upon in the "Power of
Attorney".
Next, the tax court correctly observed that it was unlikely for a
business corporation to lend hundreds of millions of pesos to another
corporation with neither security, or collateral, nor a specific deed
evidencing the terms and conditions of such loans. The parties also
did not provide a specific maturity date for the advances to become
due and demandable, and the manner of payment was unclear. All
these point to the inevitable conclusion that the advances were not
loans but capital contributions to a partnership.
The strongest indication that petitioner was a partner in the Sto Niño
mine is the fact that it would receive 50% of the net profits as
"compensation" under paragraph 12 of the agreement. The entirety
of the parties’ contractual stipulations simply leads to no other
conclusion than that petitioner’s "compensation" is actually its share
in the income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the "receipt
by a person of a share in the profits of a business is prima
facie evidence that he is a partner in the business." Petitioner
asserts, however, that no such inference can be drawn against it
since its share in the profits of the Sto Niño project was in the nature
of compensation or "wages of an employee", under the exception
provided in Article 1769 (4) (b).24
On this score, the tax court correctly noted that petitioner was not an
employee of Baguio Gold who will be paid "wages" pursuant to an
employer-employee relationship. To begin with, petitioner was the
manager of the project and had put substantial sums into the venture
in order to ensure its viability and profitability. By pegging its
compensation to profits, petitioner also stood not to be remunerated
in case the mine had no income. It is hard to believe that petitioner
would take the risk of not being paid at all for its services, if it were
truly just an ordinary employee.
Consequently, we find that petitioner’s "compensation" under
paragraph 12 of the agreement actually constitutes its share in the
net profits of the partnership. Indeed, petitioner would not be entitled
to an equal share in the income of the mine if it were just an
employee of Baguio Gold.25 It is not surprising that petitioner was to
receive a 50% share in the net profits, considering that the "Power of
Attorney" also provided for an almost equal contribution of the parties
to the St. Nino mine. The "compensation" agreed upon only serves to
reinforce the notion that the parties’ relations were indeed of partners
and not employer-employee.
All told, the lower courts did not err in treating petitioner’s advances
as investments in a partnership known as the Sto. Nino mine. The
advances were not "debts" of Baguio Gold to petitioner inasmuch as
the latter was under no unconditional obligation to return the same to
the former under the "Power of Attorney". As for the amounts that
petitioner paid as guarantor to Baguio Gold’s creditors, we find no
reason to depart from the tax court’s factual finding that Baguio
Gold’s debts were not yet due and demandable at the time that
petitioner paid the same. Verily, petitioner pre-paid Baguio Gold’s
outstanding loans to its bank creditors and this conclusion is
supported by the evidence on record.26
In sum, petitioner cannot claim the advances as a bad debt
deduction from its gross income. Deductions for income tax purposes
partake of the nature of tax exemptions and are strictly construed
against the taxpayer, who must prove by convincing evidence that he
is entitled to the deduction claimed.27 In this case, petitioner failed to
substantiate its assertion that the advances were subsisting debts of
Baguio Gold that could be deducted from its gross income.
Consequently, it could not claim the advances as a valid bad debt
deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of
Appeals in CA-G.R. SP No. 49385 dated June 30, 2000, which
affirmed the decision of the Court of Tax Appeals in C.T.A. Case No.
5200 is AFFIRMED. Petitioner Philex Mining Corporation
is ORDERED to PAY the deficiency tax on its 1982 income in the
amount of P62,811,161.31, with 20% delinquency interest computed
from February 10, 1995, which is the due date given for the payment
of the deficiency income tax, up to the actual date of payment.
 G.R. No. 193138, August 20, 2018
ANICETO G. SALUDO, JR., Petitioner, v. PHILIPPINE NATIONAL
BANK, Respondent.
DECISION
JARDELEZA, J.:
In this petition, we emphasize that a partnership for the practice of
law, constituted in accordance with the Civil Code provisions on
partnership, acquires juridical personality by operation of law. Having
a juridical personality distinct and separate from its partners, such
partnership is the real party-in-interest in a suit brought in connection
with a contract entered into in its name and by a person authorized to
act on its behalf.
Petitioner Aniceto G. Saludo, Jr. (Saludo) filed this petition for review
on certiorari1 assailing the February 8, 2010 Decision2 and August 2,
2010 Resolution3 issued by the Court of Appeals (CA) in CA-G.R. SP
No. 98898. The CA affirmed with modification the January 11, 2007
Omnibus Order4 issued by Branch 58 of the Regional Trial Court
(RTC) of Makati City in Civil Case No. 06-678, and ruled that
respondent Philippine National Bank's (PNB) counterclaims against
Saludo and the Saludo Agpalo Fernandez and Aquino Law Office
(SAFA Law Office) should be reinstated in its answer.
Records show that on June 11, 1998, SAFA Law Office entered into
a Contract of Lease5 with PNB, whereby the latter agreed to lease
632 square meters of the second floor of the PNB Financial Center
Building in Quezon City for a period of three years and for a monthly
rental fee of P189,600.00. The rental fee is subject to a yearly
escalation rate of 10%.6 SAFA Law Office then occupied the leased
premises and paid advance rental fees and security deposit in the
total amount of P1,137,600.00.7
On August 1, 2001, the Contract of Lease expired.8 According to
PNB, SAFA Law Office continued to occupy the leased premises
until February 2005, but discontinued paying its monthly rental
obligations after December 2002.9 Consequently, PNB sent a
demand letter10 dated July 17, 2003 for SAFA Law Office to pay its
outstanding unpaid rents in the amount of P4,648,086.34. PNB sent
another letter11 demanding the payment of unpaid rents in the
amount of P5,856,803.53 which was received by SAFA Law Office
on November 10, 2003.
In a letter12 to PNB dated June 9, 2004, SAFA Law Office expressed
its intention to negotiate. It claimed that it was enticed by the former
management of PNB into renting the leased premises by promising
to: (1) give it a special rate due to the large area of the place; (2)
endorse PNB's cases to the firm with rents to be paid out of
attorney's fees; and (3) retain the firm as one of PNB's external
counsels. When new management took over, it allegedly agreed to
uphold this agreement to facilitate rental payments. However, not a
single case of significance was referred to the firm. SAFA Law Office
then asked PNB to review and discuss its billings, evaluate the
improvements in the area and agree on a compensatory sum to be
applied to the unpaid rents, make good its commitment to endorse or
refer cases to SAFA Law Office under the intended terms and
conditions, and book the rental payments due as receivables payable
every time attorney's fees are due from the bank on the cases it
referred. The firm also asked PNB to give a 50% discount on its
unpaid rents, noting that while it was waiting for case referrals, it had
paid a total amount of P13,457,622.56 from January 1999 to
December 2002, which included the accelerated rates of 10% per
annum beginning August 1999 until July 2003.
In February 2005, SAFA Law Office vacated the leased
premises.13 PNB sent a demand letter14 dated July 7, 2005 requiring
the firm to pay its rental arrears in the total amount of
P10,951,948.32. In response, SAFA Law Office sent a letter dated
June 8, 2006, proposing a settlement by providing a range of
suggested computations of its outstanding rental obligations, with
deductions for the value of improvements it introduced in the
premises, professional fees due from Macroasia Corporation, and
the 50% discount allegedly promised by Dr. Lucio Tan.15 PNB,
however, declined the settlement proposal in a letter16 dated July 17,
2006, stating that it was not amenable to the settlement's terms.
Besides, PNB also claimed that it cannot assume the liabilities of
Macroasia Corporation to SAFA Law Office as Macroasia
Corporation has a personality distinct and separate from the bank.
PNB then made a final demand for SAFA Law Office to pay its
outstanding rental obligations in the amount of P25,587,838.09.
On September 1, 2006, Saludo, in his capacity as managing partner
of SAFA Law Office, filed an amended complaint17 for accounting
and/or recomputation of unpaid rentals and damages against PNB in
relation to the Contract of Lease.
On October 4, 2006, PNB filed a motion to include an indispensable
party as plaintiff,18 praying that Saludo be ordered to amend anew his
complaint to include SAFA Law Office as principal plaintiff. PNB
argued that the lessee in the Contract of Lease is not Saludo but
SAFA Law Office, and that Saludo merely signed the Contract of
Lease as the managing partner of the law firm. Thus, SAFA Law
Office must be joined as a plaintiff in the complaint because it is
considered an indispensable party under Section 7, Rule 3 of the
Rules of Court.19
On October 13, 2006, PNB filed its answer.20 By way of compulsory
counterclaim, it sought payment from SAFA Law Office in the sum of
P25,587,838.09, representing overdue rentals.21 PNB argued that as
a matter of right and equity, it can claim that amount from SAFA Law
Office in solidum with Saludo.22
On October 23, 2006, Saludo filed his motion to dismiss
counterclaims,23 mainly arguing that SAFA Law Office is neither a
legal entity nor party litigant. As it is only a relationship or association
of lawyers in the practice of law and a single proprietorship which
may only be sued through its owner or proprietor, no valid
counterclaims may be asserted against it.24
On January 11, 2007, the RTC issued an Omnibus Order denying
PNB's motion to include an indispensable party as plaintiff and
granting Saludo's motion to dismiss counterclaims in this wise:
The Court DENIES the motion of PNB to include the SAFA Law
Offices. Plaintiff has shown by documents attached to his pleadings
that indeed SAFA Law Offices is a mere single proprietorship and not
a commercial and business partnership. More importantly, plaintiff
has admitted and shown sole responsibility in the affairs entered into
by the SAFA Law Office. PNB has even admitted that the SAFA Law
Office, being a partnership in the practice of law, is a non-legal entity.
Being a non-legal entity, it cannot be a proper party, and therefore, it
cannot sue or be sued.
Consequently, plaintiff's Motion to Dismiss Counterclaims
(claimed by defendant PNB) should be GRANTED. The
counterclaims prayed for to the effect that the SAFA Law Offices be
made to pay in solidum with plaintiff the amounts stated in
defendant's Answer is disallowed since no counterclaims can be
raised against a non-legal entity.25
PNB filed its motion for reconsideration26 dated February 5, 2007,
alleging that SAFA Law Office should be included as a co-plaintiff
because it is the principal party to the contract of lease, the one that
occupied the leased premises, and paid the monthly rentals and
security deposit. In other words, it was the main actor and direct
beneficiary of the contract. Hence, it is the real party-in-
interest.27 The RTC, however, denied the motion for reconsideration
in an Order28 dated March 8, 2007.
Consequently, PNB filed a petition for certiorari29 with the CA. On
February 8, 2010, the CA rendered its assailed Decision,30 the
dispositive portion of which reads:
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed
Omnibus Order dated 11 January 2007 and Order dated 8 March
2007, issued by respondent Court in Civil Case No. 06-678,
respectively, are AFFIRMED with MODIFICATION in that petitioner's
counterclaims should be reinstated in its Answer.
SO ORDERED.31
The CA ruled that an order granting Saludo's motion to dismiss
counterclaim, being interlocutory in nature, is not appealable until
after judgment shall have been rendered on Saludo's complaint.
Since the Omnibus Order is interlocutory, and there was an
allegation of grave abuse of discretion, a petition for certiorari is the
proper remedy.32
On the merits, the CA held that Saludo is estopped from claiming
that SAFA Law Office is his single proprietorship. Under the doctrine
of estoppel, an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as
against the person relying thereon. Here, SAFA Law Office was the
one that entered into the lease contract and not Saludo. In fact, the
latter signed the contract as the firm's managing partner. The alleged
Memorandum of Understanding33 (MOU) executed by the partners of
SAFA Law Office, .which states, among others, that Saludo alone
would be liable for the firm's losses and liabilities, and the letter of
Saludo to PNB confirming that SAFA Law Office is his single
proprietorship did not convert the firm to a single proprietorship.
Moreover, SAFA Law Office sent a letter to PNB regarding its unpaid
rentals which Saludo signed as a managing partner. The firm is also
registered as a partnership with the Securities and Exchange
Commission (SEC).34
On the question of whether SAFA Law Office is an indispensable
party, the CA held that it is not. As a partnership, it may sue or be
sued in its name or by its duly authorized representative. Saludo, as
managing partner, may execute all acts of administration, including
the right to sue. Furthermore, the CA found that SAFA Law Office is
not a legal entity. A partnership for the practice of law is not a legal
entity but a mere relationship or association for a particular purpose.
Thus, SAFA Law Office cannot file an action in court. Based on these
premises, the CA held that the RTC did not gravely abuse its
discretion in denying PNB's motion to include an indispensable party
as plaintiff.35
Nonetheless, the CA ruled that PNB's counterclaims against SAFA
Law Office should not be dismissed. While SAFA Law Office is not a
legal entity, it can still be sued under Section 15,36 Rule 3 of the
Rules of Court considering that it entered into the Contract of Lease
with PNB.37
The CA further ruled that while it is true that SAFA Law Office's
liability is not in solidum with Saludo as PNB asserts, it does not
necessarily follow that both of them cannot be made parties to PNB's
counterclaims. Neither should the counterclaims be dismissed on the
ground that the nature of the alleged liability is solidary. According to
the CA, the presence ofSAFA Law Office is required for the granting
of complete relief in the determination of PNB's counterclaim. The
court must, therefore, order it to be brought in as defendant since
jurisdiction over it can be obtained pursuant to Section 12,38 Rule 6 of
the Rules of Court.39
Finally, the CA emphasized that PNB's counterclaims are
compulsory, as they arose from the filing of Saludo's complaint. It
cannot be made subject of a separate action but should be asserted
in the same suit involving the same transaction. Thus, the Presiding
Judge of the RTC gravely abused his discretion in dismissing PNB's
counterclaims as the latter may forever be barred from collecting
overdue rental fees if its counterclaims were not allowed.40
Saludo and PNB filed their respective motions for partial
reconsideration dated February 25, 201041 and February 26,
2010.42 In a Resolution dated August 2, 2010, the CA denied both
motions on the ground that no new or substantial matters had been
raised therein. Nonetheless, the CA addressed the issue on the
joining of SAFA Law Office as a defendant in PNB's compulsory
counterclaim. Pertinent portions of the CA Resolution read:
The Private Respondent claims that a compulsory counterclaim is
one directed against an opposing party. The SAFA Law Office is not
a party to the case below and to require it to be brought in as a
defendant to the compulsory counterclaim would entail making it a
co-plaintiff. Otherwise, the compulsory counterclaim would be
changed into a third-party complaint. The Private Respondent also
argues that Section 15, Rule 3 of the Rules of Court (on entities
without juridical personality) is only applicable to initiatory pleadings
and not to compulsory counterclaims. Lastly, it is claimed that since
the alleged obligations of the SAFA Law Office is solidary with the
Private Respondent, there is no need to make the former a
defendant to the counterclaim.
We disagree with the reasoning of the Private Respondent. That a
compulsory counterclaim can only be brought against an opposing
party is belied by considering one of the requisites of a compulsory
counterclaim it does not require for its adjudication the presence of
third parties of whom the court cannot acquire jurisdiction. This
shows that non-parties to a suit may be brought in as defendants to
such a counterclaim. x x x
xxxx
In the case at bench, the trial court below can acquire jurisdiction
over the SAFA Law Office considering the amount and the nature of
the counterclaim. Furthermore, the inclusion of the SAFA Law Office
as a defendant to the counterclaim will enable the granting of
complete relief in view [of] the liability of a partner to the partnership's
creditors under the law.43
Hence, this petition, where Saludo raises the following issues for our
resolution:
(1)
Whether the CA erred in including SAFA Law Office as defendant to
PNB's counterclaim despite its holding that SAFA Law Office is
neither an indispensable party nor a legal entity;
(2)
Whether the CA went beyond the issues in the petition
for certiorari and prematurely dealt with the merits of PNB's
counterclaim; and
(3)
Whether the CA erred when it gave due course to PNB's petition
for certiorari to annul and set aside the RTC's Omnibus Order dated
January 11, 2007.44
The petition is bereft of merit.
We hold that SAFA Law Office is a juridical entity and the real party-
in-interest in the suit filed with the RTC by Saludo against PNB.
Hence, it should be joined as plaintiff in that case.
I.
Contrary to Saludo's submission, SAFA Law Office is a partnership
and not a single proprietorship.
Article 1767 of the Civil Code provides that by a contract of
partnership, two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of
dividing the profits among themselves. Two or more persons may
also form a partnership for the exercise of a profession. Under Article
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. Article 1784, on the
other hand, provides that a partnership begins from the moment of
the execution of the contract, unless it is otherwise stipulated.
Here, absent evidence of an earlier agreement, SAFA Law Office
was constituted as a partnership at the time its partners signed the
Articles of Partnership45 wherein they bound themselves to establish
a partnership for the practice of law, contribute capital and industry
for the purpose, and receive compensation and benefits in the
course of its operation. The opening paragraph of the Articles of
Partnership reveals the unequivocal intention of its signatories to
form a partnership, to wit:
WE, the undersigned ANICETO G. SALUDO, JR., RUBEN E.
AGPALO, FILEMON L. FERNANDEZ, AND AMADO D. AQUINO, all
of legal age, Filipino citizens and members of the Philippine Bar,
have this day voluntarily associated ourselves for the purpose of
forming a partnership engaged in the practice of law, effective this
date, under the terms and conditions hereafter set forth, and subject
to the provisions of existing laws[.]46
The subsequent registration of the Articles of Partnership with the
SEC, on the other hand, was made in compliance with Article 1772
of the Civil Code, since the initial capital of the partnership was
P500,000.00.47 Said provision states:
Art. 1772. Every contract of partnership having a capital ofThree
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.
xxxx
The other provisions of the Articles of Partnership also positively
identify SAFA Law Office as a partnership. It constantly used the
words "partners" and "partnership." It designated petitioner Saludo
as managing partner,48 and Attys. Ruben E. Agpalo, Filemon L.
Fernandez, and Amado D. Aquino as industrial partners.49 It also
provided for the term of the partnership,50 distribution of net profits
and losses, and management of the firm in which "the partners shall
have equal interest in the conduct of [its] affairs."51 Moreover, it
provided for the cause and manner of dissolution of the
partnership.52 These provisions would not have been necessary if
what had been established was a sole proprietorship. Indeed, it may
only be concluded from the circumstances that, for all intents and
purposes, SAFA Law Office is a partnership created and organized
in accordance with the Civil Code provisions on partnership.
Saludo asserts that SAFA Law Office is a sole proprietorship on the
basis of the MOU executed by the partners of the firm. The MOU
states in full:53
MEMORANDUM OF UNDERSTANDING
WHEREAS, the undersigned executed and filed with the SEC the
Articles of Incorporation of SALUDO, AGPALO, FERNANDEZ and
AQUINO on March 13, 1997;
WHEREAS, among the provisions of said Articles of Incorporation
are the following:
1. That partners R. E. Agpalo, F. L. Fernandez and A. D. Aquino
shall be industrial partners, and they shall not contribute capital to
the partnership and shall not in any way be liable for any loss or
liability that may be incurred by the law firm in the course of its
operation.
2. That the partnership shall be dissolved by agreement of the
partners or for any cause as and in accordance with the manner
provided by law, in which event the Articles of Dissolution of said
partnership shall be filed with the Securities and Exchange
Commission. All remaining assets upon dissolution shall accrue
exclusively to A. G. Saludo, Jr. and all liabilities shall be solely for his
account.
WHEREAS, the SEC has not approved the registration of the
Articles of Incorporation and its Examiner required that the phrase
"shall not in any way be liable for any loss or liability that may be
incurred by the law firm in the course of its operation" in Article VII be
deleted;
WHEREAS, the SEC Examiner likewise required that the sentence
"All remaining assets upon dissolution shall accrue exclusively to A.
G. Saludo, Jr. and all liabilities shall be solely for his account" in
Article X be likewise deleted;
WHEREAS, in order to meet the objections of said Examiner, the
objectionable provisions have been deleted and new Articles of
Incorporation deleting said objectionable provisions have been
executed by the parties and filed with the SEC.
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenant of the parties, the parties hereby agree as
follows:
1. Notwithstanding the deletion of the portions objected to by the
said Examiner, by reason of which entirely new Articles of
Incorporation have been executed by the parties removing the
objected portions, the actual and real intent of the parties is still as
originally envisioned, namely:
a) That partners R. E. Agpalo, F. L. Fernandez and A. D. Aquino
shall not in any way be liable for any loss or liability that may be
incurred by the law firm in the course of its operation;
b) That all remaining assets upon dissolution shall accrue exclusively
to A. G. Saludo, Jr. and all liabilities shall be solely for his account.
2. That the parties hereof hereby bind and obligate themselves to
adhere and observe the real intent of the parties as above-stated,
any provisions in the Articles of Incorporation as filed to meet the
objections of the SEC Examiner to the contrary notwithstanding.
IN WITNESS WHEREOF, we have set our hands this _____ day of
May, 1997 at Makati City, Philippines.
[Sgd.]
A.G. SALUDO, JR.
 [Sgd.]
[Sgd.]
[Sgd.]
RUBEN E. AGPALO
FILEMON L. FERNANDEZ
AMADO D. AQUINO
The foregoing evinces the parties' intention to entirely shift any
liability that may be incurred by SAFA Law Office in the course of its
operation to Saludo, who shall also receive all the remaining assets
of the firm upon its dissolution. This MOU, however, does not serve
to convert SAFA Law Office into a sole proprietorship. As discussed,
SAFA Law Office was manifestly established as a partnership based
on the Articles of Partnership. The MOU, from its tenor, reinforces
this fact. It did not change the nature of the organization of SAFA
Law Office but only excused the industrial partners from liability.
The law, in its wisdom, recognized the possibility that partners in a
partnership may decide to place a limit on their individual
accountability. Consequently, to protect third persons dealing with
the partnership, the law provides a rule, embodied in Article 1816 of
the Civil Code, which states:
Art. 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 contract 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.
The foregoing provision does not prevent partners from agreeing to
limit their liability, but such agreement may only be valid as among
them. Thus, Article 1817 of the Civil Code provides:
Art. 1817. Any stipulation against the liability laid down in the
preceding article shall be void, except as among the partners.
The MOU is an agreement forged under the foregoing provision.
Consequently, the sole liability being undertaken by Saludo serves to
bind only the parties to the MOU, but never third persons like PNB.
Considering that the MOU is sanctioned by the law on partnership, it
cannot change the nature of a duly-constituted partnership. Hence,
we cannot sustain Saludo's position that SAFA Law Office is a sole
proprietorship.
II.
Having settled that SAFA Law Office is a partnership, we hold that it
acquired juridical personality by operation of law. The perfection and
validity of a contract of partnership brings about the creation of a
juridical person separate and distinct from the individuals comprising
the partnership. Thus, Article 1768 of the Civil Code provides:
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.
Article 44 of the Civil Code likewise provides that partnerships are
juridical persons, to wit:
Art. 44. The following are juridical persons:
(1)
The State and its political subdivisions;
(2)
Other corporations, institutions and entities for public interest or
purpose, created by law; their personality begins as soon as they
have been constituted according to law;
(3)
Corporations, partnerships and associations for private interest or
purpose to which the law grants a juridical personality, separate and
distinct from that of each shareholder, partner or member.54
It is this juridical personality that allows a partnership to enter into
business transactions to fulfill its purposes. Article 46 of the Civil
Code provides that "[j]uridical persons may acquire and possess
property of all kinds, as well as incur obligations and bring civil or
criminal actions, in conformity with the laws and regulations of their
organization."
SAFA Law Office entered into a contract of lease with PNB as a
juridical person to pursue the objectives of the partnership. The
terms of the contract and the manner in which the parties
implemented it are a glaring recognition of SAFA Law Office's
juridical personality. Thus, the contract stated that it is being
executed by PNB as the lessor and "SALUDO AGPALO
FERNANDEZ & AQUINO, a partnership organized and existing
under the laws of the Republic of the Philippines," as the lessee.55 It
also provided that the lessee, i.e., SAFA Law Office, shall be liable in
case of default.56
Furthermore, subsequent communications between the parties have
always been made for or on behalf ofPNB and SAFA Law Office,
respectively.57
In view of the above, we see nothing to support the position of the
RTC and the CA, as well as Saludo, that SAFA Law Office is not a
partnership and a legal entity. Saludo's claims that SAFA Law Office
is his sole proprietorship and not a legal entity fail in light of the clear
provisions of the law on partnership. To reiterate, SAFA Law Office
was created as a partnership, and as such, acquired juridical
personality by operation of law. Hence, its rights and obligations, as
well as those of its partners, are determined by law and not by what
the partners purport them to be.
III.
In holding that SAFA Law Office, a partnership for the practice of law,
is not a legal entity, the CA cited58 the case of Petition for Authority to
Continue Use of the Firm Name "Sycip, Salazar, Feliciano,
Hernandez & Castillo"59 (Sycip case) wherein the Court held that "[a]
partnership for the practice of law is not a legal entity. It is a mere
relationship or association for a particular purpose. x x x It is not a
partnership formed for the purpose of carrying on trade or business
or of holding property."60 These are direct quotes from the US case
of In re Crawford's Estate.61 We hold, however, that our reference to
this US case is an obiter dictum which cannot serve as a binding
precedent.62
An obiter dictum is an opinion of the court upon a question which
was not necessary to the decision of the case before it. It is an
opinion uttered by the way, not upon the point or question pending,
as if turning aside from the main topic of the case to collateral
subjects, or an opinion that does not embody the court's
determination and is made without argument or full consideration of
the point. It is not a professed deliberate determination of the judge
himself.63
The main issue raised for the court's determination in the Sycip case
is whether the two petitioner law firms may continue using the names
of their deceased partners in their respective firm names. The court
decided the issue in the negative on the basis of "legal and ethical
impediments."64 To be sure, the pronouncement that a partnership
for the practice of law is not a legal entity does not bear on either the
legal or ethical obstacle for the continued use of a deceased
partner's name, inasmuch as it merely describes the nature of a law
firm. The pronouncement is not determinative of the main issue. As a
matter of fact, if deleted from the judgment, the rationale of the
decision is neither affected nor altered.
Moreover, reference of the Sycip case to the In re Crawford's
Estate case was made without a full consideration of the nature of a
law firm as a partnership possessed with legal personality under our
Civil Code. First, we note that while the Court mentioned that a
partnership for the practice of law is not a legal entity, it also
identified petitioner law firms as partnerships over whom Civil Code
provisions on partnership apply.65 The Court thus cannot hold that a
partnership for the practice of law is not a legal entity without running
into conflict with Articles 44 and 1768 of the Civil Code which provide
that a partnership has a juridical personality separate and distinct
from that of each of the partners.
Second, our law on partnership does not exclude partnerships for the
practice of law from its coverage. Article 1767 of the Civil Code
provides that "[t]wo or more persons may also form a partnership for
the exercise of a profession." Article 1783, on the other hand, states
that "[a] particular partnership has for its object determinate things,
their use or fruits, or a specific undertaking, or the exercise of a
profession or vocation." Since the law uses the word "profession" in
the general sense, and does not distinguish which professional
partnerships are covered by its provisions and which are not, then no
valid distinction may be made.
Finally, we stress that unlike Philippine law, American law does not
treat of partnerships as forming a separate juridical personality for all
purposes. In the case of Bellis v. United States,66 the US Supreme
Court stated that law firms, as a form of partnership, are generally
regarded as distinct entities for specific purposes, such as
employment, capacity to be sued, capacity to hold title to property,
and more.67 State and federal laws, however, do not treat
partnerships as distinct entities for all purposes.68
Our jurisprudence has long recognized that American common law
does not treat of partnerships as a separate juridical entity unlike
Philippine law. Hence, in the case of Campos Rueda & Co. v. Pacific
Commercial Co.,69 which was decided under the old Civil Code, we
held:
Unlike the common law, the Philippine statutes consider a limited
partnership as a juridical entity for all intents and purposes, which
personality is recognized in all its acts and contracts (art. 116, Code
of Commerce). This being so and the juridical personality of a limited
partnership being different from that of its members, it must, on
general principle, answer for, and suffer, the consequence of its acts
as such an entity capable of being the subject of rights and
obligations.70 x x x
On the other hand, in the case of Commissioner of Internal Revenue
v. Suter.71 which was decided under the new Civil Code, we held:
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.72 x x x
Indeed, under the old and new Civil Codes, Philippine law has
consistently treated partnerships as having a juridical personality
separate from its partners. In view of the clear provisions of the law
on partnership, as enriched by jurisprudence, we hold that our
reference to In re Crawford's Estate in the Sycip case is an obiter
dictum.
IV.
Having settled that SAFA Law Office is a juridical person, we hold
that it is also the real party-in-interest in the case filed by Saludo
against PNB.
Section 2, Rule 3 of the Rules of Court defines a real party-in-interest
as the one "who stands to be benefited or injured by the judgment in
the suit, or the party entitled to the avails of the suit." In Lee v.
Romillo, Jr.,73 we held that the "real [party-in-interest]-plaintiffis one
who has a legal right[,] while a real [party-in-interest]-defendant is
one who has a correlative legal obligation whose act or omission
violates the legal rights of the former."74
SAFA Law Office is the party that would be benefited or injured by
the judgment in the suit before the RTC. Particularly, it is the party
interested in the accounting and/or recomputation of unpaid rentals
and damages in relation to the contract of lease. It is also the party
that would be liable for payment to PNB of overdue rentals, if that
claim would be proven. This is because it is the one that entered into
the contract of lease with PNB. As an entity possessed of a juridical
personality, it has concomitant rights and obligations with respect to
the transactions it enters into. Equally important, the general rule
under Article 1816 of the Civil Code is that partnership assets are
primarily liable for the contracts entered into in the name of the
partnership and by a person authorized to act on its behalf. All
partners, including industrial ones, are only liable pro rata with all
their property after all the partnership assets have been exhausted.
In Guy v. Gacott,75 we held that under Article 1816 of the Civil Code,
the partners' obligation with respect to the partnership liabilities is
subsidiary in nature. It is merely 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 if such partnership assets are
insufficient to cover the entire obligation.76 Consequently, considering
that SAFA Law Office is primarily liable under the contract of lease, it
is the real party-in-interest that should be joined as plaintiff in the
RTC case.
Section 2, Rule 3 of the Rules of Court requires that every action
must be prosecuted or defended in the name of the real party-in-
interest. As the one primarily affected by the outcome of the suit,
SAFA Law Office should have filed the complaint with the RTC and purposes. Hence, its partners cannot be held primarily liable for the
should be made to respond to any counterclaims that may be obligations of the partnership. As it was SAFA Law Office that
brought in the course of the proceeding. entered into a contract of lease with respondent PNB, it should also
be impleaded in any litigation concerning that contract.
In Aguila, Jr. v. Court of Appeals,77 a case for declaration of nullity of
a deed of sale was filed against a partner of A.C. Aguila & Sons, Co. Accordingly, the complaint filed by Saludo should be amended to
We dismissed the complaint and held that it was the partnership, not include SAFA Law Office as plaintiff. Section 11,79 Rule 3 of the
its partners, which should be impleaded for a cause of action against Rules of Court gives power to the court to add a party to the case on
the partnership itself. Moreover, the partners could not be held liable its own initiative at any stage of the action and on such tenns as are
for the obligations of the partnership unless it was shown that the just. We have also held in several cases80 that the court has full
legal fiction of a different juridical personality was being used for powers, apart from that power and authority which are inherent, to
fraudulent, unfair, or illegal purposes. We held: amend processes, pleadings, proceedings, and decisions by
Rule 3, §2 of the Rules of Court of 1964, under which the complaint substituting as party-plaintiff the real party-in-interest.
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 In view of the above discussion, we find it unnecessary to discuss
interest is one who would be benefited or injured by the judgment, or the other issues raised in the petition. It is unfortunate that the case
who is entitled to the avails of the suit. This ruling is now embodied in has dragged on for more than 10 years even if it involves an issue
Rule 3, §2 of the 1997 Revised Rules of Civil Procedure. Any that may be resolved by a simple application of Civil Code provisions
decision rendered against a person who is not a real party in interest on partnership. It is time for trial to proceed so that the parties'
in the case cannot be executed. Hence, a complaint filed against substantial rights may be adjudicated without further unnecessary
such a person should be dismissed for failure to state a cause of delay.
action.
WHEREFORE, the petition is DENIED. Petitioner is hereby ordered
Under Art. 1768 of the Civil Code, a partnership "has a juridical to amend his complaint to include SAFA Law Office as plaintiff in
personality separate and distinct from that of each of the partners." Civil Case No. 06-678 pending before Branch 58 of the Regional
The partners cannot be held liable for the obligations of the Trial Court of Makati City, it being the real party-in-interest.
partnership unless it is shown that the legal fiction of a different
juridical personality is being used for fraudulent, unfair, or illegal
purposes. 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.78
In this case, there is likewise no showing that SAFA Law Office, as a
separate juridical entity, is being used for fraudulent, unfair, or illegal
G.R. No. 127347 November 25, 1999
ALFREDO N. AGUILA, JR., petitioner,
vs.
HONORABLE COURT OF APPEALS and FELICIDAD S. VDA. DE
ABROGAR, respondents.
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:
Plaintiff's 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.
x x x           x x x          x x x
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.
x x x           x x x          x x x
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.
x x x           x x x          x x x
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 involving property registered in its name. A violation of this rule will
public auction to satisfy the mortgage debt and costs result in the dismissal of the complaint. 11 We cannot understand why
and if there is an excess, the same is to be given to both the Regional Trial Court and the Court of Appeals sidestepped
the owner. this issue when it was squarely raised before them by petitioner.

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.
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.

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
 THIRD DIVISION
[G.R. No. 144214. July 14, 2003.]
LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and
CARMELITO JOSE, Petitioners, v. DONALDO EFREN C.
RAMIREZ and Spouses CESAR G. RAMIREZ JR. and
CARMELITA C. RAMIREZ, Respondents.
DECISION
PANGANIBAN, J.:
A share in a partnership can be returned only after the completion of
the latter’s dissolution, liquidation and winding up of the
business.chanrob1es virtua1 1aw 1ibrary
The Case
The Petition for Review on Certiorari before us challenges the March
23, 2000 Decision 1 and the July 26, 2000 Resolution 2 of the Court
of Appeals 3 (CA) in CA-GR CV No. 41026. The assailed Decision
disposed as follows:jgc:chanrobles.com.ph
"WHEREFORE, foregoing premises considered, the Decision dated
July 21, 1992 rendered by the Regional Trial Court, Branch 148,
Makati City is hereby SET ASIDE and NULLIFIED and in lieu thereof
a new decision is rendered ordering the [petitioners] jointly and
severally to pay and reimburse to [respondents] the amount of
P253,114.00. No pronouncement as to costs." 4
Reconsideration was denied in the impugned Resolution.
The Facts
On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus
Jose formed a partnership with a capital of P750,000 for the
operation of a restaurant and catering business under the name
"Aquarius Food House and Catering Services." 5 Villareal was
appointed general manager and Carmelito Jose, operations
manager.
Respondent Donaldo Efren C. Ramirez joined as a partner in the
business on September 5, 1984. His capital contribution of P250,000
was paid by his parents, Respondents Cesar and Carmelita Ramirez.
6
After Jesus Jose withdrew from the partnership in January 1987, his
capital contribution of P250,000 was refunded to him in cash by
agreement of the partners. 7
In the same month, without prior knowledge of respondents,
petitioners closed down the restaurant, allegedly because of
increased rental. The restaurant furniture and equipment were
deposited in the respondents’ house for storage. 8
On March 1, 1987, respondent spouses wrote petitioners, saying that
they were no longer interested in continuing their partnership or in
reopening the restaurant, and that they were accepting the latter’s
offer to return their capital contribution. 9
On October 13, 1987, Carmelita Ramirez wrote another letter
informing petitioners of the deterioration of the restaurant furniture
and equipment stored in their house. She also reiterated the request
for the return of their one-third share in the equity of the partnership.
The repeated oral and written requests were, however, left
unheeded. 10
Before the Regional Trial Court (RTC) of Makati, Branch 59,
respondents subsequently filed a Complaint 11 dated November 10,
1987, for the collection of a sum of money from petitioners.
In their Answer, petitioners contended that respondents had
expressed a desire to withdraw from the partnership and had called
for its dissolution under Articles 1830 and 1831 of the Civil Code; that
respondents had been paid, upon the turnover to them of furniture
and equipment worth over P400,000; and that the latter had no right
to demand a return of their equity because their share, together with
the rest of the capital of the partnership, had been spent as a result
of irreversible business losses. 12
In their Reply, respondents alleged that they did not know of any loan
encumbrance on the restaurant. According to them, if such allegation
were true, then the loans incurred by petitioners should be regarded
as purely personal and, as such, not chargeable to the partnership.
The former further averred that they had not received any regular
report or accounting from the latter, who had solely managed the
business. Respondents also alleged that they expected the
equipment and the furniture stored in their house to be removed by
petitioners as soon as the latter found a better location for the
restaurant. 13
Respondents filed an Urgent Motion for Leave to Sell or Otherwise
Dispose of Restaurant Furniture and Equipment 14 on July 8, 1988.
The furniture and the equipment stored in their house were
inventoried and appraised at P29,000. 15 The display freezer was
sold for P5,000 and the proceeds were paid to them. 16
After trial, the RTC 17 ruled that the parties had voluntarily entered
into a partnership, which could be dissolved at any time. Petitioners
clearly intended to dissolve it when they stopped operating the
restaurant. Hence, the trial court, in its July 21, 1992 Decision, held
there liable as follows: 18
"WHEREFORE, judgment is hereby rendered in favor of
[respondents] and against the [petitioners] ordering the [petitioners]
to pay jointly and severally the following:chanrob1es virtual 1aw
library
(a) Actual damages in the amount of P250,000.00
(b) Attorney’s fee in the amount of P30,000.00
(c) Costs of suit."cralaw virtua1aw library
The CA Ruling
The CA held that, although respondents had no right to demand the
return of their capital contribution, the partnership was nonetheless
dissolved when petitioners lost interest in continuing the restaurant
business with them. Because petitioners never gave a proper
accounting of the partnership accounts for liquidation purposes, and
because no sufficient evidence was presented to show financial
losses, the CA. computed their liability as
follows:jgc:chanrobles.com.ph
"Consequently, since what has been proven is only the outstanding
obligation of the partnership in the amount of P240,658.00, although
contracted by the partnership before [respondents’] have joined the
partnership but in accordance with Article 1826 of the New Civil
Code, they are liable which must have to be deducted from the
remaining capitalization of the said partnership which is in the
amount of P1,000,000.00 resulting in the amount of P759,342.00,
and in order to get the share of [respondents], this amount of
P759,342.00 must be divided into three (3) shares or in the amount
of P253,114.00 for each share and which is the only amount which
[petitioner] will return to [respondents’] representing the contribution
to the partnership minus the outstanding debt thereof." 19
Hence, this Petition. 20
Issues
In their Memorandum, 21 petitioners submit the following issues for
our consideration:jgc:chanrobles.com.ph
"9.1. Whether the Honorable Court of Appeals’ decision ordering the
distribution of the capital contribution, instead of the net capital after
the dissolution and liquidation of a partnership, thereby treating the
capital contribution like a loan, is in accordance with law and
jurisprudence;
"9.2. Whether the Honorable Court of Appeals’ decision ordering the
petitioners to jointly and severally pay and reimburse the amount of
[P]253,114.00 is supported by the evidence on record; and

"9.3. Whether the Honorable Court of Appeals was correct in making
[n]o pronouncement as to costs." 22
On closer scrutiny, the issues are as follows: (1) whether petitioners
are liable to respondents for the latter’s share in the partnership; (2)
whether the CA’s computation of P253,114 as respondents’ share is
correct; and (3) whether the CA was likewise correct in not assessing
costs.
This Court’s Ruling
The Petition has merit.
First Issue:chanrob1es virtual 1aw library
Share in Partnership
Both the trial and the appellate courts found that a partnership had
indeed existed, and that it was dissolved on March 1, 1987. They
found that the dissolution took place when respondents informed
petitioners of the intention to discontinue it because of the former’s
dissatisfaction with, and loss of trust in, the latter’s management of
the partnership affairs. These findings were amply supported by the
evidence on record. Respondents consequently demanded from
petitioners the return of their one-third equity in the partnership.
We hold that respondents have no right to demand from petitioners
the return of their equity share. Except as managers of the
partnership, petitioners did not personally hold its equity or assets.
"The partnership has a juridical personality separate and distinct
from that of each of the partners." 23 Since the capital was
contributed to the partnership, not to petitioners, it is the partnership
that must refund the equity of the retiring partners. 24
Second Issue:chanrob1es virtual 1aw library
What Must Be Returned?
Since it is the partnership, as a separate and distinct entity, that must
refund the shares of the partners, the amount to be refunded is
necessarily limited to its total resources. In other words, it can only
pay out what it has in its coffers, which consists of all its assets.
However, before the partners can be paid their shares, the creditors
of the partnership must first be compensated. 25 After all the
creditors have been paid, whatever is left of the partnership assets
becomes available for the payment of the partners’ shares.
Evidently, in the present case, the exact amount of refund equivalent
to respondents’ one-third share in the partnership cannot be
determined until all the partnership assets will have been liquidated
— in other words, sold and converted to cash — and all partnership
creditors, if any, paid. The CA’s computation of the amount to be
refunded to respondents as their share was thus erroneous.
First, it seems that the appellate court was under the
misapprehension that the total capital contribution was equivalent to
the gross assets to be distributed to the partners at the time of the
dissolution of the partnership. We cannot sustain the underlying idea
that the capital contribution at the beginning of the partnership
remains intact, unimpaired and available for distribution or return to
the partners. Such idea is speculative, conjectural and totally without
factual or legal support.
Generally, in the pursuit of a partnership business, its capital is either
increased by profits earned or decreased by losses sustained. It
does not remain static and unaffected by the changing fortunes of
the business. In the present case, the financial statements presented
before the trial court showed that the business had made meager
profits. 26 However, notable therefrom is the omission of any
provision for the depreciation 27 of the furniture and the equipment.
The amortization of the goodwill 28 (initially valued at P500,000) is
not reflected either. Properly taking these non-cash items into
account will show that the partnership was actually sustaining
substantial losses, which consequently decreased the capital of the
partnership. Both the trial and the appellate courts in fact recognized
the decrease of the partnership assets to almost nil, but the latter
failed to recognize the consequent corresponding decrease of the
capital.

Second, the CA’s finding that the partnership had an outstanding
obligation in the amount of P240,658 was not supported by evidence.
We sustain the contrary finding of the RTC, which had rejected the
contention that the obligation belonged to the partnership for the
following reason:jgc:chanrobles.com.ph
". . . [E]vidence on record failed to show the exact loan owed by the
partnership to its creditors. The balance sheet (Exh.’4’) does not
reveal the total loan. The Agreement (Exh.’A’) par. 6 shows an
outstanding obligation of P240,055.00 which the partnership owes to
different creditors, while the Certification issued by Mercator Finance
(Exh.’8’) shows that it was Sps. Diogenes P. Villareal and
Luzviminda J. Villareal, the former being the nominal party defendant
in the instant case, who obtained a loan of P355,000.00 on Oct.
1983, when the original partnership was not yet formed."cralaw
virtua1aw library
Third, the CA failed to reduce the capitalization by P250,000, which
was the amount paid by the partnership to Jesus Jose when he
withdrew from the partnership.
Because of the above-mentioned transactions, the partnership
capital was actually reduced. When petitioners and respondents
ventured into business together, they should have prepared for the
fact that their investment would either grow or shrink. In the present
case, the investment of respondents substantially dwindled. The
original amount of P250,000 which they had invested could no longer
be returned to them, because one third of the partnership properties
at the time of dissolution did not amount to that much.
It is a long established doctrine that the law does not relieve parties
from the effects of unwise, foolish or disastrous contracts they have
entered into with all the required formalities and with full awareness
of what they were doing. Courts have no power to relieve them from
obligations they have voluntarily assumed, simply because their
contracts turn out to be disastrous deals or unwise investments. 29
Petitioners further argue that respondents acted negligently by
permitting the partnership assets in their custody to deteriorate to the
point of being almost worthless. Supposedly, the latter should have
liquidated these sole tangible assets of the partnership and
considered the proceeds as payment of their net capital. Hence,
petitioners argue that the turnover of the remaining partnership
assets to respondents was precisely the manner of liquidating the
partnership and fully settling the latter’s share in the partnership.
We disagree. The delivery of the store furniture and equipment to
private respondents was for the purpose of storage. They were
unaware that the restaurant would no longer be reopened by
petitioners. Hence, the former cannot be faulted for not disposing of
the stored items to recover their capital investment.
Third Issue:chanrob1es virtual 1aw library
Costs
Section 1, Rule 142, provides:jgc:chanrobles.com.ph
"SECTION 1. Costs ordinarily follow results of suit. — Unless
otherwise provided in these rules, costs shall be allowed to the
prevailing party as a matter of course, but the court shall have power,
for special reasons, to adjudge that either party shall pay the costs of
an action, or that the same be divided, as may be equitable. No costs
shall be allowed against the Republic of the Philippines unless
otherwise provided by law."cralaw virtua1aw library
Although, as a rule, costs are adjudged against the losing party,
courts have discretion, "for special reasons," to decree otherwise.
When a lower court is reversed, the higher court normally does not
award costs, because the losing party relied on the lower court’s
judgment which is presumed to have been issued in good faith, even
if found later on to be erroneous. Unless shown to be patently
capricious, the award shall not be disturbed by a reviewing tribunal.
WHEREFORE, the Petition is GRANTED, and the assailed Decision
and Resolution SET ASIDE. This disposition is without prejudice to
proper proceedings for the accounting, the liquidation and the
distribution of the remaining partnership assets, if any. No
pronouncement as to costs.chanrob1es virtua1 1aw 1ibrary
SO ORDERED.