Bus. Org. I Cases - Page 1 Syllabus

Bus. Org.
I Cases – Page 1 Syllabus
Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 154486 December 1, 2010
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 Decision 3 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 exception of the real property adjudicated to Pacita Jarantilla, 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 complaint 13 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 properties 14 (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
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Bus. Org. I Cases – Page 1 Syllabus
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 agreement 17 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 Agreement 20and 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
Page 2 of 102
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
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 Revenue 37 to further elucidate on the
distinctions between a co-ownership and a partnership, to wit:
Page 3 of 102
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
Page 4 of 102
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
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
Page 5 of 102
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.
Page 6 of 102
SECOND DIVISION
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 decision 2 of the Court of Appeals dated February 29, 2000, in CA-G.R.
SP No. 52671, affirming with modification the decision 3 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 decision 4 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 Sahot 5 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.
Page 7 of 102
On appeal, the National Labor Relations Commission modified the judgment of the Labor Arbiter. It declared that private
respondent was an employee, not an industrial partner, since the start. Private respondent Sahot did not abandon his job
but his employment was terminated on account of his illness, pursuant to Article 284 9 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.
Page 8 of 102
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
Page 9 of 102
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.
Page 10 of 102

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 134559 December 9, 1999

ANTONIA TORRES assisted by her husband, ANGELO TORRES; and EMETERIA BARING, petitioners,
vs.
COURT OF APPEALS and MANUEL TORRES, respondents.
PANGANIBAN, J.:
Courts may not extricate parties from the necessary consequences of their acts. That the terms of a contract turn out to be
financially disadvantageous to them will not relieve them of their obligations therein. The lack of an inventory of real
property will not ipso facto release the contracting partners from their respective obligations to each other arising from
acts executed in accordance with their agreement.
The Case
The Petition for Review on Certiorari before us assails the March 5, 1998 Decision 1 of the Court of Appeals 2 (CA) in
CA-GR CV No. 42378 and its June 25, 1998 Resolution denying reconsideration. The assailed Decision affirmed the
ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-21208, which disposed as follows:
WHEREFORE, for all the foregoing considerations, the Court, finding for the defendant and against the
plaintiffs, orders the dismissal of the plaintiffs complaint. The counterclaims of the defendant are likewise
ordered dismissed. No pronouncement as to costs. 3
The Facts
Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture agreement" with Respondent
Manuel Torres for the development of a parcel of land into a subdivision. Pursuant to the contract, they executed a Deed
of Sale covering the said parcel of land in favor of respondent, who then had it registered in his name. By mortgaging the
property, respondent obtained from Equitable Bank a loan of P40,000 which, under the Joint Venture Agreement, was to
be used for the development of the subdivision. 4 All three of them also agreed to share the proceeds from the sale of the
subdivided lots.
The project did not push through, and the land was subsequently foreclosed by the bank.
According to petitioners, the project failed because of "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.
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:
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.
The CA elucidated further:
Page 11 of 102
In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to
what he may have contributed, but the industrial partner shall not be liable for the losses. As for the
profits, the industrial partner shall receive such share as may be just and equitable under the
circumstances. If besides his services he has contributed capital, he shall also receive a share in the profits
in proportion to his capital.
The Issue
Petitioners impute to the Court of Appeals the following error:
. . . [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:
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:
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of March, 1969, by
and between MR. MANUEL R. TORRES, . . . the FIRST PARTY, likewise, MRS. ANTONIA B.
TORRES, and MISS EMETERIA BARING, . . . the SECOND PARTY:
WITNESSETH:
That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property located at
Lapu-Lapu City, Island of Mactan, under Lot No. 1368 covering TCT No. T-0184 with a total area of
17,009 square meters, to be sub-divided by the FIRST PARTY;
Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY THOUSAND
(P20,000.00) Pesos, Philippine Currency upon the execution of this contract for the property entrusted by
the SECOND PARTY, for sub-division projects and development purposes;
NOW THEREFORE, for and in consideration of the above covenants and promises herein contained the
respective parties hereto do hereby stipulate and agree as follows:
ONE: That the SECOND PARTY signed an absolute Deed of Sale . . . 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.
Page 12 of 102
SEVENTH: That the SECOND PARTIES, should be given an option to get back the property mentioned
provided the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, borrowed by
the SECOND PARTY, will be paid in full to the FIRST PARTY, including all necessary improvements
spent by the FIRST PARTY, and-the FIRST PARTY will be given a grace period to turnover the property
mentioned above.
That this AGREEMENT shall be binding and obligatory to the parties who executed same freely and
voluntarily for the uses and purposes therein stated. 10
A reading of the terms embodied in the Agreement indubitably shows the existence of a partnership pursuant to Article
1767 of the Civil Code, which provides:
Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.
Under the above-quoted Agreement, petitioners would contribute property to the partnership in the form of land which
was to be developed into a subdivision; while respondent would give, in addition to his industry, the amount needed for
general expenses and other costs. Furthermore, the income from the said project would be divided according to the
stipulated percentage. Clearly, the contract manifested the intention of the parties to form a partnership. 11
It should be stressed that the parties implemented the contract. Thus, petitioners transferred the title to the land to facilitate
its use in the name of the respondent. On the other hand, respondent caused the subject land to be mortgaged, the proceeds
of which were used for the survey and the subdivision of the land. As noted earlier, he developed the roads, the curbs and
the gutters of the subdivision and entered into a contract to construct low-cost housing units on the property.
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:
Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only
to the fulfillment of what has been expressly stipulated but also to all the consequences which, according
to their nature, may be in keeping with good faith, usage and law.
It is undisputed that petitioners are educated and are thus presumed to have understood the terms of the contract they
voluntarily signed. If it was not in consonance with their expectations, they should have objected to it and insisted on the
provisions they wanted.
Courts are not authorized to extricate parties from the necessary consequences of their acts, and the fact that the
contractual stipulations may turn out to be financially disadvantageous will not relieve parties thereto of their obligations.
They cannot now disavow the relationship formed from such agreement due to their supposed misunderstanding of its
terms.
Alleged Nullity of the
Partnership Agreement
Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code, which provides:
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an
inventory of said property is not made, signed by the parties, and attached to the public instrument.
They contend that since the parties did not make, sign or attach to the public instrument an inventory of the real property
contributed, the partnership is void.
We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo M. Tolentino
states that under the aforecited provision which is a complement of Article 1771, 12 "The execution of a public instrument
would be useless if there is no inventory of the property contributed, because without its designation and description, they
cannot be subject to inscription in the Registry of Property, and their contribution cannot prejudice third persons. This will
result in fraud to those who contract with the partnership in the belief [in] the efficacy of the guaranty in which the
immovables may consist. Thus, the contract is declared void by the law when no such inventory is made." The case at bar
does not involve third parties who may be prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis for their claim that respondent should pay them
60 percent of the value of the property. 13 They cannot in one breath deny the contract and in another recognize it,
depending on what momentarily suits their purpose. Parties cannot adopt inconsistent positions in regard to a contract and
courts will not tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from considering the Joint Venture Agreement an
ordinary contract from which the parties' rights and obligations to each other may be inferred and enforced.
Partnership Agreement Not the Result
Page 13 of 102
of an Earlier Illegal Contract

Petitioners also contend that the Joint Venture Agreement is void under Article 1422 14 of the Civil Code, because it is the
direct result of an earlier illegal contract, which was for the sale of the land without valid consideration.
This argument is puerile. The Joint Venture Agreement clearly states that the consideration for the sale was the
expectation of profits from the subdivision project. Its first stipulation states that petitioners did not actually receive
payment for the parcel of land sold to respondent. Consideration, more properly denominated as cause, can take different
forms, such as the prestation or promise of a thing or service by another. 15
In this case, the cause of the contract of sale consisted not in the stated peso value of the land, but in the expectation of
profits from the subdivision project, for which the land was intended to be used. As explained by the trial court, "the land
was in effect given to the partnership as [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."
Liability of the Parties
Claiming that rerpondent was solely responsible for the failure of the subdivision project, petitioners maintain that he
should be made to pay damages equivalent to 60 percent of the value of the property, which was their share in the profits
under the Joint Venture Agreement.
We are not persuaded. True, the Court of Appeals held that petitioners' acts were not the cause of the failure of the
project. 16 But it also ruled that neither was respondent responsible therefor. 17 In imputing the blame solely to him,
petitioners failed to give any reason why we should disregard the factual findings of the appellate court relieving him of
fault. Verily, factual issues cannot be resolved in a petition for review under Rule 45, as in this case. Petitioners have not
alleged, not to say shown, that their Petition constitutes one of the exceptions to this doctrine. 18Accordingly, we find no
reversible error in the CA's ruling that petitioners are not entitled to damages.
WHEREFORE, the Perition is hereby DENIED and the challenged Decision AFFIRMED. Costs against petitioners.
SO ORDERED
Page 14 of 102

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide the
profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their own to a
"common fund." Their contribution may be in the form of credit or industry, not necessarily cash or fixed assets. Being
partner, they are all liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into on
behalf of an unincorporated association or ostensible corporation may lie in a person who may not have directly transacted
on its behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the Court of
Appeals in CA-GR CV
41477, 1 which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby affirmed. 2
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA, reads as
follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September 20,
1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as
hereinafter made by reason of the special and unique facts and circumstances and the proceedings that
transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the
Agreement plus P68,000.00 representing the unpaid price of the floats not covered by
said Agreement;
b. 12% interest per annum counted from date of plaintiff's invoices and computed on
their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80
dated February 9, 1990;
ii. Accrued interest for P27,904.02 on Invoice No. 14413 for
P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00
dated February 19, 1990;
c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing P500.00 per
appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets
counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of
auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the unpaid price
of nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total
amount P600,045.00, this Court noted that these items were attached to guarantee any judgment
that may be rendered in favor of the plaintiff but, upon agreement of the parties, and, to avoid
further deterioration of the nets during the pendency of this case, it was ordered sold at public
auction for not less than P900,000.00 for which the plaintiff was the sole and winning bidder. The
proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount of
P900,000.00 replaced the attached property as a guaranty for any judgment that plaintiff may be
Page 15 of 102
able to secure in this case with the ownership and possession of the nets and floats awarded and
delivered by the sheriff to plaintiff as the highest bidder in the public auction sale. It has also been
noted that ownership of the nets [was] retained by the plaintiff until full payment [was] made as
stipulated in the invoices; hence, in effect, the plaintiff attached its own properties. It [was] for
this reason also that this Court earlier ordered the attachment bond filed by plaintiff to guaranty
damages to defendants to be cancelled and for the P900,000.00 cash bidded and paid for by
plaintiff to serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff may be
entitled to in this case will have to be satisfied from the amount of P900,000.00 as this amount
replaced the attached nets and floats. Considering, however, that the total judgment obligation as
computed above would amount to only P840,216.92, it would be inequitable, unfair and unjust to
award the excess to the defendants who are not entitled to damages and who did not put up a
single centavo to raise the amount of P900,000.00 aside from the fact that they are not the owners
of the nets and floats. For this reason, the defendants are hereby relieved from any and all
liabilities arising from the monetary judgment obligation enumerated above and for plaintiff to
retain possession and ownership of the nets and floats and for the reimbursement of the
P900,000.00 deposited by it with the Clerk of Court.
SO ORDERED. 3
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated February 7,
1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (herein
respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was
not a signatory to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats worth
P68,000 were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents filed a collection suit
against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought
against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a
nonexistent corporation as shown by a Certification from the Securities and Exchange Commission. 5 On September 20,
1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on
board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a reasonable time
within which to pay. He also turned over to respondent some of the nets which were in his possession. Peter Yao filed an
Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present evidence on his
behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment. 6 The trial court maintained the Writ,
and upon motion of private respondent, ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear
Industries won the bidding and deposited with the said court the sales proceeds of P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was entitled to
the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the witnesses
presented and (2) on a Compromise Agreement executed by the three 9 in Civil Case No. 1492-MN which Chua and Yao
had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b)
a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e) damages. 10 The
Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in
the amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be
applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or
Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than
P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim; 1/3
Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the
deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim;
1/3 Antonio Chua; 1/3 Peter Yao. 11
The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint liability
could be presumed from the equal distribution of the profit and loss. 21
Page 16 of 102
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and may thus
be held liable as a such for the fishing nets and floats purchased by and for the use of the partnership. The appellate court
ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong Lim undertook a
partnership for a specific undertaking, that is for commercial fishing . . . . Oviously, the ultimate
undertaking of the defendants was to divide the profits among themselves which is what a partnership
essentially is . . . . By a contract of partnership, two or more persons bind themselves to contribute money,
property or industry to a common fund with the intention of dividing the profits among themselves
(Article 1767, New Civil Code). 13
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT
THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A
PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN
QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING,
THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM
AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF
PETITIONER LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats from respondent, the Court must
resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts the CA
finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that the CA based its finding on
the Compromise Agreement alone. Furthermore, he disclaims any direct participation in the purchase of the nets, alleging
that the negotiations were conducted by Chua and Yao only, and that he has not even met the representatives of the
respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract of
Lease " dated February 1, 1990, showed that he had merely leased to the two the main asset of the purported partnership
— the fishing boat F/B Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the
gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly showed that there
existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides:
Art. 1767 — By the contract of partnership, two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join
him, while Antonio Chua was already Yao's partner;
(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to acquire two fishing
boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance the
venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale over these
two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan extended by Jesus
Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry docking and other
expenses for the boats would be shouldered by Chua and Yao;
Page 17 of 102
(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the partnership in
the amount of P1 million secured by a check, because of which, Yao and Chua entrusted the ownership
papers of two other boats, Chua's FB Lady Anne Mel and Yao's FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from
Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported
business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by Antonio
Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents; (b)
reformation of contracts; (c) declaration of ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed between the parties-
litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing
business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was
petitioner's brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the
proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the
repair of which were financed with borrowed money, fell under the term "common fund" under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties
agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows
that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets and the
floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their business. It
would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition of the
aforesaid equipment, without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the fishing
business. They purchased the boats, which constituted the main assets of the partnership, and they agreed that the
proceeds from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only questions of law. Thus, the
foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that the present
action is embraced by one of the exceptions to the rule. 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.
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.
Page 18 of 102
We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his property to pay a debt he did not incur,
if the relationship among the three of them was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and
not to him. Again, we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred
or arising as a result thereof: Provided however, That when any such ostensible corporation is sued on
any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on
the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from denying its
corporate existence. "The reason behind this doctrine is obvious — an unincorporated association has no personality and
would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law; it
cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a
person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all
the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered
into or for other acts performed as such agent. 17
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first instance, an
unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack of
personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received advantages
and benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation
and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the transaction made by the ostensible corporation, despite
knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it sold. The
only question here is whether petitioner should be held jointly 18 liable with Chua and Yao. Petitioner contests such
liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Since his name
does not appear on any of the contracts and since he never directly transacted with the respondent corporation, ergo, he
cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier been
proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the Writ has effectively
stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation. Although it was
never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three as contracting
parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a corporation and those
benefited by it, knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the benefits
of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of
said association and is covered by the scope of the doctrine of corporation by estoppel. We reiterate the ruling of the Court
in Alonso v. Villamor: 19
A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art
of movement and position, entraps and destroys the other. It is, rather, a contest in which each contending
party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and
indecisive all imperfections of form and technicalities of procedure, asks that justice be done upon the
merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality, when it deserts its
proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in technicalities.
Third Issue:
Validity of Attachment
Page 19 of 102
Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with the Court of
Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an asset of the partnership
and that it was placed in the name of petitioner, only to assure payment of the debt he and his partners owed. The nets and
the floats were specifically manufactured and tailor-made according to their own design, and were bought and used in the
fishing venture they agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated in the
invoices is proper. Besides, by specific agreement, ownership of the nets remained with Respondent Philippine Fishing
Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Page 20 of 102

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 112675 January 25, 1999

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 PHILIPPINE; 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; PEOPLE'S 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, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMISSIONER OF INTERNAL
REVENUE, respondent.
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 insurance 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 pool's remittances to the member companies and to the said foreign firm be
taxable as dividends? Under the facts of this case, has the goverment's 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
Decision 1 of the Court of Appeals 2 in CA-GR SP 25902, which dismissed petitioners' appeal of the October 19, 1992
Decision 3 of the Court of Tax Appeals 4 (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 petitioner 5
The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution 6denying 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 (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.
On April 14, 1976, the pool of machinery insurers submitted a 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 deficiency corporate taxes in the
Page 21 of 102
amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on
dividends paid to Munich and to the petitioners, respectively. These assessments were protested by the
petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the
petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax, interest, and with
[h]olding tax, itemized as follows:
Net income per information return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
——————
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE
Dividend paid to Munich
Reinsurance Company P3,728,412.00
——————
35% withholding tax at
source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penalty-
non-filing of return 300.00
late payment 300.00
——————
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
===========
10% withholding tax at
source due thereon P65,563.60
Add: 25% surcharge 16,390.90
14% interest from
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 & P89,438.68
COLLECTIBLE =========== 8
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation, and that the
latter's 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 Commissioner's right to assess the Clearing House had already
prescribed. 10
The Court's Ruling
Page 22 of 102
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 government's 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 pool of clearing house was an informal partnership,
which was 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 risk
thus reinsured. 11 Hence, the pool did not act or earn income as a reinsurer. 12Its 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." 13
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." 17
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency tasked with the
enforcement of tax law, 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 (compañias colectivas), general professional
partnerships, private educational institutions, and building and loan associations . . . .
Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as
unregistered partnerships and associations. Parenthetically, the NIRC's 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 . . . .
Sec. 22. — Definition. — When used in this Title:
x x x x x x x x x
(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.
x x x x x x x x x
Thus, the Court in Evangelista v. Collector of Internal Revenue 22 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. 24
Page 23 of 102
. . . 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 Merten's Law of Federal Income Taxation, p.
562 Note 63)
Art. 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 . . . for the transaction of
business." 28
In the case before us, the ceding companies entered into a Pool Agreement 29 or an association 30 that would handle all the
insurance businesses covered under their quota-share reinsurance treaty 31 and surplus reinsurance treaty 32 with 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. 24
(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. 35
(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 pool's formation. As aptly found by the CTA:
. . . 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, . . . 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 Pascuals v. Commissioner 38 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:
Pool's 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 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 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 1 43 and Article 5 of paragraph 5 44 of
the RP-West German Tax Treaty. 45
Petitioners are clutching at straws. Double taxation means taxing the same property twice when it should be taxed only
once. That is, ". . . 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.
Page 24 of 102
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 ". . . be paid upon reinsurance by any company that has already paid the
tax . . ." 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 Article 3 49 and 10 50 of the Quota-Share Reinsurance treaty and Articles 3 51 and 10 52 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. 53
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 government's 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. 56
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 government's 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 pool's 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 Resolution of the Court of Appeals dated October 11, 1993 and November
15, 1993 are hereby AFFIRMED. Cost against petitioners.1âwphi1.nêt
SO ORDERED.
Page 25 of 102

SUPREME COURT
Manila
THIRD DIVISION
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 Decision 1 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 agreement 4 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
Page 26 of 102
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
Page 27 of 102
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, 13petitioner
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
Page 28 of 102
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
Page 29 of 102
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.
SO ORDERED.
Page 30 of 102
FIRST DIVISION
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 Order 4 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 Lease 5 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 letter11demanding 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.
Page 31 of 102
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 Order 28 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,
Page 32 of 102
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, 2010 41 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.
Page 33 of 102
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
Page 34 of 102
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.
Page 35 of 102
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 cited 58the 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
Page 36 of 102
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,
Page 37 of 102
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 should be made to respond to any counterclaims that may be brought in the course of the
proceeding.
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. We dismissed the complaint and held that it was the partnership, not its partners, which should be
impleaded for a cause of action against the partnership itself. Moreover, the partners could not be held liable for the
obligations of the partnership unless it was shown that the legal fiction of a different juridical personality was being used
for fraudulent, unfair, or illegal purposes. We held:
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. 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. Hence, a complaint filed against such a person should be dismissed for failure to state a cause
of action.
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. 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 purposes. Hence, its partners cannot be held primarily liable for the obligations of the
partnership. As it was SAFA Law Office that entered into a contract of lease with respondent PNB, it should also be
impleaded in any litigation concerning that contract.
Accordingly, the complaint filed by Saludo should be amended to include SAFA Law Office as plaintiff. Section
11,79 Rule 3 of the Rules of Court gives power to the court to add a party to the case on its own initiative at any stage of
the action and on such tenns as are just. We have also held in several cases 80that the court has full powers, apart from that
power and authority which are inherent, to amend processes, pleadings, proceedings, and decisions by substituting as
party-plaintiff the real party-in-interest.
In view of the above discussion, we find it unnecessary to discuss the other issues raised in the petition. It is unfortunate
that the case has dragged on for more than 10 years even if it involves an issue that may be resolved by a simple
application of Civil Code provisions on partnership. It is time for trial to proceed so that the parties' substantial rights may
be adjudicated without further unnecessary delay.
WHEREFORE, the petition is DENIED. Petitioner is hereby ordered to amend his complaint to include SAFA Law
Office as plaintiff in Civil Case No. 06-678 pending before Branch 58 of the Regional Trial Court of Makati City, it being
the real party-in-interest.
SO ORDERED.
Page 38 of 102

SUPREME COURT
Manila
SECOND DIVISION
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
Page 39 of 102
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.
Page 40 of 102
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 public auction
to satisfy the mortgage debt and costs and if there is an excess, the same is to be given to the owner.
Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila & Co., against which this case should
have been brought; (2) the judgment in the ejectment case is a bar to the filing of the complaint for declaration of nullity
of a deed of sale in this case; and (3) the contract between A.C. Aguila & Sons, Co. and private respondent is a pacto de
retro sale and not an equitable mortgage as held by the appellate court.
The petition is meritorious.
Rule 3, §2 of the Rules of Court of 1964, under which the complaint in this case was filed, provided that "every action
must be prosecuted and defended in the name of the real party in interest." A real party in interest is one who would be
benefited or injured by the judgment, or who is entitled to the avails of the suit. 7 This ruling is now embodied in Rule 3,
§2 of the 1997 Revised Rules of Civil Procedure. Any decision rendered against a person who is not a real party in interest
in the case cannot be executed. 8 Hence, a complaint filed against such a person should be dismissed for failure to state a
cause of action. 9
Under Art. 1768 of the Civil Code, a partnership "has a juridical personality separate and distinct from that of each of the
partners." The partners cannot be held liable for the obligations of the partnership unless it is shown that the legal fiction
of a different juridical personality is being used for fraudulent, unfair, or illegal purposes. 10 In this case, private
respondent has not shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is being used for fraudulent, unfair,
Page 41 of 102
or illegal purposes. Moreover, the title to the subject property is in the name of A.C. Aguila & Sons, Co. and the
Memorandum of Agreement was executed between private respondent, with the consent of her late husband, and A.C.
Aguila & Sons, Co., represented by petitioner. Hence, it is the partnership, not its officers or agents, which should be
impleaded in any litigation involving property registered in its name. A violation of this rule will result in the dismissal of
the complaint. 11 We cannot understand why both the Regional Trial Court and the Court of Appeals sidestepped this issue
when it was squarely raised before them by petitioner.
Our conclusion that petitioner is not the real party in interest against whom this action should be prosecuted makes it
unnecessary to discuss the other issues raised by him in this appeal.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the complaint against petitioner is
DISMISSED.
SO ORDERED.
Page 42 of 102
THIRD DIVISION
G.R. No. 144214 July 14, 2003
LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO JOSE, petitioners,
vs.
DONALDO EFREN C. RAMIREZ and Spouses CESAR G. RAMIREZ JR. and CARMELITA C.
RAMIREZ,respondents.
PANGANIBAN, J.:
A share in a partnership can be returned only after the completion of the latter's dissolution, liquidation and winding up of
the business.
The Case
The Petition for Review on Certiorari before us challenges the March 23, 2000 Decision 1 and the July 26, 2000
Resolution2 of the Court of Appeals3 (CA) in CA-GR CV No. 41026. The assailed Decision disposed as follows:
"WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992 rendered by the Regional Trial
Court, Branch 148, Makati City is hereby SET ASIDE and NULLIFIED and in lieu thereof a new decision is
rendered ordering the [petitioners] jointly and severally to pay and reimburse to [respondents] the amount of
P253,114.00. No pronouncement as to costs."4
Reconsideration was denied in the impugned Resolution.
The Facts
On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus Jose formed a partnership with a capital of P750,000
for the operation of a restaurant and catering business under the name "Aquarius Food House and Catering
Services."5 Villareal was appointed general manager and Carmelito Jose, operations manager.
Respondent Donaldo Efren C. Ramirez joined as a partner in the business on September 5, 1984. His capital contribution
of P250,000 was paid by his parents, Respondents Cesar and Carmelita Ramirez. 6
After Jesus Jose withdrew from the partnership in January 1987, his capital contribution of P250,000 was refunded to him
in cash by agreement of the partners.7
In the same month, without prior knowledge of respondents, petitioners closed down the restaurant, allegedly because of
increased rental. The restaurant furniture and equipment were deposited in the respondents' house for storage. 8
On March 1, 1987, respondent spouses wrote petitioners, saying that they were no longer interested in continuing their
partnership or in reopening the restaurant, and that they were accepting the latter's offer to return their capital
contribution.9
On October 13, 1987, Carmelita Ramirez wrote another letter informing petitioners of the deterioration of the restaurant
furniture and equipment stored in their house. She also reiterated the request for the return of their one-third share in the
equity of the partnership. The repeated oral and written requests were, however, left unheeded. 10
Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently filed a Complaint 11 dated
November 10, 1987, for the collection of a sum of money from petitioners.
In their Answer, petitioners contended that respondents had expressed a desire to withdraw from the partnership and had
called for its dissolution under Articles 1830 and 1831 of the Civil Code; that respondents had been paid, upon the
turnover to them of furniture and equipment worth over P400,000; and that the latter had no right to demand a return of
their equity because their share, together with the rest of the capital of the partnership, had been spent as a result of
irreversible business losses.12
In their Reply, respondents alleged that they did not know of any loan encumbrance on the restaurant. According to them,
if such allegation were true, then the loans incurred by petitioners should be regarded as purely personal and, as such, not
chargeable to the partnership. The former further averred that they had not received any regular report or accounting from
the latter, who had solely managed the business. Respondents also alleged that they expected the equipment and the
furniture stored in their house to be removed by petitioners as soon as the latter found a better location for the restaurant. 13
Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose of Restaurant Furniture and 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:
(a) Actual damages in the amount of P250,000.00
(b) Attorney's fee in the amount of P30,000.00
Page 43 of 102
(c) Costs of suit."

The CA Ruling
The CA held that, although respondents had no right to demand the return of their capital contribution, the partnership was
nonetheless dissolved when petitioners lost interest in continuing the restaurant business with them. Because petitioners
never gave a proper accounting of the partnership accounts for liquidation purposes, and because no sufficient evidence
was presented to show financial losses, the CA. computed their liability as follows:
"Consequently, since what has been proven is only the outstanding obligation of the partnership in the amount of
P240,658.00, although contracted by the partnership before [respondents'] have joined the partnership but in
accordance with Article 1826 of the New Civil Code, they are liable which must have to be deducted from the
remaining capitalization of the said partnership which is in the amount of P1,000,000.00 resulting in the amount
of P759,342.00, and in order to get the share of [respondents], this amount of P759,342.00 must be divided into
three (3) shares or in the amount of P253,114.00 for each share and which is the only amount which [petitioner]
will return to [respondents'] representing the contribution to the partnership minus the outstanding debt thereof." 19
Hence, this Petition.20
Issues
In their Memorandum,21 petitioners submit the following issues for our consideration:
"9.1. Whether the Honorable Court of Appeals' decision ordering the distribution of the capital contribution,
instead of the net capital after the dissolution and liquidation of a partnership, thereby treating the capital
contribution like a loan, is in accordance with law and jurisprudence;
"9.2. Whether the Honorable Court of Appeals' decision ordering the petitioners to jointly and severally pay and
reimburse the amount of [P]253,114.00 is supported by the evidence on record; and
"9.3. Whether the Honorable Court of Appeals was correct in making [n]o pronouncement as to costs." 22
On closer scrutiny, the issues are as follows: (1) whether petitioners are liable to respondents for the latter's share in the
partnership; (2) whether the CA's computation of P253,114 as respondents' share is correct; and (3) whether the CA was
likewise correct in not assessing costs.
This Court's Ruling
The Petition has merit.
First Issue:
Share in Partnership
Both the trial and the appellate courts found that a partnership had indeed existed, and that it was dissolved on March 1,
1987. They found that the dissolution took place when respondents informed petitioners of the intention to discontinue it
because of the former's dissatisfaction with, and loss of trust in, the latter's management of the partnership affairs. These
findings were amply supported by the evidence on record. Respondents consequently demanded from petitioners the
return of their one-third equity in the partnership.
We hold that respondents have no right to demand from petitioners the return of their equity share. Except as managers of
the partnership, petitioners did not personally hold its equity or assets. "The partnership has a juridical personality
separate and distinct from that of each of the partners." 23 Since the capital was contributed to the partnership, not to
petitioners, it is the partnership that must refund the equity of the retiring partners. 24
Second Issue:
What Must Be Returned?
Since it is the partnership, as a separate and distinct entity, that must refund the shares of the partners, the amount to be
refunded is necessarily limited to its total resources. In other words, it can only pay out what it has in its coffers, which
consists of all its assets. However, before the partners can be paid their shares, the creditors of the partnership must first
be compensated.25 After all the creditors have been paid, whatever is left of the partnership assets becomes available for
the payment of the partners' shares.
Evidently, in the present case, the exact amount of refund equivalent to respondents' one-third share in the partnership
cannot be determined until all the partnership assets will have been liquidated — in other words, sold and converted to
cash — and all partnership creditors, if any, paid. The CA's computation of the amount to be refunded to respondents as
their share was thus erroneous.
First, it seems that the appellate court was under the misapprehension that the total capital contribution was equivalent to
the gross assets to be distributed to the partners at the time of the dissolution of the partnership. We cannot sustain the
underlying idea that the capital contribution at the beginning of the partnership remains intact, unimpaired and available
for distribution or return to the partners. Such idea is speculative, conjectural and totally without factual or legal support.
Generally, in the pursuit of a partnership business, its capital is either increased by profits earned or decreased by losses
sustained. It does not remain static and unaffected by the changing fortunes of the business. In the present case, the
financial statements presented before the trial court showed that the business had made meager profits. 26However, notable
Page 44 of 102
therefrom is the omission of any provision for the depreciation 27 of the furniture and the equipment. The amortization of
the goodwill28 (initially valued at P500,000) is not reflected either. Properly taking these non-cash items into account will
show that the partnership was actually sustaining substantial losses, which consequently decreased the capital of the
partnership. Both the trial and the appellate courts in fact recognized the decrease of the partnership assets to almost nil,
but the latter failed to recognize the consequent corresponding decrease of the capital.
Second, the CA's finding that the partnership had an outstanding obligation in the amount of P240,658 was not supported
by evidence. We sustain the contrary finding of the RTC, which had rejected the contention that the obligation belonged
to the partnership for the following reason:
"x x x [E]vidence on record failed to show the exact loan owed by the partnership to its creditors. The balance
sheet (Exh. '4') does not reveal the total loan. The Agreement (Exh. 'A') par. 6 shows an outstanding obligation of
P240,055.00 which the partnership owes to different creditors, while the Certification issued by Mercator Finance
(Exh. '8') shows that it was Sps. Diogenes P. Villareal and Luzviminda J. Villareal, the former being the nominal
party defendant in the instant case, who obtained a loan of P355,000.00 on Oct. 1983, when the original
partnership was not yet formed."
Third, the CA failed to reduce the capitalization by P250,000, which was the amount paid by the partnership to Jesus Jose
when he withdrew from the partnership.
Because of the above-mentioned transactions, the partnership capital was actually reduced. When petitioners and
respondents ventured into business together, they should have prepared for the fact that their investment would either
grow or shrink. In the present case, the investment of respondents substantially dwindled. The original amount of
P250,000 which they had invested could no longer be returned to them, because one third of the partnership properties at
the time of dissolution did not amount to that much.
It is a long established doctrine that the law does not relieve parties from the effects of unwise, foolish or disastrous
contracts they have entered into with all the required formalities and with full awareness of what they were doing. Courts
have no power to relieve them from obligations they have voluntarily assumed, simply because their contracts turn out to
be disastrous deals or unwise investments.29
Petitioners further argue that respondents acted negligently by permitting the partnership assets in their custody to
deteriorate to the point of being almost worthless. Supposedly, the latter should have liquidated these sole tangible assets
of the partnership and considered the proceeds as payment of their net capital. Hence, petitioners argue that the turnover
of the remaining partnership assets to respondents was precisely the manner of liquidating the partnership and fully
settling the latter's share in the partnership.
We disagree. The delivery of the store furniture and equipment to private respondents was for the purpose of storage.
They were unaware that the restaurant would no longer be reopened by petitioners. Hence, the former cannot be faulted
for not disposing of the stored items to recover their capital investment.
Third Issue:
Costs
Section 1, Rule 142, provides:
"SECTION 1. Costs ordinarily follow results of suit. — Unless otherwise provided in these rules, costs shall be
allowed to the prevailing party as a matter of course, but the court shall have power, for special reasons, to
adjudge that either party shall pay the costs of an action, or that the same be divided, as may be equitable. No
costs shall be allowed against the Republic of the Philippines unless otherwise provided by law."
Although, as a rule, costs are adjudged against the losing party, courts have discretion, "for special reasons," to decree
otherwise. When a lower court is reversed, the higher court normally does not award costs, because the losing party relied
on the lower court's judgment which is presumed to have been issued in good faith, even if found later on to be erroneous.
Unless shown to be patently capricious, the award shall not be disturbed by a reviewing tribunal.
WHEREFORE, the Petition is GRANTED, and the assailed Decision and Resolution SET ASIDE. This disposition is
without prejudice to proper proceedings for the accounting, the liquidation and the distribution of the remaining
partnership assets, if any. No pronouncement as to costs.
SO ORDERED.
Page 45 of 102

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers
and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.
AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had
acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963
square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the
petitioners, to enable them to build their residences. The company sold the two lots to petitioners for P178,708.12 on
March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would show that they were co-
owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities
Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the sale a total profit
of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half
thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal
Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual
income tax on their shares thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and
P15,547.56 as 42% accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a
mere capital gain of which ½ is taxable) and required them to pay deficiency income taxes aggregating P56,707.20
including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit
of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture
within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans. Co.,
102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented.
Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code
simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit among
themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and
confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as
partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in
any joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their
residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve
the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the
nature of things a temporary state. It had to be terminated sooner or later. Castan Tobeñas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad
presupone necesariamente la convencion, mentras que la comunidad puede existir y existe ordinariamente
sin ela; y por razon del fin objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la
indivision es solo mantener en su integridad la cosa comun y favorecer su conservacion.
Page 46 of 102
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro
Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de
bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica señala como nota
fundamental de diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme, la
finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera conservacion y
aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or interest in any property from which the returns
are derived". There must be an unmistakable intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small
amounts to purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won the
third prize of P50,000. The 15 persons were held liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Oña vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.—We find that the case at bar is fundamentally similar to the
De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in question pro-
indiviso from their deceased parents; they did not contribute or invest additional ' capital to increase or
expand the inherited properties; they merely continued dedicating the property to the use to which it had
been put by their forebears; they individually reported in their tax returns their corresponding shares in
the income and expenses of the 'hacienda', and they continued for many years the status of co-ownership
in order, as conceded by respondent, 'to preserve its (the 'hacienda') value and to continue the existing
contractual relations with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA
Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own properties which
produce income should not automatically be considered partners of an unregistered partnership, or a
corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income
of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not
produce an income at all, it is not subject to any kind of income tax, whether the income tax on
individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738, September 11,
1961, cited in Arañas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement the co-
heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was
held that they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son purchased
a lot and building, entrusted the administration of the building to an administrator and divided equally the net income, and
from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces
of real property which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in these two
cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the
petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might
have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.
SO ORDERED.
Page 47 of 102

SUPREME COURT
Manila
EN BANC
G.R. Nos. L-24020-21 July 29, 1968
FLORENCIO REYES and ANGEL REYES, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and HON. COURT OF TAX APPEALS, respondents.
Jose W. Diokno and Domingo Sandoval for petitioners.
Office of the Solicitor General for respondents.
FERNANDO, J.:
Petitioners in this case were assessed by respondent Commissioner of Internal Revenue the sum of P46,647.00 as income
tax, surcharge and compromise for the years 1951 to 1954, an assessment subsequently reduced to P37,528.00. This
assessment sought to be reconsidered unsuccessfully was the subject of an appeal to respondent Court of Tax Appeals.
Thereafter, another assessment was made against petitioners, this time for back income taxes plus surcharge and
compromise in the total sum of P25,973.75, covering the years 1955 and 1956. There being a failure on their part to have
such assessments reconsidered, the matter was likewise taken to the respondent Court of Tax Appeals. The two
cases1 involving as they did identical issues and ultimately traceable to facts similar in character were heard jointly with
only one decision being rendered.
In that joint decision of respondent Court of Tax Appeals, the tax liability for the years 1951 to 1954 was reduced to
P37,128.00 and for the years 1955 and 1956, to P20,619.00 as income tax due "from the partnership formed" by
petitioners.2 The reduction was due to the elimination of surcharge, the failure to file the income tax return being accepted
as due to petitioners honest belief that no such liability was incurred as well as the compromise penalties for such failure
to file.3 A reconsideration of the aforesaid decision was sought and denied by respondent Court of Tax Appeals. Hence
this petition for review.
The facts as found by respondent Court of Tax Appeals, which being supported by substantial evidence, must be
respected4 follow: "On October 31, 1950, petitioners, father and son, purchased a lot and building, known as the Gibbs
Building, situated at 671 Dasmariñas Street, Manila, for P835,000.00, of which they paid the sum of P375,000.00, leaving
a balance of P460,000.00, representing the mortgage obligation of the vendors with the China Banking Corporation,
which mortgage obligations were assumed by the vendees. The initial payment of P375,000.00 was shared equally by
petitioners. At the time of the purchase, the building was leased to various tenants, whose rights under the lease contracts
with the original owners, the purchasers, petitioners herein, agreed to respect. The administration of the building was
entrusted to an administrator who collected the rents; kept its books and records and rendered statements of accounts to
the owners; negotiated leases; made necessary repairs and disbursed payments, whenever necessary, after approval by the
owners; and performed such other functions necessary for the conservation and preservation of the building. Petitioners
divided equally the income of operation and maintenance. The gross income from rentals of the building amounted to
about P90,000.00 annually."5
From the above facts, the respondent Court of Tax Appeals applying the appropriate provisions of the National Internal
Revenue Code, the first of which imposes an income tax on corporations "organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including duly registered general co-partnerships (companias
colectivas), ...,"6 a term, which according to the second provision cited, includes partnerships "no matter how created or
organized, ...,"7 and applying the leading case of Evangelista v. Collector of Internal Revenue,8 sustained the action of
respondent Commissioner of Internal Revenue, but reduced the tax liability of petitioners, as previously noted.
Petitioners maintain the view that the Evangelista ruling does not apply; for them, the situation is
dissimilar.1äwphï1.ñëtConsequently they allege that the reliance by respondent Court of Tax Appeals was unwarranted
and the decision should be set aside. If their interpretation of the authoritative doctrine therein set forth commands assent,
then clearly what respondent Court of Tax Appeals did fails to find shelter in the law. That is the crux of the matter. A
perusal of the Evangelista decision is therefore unavoidable.
As noted in the opinion of the Court, penned by the present Chief Justice, the issue was whether petitioners are subject to
the tax on corporations provided for in section 24 of Commonwealth Act No. 466, otherwise known as the National
Internal Revenue Code, ..."9 After referring to another section of the National Internal Revenue Code, which explicitly
provides that the term corporation "includes partnerships" and then to Article 1767 of the Civil Code of the Philippines,
defining what a contract of partnership is, the opinion goes on to state that "the essential elements of a partnership are two,
namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits
among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have
Page 48 of 102
agreed to and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in
acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that
their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, ..." 10
In support of the above conclusion, reference was made to the following circumstances, namely, the common fund being
created purposely not something already found in existence, the investment of the same not merely in one transaction but
in a series of transactions; the lots thus acquired not being devoted to residential purposes or to other personal uses of
petitioners in that case; such properties having been under the management of one person with full power to lease, to
collect rents, to issue receipts, to bring suits, to sign letters and contracts and to endorse notes and checks; the above
conditions having existed for more than 10 years since the acquisition of the above properties; and no testimony having
been introduced as to the purpose "in creating the set up already adverted to, or on the causes for its continued
existence."11 The conclusion that emerged had all the imprint of inevitability. Thus: "Although, taken singly, they might
not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances is such
as to leave no room for doubt on the existence of said intent in petitioners herein." 12
It may be said that there could be a differentiation made between the circumstances above detailed and those existing in
the present case. It does not suffice though to preclude the applicability of the Evangelista decision. Petitioners could harp
on these being only one transaction. They could stress that an affidavit of one of them found in the Bureau of Internal
Revenue records would indicate that their intention was to house in the building acquired by them the respective
enterprises, coupled with a plan of effecting a division in 10 years. It is a little surprising then that while the purchase was
made on October 31, 1950 and their brief as petitioners filed on October 20, 1965, almost 15 years later, there was no
allegation that such division as between them was in fact made. Moreover, the facts as found and as submitted in the brief
made clear that the building in question continued to be leased by other parties with petitioners dividing "equally the
income ... after deducting the expenses of operation and maintenance ..." 13 Differences of such slight significance do not
call for a different ruling.
It is obvious that petitioners' effort to avoid the controlling force of the Evangelista ruling cannot be deemed successful.
Respondent Court of Tax Appeals acted correctly. It yielded to the command of an authoritative decision; it recognized its
binding character. There is clearly no merit to the second error assigned by petitioners, who would deny its applicability to
their situation.
The first alleged error committed by respondent Court of Tax Appeals in holding that petitioners, in acquiring the Gibbs
Building, established a partnership subject to income tax as a corporation under the National Internal Revenue Code is
likewise untenable. In their discussion in their brief of this alleged error, stress is laid on their being co-owners and not
partners. Such an allegation was likewise made in the Evangelista case.
This is the way it was disposed of in the opinion of the present Chief Justice: "This pretense was correctly rejected by the
Court of Tax Appeals."14 Then came the explanation why: "To begin with, the tax in question is one imposed upon
"corporations", which, strictly speaking, are distinct and different from "partnerships". When our Internal Revenue Code
includes "partnerships" among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24 of
said Code exempts from the aforementioned tax "duly registered general partnerships", which constitute precisely one of
the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law
on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Again, pursuant to
said section 84(b), the term "corporation" includes, among others, "joint accounts, (cuentas en participacion)" and
"associations", none of which has a legal personality of its own, independent of that of its members. Accordingly, the
lawmaker could not have regarded that personality as a condition essential to the existence of the partnerships therein
referred to. In fact, as above stated, "duly registered general copartnerships" — which are possessed of the aforementioned
personality - have been expressly excluded by law (sections 24 and 84[b]) from the connotation of the term
"corporation"."15 The opinion went on to summarize the matter aptly: "For purposes of the tax on corporations, our
National Internal Revenue Code, include these partnerships — with the exception only of duly registered general co-
partnerships within the purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for corporations." 16
In the light of the above, it cannot be said that the respondent Court of Tax Appeals decided the matter incorrectly. There
is no warrant for the assertion that it failed to apply the settled law to uncontroverted facts. Its decision cannot be
successfully assailed. Moreover, an observation made in Alhambra Cigar & Cigarette Manufacturing Co. v.
Commissioner of Internal Revenue,17 is well-worth recalling. Thus: "Nor as a matter of principle is it advisable for this
Court to set aside the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of
Page 49 of 102
its functions, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject, unless, as did not happen here, there has been an abuse or improvident exercise of its authority."
WHEREFORE, the decision of the respondent Court of Tax Appeals ordering petitioners "to pay the sums of P37,128.00
as income tax due from the partnership formed by herein petitioners for the years 1951 to 1954 and P20,619.00 for the
years 1955 and 1956 within thirty days from the date this decision becomes final, plus the corresponding surcharge and
interest in case of delinquency," is affirmed. With costs against petitioners.
Page 50 of 102

SUPREME COURT
Manila
EN BANC
G.R. No. L-35840 March 31, 1933
FRANCISCO BASTIDA, plaintiff-appellee,
vs.
MENZI & Co., INC., J.M. MENZI and P.C. SCHLOBOHM, defendants.
MENZI & CO., appellant.
Romualdez Brothers and Harvey and O'Brien for appellant.
Jose M. Casal, Alberto Barretto and Gibbs and McDonough for appellee.
VICKERS, J.:
This is an appeal by Menzi & Co., Inc., one of the defendants, from a decision of the Court of First Instance of Manila.
The case was tried on the amended complaint dated May 26, 1928 and defendants' amended answer thereto of September
1, 1928. For the sake of clearness, we shall incorporate herein the principal allegations of the parties.
FIRST CAUSE OF ACTION
Plaintiff alleged:
I
That the defendant J.M. Menzi, together with his wife and daughter, owns ninety-nine per cent (99%) of the capital stock
of the defendant Menzi & Co., Inc., that the plaintiff has been informed and therefore believes that the defendant J.M.
Menzi, his wife and daughter, together with the defendant P.C. Schlobohm and one Juan Seiboth, constitute the board of
directors of the defendant, Menzi & Co., Inc.;
II
That on April 27, 1922, the defendant Menzi & Co., Inc. through its president and general manager, J.M. Menzi, under the
authority of the board of directors, entered into a contract with the plaintiff to engage in the business of exploiting
prepared fertilizers, as evidenced by the contract marked Exhibit A, attached to the original complaint as a part thereof,
and likewise made a part of the amended complaint, as if it were here copied verbatim;
III
That in pursuance of said contract, plaintiff and defendant Menzi & Co., Inc., began to manufacture prepared fertilizers,
the former superintending the work of actual preparation, and the latter, through defendants J.M. Menzi and P. C.
Schlobohm, managing the business and opening an account entitled "FERTILIZERS" on the books of the defendant
Menzi & Co., Inc., where all the accounts of the partnership business were supposed to be kept; the plaintiff had no
participation in the making of these entries, which were wholly in the defendants' charge, under whose orders every entry
was made;
IV
That according to paragraph 7 of the contract Exhibit A, the defendant Menzi & Co., Inc., was obliged to render annual
balance sheets to be plaintiff upon the 30th day of June of each year; that the plaintiff had no intervention in the
preparation of these yearly balances, nor was he permitted to have any access to the books of account; and when the
balance sheets were shown him, he, believing in good faith that they contained the true statement of the partnership
business, and relying upon the good faith of the defendants, Menzi & Co., Inc., J.M. Menzi, and P.C. Schlobohm,
accepted and signed them, the last balance sheet having been rendered in the year 1926;
V
That by reason of the foregoing facts and especially those set forth in the preceding paragraph, the plaintiff was kept in
ignorance of the defendants' acts relating to the management of the partnership funds, and the keeping of accounts, until
he was informed and so believes and alleges, that the defendants had conspired to conceal from him the true status of the
business, and to his damage and prejudice made false entries in the books of account and in the yearly balance sheets, the
exact nature and amount of which it is impossible to ascertain, even after the examination of the books of the business,
due to the defendants' refusal to furnish all the books and data required for the purpose, and the constant obstacles they
have placed in the way of the examination of the books of account and vouchers;
VI
That when the plaintiff received the information mentioned in the preceding paragraph, he demanded that the defendants
permit him to examine the books and vouchers of the business, which were in their possession, in order to ascertain the
truth of the alleged false entries in the books and balance sheets submitted for his approval, but the defendants refused,
and did not consent to the examination until after the original complaint was filed in this case; but up to this time they
Page 51 of 102
have refused to furnish all the books, data, and vouchers necessary for a complete and accurate examination of all the
partnership's accounts; and
VII
That as a result of the partial examination of the books of account of the business, the plaintiff has, through his
accountants, discovered that the defendants, conspiring and confederating together, presented to the plaintiff during the
period covered by the partnership contract false and incorrect accounts,
(a) For having included therein undue interest;
(b) For having entered, as a charge to fertilizers, salaries and wages which should have been paid and were in fact
paid by the defendant Menzi & Co., Inc.;
(c) For having collected from the partnership the income tax which should have been paid for its own account by
Menzi & Co., Inc.;
(d) For having collected, to the damage and prejudice of the plaintiff, commissions on the purchase of materials
for the manufacture of fertilizers;
(e) For having appropriated, to the damage and prejudice of the plaintiff, the profits obtained from the sale of
fertilizers belonging to the partnership and bought with its own funds; and
(f) For having appropriated to themselves all rebates for freight insurance, taxes, etc., upon materials for fertilizer
bought abroad, no entries of said rebates having been made on the books to the credit of the partnership.
Upon the strength of the facts set out in this first cause of action, the plaintiff prays the court:
1. To prohibit the defendants, each and every one of them, from destroying and concealing the books and papers
of the partnership constituted between the defendant Menzi & Co., Inc., and the plaintiff;
2. To summon each and every defendant to appear and give a true account of all facts relating to the partnership
between the plaintiff and the defendant Menzi & Co., Inc., and of each and every act and transaction connected
with the business of said partnership from the beginning to April 27, 1927, and a true statement of all merchandise
of whatever description, purchased for said partnership, and of all the expenditures and sale of every kind,
together with the true amount thereof, besides the sums received by the partnership from every source together
with their exact nature, and a true and complete account of the vouchers for all sums paid by the partnership, and
of the salaries paid to its employees;
3. To declare null and void the yearly balances submitted by the defendants to the plaintiff from 1922 to 1926,
both inclusive;
4. To order the defendants to give a true statement of all receipts and disbursements of the partnership during the
period of its existence, besides granting the plaintiff any other remedy that the court may deem just and equitable.
EXHIBIT A
CONTRATO
que se celebra entre los Sres. Menzi y Compañia, de Manila, como Primera Parte, y D. Francisco Bastada,
tambien de Manila, como Segunda Parte, bajo las siguientes
CONDICIONES
1.ª El objeto de este contrato es la explotacion del negocio de Abonos o Fertilizantes Preparados, para diversas
aplicaciones agricolas;
2.ª La duracion de este contrato sera de cinco años, a contrar desde la fecha de su firma;
3.ª La Primera Parte se compromete a facilitar la ayuda financiera necesaria para el negocio;
4.ª La Segunda Parte se compromete a poner su entero tiempo y toda su experiencia a la disposicion del negocio;
5.ª La Segunda Parte no podra, directa o indirectamente, dedicarse por si sola ni en sociedad con otras personas, o
de manera alguna que no sea con la Primera Parte, al negecio de Abonos, simples o preparados, o de materia
alguna que se aplique comunmente a la fertilizacion de suelos y plantas, durante la vigencia de este contrato, a
menos que obtenga autorizacion expresa de la Primera Parte para ello;
6.ª La Primera Parte no podra dedicarse, por si sola ni en sociedad o combinacion con otras personas o entidades,
ni de otro modo que en sociedad con la Segunda Parte, al negocio de Abonos o Fertilizantes preparados, ya sean
ellos importados, ya preparados en las Islas Fllipinas; tampoco podra dedicarse a la venta o negocio de materias o
productos que tengan aplicacion como fertilizantes, o que se usen en la composicion de fertilizantes o abonos, si
ellos son productos de suelo de la manufactura filipinos, pudiendo sin embargo vender o negociar en materim
fertilizantes simples importados de los Estados Unidos o del Extranjero;
7.ª La Primera Parte se obliga a ceder y a hacer efectivo a la Segunda Parte el 35 por ciento (treinta y cinco por
ciento) de las utilidades netas del negocio de abonos, liquidables el 30 de junio de cada año;
8.ª La Primera Parte facilitara la Segunda, mensualmente, la cantidad de P300 (trescientos pesos), a cuenta de su
parte de beneficios.
Page 52 of 102
9.ª Durante el año 1923 la Parte concedera a la Segunda permiso para que este se ausente de Filipinas por un
periodo de tiempo que no exceda de un año, sin menoscabo para derechos de la Segunda Parte con arreglo a este
contrato.
En testimonio de lo cual firmamos el presente en la Ciudad de Manila, I. F., a veintisiete de abril de 1922.
MENZI & CO., INC.
Por (Fdo.) J. MENZI
General Manager
Primera Parte
(Fdo.) F. BASTIDA
Segunda Parte
MENZI & CO., INC.
(Fdo.) MAX KAEGI
Acting Secretary
Defendants denied all the allegations of the amended complaint, except the formal allegations as to the parties, and as a
special defense to the first cause of action alleged:
1. That the defendant corporation, Menzi & Co., Inc., has been engaged in the general merchandise business in
the Philippine Islands since its organization in October, 1921, including the importation and sale of all kinds of
goods, wares, and merchandise, and especially simple fertilizer and fertilizer ingredients, and as a part of that
business, it has been engaged since its organization in the manufacture and sale of prepared fertilizers for
agricultural purposes, and has used for that purpose trade-marks belonging to it;
2. That on or about November, 1921, the defendant, Menzi & CO., Inc., made and entered into an employment
agreement with the plaintiff, who represented that he had had much experience in the mixing of fertilizers, to
superintend the mixing of the ingredients in the manufacture of prepared fertilizers in its fertilizer department and
to obtain orders for such prepared fertilizers subject to its approval, for a compensation of 50 per cent of the net
profits which it might derive from the sale of the fertilizers prepared by him, and that said Francisco Bastida
worked under said agreement until April 27, 1922, and received the compensation agreed upon for his services;
that on the said 27th of April, 1922, the said Menzi & Co., Inc., and the said Francisco Bastida made and entered
into the written agreement, which is marked Exhibit A, and made a part of the amended complaint in this case,
whereby they mutually agreed that the employment of the said Francisco Bastida by the said Menzi & Co., Inc., in
the capacity stated, should be for a definite period of five years from that date and under the other terms and
conditions stated therein, but with the understanding and agreement that the said Francisco Bastida should receive
as compensation for his said services only 35 per cent of the net profits derived from the sale of the fertilizers
prepared by him during the period of the contract instead of 50 per cent of such profits, as provided in his former
agreement; that the said Francisco Bastida was found to be incompetent to do anything in relation to its said
fertilizer business with the exception of over-seeing the mixing of the ingredients in the manufacture of the same,
and on or about the month of December, 1922, the defendant, Menzi & Inc., in order to make said business
successful, was obliged to and actually did assume the full management and direction of said business;
3. That the accounts of the business of the said fertilizer department of Menzi & Co., Inc., were duly kept in the
regular books of its general business, in the ordinary course thereof, up to June 30, 1923, and that after that time
and during the remainder of the period of said agreement, for the purpose of convenience in determining the
amount of compensation due to the plaintiff under his agreement, separate books of account for its said fertilizer
business were duly, kept in the name of 'Menzi & Co., Inc., Fertilizer', and used exclusively for that purpose and it
was mutually agreed between the said Francisco Bastida and the said Menzi & Co., Inc., that the yearly balances
for the determination of the net profits of said business due to the said plaintiff as compensation for his services
under said agreement would be made as of December 31st, instead of June 30th, of each year, during the period of
said agreement; that the accounts of the business of its said fertilizer department, as recorded in its said books, and
the vouchers and records supporting the same, for each year of said business have been duly audited by Messrs.
White, Page & Co., certified public accountants, of Manila, who, shortly after the close of business at the end of
each year up to and including the year 1926, have prepared therefrom a manufacturing and profit and loss account
and balance sheet, showing the status of said business and the share of the net profits pertaining to the plaintiff as
his compensation under said agreement; that after the said manufacturing and profit and the loss account and
balance sheet for each year of the business of its said fertilizer department up to and including the year 1926, had
been prepared by the said auditors and certified by them, they were shown to and examined by the plaintiff, and
duly accepted, and approved by him, with full knowledge of their contents, and as evidence of such approval, he
signed his name on each of them, as shown on the copies of said manufacturing and profit and loss account and
balance sheet for each year up to and including the year 1926, which are attached to the record of this case, and
Page 53 of 102
which are hereby referred to and made a part of this amended answer, and in accordance therewith, the said
plaintiff has actually received the portion of the net profits of its said business for those years pertaining to him
for his services under said agreement; that at no time during the course of said fertilizer business and the
liquidation thereof has the plaintiff been in any way denied access to the books and records pertaining thereto, but
on the contrary, said books and records have been subject to his inspection and examination at any time during
business hours, and even since the commencement of this action, the plaintiff and his accountants, Messrs.
Haskins & Sells, of Manila, have been going over and examining said books and records for months and the
defendant, Menzi & Co. Inc., through its officers, have turned over to said plaintiff and his accountant the books
and records of said business and even furnished them suitable accommodations in its own office to examine the
same;
4. That prior to the termination of the said agreement, Exhibit A, the defendant, Menzi & Co., Inc., duly notified
the plaintiff that it would not under any conditions renew his said agreement or continue his said employment
with it after its expiration, and after the termination of said agreement of April 27, 1927, the said Menzi & Co.,
Inc., had the certified public accountants, White, Page & Co., audit the accounts of the business of its said
fertilizer department for the four months of 1927 covered by plaintiff's agreement and prepare a manufacturing
and profit and loss account and balance sheet of said business showing the status of said business at the
termination of said agreement, a copy of which was shown to and explained to the plaintiff; that at that time there
were accounts receivable to be collected for business covered by said agreement of over P100,000, and there was
guano, ashes, fine tobacco and other fertilizer ingredients on hand of over P75,000, which had to be disposed of
by Menzi & Co., Inc., or valued by the parties, before the net profits of said business for the period of the
agreement could be determined; that Menzi & Co., Inc., offered to take the face value of said accounts and the
cost value of the other properties for the purpose of determining the profits of said business for that period, and to
pay to the plaintiff at that time his proportion of such profits on that basis, which the plaintiff refused to accept,
and being disgruntled because the said Menzi & Co., Inc., would not continue him in its service, the said plaintiff
commenced this action, including therein not only Menzi & Co. Inc., but also it managers J.M. Menzi and P.C.
Schlobohm, wherein he knowingly make various false and malicious allegations against the defendants; that since
that time the said Menzi & Co., Inc., has been collecting the accounts receivable and disposing of the stocks on
hand, and there is still on hand old stock of approximately P25,000, which it has been unable to dispose of up to
this time; that as soon as possible a final liquidation and amounting of the net profits of the business covered by
said agreement for the last four months thereof will be made and the share thereof appertaining to the plaintiff will
be paid to him; that the plaintiff has been informed from time to time as to the status of the disposition of such
properties, and he and his auditors have fully examined the books and records of said business in relation thereto.
SECOND CAUSE OF ACTION
As a second cause of action plaintiff alleged:
I. That the plaintiff hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.
II. That the examination made by the plaintiff's auditors of some of the books of the partnership that were
furnished by the defendants disclosed the fact that said defendants had charged to "purchases" of the business,
undue interest, the amount of which the plaintiff is unable to determine, as he has never had at his disposal the
books and vouchers necessary for that purpose, and especially, owning to the fact that the partnership constituted
between the plaintiff and the defendant Menzi & Co., Inc., never kept its own cash book, but that its funds were
maliciously included in the private funds of the defendant entity, neither was there a separate BANK ACCOUNT
of the partnership, such account being included in the defendant's bank account.
III. That from the examination of the partnership books as aforesaid, the plaintiff estimates that the partnership
between himself and the defendant Menzi & Co., Inc., has been defrauded by the defendants by way of interest in
an amount of approximately P184,432.51, of which 35 per cent, or P64,551.38, belongs to the plaintiff
exclusively.
Wherefore, the plaintiff prays the court to render judgment ordering the defendants jointly and severally to pay him the
sum of P64,551.38, or any amount which may finally appear to be due and owing from the defendants to the plaintiff
upon this ground, with legal interest from the filing of the original complaint until payment.
Defendants alleged:
1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the special defense to the
first cause of action in this amended answer;
2. That under the contract of employment, Exhibit A, of the amended complaint, the defendant, Menzi & Co.,
Inc., only undertook and agreed to facilitate financial aid in carrying on the said fertilizer business, as it had been
doing before the plaintiff was employed under the said agreement; that the said defendant, Menzi & Co., Inc., in
the course of the said business of its fertilizer department, opened letters of credit through the banks of Manila,
Page 54 of 102
accepted and paid drafts drawn upon it under said letters of credit, and obtained loans and advances of moneys for
the purchase of materials to be used in mixing and manufacturing its fertilizers and in paying the expenses of said
business; that such drafts and loans naturally provided for interest at the banking rate from the dates thereof until
paid, as is the case in all, such business enterprises, and that such payments of interest as were actually made on
such drafts, loans and advances during the period of the said employment agreement constituted legitimate
expenses of said business under said agreement.
THIRD CAUSE OF ACTION
As third cause of action, plaintiff alleged:
I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.
II. That under the terms of the contract Exhibit A, neither the defendants J.M. Menzi and P.C. Schlobohm, nor the
defendant Menzi & Co., Inc., had a right to collect for itself or themselves any amount whatsoever by way of
salary for services rendered to the partnership between the plaintiff and the defendant, inasmuch as such services
were compensated with the 65% of the net profits of the business constituting their share.
III. That the plaintiff has, on his on account and with his own money, paid all the employees he has placed in the
service of the partnership, having expended for their account, during the period of the contract, over P88,000,
without ever having made any claim upon the defendants for this sum because it was included in the
compensation of 35 per cent which he was to receive in accordance with the contract Exhibit A.
IV. That the defendants J.M. Menzi and P.C. Schlobohm, not satisfied with collecting undue and excessive
salaries for themselves, have made the partnership, or the fertilizer business, pay the salaries of a number of the
employees of the defendant Menzi & Co., Inc.
V. That under this item of undue salaries the defendants have appropriated P43,920 of the partnership funds, of
which 35 per cent, or P15,372 belongs exclusively to the plaintiff.
Wherefore, the plaintiff prays the court to render judgment ordering the defendants to pay jointly and severally to the
plaintiff the amount of P15,372, with legal interest from the date of the filing of the original complaint until the date of
payment.
Defendants alleged:
1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4 of the special defense the first
cause of action in this amended answer;
2. That the defendant, Menzi & Co., Inc., through its manager, exclusively managed and conducted its said
fertilizer business, in which the plaintiff was to receive 35 percent of the net profits as compensation for this
services, as hereinbefore alleged, from on or about January 1, 1923, when its other departments had special
experienced Europeans in charge thereof, who received not only salaries but also a percentage of the net profits of
such departments; that its said fertilizer business, after its manager took charge of it, became very successful, and
owing to the large volume of business transacted, said business required great deal of time and attention, and
actually consumed at least one-half of the time of the manager and certain employees of Menzi & Co., Inc., in
carrying it on; that the said Menzi & Co., furnished office space, stationery and other incidentals, for said
business, and had its employees perform the duties of cashiers, accountants, clerks, messengers, etc., for the same,
and for that reason the said Menzi & Co., Inc., charged each year, from and after 1922, as expenses of said
business, which pertained to the fertilizer department, as certain amount as salaries and wages to cover the
proportional part of the overhead expenses of Menzi & Co., Inc.; that the same method is followed in each of the
several departments of the business of Menzi & Co., Inc., that each and every year from and after 1922, a just
proportion of said overhead expenses were charged to said fertilizer departments and entered on the books
thereof, with the knowledge and consent of the plaintiff, and included in the auditors' reports, which were
examined, accepted and approved by him, and he is now estopped from saying that such expenses were not
legitimate and just expenses of said business.
FOURTH CAUSE OF ACTION
As fourth cause of action, the plaintiff alleged:
I. That he hereby reproduces paragraph I, II, III, IV, and V of the first cause of action.
II. That the defendant Menzi & Co., Inc., through the defendant J. M. Menzi and P. C. Schlobohm, has paid, with
the funds of the partnership between the defendant entity and the plaintiff, the income tax due from said defendant
entity for the fertilizer business, thereby defrauding the partnership in the amount of P10,361.72 of which 35 per
cent belongs exclusively to the plaintiff, amounting to P3,626.60.
III. That the plaintiff has, during the period of the contract, paid with his own money the income tax
corresponding to his share which consists in 35 per cent of the profits of the fertilizer business, expending about
P5,000 without ever having made any claim for reimbursement against the partnership, inasmuch as it has always
been understood among the partners that each of them would pay his own income tax.
Page 55 of 102
Wherefore, the plaintiff prays the court to order the defendants jointly and severally to pay the plaintiff the sum of
P3,362.60, with legal interest from the date of the filing of the original complaint until its payment.
Defendants alleged:
2. That under the Income Tax Law Menzi & Co., Inc., was obliged to and did make return to the Government of
the Philippine Islands each year during the period of the agreement, Exhibit A, of the income of its whole
business, including its fertilizer department; that the proportional share of such income taxes found to be due on
the business of the fertilizer department was charged as a proper and legitimate expense of that department, in the
same manner as was done in the other departments of its business; that inasmuch as the agreement with the
plaintiff was an employment agreement, he was required to make his own return under the Income Tax Law and
to pay his own income taxes, instead of having them paid at the source, as might be done under the law, so that he
would be entitled to the personal exemptions allowed by the law; that the income taxes paid by the said Menzi &
Co., Inc., pertaining to the business, were duly entered on the books of that department, and included in the
auditors' reports hereinbefore referred to, which reports were examined, accepted and approved by the plaintiff,
with full knowledge of their contents, and he is now estopped from saying that such taxes are not a legitimate
expense of said business.
FIFTH CAUSE OF ACTION
As fifth cause of action, plaintiff alleged:
I. That hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.
II. That the plaintiff has discovered that the defendants Menzi & Co., Inc., had been receiving, during the period
of the contract Exhibit A, from foreign firms selling fertilizing material, a secret commission equivalent to 5 per
cent of the total value of the purchases of fertilizing material made by the partnership constituted between the
plaintiff and the defendant Menzi Co., Inc., and that said 5 per cent commission was not entered by the defendants
in the books of the business, to the credit and benefit of the partnership constituted between the plaintiff and the
defendant, but to the credit of the defendant Menzi Co., Inc., which appropriated it to itself.
III. That the exact amount, or even the approximate amount of the fraud thus suffered by the plaintiff cannot be
determined, because the entries referring to these items do not appear in the partnership books, although the
plaintiff believes and alleges that they do appear in the private books of the defendant Menzi & Co., Inc., which
the latter has refused to furnish, notwithstanding the demands made therefore by the auditors and the lawyers of
the plaintiff.
IV. That taking as basis the amount of the purchases of some fertilizing material made by the partnership during
the first four years of the contract Exhibit A, the plaintiff estimates that this 5 per cent commission collected by
the defendant Menzi Co., Inc., to the damage and prejudice of the plaintiff, amounts to P127,375.77 of which 35
per cent belongs exclusively to the plaintiff.
Wherefore, the plaintiff prays the court to order the defendants to pay jointly and severally to the plaintiff the amount of
P44,581.52, or the exact amount owed upon this ground, after both parties have adduced their evidence upon the point.
Defendants alleged:
1. That they repeat and make a part of this special defense paragraph 1, 2, 3 and 4, of the special defense to the
2. That the defendant, Menzi & Co., Inc., did have during the period of said agreement, Exhibit A, and has now
what is called a "Propaganda Agency Agreement" which the Deutsches Kalesyndikat, G.M.B., of Berlin, which is
a manufacturer of potash, by virtue of which said Menzi & Co., Inc., was to receive for its propaganda work in
advertising and bringing about sales of its potash a commission of 5 per cent on all orders of potash received by it
from the Philippine Islands; that during the period of said agreement, Exhibit A, orders were sent to said concern
for potash, through C. Andre & Co., of Hamburg, as the agent of the said Menzi & Co., Inc., upon which the said
Menzi & Co., Inc., received a 5 per cent commission, amounting in all to P2,222.32 for the propaganda work
which it did for said firm in the Philippine Islands; that said commissioners were not in any sense discounts on the
purchase price of said potash, and have no relation to the fertilizer business of which the plaintiff was to receive a
share of the net profits for his services, and consequently were not credited to that department;
3. That in going over the books of Menzi Co., Inc., it has been found that there are only two items of
commissions, which were received from the United Supply Co., of San Francisco, in the total of sum $66.51,
which through oversight, were not credited on the books of the fertilizer department of Menzi & Co., Inc., but due
allowance has now been given to the department for such item.
SIXTH CAUSE OF ACTION
As sixth cause of action, plaintiff alleged:
Page 56 of 102
I. That hereby reproduces paragraphs I, II, III, IV and V, of the first cause of action.
II. That the defendant Menzi Co., Inc., in collusion with and through the defendants J.M. Menzi and P.C.
Schlobohm and their assistants, has tampered with the books of the business making fictitious transfers in favor of
the defendant Menzi & Co., Inc., of merchandise belonging to the partnership, purchased with the latter's money,
and deposited in its warehouses, and then sold by Menzi & Co., Inc., to third persons, thereby appropriating to
itself the profits obtained from such resale.
III. That it is impossible to ascertain the amount of the fraud suffered by the plaintiff in this respect as the real
amount obtained from such sales can only be ascertained from the examination of the private books of the
defendant entity, which the latter has refused to permit notwithstanding the demand made for the purpose by the
auditors and the lawyers of the plaintiff, and no basis of computation can be established, even approximately, to
ascertain the extent of the fraud sustained by the plaintiff in this respect, by merely examining the partnership
books.
Wherefore, the plaintiff prays the court to order the defendants J.M. Menzi and P.C. Schlobohm, to make a sworn
statement as to all the profits received from the sale to third persons of the fertilizers pertaining to the partnership, and the
profits they have appropriated, ordering them jointly and severally to pay 35 per cent of the net amount, with legal interest
from the filing of the original complaint until the payment thereof.
Defendant alleged:
first cause of action in this amended answer:
2. That under the express terms of the employment agreement, Exhibit A, the defendant, Menzi & Co., Inc., had
the right to import into the Philippine Islands in the course of its fertilizer business and sell fro its exclusive
account and benefit simple fertilizer ingredients; that the only materials imported by it and sold during the period
of said agreement were simple fertilizer ingredients, which had nothing whatever to do with the business of mixed
fertilizers, of which the plaintiff was to receive a share of the net profits as a part of his compensation.
SEVENTH CAUSE OF ACTION
As seventh cause of action, plaintiff alleged:
II. That during the existence of the contract Exhibit A, the defendant Menzi & Co., Inc., for the account of the
partnership constituted between itself and the plaintiff, and with the latter's money, purchased from a several
foreign firms various simple fertilizing material for the use of the partnership.
III. That in the paid invoices for such purchases there are charged, besides the cost price of the merchandise, other
amounts for freight, insurance, duty, etc., some of which were not entirely thus spent and were later credited by
the selling firms to the defendant Menzi & Co., Inc.
IV. That said defendant Menzi & Co., Inc., through and in collusion with the defendants J.M. Menzi and P.C.
Schlobohm upon receipt of the credit notes remitted by the selling firms of fertilizing material, for rebates upon
freight, insurance, duty, etc., charged in the invoice but not all expended, did not enter them upon the books to the
credit of the partnership constituted between the defendant and the plaintiff, but entered or had them entered to the
credit on Menzi & Co., Inc., thereby defrauding the plaintiff of 35 per cent of the value of such reductions.
V. That the total amount, or even the approximate amount of this fraud cannot be ascertained without an
examination of the private books of Menzi & Co., Inc., which the latter has refused to permit notwithstanding the
demand to this effect made upon them by the auditors and the lawyers of the plaintiff.
Wherefore, the plaintiff prays the court to order the defendants J.M. Menzi and P.C. Schlobohm, to make a sworn
statement as to the total amount of such rebates, and to sentence the defendants to pay the plaintiff jointly and severally 35
per cent of the net amount.
Defendants alleged:
first cause of action in this amended answer:
2. That during the period of said employment agreement, Exhibit A, the defendant, Menzi & Co., Inc., received
from its agent, C. Andre & Co., of Hamburg, certain credits pertaining to the fertilizer business in the profits of
which the plaintiff was interested, by way of refunds of German Export Taxes, in the total sum of P1,402.54; that
all of department as received, but it has just recently been discovered that through error an additional sum of
P216.22 was credited to said department, which does not pertain to said business in the profits of which the
plaintiff is interested.
EIGHT CAUSE OF ACTION
A eighth cause of action, plaintiff alleged:
I. That he hereby reproduces paragraphs I, II, III, IV and V of the first cause of action.
Page 57 of 102
II. That on or about April 21, 1927, that is, before the expiration of the contract Exhibit A of the complaint, the
defendant Menzi & Co., Inc., acting as manager of the fertilizer business constituted between said defendant and
the plaintiff, entered into a contract with the Compañia General de Tabacos de Filipinas for the sale of said entity
of three thousand tons of fertilizers of the trade mark "Corona No. 1", at the rate of P111 per ton, f. o. b. Bais,
Oriental Negros, to be delivered, as they were delivered, according to information received by the plaintiff, during
the months of November and December, 1927, and January, February, March, and April, 1928.
III. That both the contract mentioned above and the benefits derived therefrom, which the plaintiff estimates at
P90,000, Philippine currency, belongs to the fertilizer business constituted between the plaintiff and the
defendant, of which 35 per cent, or P31,500, belongs to said plaintiff.
IV. That notwithstanding the expiration of the partnership contract Exhibit A, on April 27, 1927, the defendants
have not rendered a true accounting of the profits obtained by the business during the last four months thereof, as
the purposed balance submitted to the plaintiff was incorrect with regard to the inventory of merchandise,
transportation equipment, and the value of the trade marks, for which reason such proposed balance did not
represent the true status of the business of the partnership on April 30, 1927.
V. That the proposed balance submitted to the plaintiff with reference to the partnership operations during the last
four months of its existence, was likewise incorrect, inasmuch as it did not include the profit realized or to be
realized from the contract entered into with the Compañia General de Tabacos de Filipinas, notwithstanding the
fact that this contract was negotiated during the existence of the partnership, and while the defendant Menzi &
Co., Inc., was the manager thereof.
VI. That the defendant entity now contends that the contract entered into with the Compañia General de Tabacos
de Filipinas belongs to it exclusively, and refuses to give the plaintiff his share consisting in 35 per cent of the
profits produced thereby.
Wherefore, the plaintiff prays the honorable court to order the defendants to render a true and detailed account of the
business during the last four months of the existence of the partnership, i. e., from January 1, 1927 to April 27, 1927, and
to sentence them likewise to pay the plaintiff 35 per cent of the net profits.
Defendants alleged:
2. That the said order for 3,000 tons of mixed fertilizer, received by Menzi & Co., Inc., from the Compañia
General de Tabacos Filipinas on April 21, 1927, was taken by it in the regular course of its fertilizer business, and
was to be manufactured and delivered in December, 1927, and up to April, 1928; that the employment agreement
of the plaintiff expired by its own terms on April 27, 1927, and he has not been in any way in the service of the
defendant, Menzi & Co., Inc., since that time, and he cannot possibly have any interest in the fertilizers
manufactured and delivered by the said Menzi & Co., Inc., after the expiration of his contract for any service
rendered to it.
NINTH CAUSE OF ACTION
As ninth cause of action, plaintiff alleged:
II. That during the period of the contract Exhibit A, the partnership constituted thereby registered in the Bureau of
Commerce and Industry the trade marks "CORONA NO. 1", CORONA NO. 2", "ARADO", and "HOZ", the
plaintiff and the defendant having by their efforts succeeded in making them favorably known in the market.
III. That the plaintiff and the defendant, laboring jointly, have succeeded in making the fertilizing business a
prosperous concern to such an extent that the profits obtained from the business during the five years it has
existed, amount to approximately P1,000,000, Philippine currency.
IV. That the value of the good will and the trade marks of a business of this nature amounts to at least P1,000,000,
of which sum 35 per cent belongs to the plaintiff, or, P350,000.
V. That at the time of the expiration of the contract Exhibit A, the defendant entity, notwithstanding and in spite
of the plaintiff's insistent opposition, has assumed the charge of liquidating the fertilizing business, without
having rendered a monthly account of the state of the liquidation, as required by law, thereby causing the plaintiff
damages.
VI. That the damages sustained by the plaintiff, as well as the amount of his share in the remaining property of the
plaintiff, and may only be truly and correctly ascertained by compelling the defendants J. M. Menzi and P. C.
Schlobohm to declare under oath and explain to the court in detail the sums obtained from the sale of the
remaining merchandise, after the expiration of the partnership contract.
VII. That after the contract Exhibit A had expired, the defendant continued to use for its own benefit the good-will
and trade marks belonging to the partnership, as well as its transportation equipment and other machinery, thereby
Page 58 of 102
indicating its intention to retain such good-will, trade marks, transportation equipment and machinery, for the
manufacture of fertilizers, by virtue of which the defendant is bound to pay the plaintiff 35 per cent of the value of
said property.
VIII. That the true value of the transportation equipment and machinery employed in the preparation of the
fertilizers amounts of P20,000, 35 per cent of which amount to P7,000.
IX. That the plaintiff has repeatedly demanded that the defendant entity render a true and detailed account of the
state of the liquidation of the partnership business, but said defendants has ignored such demands, so that the
plaintiff does not, and this date, know whether the liquidation of the business has been finished, or what the status
of it is at present.
Wherefore, the plaintiff prays the Honorable Court:
1. To order the defendants J.M. Menzi and P.C. Schlobohm to render a true and detailed account of the status of
business in liquidation, that is, from April 28, 1927, until it is finished, ordering all the defendants to pay the
plaintiff jointly and severally 35 per cent of the net amount.
2. To order the defendants to pay the plaintiff jointly and severally the amount of P350,000, which is 35 per cent
of the value of the goodwill and the trade marks of the fertilizer business;
3. To order the defendants to pay the plaintiff jointly and severally the amount of P7,000 which is 35 per cent of
the value of the transportation equipment and machinery of the business; and
4. To order the defendants to pay the costs of this trial, and further, to grant any other remedy that this Honorable
Court may deem just and equitable.
Defendants alleged:
2. That the good-will, if any, of said fertilizer business of the defendant, Menzi & Co., Inc., pertains exclusively to
it, and the plaintiff can have no interest therein of any nature under his said employment agreement; that the trade-
marks mentioned by the plaintiff in his amended complaint, as a part of such good-will, belonged to and have
been used by the said Menzi & Co., Inc., in its fertilizer business from and since its organization, and the plaintiff
can have no rights to or interest therein under his said employment agreement; that the transportation equipment
pertains to the fertilizer department of Menzi & Co., Inc., and whenever it has been used by the said Menzi & Co.,
Inc., in its own business, due and reasonable compensation for its use has been allowed to said business; that the
machinery pertaining to the said fertilizer business was destroyed by fire in October, 1926, and the value thereof
in the sum of P20,000 was collected from the Insurance Company, and the plaintiff has been given credit for 35
per cent of that amount; that the present machinery used by Menzi & Co., Inc., was constructed by it, and the
costs thereof was not charged to the fertilizer department, and the plaintiff has no right to have it taken into
consideration in arriving at the net profits due to him under his said employment agreement.
The dispositive part of the decision of the trial court is as follows:
Wherefore, let judgment be entered:
(a) Holding that the contract entered into by the parties, evidenced by Exhibit A, as a contract of general regular
commercial partnership, wherein Menzi & Co., Inc., was the capitalist, and the plaintiff, the industrial partner;
(b) Holding the plaintiff, by the mere fact of having signed and approved the balance sheets, Exhibits C to C-8, is
not estopped from questioning the statements of the accounts therein contained;
(c) Ordering Menzi & Co., Inc., upon the second ground of action, to pay the plaintiff the sum of P 60,385.67
with legal interest from the date of the filing of the original complaint until paid;
(d) Dismissing the third cause of action;
(e) Ordering Menzi & Co., Inc., upon the fourth cause of action, to pay the plaintiff the sum of P3,821.41, with
legal interest from the date of the filing of the original until paid;
(f ) Dismissing the fifth cause of action;
(g) Dismissing the sixth cause of action;
(h) Dismissing the seventh cause of action;
(i) Ordering the defendant Menzi & Co., Inc., upon the eighth cause of action, to pay the plaintiff the sum of
P6,578.38 with legal interest from January 1, 1929, the date of the liquidation of the fertilizer business, until paid;
(j ) Ordering Menzi & Co., Inc., upon the ninth cause of action to pay the plaintiff the sum of P196,709.20 with
legal interest from the date of the filing of the original complaint until paid;
(k) Ordering the said defendant corporation, in view of the plaintiff's share of the profits of the business accruing
from January 1, 1927 to December 31, 1928, to pay the plaintiff 35 per cent of the net balance shown in Exhibits
51 and 51-A, after deducting the item of P2,410 for income tax, and any other sum charged for interest under the
entry "Purchases";
Page 59 of 102
(l) Ordering the defendant corporation, in connection with the final liquidation set in Exhibit 52 and 52-A, to pay
the plaintiff the sum of P17,463.54 with legal interest from January 1, 1929, until fully paid;
(m) Dismissing the case with reference to the other defendants, J. M. Menzi and P. C. Schlobohm; and
(n) Menzi & Co., Inc., shall pay the costs of the trial.
The appellant makes the following assignment of error:
I. The trial court erred in finding and holding that the contract Exhibit A constitutes a regular collective
commercial copartnership between the defendant corporation, Menzi & Co., Inc., and the plaintiff, Francisco
Bastida, and not a contract of employment.
II. The trial court erred in finding and holding that the defendant, Menzi & Co., Inc., had wrongfully charged to
the fertilizer business in question the sum of P10,918.33 as income taxes partners' balances, foreign drafts, local
drafts, and on other credit balances in the sum of P172,530.49, and that 35 per cent thereof, or the sum of
P60,358.67, with legal interest thereon from the date of filing his complaint, corresponds to the plaintiff.
III. The trial court erred finding and holding that the defendant, Menzi & Co., Inc., had wrongfully charged to the
fertilizer business in question the sum of P10,918.33 as income taxes for the years 1923, 1924, 1925 and 1926,
and that the plaintiff is entitled to 35 per cent thereof, or the sum of P3,821.41, with legal interest thereon from the
date of filing his complaint, and in disallowing the item of P2,410 charged as income tax in the liquidation in
Exhibits 51 and 51 A for the period from January 1 to April 27, 1927.
IV. The trial court erred in refusing to find and hold under the evidence in this case that the contract, Exhibit A
was daring the whole period thereof considered by the parties and performed by them as a contract of
employment in relation to the fertilizer business of the defendant, and that the accounts of said business were kept
by the defendant, Menzi & Co., Inc., on that theory with the knowledge and consent of the plaintiff, and that at the
end of each year for five years a balance sheet and profit and loss statement of said business were prepared from
the books of account of said business on the same theory and submitted to the plaintiff, and that each year said
balance sheet and profit and loss statement were examined, approved and signed by said contract in accordance
therewith with full knowledge of the manner in which said business was conducted and the charges for interest
and income taxes made against the same and that by reason of such facts, the plaintiff is now estopped from
raising any question as to the nature of said contract or the propriety of such charges.
V. The trial court erred in finding and holding that the plaintiff, Francisco Bastida, is entitled to 35 per cent of the
net profits in the sum of P18,795.38 received by the defendant, Menzi & Co., Inc., from its contract with the
Compañia General de Tabacos de Filipinas, or the sum of P6.578.38, with legal interest thereon from January 1,
1929, the date upon which the liquidation of said business was terminated.
VI. The trial court erred in finding and holding that the value of the good-will of the fertilizer business in question
was P562,312, and that the plaintiff, Francisco Bastida, was entitled to 35 per cent of such valuation, or the sum
of P196,709.20, with legal interest thereon from the date of filing his complaint.
VII. The trial court erred in rendering judgment in favor of the plaintiff and against defendant, Menzi & Co., Inc.,
(a) on the second cause of action, for the sum of P60,385.67, with legal interest thereon from the date of filing the
complaint; (b) on the fourth cause of action, for the sum of P3,821.41, with legal interest thereon from the date of
filing the complaint; (c) on the eight cause of action, for the sum of P6,578.38, with legal interest thereon from
January 1, 1929; and (d) on the ninth cause of action, for the sum of P196,709.20, with legal interest thereon from
the date of filing the original complaint; and (e) for the costs of the action, and in not approving the final
liquidation of said business, Exhibits 51 and 51-A and 52 and 52-A, as true and correct, and entering judgment
against said defendant only for the amounts admitted therein as due the plaintiff with legal interest, with the costs
against the plaintiff.
VIII. The trial court erred in overruling the defendants' motion for a new trial.
It appears from the evidence that the defendants corporation was organized in 1921 for purpose of importing and selling
general merchandise, including fertilizers and fertilizer ingredients. It appears through John Bordman and the Menzi-
Bordman Co. the good-will, trade-marks, business, and other assets of the old German firm of Behn, Meyer & Co., Ltd.,
including its fertilizer business with its stocks and trade-marks. Behn, Meyer & Co., Ltd., had owned and carried on this
fertilizer business from 1910 until that firm was taken over the Alien Property Custodian in 1917. Among the trade-marks
thus acquired by the appellant were those known as the "ARADO", "HOZ", and "CORONA". They were registered in the
Bureau of Commerce and Industry in the name of Menzi & Co. The trade marks "ARADO" and "HOZ" had been used by
Behn, Meyer & Co., Ltd., in the sale of its mixed fertilizers, and the trade mark "CORONA" had been used in its other
business. The "HOZ" trade-mark was used by John Bordman and the Menzi-Bordman Co. in the continuation of the
fertilizer business that had belonged to Behn, Meyer & Co., Ltd.
The business of Menzi & Co., Inc., was divided into several different departments, each of which was in charge of a
manager, who received a fixed salary and a percentage of the profits. The corporation had to borrow money or obtain
Page 60 of 102
credits from time to time and to pay interest thereon. The amount paid for interest was charged against the department
concerned, and the interest charges were taken into account in determining the net profits of each department. The
practice of the corporation was to debit or credit each department with interest at the bank rate on its daily balance. The
fertilizer business of Menzi & Co., Inc., was carried on in accordance with this practice under the "Sundries Department"
until July, 1923, and after that as a separate department.
In November, 1921, the plaintiff, who had had some experience in mixing and selling fertilizer, went to see Toehl, the
manager of the sundries department of Menzi & Co., Inc., and told him that he had a written contract with the Philippine
Sugar Centrals Agency for 1,250 tons of mixed fertilizers, and that he could obtain other contracts, including one from the
Calamba Sugar Estates for 450 tons, but the he did not have the money to buy the ingredients to fill the order and carry on
the on the business. He offered to assign to Menzi & Co., Inc., his contract with the Philippine Sugar Centrals Agency and
to supervise the mixing of the fertilizer and to obtain other orders for fifty per cent of the net profits that Menzi & Co.,
might derive therefrom. J.M. Menzi, the general manager of Menzi & Co., accepted plaintiff's offer. Plaintiff assigned to
Menzi & Co., Inc., his contract with the Sugar Centrals Agency, and the defendant corporation proceeded to fill the order.
Plaintiff supervised the mixing of the fertilizer.
On January 10, 1922 the defendant corporation at plaintiff's request gave him the following letter, Exhibit B:
MANILA, 10 de enero de 1922
Sr. FRANCISCO BASTIDA
Manila
MUY SR. NUESTRO: Interin formalizamos el contrato que, en principio, tenemos convenido para la explotacion del
negocio de abono y fertilizantes, por la presente venimos en confirmar su derecho de 50 por ciento de las untilidades que
se deriven del contrato obtenido por Vd. de la Philippine Sugar Centrals (por 1250 tonel.) y del contrato con la Calamba
Sugar Estates, asi como de cuantos contratos se cierren con definitiva de nuestro contrato mutuo, lo que formalizacion
definitiva de nuestro contrato mutuo, lo que hacemos para garantia y seguridad de Vd.
MENZI & CO.,
Por (Fdo.) W. TOEHL
Menzi & Co., Inc., continued to carry on its fertilizer business under this arrangement with the plaintiff. It ordered
ingredients from the United States and other countries, and the interest on the drafts for the purchase of these materials
was changed to the business as a part of the cost of the materials. The mixed fertilizers were sold by Menzi & Co., Inc.,
between January 19 and April 1, 1922 under its "CORONA" brand. Menzi & Co., Inc., had only one bank account for its
whole business. The fertilizer business had no separate capital. A fertilizer account was opened in the general ledger, and
interest at the rate charged by the Bank of the Philippine Islands was debited or credited to that account on the daily
balances of the fertilizer business. This was in accordance with appellant's established practice, to which the plaintiff
assented.
On or about April 24, 1922 the net profits of the business carried on under the oral agreement were determined by Menzi
& Co., Inc., after deducting interest charges, proportional part of warehouse rent and salaries and wages, and the other
expenses of said business, and the plaintiff was paid some twenty thousand pesos in full satisfaction of his share of the
profits.
Pursuant to the aforementioned verbal agreement, confirmed by the letter, Exhibit B, the defendant corporation April 27,
1922 entered a written contract with the plaintiff, marked Exhibit A, which is the basis of the present action.
The fertilizer business was carried on by Menzi & Co., Inc., after the execution of Exhibit A in practically the same
manner as it was prior thereto. The intervention of the plaintiff was limited to supervising the mixing of the fertilizers in
Menzi & Co.'s, Inc., bodegas.
The trade-marks used in the sale of the fertilizer were registered in the Bureau of Commerce & Industry in the name of
Menzi & Co., Inc., and the fees were paid by that company. They were not changed to the fertilizer business, in which the
plaintiff was interested. Only the fees for registering the formulas in the Bureau of Science were charged to the fertilizer
business, and the total amount thereof was credited to this business in the final liquidation on April 27, 1927.
On May 3, 1924 the plaintiff made a contract with Menzi & Co., Inc., to furnish it all the stems and scraps to tobacco that
it might need for its fertilizer business either in the Philippine Islands or for export to other countries. This contract is
rendered to in the record as the "Vastago Contract". Menzi & Co., Inc., advanced the plaintiff, paying the salaries of his
employees, and other expenses in performing his contract.
White, Page & Co., certified public accountants, audited the books of Menzi & Co., Inc., every month, and at the end of
each year they prepared a balance sheet and a profit and loss statement of the fertilizer business. These statements were
delivered to the plaintiff for examination, and after he had had an opportunity of verifying them he approved them without
objection and returned them to Menzi & Co., Inc.
Plaintiff collected from Menzi Co., Inc., as his share or 35 per cent of the net profits of the fertilizer business the
following amounts:
Page 61 of 102
1922 . . . . . . . . . . . . . . . . . . . . . P1,874.73
1923 . . . . . . . . . . . . . . . . . . . . . 30,212.62
1924 . . . . . . . . . . . . . . . . . . . . . 101,081.56
1925 . . . . . . . . . . . . . . . . . . . . . 35,665.03
1926 . . . . . . . . . . . . . . . . . . . . . 27,649.98
Total . . . . . . . . . . . . . . . . . . . . P196,483.92
To this amount must be added plaintiff's share of the net profits from January 1 to April 27, 1927, amounting to
P34,766.87, making a total of P231,250.79.
Prior to the expiration of the contract, Exhibit A, the manager of Menzi & Co. Inc., notified the plaintiff that the contract
for his services would not be renewed.
When plaintiff's contract expired on April 27, 1927, the fertilizer department of Menzi & Co., Inc., had on hand materials
and ingredients and two Ford trucks of the book value of approximately P75,000, and accounts receivable amounting to
P103,000. There were claims outstanding and bills to pay. Before the net profits could be finally determined, it was
necessary to dispose of the materials and equipment, collect the outstanding accounts for Menzi & Co., Inc., prepared a
balance sheet and a profit and loss statement for the period from January 1 to April 27, 1927 as a basis of settlement, but
the plaintiff refused to accept it, and filed the present action.
Menzi & Co., Inc., then proceeded to liquidate fertilizer business in question. In October, 1927 it proposed to the plaintiff
that the old and damaged stocks on hand having a book value of P40,000, which the defendant corporation had been
unable to dispose of, be sold at public or private sale, or divided between the parties. The plaintiff refused to agree to this.
The defendant corporation then applied to the trial court for an order for the sale of the remaining property at public
auction, but apparently the court did not act on the petition.
The old stocks were taken over by Menzi & Co., Inc., and the final liquidation of the fertilizer business was completed in
December, 1928 and a final balance sheet and a profit and loss statement were submitted to the plaintiff during the trial.
During the liquidation the books of Menzi & Co., Inc., for the whole period of the contract in question were reaudited by
White, Page & Co.., certain errors of bookkeeping were discovered by them. After making the corrections they found the
balance due the plaintiff to be P21,633.20.
Plaintiff employed a certified public accountant, Vernon Thompson, to examine the books and vouchers of Menzi & Co.
Thompson assumed the plaintiff and Menzi & Co., Inc., to be partners, and that Menzi & Co., Inc., was obliged to furnish
free of charge all the capital the partnership should need. He naturally reached very different conclusions from those of
the auditors of Menzi Co., Inc.
We come now to a consideration of appellant's assignment of error. After considering the evidence and the arguments of
counsel, we are unanimously of the opinion that under the facts of this case the relationship established between Menzi &
Co. and by the plaintiff was to receive 35 per cent of the net profits of the fertilizer business of Menzi & Co., Inc., in
compensation for his services of supervising the mixing of the fertilizers. Neither the provisions of the contract nor the
conduct of the parties prior or subsequent to its execution justified the finding that it was a contract of copartnership.
Exhibit A, as appears from the statement of facts, was in effect a continuation of the verbal agreement between the parties,
whereby the plaintiff worked for the defendant corporation for one-half of the net profits derived by the corporation from
certain fertilizer contracts. Plaintiff was paid his share of the profits from those transactions after Menzi & Co., Inc., had
deducted the same items of expense which he now protests. Plaintiff never made any objection to defendant's manner of
keeping the accounts or to the charges. The business was continued in the same manner under the written agreement,
Exhibit A, and for four years the plaintiff never made any objection. On the contrary he approved and signed every year
the balance sheet and the profit and loss statement. It was only when plaintiff's contract was about to expire and the
defendant corporation had notified him that it would not renew it that the plaintiff began to make objections.
The trial court relied on article 116 of the Code of Commerce, which provides that articles of association by which two or
more persons obligate themselves to place in a common fund any property, industry, or any of these things, in order to
obtain profit, shall be commercial, no matter what its class may be, provided it has been established in accordance with
the provisions of this Code; but in the case at bar there was no common fund, that is, a fund belonging to the parties as
joint owners or partners. The business belonged to Menzi & Co., Inc. The plaintiff was working for Menzi & Co., Inc.
Instead of receiving a fixed salary or a fixed salary and a small percentage of the net profits, he was to receive 35 per cent
of the net profits as compensation for his services. Menzi & Co., Inc., was to advanced him P300 a month on account of
his participation in the profits. It will be noted that no provision was made for reimbursing Menzi & Co., Inc., in case
Page 62 of 102
there should be no net profits at the end of the year. It is now well settled that the old rule that sharing profits as profits
made one a partner is overthrown. (Mechem, second edition, p. 89.)
It is nowhere stated in Exhibit A that the parties were establishing a partnership or intended to become partners. Great
stress in laid by the trial judge and plaintiff's attorneys on the fact that in the sixth paragraph of Exhibit A the phrase "en
sociedad con" is used in providing that defendant corporation not engage in the business of prepared fertilizers except in
association with the plaintiff (en sociedad con). The fact is that en sociedad con as there used merely means en reunion
con or in association with, and does not carry the meaning of "in partnership with".
The trial judge found that the defendant corporation had not always regarded the contract in question as an employment
agreement, because in its answer to the original complaint it stated that before the expiration of Exhibit A it notified the
plaintiff that it would not continue associated with him in said business. The trial judge concluded that the phrase
"associated with", used by the defendant corporation, indicated that it regarded the contract, Exhibit A, as an agreement of
copartnership.
In the first place, the complaint and answer having been superseded by the amended complaint and the answer thereto,
and the answer to the original complaint not having been presented in evidence as an exhibit, the trial court was not
authorized to take it into account. "Where amended pleadings have been filed, allegations in the original pleadings are
held admissible, but in such case the original pleadings can have no effect, unless formally offered in evidence." (Jones on
Evidence, sec. 273; Lucido vs. Calupitan, 27 Phil., 148.)
In the second place, although the word "associated" may be related etymologically to the Spanish word "socio", meaning
partner, it does not in its common acceptation imply any partnership relation.
The 7th, 8th, and 9th paragraphs of Exhibit A, whereby the defendant corporation obligated itself to pay to the plaintiff 35
per cent of the net profits of the fertilizer business, to advance to him P300 a month on account of his share of the profits,
and to grant him permission during 1923 to absent himself from the Philippines for not more than one year are utterly
incompatible with the claim that it was the intention of the parties to form a copartnership. Various other reasons for
holding that the parties were not partners are advanced in appellant's brief. We do not deem it necessary to discuss them
here. We merely wish to add that in the Vastago contract, Exhibit A, the plaintiff clearly recognized Menzi & Co., Inc., as
the owners of the fertilizer business in question.
As to the various items of the expense rejected by the trial judge, they were in our opinion proper charges and erroneously
disallowed, and this would true even if the parties had been partners. Although Menzi & Co., Inc., agreed to furnish the
necessary financial aid for the fertilizer business, it did not obligate itself to contribute any fixed sum as capital or to
defray at its own expense the cost of securing the necessary credit. Some of the contentions of the plaintiff and his expert
witness Thompson are so obviously without merit as not to merit serious consideration. For instance, they objected to the
interest charges on draft for materials purchased abroad. Their contention is that the corporation should have furnished the
money to purchase these materials for cash, overlooking the fact that the interest was added to the cost price, and that the
plaintiff was not prejudiced by the practice complained of. It was also urged, and this seems to us the height of absurdity,
that the defendant corporation should have furnished free of charge such financial assistance as would have made it
unnecessary to discount customers' notes, thereby enabling the business to reap the interest. In other words, the defendant
corporation should have enabled the fertilizer department to do business on a credit instead of a cash basis.
The charges now complained of, as we have already stated, are the same as those made under the verbal agreement, upon
the termination of which the parties made a settlement; the charges in question were acquiesced in by the plaintiff for
years, and it is now too late for him to contest them. The decision of this court in the case of Kriedt vs. E.C. McCullough
& Co. (37 Phil., 474), is in point. A portion of the syllabus of that case reads as follows:
1. CONTRACTS; INTERPRETATION; CONTEMPORANEOUS ACTS OF PARTIES. — Acts done by the
parties to a contract in the course of its performance are admissible in evidence upon the question of its meaning,
as being their own contemporaneous interpretation of its terms.
2. ID, ID; ACTION OF PARTIES UNDER PRIOR CONTRACT. — In an action upon a contract containing a
provision a doubtful application it appeared that under a similar prior contract the parties had, upon the
termination of said contract, adjusted their rights and made a settlement in which the doubtful clause had been
given effect in conformity with the interpretation placed thereon by one of the parties. Held: That this action of
the parties under the prior contract could properly be considered upon the question of the interpretation of the
same clause in the later contract.
3. ID.; ID.; ACQUIESCENCE. — Where one of the parties to a contract acquiesces in the interpretation placed
by the other upon a provision of doubtful application, the party so acquiescing is bound by such interpretation.
4. ID.; ID.; ILLUSTRATION. — One of the parties to a contract, being aware at the time of the execution thereof
that the other placed a certain interpretation upon a provision of doubtful application, nevertheless proceeded,
without raising any question upon the point, to perform the services which he was bound to render under the
contract. Upon the termination of the contract by mutual consent a question was raised as to the proper
Page 63 of 102
interpretation of the doubtful provision. Held: That the party raising such question had acquiesced in the
interpretation placed upon the contract by the other party and was bound thereby.
The trial court held that the plaintiff was entitled to P6,578.38 or 35 per cent of the net profits derived by Menzi & Co.,
Inc., from its contract for fertilizers with the Tabacalera. This finding in our opinion is not justified by the evidence. This
contract was obtained by Menzi & Co., Inc., shortly before plaintiff's contract with the defendant corporation expired.
Plaintiff tried to get the Tabacalera contract for himself. When this contract was filled, plaintiff had ceased to work for
Menzi & Co., Inc., and he has no right to participate in the profits derived therefrom.
Appellant's sixth assignment of error is that the trial court erred in finding the value of the good-will of the fertilizer
business in question to be P562,312, and that the plaintiff was entitled to 35 per cent thereof or P196,709.20. In reaching
this conclusion the trial court unfortunately relied on the opinion of the accountant, Vernon Thompson, who assumed,
erroneously as we have seen, that the plaintiff and Menzi & Co., Inc., were partners; but even if they had been partners
there would have been no good-will to dispose of. The defendant corporation had a fertilizer business before it entered
into any agreement with the plaintiff; plaintiff's agreement was for a fixed period, five years, and during that time the
business was carried on in the name of Menzi & Co., Inc., and in Menzi & Co.'s warehouses and after the expiration of
plaintiff's contract Menzi & Co., Inc., continued its fertilizer business, as it had a perfect right to do. There was really
nothing to which any good-will could attach. Plaintiff maintains, however, that the trade-marks used in the fertilizer
business during the time that he was connected with it acquired great value, and that they have been appropriated by the
appellant to its own use. That seems to be the only basis of the alleged good-will, to which a fabulous valuation was
given. As we have seen, the trade- marks were not new. They had been used by Behn, Meyer & Co. in its business for
other goods and one of them for fertilizer. They belonged to Menzi & Co., Inc., and were registered in its name; only the
expense of registering the formulas in the Bureau of Science was charged to the business in which the plaintiff was
interested. These trade-marks remained the exclusive property of Menzi & Co., and the plaintiff had no interest therein on
the expiration of his contract.
The balance due the plaintiff, as appears from Exhibit 52, is P21,633.20. We are satisfied by the evidence that said
balance is correct.
For the foregoing reasons, the decision appealed from is modified and the defendant corporation is sentenced to pay the
plaintiff twenty-one thousand, six hundred and thirty-three pesos and twenty centavos (P21,633.20), with legal interest
thereon from the date of the filing of the complaint on June 17, 1927, without a special finding as to costs.
Page 64 of 102

SUPREME COURT
SECOND DIVISION
G.R. No. 126881 October 3, 2000
HEIRS OF TAN ENG KEE, petitioners,
vs.
COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President TAN ENG
LAY,respondents.
DE LEON, JR., J.:
In this petition for review on certiorari, petitioners pray for the reversal of the Decision 1 dated March 13, 1996 of the
former Fifth Division2 of the Court of Appeals in CA-G.R. CV No. 47937, the dispositive portion of which states:
THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the complaint dismissed.
The facts are:
Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law spouse of the decedent,
joined by their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio, collectively known as herein petitioners
HEIRS OF TAN ENG KEE, filed suit against the decedent's brother TAN ENG LAY on February 19, 1990. The
complaint,3 docketed as Civil Case No. 1983-R in the Regional Trial Court of Baguio City was for accounting, liquidation
and winding up of the alleged partnership formed after World War II between Tan Eng Kee and Tan Eng Lay. On March
18, 1991, the petitioners filed an amended complaint 4 impleading private respondent herein BENGUET LUMBER
COMPANY, as represented by Tan Eng Lay. The amended complaint was admitted by the trial court in its Order dated
May 3, 1991.5
The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan Eng Lay, pooling their
resources and industry together, entered into a partnership engaged in the business of selling lumber and hardware and
construction supplies. They named their enterprise "Benguet Lumber" which they jointly managed until Tan Eng Kee's
death. Petitioners herein averred that the business prospered due to the hard work and thrift of the alleged partners.
However, they claimed that in 1981, Tan Eng Lay and his children caused the conversion of the partnership "Benguet
Lumber" into a corporation called "Benguet Lumber Company." The incorporation was purportedly a ruse to deprive Tan
Eng Kee and his heirs of their rightful participation in the profits of the business. Petitioners prayed for accounting of the
partnership assets, and the dissolution, winding up and liquidation thereof, and the equal division of the net assets of
Benguet Lumber.
After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment 6 on April 12, 1995, to wit:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
a) Declaring that Benguet Lumber is a joint venture which is akin to a particular partnership;
b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or partners in a business
venture and/or particular partnership called Benguet Lumber and as such should share in the profits and/or losses
of the business venture or particular partnership;
c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet Lumber Co. Inc. and as
such the heirs or legal representatives of the deceased Tan Eng Kee have a legal right to share in said assets;
d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as partner in a particular
partnership have descended to the plaintiffs who are his legal heirs.
e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of Benguet Lumber
Company Inc. to render an accounting of all the assets of Benguet Lumber Company, Inc. so the plaintiffs know
their proper share in the business;
f) Ordering the appointment of a receiver to preserve and/or administer the assets of Benguet Lumber Company,
Inc. until such time that said corporation is finally liquidated are directed to submit the name of any person they
want to be appointed as receiver failing in which this Court will appoint the Branch Clerk of Court or another one
who is qualified to act as such.
g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in filing the instant case.
h) Dismissing the counter-claim of the defendant for lack of merit.
SO ORDERED.
Private respondent sought relief before the Court of Appeals which, on March 13, 1996, rendered the assailed decision
reversing the judgment of the trial court. Petitioners' motion for reconsideration 7 was denied by the Court of Appeals in a
Resolution8 dated October 11, 1996.
Hence, the present petition.
Page 65 of 102
As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and Wilborn Tan for the
use of allegedly falsified documents in a judicial proceeding. Petitioners complained that Exhibits "4" to "4-U" offered by
the defendants before the trial court, consisting of payrolls indicating that Tan Eng Kee was a mere employee of Benguet
Lumber, were fake, based on the discrepancy in the signatures of Tan Eng Kee. They also filed Criminal Cases Nos.
78857-78870 against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan, for alleged
falsification of commercial documents by a private individual. On March 20, 1999, the Municipal Trial Court of Baguio
City, Branch 1, wherein the charges were filed, rendered judgment 9 dismissing the cases for insufficiency of evidence.
In their assignment of errors, petitioners claim that:
I
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP
BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS
NO FIRM ACCOUNT; (B) THERE WAS NO FIRM LETTERHEADS SUBMITTED AS EVIDENCE; (C)
THERE WAS NO CERTIFICATE OF PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO
PROFITS AND LOSSES; AND (E) THERE WAS NO TIME FIXED FOR THE DURATION OF THE
PARTNERSHIP (PAGE 13, DECISION).
II
THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING
TESTIMONY OF RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A SOLE
PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY AN EMPLOYEE THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING FACTS
WHICH WERE DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT SUPPORT THE
EXISTENCE OF A PARTNERSHIP JUST BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP
DULY RECORDED BEFORE THE SECURITIES AND EXCHANGE COMMISSION:
a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE
BENGUET LUMBER COMPOUND;
b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE EMPLOYEES
OF BENGUET LUMBER;
c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE EMPLOYEES
THEREIN;
d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING THE PRICES OF
STOCKS TO BE SOLD TO THE PUBLIC; AND
e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS TO THE
SUPPLIERS (PAGE 18, DECISION).
IV
JUST BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO TAN AND VERONICA CHOI,
TOGETHER WITH THEIR WITNESS BEATRIZ TANDOC, ADMITTED THAT THEY DO NOT KNOW
WHEN THE ESTABLISHMENT KNOWN IN BAGUIO CITY AS BENGUET LUMBER WAS STARTED AS
A PARTNERSHIP (PAGE 16-17, DECISION).
V
BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE THE PRESENT
CAPITAL OR ASSETS OF BENGUET LUMBER IS DEFINITELY MORE THAN P3,000.00 AND AS SUCH
THE EXECUTION OF A PUBLIC INSTRUMENT CREATING A PARTNERSHIP SHOULD HAVE BEEN
MADE AND NO SUCH PUBLIC INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17,
DECISION).
As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not be disturbed on
appeal if such are supported by the evidence. 10 Our jurisdiction, it must be emphasized, does not include review of factual
issues. Thus:
Filing of petition with Supreme Court. — A party desiring to appeal by certiorari from a judgment or final order
or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever
authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The petition shall
raise only questions of law which must be distinctly set forth.11 [emphasis supplied]
Admitted exceptions have been recognized, though, and when present, may compel us to analyze the evidentiary basis on
which the lower court rendered judgment. Review of factual issues is therefore warranted:
Page 66 of 102
(1) when the factual findings of the Court of Appeals and the trial court are contradictory;
(2) when the findings are grounded entirely on speculation, surmises, or conjectures;
(3) when the inference made by the Court of Appeals from its findings of fact is manifestly mistaken, absurd, or
impossible;
(4) when there is grave abuse of discretion in the appreciation of facts;
(5) when the appellate court, in making its findings, goes beyond the issues of the case, and such findings are
contrary to the admissions of both appellant and appellee;
(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;
(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered, will justify a
different conclusion;
(8) when the findings of fact are themselves conflicting;
(9) when the findings of fact are conclusions without citation of the specific evidence on which they are based;
and
(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence but such findings
are contradicted by the evidence on record. 12
In reversing the trial court, the Court of Appeals ruled, to wit:
We note that the Court a quo over extended the issue because while the plaintiffs mentioned only the existence of
a partnership, the Court in turn went beyond that by justifying the existence of a joint venture.
When mention is made of a joint venture, it would presuppose parity of standing between the parties, equal
proprietary interest and the exercise by the parties equally of the conduct of the business, thus:
xxx xxx xxx
We have the admission that the father of the plaintiffs was not a partner of the Benguet Lumber before the war.
The appellees however argued that (Rollo, p. 104; Brief, p. 6) this is because during the war, the entire stocks of
the pre-war Benguet Lumber were confiscated if not burned by the Japanese. After the war, because of the
absence of capital to start a lumber and hardware business, Lay and Kee pooled the proceeds of their individual
businesses earned from buying and selling military supplies, so that the common fund would be enough to form a
partnership, both in the lumber and hardware business. That Lay and Kee actually established the Benguet
Lumber in Baguio City, was even testified to by witnesses. Because of the pooling of resources, the post-war
Benguet Lumber was eventually established. That the father of the plaintiffs and Lay were partners, is obvious
from the fact that: (1) they conducted the affairs of the business during Kee's lifetime, jointly, (2) they were the
ones giving orders to the employees, (3) they were the ones preparing orders from the suppliers, (4) their families
stayed together at the Benguet Lumber compound, and (5) all their children were employed in the business in
different capacities.
xxx xxx xxx
It is obvious that there was no partnership whatsoever. Except for a firm name, there was no firm account, no firm
letterheads submitted as evidence, no certificate of partnership, no agreement as to profits and losses, and no time
fixed for the duration of the partnership. There was even no attempt to submit an accounting corresponding to the
period after the war until Kee's death in 1984. It had no business book, no written account nor any memorandum
for that matter and no license mentioning the existence of a partnership [citation omitted].
Also, the exhibits support the establishment of only a proprietorship. The certification dated March 4, 1971,
Exhibit "2", mentioned co-defendant Lay as the only registered owner of the Benguet Lumber and Hardware. His
application for registration, effective 1954, in fact mentioned that his business started in 1945 until 1985
(thereafter, the incorporation). The deceased, Kee, on the other hand, was merely an employee of the Benguet
Lumber Company, on the basis of his SSS coverage effective 1958, Exhibit "3". In the Payrolls, Exhibits "4" to
"4-U", inclusive, for the years 1982 to 1983, Kee was similarly listed only as an employee; precisely, he was on
the payroll listing. In the Termination Notice, Exhibit "5", Lay was mentioned also as the proprietor.
xxx xxx xxx
We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in any form, but when
an immovable is constituted, the execution of a public instrument becomes necessary. This is equally true if the
capitalization exceeds P3,000.00, in which case a public instrument is also necessary, and which is to be recorded
with the Securities and Exchange Commission. In this case at bar, we can easily assume that the business
establishment, which from the language of the appellees, prospered (pars. 5 & 9, Complaint), definitely exceeded
P3,000.00, in addition to the accumulation of real properties and to the fact that it is now a compound. The
execution of a public instrument, on the other hand, was never established by the appellees.
And then in 1981, the business was incorporated and the incorporators were only Lay and the members of his
family. There is no proof either that the capital assets of the partnership, assuming them to be in existence, were
Page 67 of 102
maliciously assigned or transferred by Lay, supposedly to the corporation and since then have been treated as a
part of the latter's capital assets, contrary to the allegations in pars. 6, 7 and 8 of the complaint.
These are not evidences supporting the existence of a partnership:
1) That Kee was living in a bunk house just across the lumber store, and then in a room in the bunk house in
Trinidad, but within the compound of the lumber establishment, as testified to by Tandoc; 2) that both Lay and
Kee were seated on a table and were "commanding people" as testified to by the son, Elpidio Tan; 3) that both
were supervising the laborers, as testified to by Victoria Choi; and 4) that Dionisio Peralta was supposedly being
told by Kee that the proceeds of the 80 pieces of the G.I. sheets were added to the business.
Partnership presupposes the following elements [citation omitted]: 1) a contract, either oral or written. However,
if it involves real property or where the capital is P3,000.00 or more, the execution of a contract is necessary; 2)
the capacity of the parties to execute the contract; 3) money property or industry contribution; 4) community of
funds and interest, mentioning equality of the partners or one having a proportionate share in the benefits; and 5)
intention to divide the profits, being the true test of the partnership. The intention to join in the business venture
for the purpose of obtaining profits thereafter to be divided, must be established. We cannot see these elements
from the testimonial evidence of the appellees.
As can be seen, the appellate court disputed and differed from the trial court which had adjudged that TAN ENG KEE and
TAN ENG LAY had allegedly entered into a joint venture. In this connection, we have held that whether a partnership
exists is a factual matter; consequently, since the appeal is brought to us under Rule 45, we cannot entertain inquiries
relative to the correctness of the assessment of the evidence by the court a quo. 13 Inasmuch as the Court of Appeals and the
trial court had reached conflicting conclusions, perforce we must examine the record to determine if the reversal was
justified.
The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet Lumber. A contract of
partnership is defined by law as one where:
. . . two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention
of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession. 14
Thus, in order to constitute a partnership, it must be established that (1) two or more persons bound themselves to
contribute money, property, or industry to a common fund, and (2) they intend to divide the profits among
themselves.15 The agreement need not be formally reduced into writing, since statute allows the oral constitution
of a partnership, save in two instances: (1) when immovable property or real rights are contributed, 16 and (2) when
the partnership has a capital of three thousand pesos or more. 17 In both cases, a public instrument is required. 18 An
inventory to be signed by the parties and attached to the public instrument is also indispensable to the validity of
the partnership whenever immovable property is contributed to the partnership. 19
The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture, which it said is akin to a
particular partnership.20 A particular partnership is distinguished from a joint adventure, to wit:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal partnership, with no
firm name and no legal personality. In a joint account, the participating merchants can transact business under
their own name, and can be individually liable therefor.
(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the business
of pursuing to a successful termination may continue for a number of years; a partnership generally relates to a
continuing business of various transactions of a certain kind. 21
A joint venture "presupposes generally a parity of standing between the joint co-ventures or partners, in which each party
has an equal proprietary interest in the capital or property contributed, and where each party exercises equal rights in the
conduct of the business."22 Nonetheless, in Aurbach, et. al. v. Sanitary Wares Manufacturing Corporation, et. al., 23 we
expressed the view that a joint venture may be likened to a particular partnership, thus:
The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been
generally understood to mean an organization formed for some temporary purpose. (Gates v. Megargel, 266 Fed.
811 [1920]) It is hardly distinguishable from the partnership, since their elements are similar — community of
interest in the business, sharing of profits and losses, and a mutual right of control. (Blackner v. McDermott, 176
F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P.2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288
P.2d. 12 289 P.2d. 242 [1955]). The main distinction cited by most opinions in common law jurisdiction is that
the partnership contemplates a general business with some degree of continuity, while the joint venture is formed
for the execution of a single transaction, and is thus of a temporary nature. (Tufts v. Mann. 116 Cal. App. 170, 2
P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]).
This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be
particular or universal, and a particular partnership may have for its object a specific undertaking. (Art. 1783,
Page 68 of 102
Civil Code). It would seem therefore that under Philippine law, a joint venture is a form of partnership and should
thus be governed by the law of partnerships. The Supreme Court has however recognized a distinction between
these two business forms, and has held that although a corporation cannot enter into a partnership contract, it may
however engage in a joint venture with others. (At p. 12, Tuazon v. Bolaños, 95 Phil. 906 [1954]) (Campos and
Lopez-Campos Comments, Notes and Selected Cases, Corporation Code 1981).
Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of partnership but there
is none. The alleged partnership, though, was never formally organized. In addition, petitioners point out that the New
Civil Code was not yet in effect when the partnership was allegedly formed sometime in 1945, although the contrary may
well be argued that nothing prevented the parties from complying with the provisions of the New Civil Code when it took
effect on August 30, 1950. But all that is in the past. The net effect, however, is that we are asked to determine whether a
partnership existed based purely on circumstantial evidence. A review of the record persuades us that the Court of
Appeals correctly reversed the decision of the trial court. The evidence presented by petitioners falls short of the quantum
of proof required to establish a partnership.
Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could have expounded on
the precise nature of the business relationship between them. In the absence of evidence, we cannot accept as an
established fact that Tan Eng Kee allegedly contributed his resources to a common fund for the purpose of establishing a
partnership. The testimonies to that effect of petitioners' witnesses is directly controverted by Tan Eng Lay. It should be
noted that it is not with the number of witnesses wherein preponderance lies; 24 the quality of their testimonies is to be
considered. None of petitioners' witnesses could suitably account for the beginnings of Benguet Lumber Company, except
perhaps for Dionisio Peralta whose deceased wife was related to Matilde Abubo. 25 He stated that when he met Tan Eng
Kee after the liberation, the latter asked the former to accompany him to get 80 pieces of G.I. sheets supposedly owned by
both brothers.26 Tan Eng Lay, however, denied knowledge of this meeting or of the conversation between Peralta and his
brother.27 Tan Eng Lay consistently testified that he had his business and his brother had his, that it was only later on that
his said brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or co-possession (specifically here,
of the G.I. sheets) is not an indicium of the existence of a partnership. 28
Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in existence, Tan Eng
Kee never asked for an accounting. The essence of a partnership is that the partners share in the profits and losses. 29 Each
has the right to demand an accounting as long as the partnership exists. 30 We have allowed a scenario wherein "[i]f
excellent relations exist among the partners at the start of the business and all the partners are more interested in seeing the
firm grow rather than get immediate returns, a deferment of sharing in the profits is perfectly plausible." 31 But in the
situation in the case at bar, the deferment, if any, had gone on too long to be plausible. A person is presumed to take
ordinary care of his concerns.32 As we explained in another case:
In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second place, she did not furnish
any help or intervention in the management of the theatre. In the third place, it does not appear that she has even
demanded from defendant any accounting of the expenses and earnings of the business. Were she really a
partner, her first concern should have been to find out how the business was progressing, whether the expenses
were legitimate, whether the earnings were correct, etc. She was absolutely silent with respect to any of the acts
that a partner should have done; all that she did was to receive her share of P3,000.00 a month, which cannot be
interpreted in any manner than a payment for the use of the premises which she had leased from the owners.
Clearly, plaintiff had always acted in accordance with the original letter of defendant of June 17, 1945 (Exh. "A"),
which shows that both parties considered this offer as the real contract between them. 33 [emphasis supplied]
A demand for periodic accounting is evidence of a partnership. 34 During his lifetime, Tan Eng Kee appeared never to have
made any such demand for accounting from his brother, Tang Eng Lay.
This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of payrolls purporting to show that
Tan Eng Kee was an ordinary employee of Benguet Lumber, as it was then called. The authenticity of these documents
was questioned by petitioners, to the extent that they filed criminal charges against Tan Eng Lay and his wife and
children. As aforesaid, the criminal cases were dismissed for insufficiency of evidence. Exhibits "4" to "4-U" in fact
shows that Tan Eng Kee received sums as wages of an employee. In connection therewith, Article 1769 of the Civil Code
provides:
In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third
persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-
have a joint or common right or interest in any property which the returns are derived;
Page 69 of 102
(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a partner in
the business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by installment or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a business or other property by installments or
otherwise.
In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an employee, not a partner. Even
if the payrolls as evidence were discarded, petitioners would still be back to square one, so to speak, since they did not
present and offer evidence that would show that Tan Eng Kee received amounts of money allegedly representing his share
in the profits of the enterprise. Petitioners failed to show how much their father, Tan Eng Kee, received, if any, as his
share in the profits of Benguet Lumber Company for any particular period. Hence, they failed to prove that Tan Eng Kee
and Tan Eng Lay intended to divide the profits of the business between themselves, which is one of the essential features
of a partnership.
Nevertheless, petitioners would still want us to infer or believe the alleged existence of a partnership from this set of
circumstances: that Tan Eng Lay and Tan Eng Kee were commanding the employees; that both were supervising the
employees; that both were the ones who determined the price at which the stocks were to be sold; and that both placed
orders to the suppliers of the Benguet Lumber Company. They also point out that the families of the brothers Tan Eng
Kee and Tan Eng Lay lived at the Benguet Lumber Company compound, a privilege not extended to its ordinary
employees.
However, private respondent counters that:
Petitioners seem to have missed the point in asserting that the above enumerated powers and privileges granted in
favor of Tan Eng Kee, were indicative of his being a partner in Benguet Lumber for the following reasons:
(i) even a mere supervisor in a company, factory or store gives orders and directions to his subordinates. So long,
therefore, that an employee's position is higher in rank, it is not unusual that he orders around those lower in rank.
(ii) even a messenger or other trusted employee, over whom confidence is reposed by the owner, can order
materials from suppliers for and in behalf of Benguet Lumber. Furthermore, even a partner does not necessarily
have to perform this particular task. It is, thus, not an indication that Tan Eng Kee was a partner.
(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this privilege was not
accorded to other employees, the undisputed fact remains that Tan Eng Kee is the brother of Tan Eng Lay.
Naturally, close personal relations existed between them. Whatever privileges Tan Eng Lay gave his brother, and
which were not given the other employees, only proves the kindness and generosity of Tan Eng Lay towards a
blood relative.
(iv) and even if it is assumed that Tan Eng Kee was quarreling with Tan Eng Lay in connection with the pricing
of stocks, this does not adequately prove the existence of a partnership relation between them. Even highly
confidential employees and the owners of a company sometimes argue with respect to certain matters which, in
no way indicates that they are partners as to each other. 35
In the instant case, we find private respondent's arguments to be well-taken. Where circumstances taken singly may be
inadequate to prove the intent to form a partnership, nevertheless, the collective effect of these circumstances may be such
as to support a finding of the existence of the parties' intent. 36 Yet, in the case at bench, even the aforesaid circumstances
when taken together are not persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was involved in
the operations of Benguet Lumber, but in what capacity is unclear. We cannot discount the likelihood that as a member of
the family, he occupied a niche above the rank-and-file employees. He would have enjoyed liberties otherwise unavailable
were he not kin, such as his residence in the Benguet Lumber Company compound. He would have moral, if not actual,
superiority over his fellow employees, thereby entitling him to exercise powers of supervision. It may even be that among
his duties is to place orders with suppliers. Again, the circumstances proffered by petitioners do not provide a logical
nexus to the conclusion desired; these are not inconsistent with the powers and duties of a manager, even in a business
organized and run as informally as Benguet Lumber Company.
There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of. Hence, the
petition must fail.
WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is
hereby AFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.
Page 70 of 102
FIRST DIVISION
G.R. No. 127405 September 20, 2001
MARJORIE TOCAO and WILLIAM T. BELO, petitioners,
vs.
COURT OF APPEALS and NENITA A. ANAY, respondent.
RESOLUTION
YNARES-SANTIAGO, J.:
The inherent powers of a Court to amend and control its processes and orders so as to make them conformable to law and
justice includes the right to reverse itself, especially when in its honest opinion it has committed an error or mistake in
judgment, and that to adhere to its decision will cause injustice to a party litigant. 1
On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed a Motion for Reconsideration of our
Decision dated October 4, 2000. They maintain that there was no partnership between petitioner Belo, on the one hand,
and respondent Nenita A. Anay, on the other hand; and that the latter being merely an employee of petitioner Tocao.
After a careful review of the evidence presented, we are convinced that, indeed, petitioner Belo acted merely as guarantor
of Geminesse Enterprise. This was categorically affirmed by respondent's own witness, Elizabeth Bantilan, during her
cross-examination. Furthermore, Bantilan testified that it was Peter Lo who was the company's financier. Thus:
Q - You mentioned a while ago the name William Belo. Now, what is the role of William Belo with
Geminesse Enterprise?
A - William Belo is the friend of Marjorie Tocao and he was the guarantor of the company.
Q - What do you mean by guarantor?
A - He guarantees the stocks that she owes somebody who is Peter Lo and he acts as guarantor for us. We can
borrow money from him.
Q - You mentioned a certain Peter Lo. Who is this Peter Lo?
A - Peter Lo is based in Singapore.
Q - What is the role of Peter Lo in the Geminesse Enterprise?
A - He is the one fixing our orders that open the L/C.
Q - You mean Peter Lo is the financier?
A - Yes, he is the financier.
Q - And the defendant William Belo is merely the guarantor of Geminesse Enterprise, am I correct?
A - Yes, sir2
The foregoing was neither refuted nor contradicted by respondent's evidence. It should be recalled that the business
relationship created between petitioner Tocao and respondent Anay was an informal partnership, which was not even
recorded with the Securities and Exchange Commission. As such, it was understandable that Belo, who was after all
petitioner Tocao's good friend and confidante, would occasionally participate in the affairs of the business, although never
in a formal or official capacity.3 Again, respondent's witness, Elizabeth Bantilan, confirmed that petitioner Belo's presence
in Geminesse Enterprise's meetings was merely as guarantor of the company and to help petitioner Tocao. 4
Furthermore, no evidence was presented to show that petitioner Belo participated in the profits of the business enterprise.
Respondent herself professed lack of knowledge that petitioner Belo received any share in the net income of the
partnership.5 On the other hand, petitioner Tocao declared that petitioner Belo was not entitled to any share in the profits
of Geminesse Enterprise.6 With no participation in the profits, petitioner Belo cannot be deemed a partner since the
essence of a partnership is that the partners share in the profits and losses. 7
Consequently, inasmuch as petitioner Belo was not a partner in Geminesse Enterprise, respondent had no cause of action
against him and her complaint against him should accordingly be dismissed.
As regards the award of damages, petitioners argue that respondent should be deemed in bad faith for failing to account
for stocks of Geminesse Enterprise amounting to P208,250.00 and that, accordingly, her claim for damages should be
barred to that extent. We do not agree. Given the circumstances surrounding private respondent's sudden ouster from the
partnership by petitioner Tocao, her act of withholding whatever stocks were in her possession and control was justified,
if only to serve as security for her claims against the partnership. However, while we do not agree that the same renders
private respondent in bad faith and should bar her claim for damages, we find that the said sum of P208,250.00 should be
deducted from whatever amount is finally adjudged in her favor on the basis of the formal account of the partnership
affairs to be submitted to the Regional Trial Court.
WHEREFORE, based on the foregoing, the Motion for Reconsideration of petitioners is PARTIALLY GRANTED. The
Regional Trial Court of Makati is hereby ordered to DISMISS the complaint, docketed as Civil Case No. 88-509, as
against petitioner William T. Belo only. The sum of P208,250.00 shall be deducted from whatever amount petitioner
Marjorie Tocao shall be held liable to pay respondent after the normal accounting of the partnership affairs.
Page 71 of 102
SO ORDERED.
Page 72 of 102

SUPREME COURT
Manila
EN BANC
G.R. No. L-12541 August 28, 1959
ROSARIO U. YULO, assisted by her husband JOSE C. YULO, plaintiffs-appellants,
vs.
YANG CHIAO SENG, defendant-appellee.
Punzalan, Yabut, Eusebio & Tiburcio for appellants.
Augusto Francisco and Julian T. Ocampo for appellee.
LABRADOR, J.:
Appeal from the judgment of the Court of First Instance of Manila, Hon. Bienvenido A. Tan, presiding, dismissing
plaintiff's complaint as well as defendant's counterclaim. The appeal is prosecuted by plaintiff.
The record discloses that on June 17, 1945, defendant Yang Chiao Seng wrote a letter to the palintiff Mrs. Rosario U.
Yulo, proposing the formation of a partnership between them to run and operate a theatre on the premises occupied by
former Cine Oro at Plaza Sta. Cruz, Manila. The principal conditions of the offer are (1) that Yang Chiao Seng guarantees
Mrs. Yulo a monthly participation of P3,000 payable quarterly in advance within the first 15 days of each quarter, (2) that
the partnership shall be for a period of two years and six months, starting from July 1, 1945 to December 31, 1947, with
the condition that if the land is expropriated or rendered impracticable for the business, or if the owner constructs a
permanent building thereon, or Mrs. Yulo's right of lease is terminated by the owner, then the partnership shall be
terminated even if the period for which the partnership was agreed to be established has not yet expired; (3) that Mrs.
Yulo is authorized personally to conduct such business in the lobby of the building as is ordinarily carried on in lobbies of
theatres in operation, provided the said business may not obstruct the free ingress and agrees of patrons of the theatre; (4)
that after December 31, 1947, all improvements placed by the partnership shall belong to Mrs. Yulo, but if the partnership
agreement is terminated before the lapse of one and a half years period under any of the causes mentioned in paragraph
(2), then Yang Chiao Seng shall have the right to remove and take away all improvements that the partnership may place
in the premises.
Pursuant to the above offer, which plaintiff evidently accepted, the parties executed a partnership agreement establishing
the "Yang & Company, Limited," which was to exist from July 1, 1945 to December 31, 1947. It states that it will conduct
and carry on the business of operating a theatre for the exhibition of motion and talking pictures. The capital is fixed at
P100,000, P80,000 of which is to be furnished by Yang Chiao Seng and P20,000, by Mrs. Yulo. All gains and profits are
to be distributed among the partners in the same proportion as their capital contribution and the liability of Mrs. Yulo, in
case of loss, shall be limited to her capital contribution (Exh. "B").
In June , 1946, they executed a supplementary agreement, extending the partnership for a period of three years beginning
January 1, 1948 to December 31, 1950. The benefits are to be divided between them at the rate of 50-50 and after
December 31, 1950, the showhouse building shall belong exclusively to the second party, Mrs. Yulo.
The land on which the theatre was constructed was leased by plaintiff Mrs. Yulo from Emilia Carrion Santa Marina and
Maria Carrion Santa Marina. In the contract of lease it was stipulated that the lease shall continue for an indefinite period
of time, but that after one year the lease may be cancelled by either party by written notice to the other party at least 90
days before the date of cancellation. The last contract was executed between the owners and Mrs. Yulo on April 5, 1948.
But on April 12, 1949, the attorney for the owners notified Mrs. Yulo of the owner's desire to cancel the contract of lease
on July 31, 1949. In view of the above notice, Mrs. Yulo and her husband brought a civil action to the Court of First
Instance of Manila on July 3, 1949 to declare the lease of the premises. On February 9, 1950, the Municipal Court of
Manila rendered judgment ordering the ejectment of Mrs. Yulo and Mr. Yang. The judgment was appealed. In the Court
of First Instance, the two cases were afterwards heard jointly, and judgment was rendered dismissing the complaint of
Mrs. Yulo and her husband, and declaring the contract of lease of the premises terminated as of July 31, 1949, and fixing
the reasonable monthly rentals of said premises at P100. Both parties appealed from said decision and the Court of
Appeals, on April 30, 1955, affirmed the judgment.
On October 27, 1950, Mrs. Yulo demanded from Yang Chiao Seng her share in the profits of the business. Yang answered
the letter saying that upon the advice of his counsel he had to suspend the payment (of the rentals) because of the
pendency of the ejectment suit by the owners of the land against Mrs. Yulo. In this letter Yang alleges that inasmuch as he
is a sublessee and inasmuch as Mrs. Yulo has not paid to the lessors the rentals from August, 1949, he was retaining the
rentals to make good to the landowners the rentals due from Mrs. Yulo in arrears (Exh. "E").
In view of the refusal of Yang to pay her the amount agreed upon, Mrs. Yulo instituted this action on May 26, 1954,
alleging the existence of a partnership between them and that the defendant Yang Chiao Seng has refused to pay her share
Page 73 of 102
from December, 1949 to December, 1950; that after December 31, 1950 the partnership between Mrs. Yulo and Yang
terminated, as a result of which, plaintiff became the absolute owner of the building occupied by the Cine Astor; that the
reasonable rental that the defendant should pay therefor from January, 1951 is P5,000; that the defendant has acted
maliciously and refuses to pay the participation of the plaintiff in the profits of the business amounting to P35,000 from
November, 1949 to October, 1950, and that as a result of such bad faith and malice on the part of the defendant, Mrs.
Yulo has suffered damages in the amount of P160,000 and exemplary damages to the extent of P5,000. The prayer
includes a demand for the payment of the above sums plus the sum of P10,000 for the attorney's fees.
In answer to the complaint, defendant alleges that the real agreement between the plaintiff and the defendant was one of
lease and not of partnership; that the partnership was adopted as a subterfuge to get around the prohibition contained in
the contract of lease between the owners and the plaintiff against the sublease of the said property. As to the other claims,
he denies the same and alleges that the fair rental value of the land is only P1,100. By way of counterclaim he alleges that
by reason of an attachment issued against the properties of the defendant the latter has suffered damages amounting to
P100,000.
The first hearing was had on April 19, 1955, at which time only the plaintiff appeared. The court heard evidence of the
plaintiff in the absence of the defendant and thereafter rendered judgment ordering the defendant to pay to the plaintiff
P41,000 for her participation in the business up to December, 1950; P5,000 as monthly rental for the use and occupation
of the building from January 1, 1951 until defendant vacates the same, and P3,000 for the use and occupation of the lobby
from July 1, 1945 until defendant vacates the property. This decision, however, was set aside on a motion for
reconsideration. In said motion it is claimed that defendant failed to appear at the hearing because of his honest belief that
a joint petition for postponement filed by both parties, in view of a possible amicable settlement, would be granted; that in
view of the decision of the Court of Appeals in two previous cases between the owners of the land and the plaintiff
Rosario Yulo, the plaintiff has no right to claim the alleged participation in the profit of the business, etc. The court,
finding the above motion, well-founded, set aside its decision and a new trial was held. After trial the court rendered the
decision making the following findings: that it is not true that a partnership was created between the plaintiff and the
defendant because defendant has not actually contributed the sum mentioned in the Articles of Partnership, or any other
amount; that the real agreement between the plaintiff and the defendant is not of the partnership but one of the lease for
the reason that under the agreement the plaintiff did not share either in the profits or in the losses of the business as
required by Article 1769 of the Civil Code; and that the fact that plaintiff was granted a "guaranteed participation" in the
profits also belies the supposed existence of a partnership between them. It. therefore, denied plaintiff's claim for damages
or supposed participation in the profits.
As to her claim for damages for the refusal of the defendant to allow the use of the supposed lobby of the theatre, the court
after ocular inspection found that the said lobby was very narrow space leading to the balcony of the theatre which could
not be used for business purposes under existing ordinances of the City of Manila because it would constitute a hazard and
danger to the patrons of the theatre. The court, therefore, dismissed the complaint; so did it dismiss the defendant's
counterclaim, on the ground that the defendant failed to present sufficient evidence to sustain the same. It is against this
decision that the appeal has been prosecuted by plaintiff to this Court.
The first assignment of error imputed to the trial court is its order setting aside its former decision and allowing a new
trial. This assignment of error is without merit. As that parties agreed to postpone the trial because of a probable amicable
settlement, the plaintiff could not take advantage of defendant's absence at the time fixed for the hearing. The lower court,
therefore, did not err in setting aside its former judgment. The final result of the hearing shown by the decision indicates
that the setting aside of the previous decision was in the interest of justice.
In the second assignment of error plaintiff-appellant claims that the lower court erred in not striking out the evidence
offered by the defendant-appellee to prove that the relation between him and the plaintiff is one of the sublease and not of
partnership. The action of the lower court in admitting evidence is justified by the express allegation in the defendant's
answer that the agreement set forth in the complaint was one of lease and not of partnership, and that the partnership
formed was adopted in view of a prohibition contained in plaintiff's lease against a sublease of the property.
The most important issue raised in the appeal is that contained in the fourth assignment of error, to the effect that the
lower court erred in holding that the written contracts, Exhs. "A", "B", and "C, between plaintiff and defendant, are one of
lease and not of partnership. We have gone over the evidence and we fully agree with the conclusion of the trial court that
the agreement was a sublease, not a partnership. The following are the requisites of partnership: (1) two or more persons
who bind themselves to contribute money, property, or industry to a common fund; (2) intention on the part of the
partners to divide the profits among themselves. (Art. 1767, Civil Code.).
In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she did not furnish any help
or intervention in the management of the theatre. In the third place, it does not appear that she has ever demanded from
defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concern should
have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnings were
Page 74 of 102
correct, etc. She was absolutely silent with respect to any of the acts that a partner should have done; all that she did was
to receive her share of P3,000 a month, which can not be interpreted in any manner than a payment for the use of the
premises which she had leased from the owners. Clearly, plaintiff had always acted in accordance with the original letter
of defendant of June 17, 1945 (Exh. "A"), which shows that both parties considered this offer as the real contract between
them.
Plaintiff claims the sum of P41,000 as representing her share or participation in the business from December, 1949. But
the original letter of the defendant, Exh. "A", expressly states that the agreement between the plaintiff and the defendant
was to end upon the termination of the right of the plaintiff to the lease. Plaintiff's right having terminated in July, 1949 as
found by the Court of Appeals, the partnership agreement or the agreement for her to receive a participation of P3,000
automatically ceased as of said date.
We find no error in the judgment of the court below and we affirm it in toto, with costs against plaintiff-appellant.
Page 75 of 102

SUPREME COURT
Manila
EN BANC
G.R. No. L-9996 October 15, 1957
EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor Felicisimo
R. Rosete for Respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a decision
of the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer's tax
and the residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent's assessment for the
same in the total amount of P6,878.34, which is hereby affirmed and the petition for review filed by petitioner is
hereby dismissed with costs against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together with their
personal monies was used by them for the purpose of buying real properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq. m.
including improvements thereon from the sum of P100,000.00; this property has an assessed value of P57,517.00
as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area of
3,718.40 sq. m. including improvements thereon for P130,000.00; this property has an assessed value of
P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m. including
improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including improvements
thereon for P237,234.34. This property has an assessed value of P59,140.00 as of 1948;
6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to 'manage their
properties with full power to lease; to collect and receive rents; to issue receipts therefor; in default of such
payment, to bring suits against the defaulting tenants; to sign all letters, contracts, etc., for and in their behalf, and
to endorse and deposit all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners had the same rented or leases to
various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total amount collected as rents on
their real properties was P9,599.00 while the expenses amounted to P3,650.00 thereby leaving them a net rental
income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount was
deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was deducted the
sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded the payment of income
tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949, computed,
according to assessment made by said officer, as follows:
INCOME TAXES
1945 14.84
1946 1,144.71
1947 10.34
Page 76 of 102
1948 1,912.30
1949 1,575.90
Total including surcharge and P6,157.09

compromise
REAL ESTATE DEALER'S FIXED TAX
1946 P37.50
1947 150.00
1948 150.00
1949 150.00
Total including penalty P527.00
RESIDENCE TAXES OF CORPORATION
1945 P38.75
1946 38.75
1947 38.75
1948 38.75
1949 38.75
Total including surcharge P193.75
TOTAL TAXES DUE P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, whereupon they
instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in his
letter of demand dated September 24, 1954" be reversed, and that they be absolved from the payment of the taxes in
question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the respondent, and a petition
for reconsideration and new trial having been subsequently denied, the case is now before Us for review at the instance of
the petitioners.
The issue in this case whether petitioners are subject to the tax on corporations provided for in section 24 of
Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for
corporations and the real estate dealers fixed tax. With respect to the tax on corporations, the issue hinges on the meaning
of the terms "corporation" and "partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid annually upon the total
net income received in the preceding taxable year from all sources by every corporation organized in, or existing
under the laws of the Philippines, no matter how created or organized but not including duly registered general
co-partnerships (compañias colectivas), a tax upon such income equal to the sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not include
duly registered general copartnerships. (compañias colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money, properly, or industry to
a common fund, with the intention of dividing the profits among themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money,
property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element
is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and
Page 77 of 102
property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all
the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate
transactions for monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not property inherited by
them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof
in order to establish said common fund.
2. They invested the same, not merely not merely in one transaction, but in a series of transactions. On February
2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was
soon followed on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions
undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly
indicative of a pattern or common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioners in February, 1943. In other
words, one cannot but perceive a character of habitually peculiar to business transactions engaged in the purpose
of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The
properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that
there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one person, namely Simeon
Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts,
and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if
the same belonged to a corporation or business and enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years,
since the first property was acquired, and over twelve (12) years, since Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already
adverted to, or on the causes for its continued existence. They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective
effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein.
Only one or two of the aforementioned circumstances were present in the cases cited by petitioners herein, and, hence,
those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts performed by
them, a legal entity, with a personality independent of that of its members, did not come into existence, and some of the
characteristics of partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court of Tax
Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and different
from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the
technical sense of the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships which constitute precisely one of the most typical forms of partnerships in this jurisdiction.
Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or
organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes,
among other, joint accounts, (cuentas en participation)" and "associations," none of which has a legal personality of its
own, independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein referred to. In fact, as above stated, "duly registered general
copartnerships" — which are possessed of the aforementioned personality — have been expressly excluded by law
(sections 24 and 84 [b] from the connotation of the term "corporation" It may not be amiss to add that petitioners'
allegation to the effect that their liability in connection with the leasing of the lots above referred to, under the
management of one person — even if true, on which we express no opinion — tends to increase the similarity between
the nature of their venture and that corporations, and is, therefore, an additional argument in favor of the imposition of
said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from "partnerships". By
specific provisions of said laws, such "corporations" include "associations, joint-stock companies and insurance
companies." However, the term "association" is not used in the aforementioned laws.
Page 78 of 102
. . . in any narrow or technical sense. It includes any organization, created for the transaction of designed affairs,
or the attainment of some object, which like a corporation, continues notwithstanding that its members or
participants change, and the affairs of which, like corporate affairs, are conducted by a single individual, a
committee, a board, or some other group, acting in a representative capacity. It is immaterial whether such
organization is created by an agreement, a declaration of trust, a statute, or otherwise. It includes a voluntary
association, a joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust, a 'common law' trust,
and 'investment' trust (whether of the fixed or the management type), an interinsuarance exchange operating
through an attorney in fact, a partnership association, and any other type of organization (by whatever name
known) which is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A Mertens Law of
Federal Income Taxation, p. 788; emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a partnership as
known at common law but, as well, a syndicate, group, pool, joint venture or other unincorporated organizations
which carries on any business financial operation, or venture, and which is not, within the meaning of the Code, a
trust, estate, or a corporation. . . (7A Merten's Law of Federal Income taxation, p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization,
through or by means of which any business, financial operation, or venture is carried on, . . .. ( 8 Merten's Law of
Federal Income Taxation, p. 562 Note 63; emphasis supplied.) .
For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships — with the
exception only of duly registered general copartnerships — within the purview of the term "corporation." It is, therefore,
clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned and are subject to the
income tax for corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic or
resident foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of five pesos
and an annual additional tax which in no case, shall exceed one thousand pesos, in accordance with the following
schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account (cuentas en
participacion), association or insurance company, no matter how created or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our National Internal
Revenue Code (commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day immediately
after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and
"partnership" are used in both statutes with substantially the same meaning. Consequently, petitioners are subject, also, to
the residence tax for corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a period of
over twelve years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged from P9,599 to
P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real
estate dealers," inasmuch as, pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing, or renting
property or his own account as principal and holding himself out as a full or part time dealer in real estate or as
an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos
or more a year. . . (emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners herein.
It is so ordered.
Page 79 of 102

SUPREME COURT
Manila
EN BANC
G.R. No. L-19342 May 25, 1972
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B. OÑA, LUZ
B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and Special Attorney
Purificacion Ureta for respondent.
BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above, holding
that petitioners have constituted an unregistered partnership and are, therefore, subject to the payment of the deficiency
corporate income taxes assessed against them by respondent Commissioner of Internal Revenue for the years 1955 and
1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from December 15, 1958, subject to the
provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of Republic Act No. 2343 and the
costs of the suit,1 as well as the resolution of said court denying petitioners' motion for reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and her five
children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila for the
settlement of her estate. Later, Lorenzo T. Oña the surviving spouse was appointed administrator of the
estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator submitted
the project of partition, which was approved by the Court on May 16, 1949 (See Exhibit K). Because
three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oña, were still minors when the
project of partition was approved, Lorenzo T. Oña, their father and administrator of the estate, filed a
petition in Civil Case No. 9637 of the Court of First Instance of Manila for appointment as guardian of
said minors. On November 14, 1949, the Court appointed him guardian of the persons and property of the
aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have undivided one-
half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses with a total
assessed value of P17,590.00 and an undetermined amount to be collected from the War Damage
Commission. Later, they received from said Commission the amount of P50,000.00, more or less. This
amount was not divided among them but was used in the rehabilitation of properties owned by them in
common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were acquired after the death of the
decedent with money borrowed from the Philippine Trust Company in the amount of P72,173.00 (t.s.n.,
p. 24; Exhibit 3, pp. 31-34 BIR rec.).
The project of partition also shows that the estate shares equally with Lorenzo T. Oña, the administrator
thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter with the approval of
the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no attempt was made to
divide the properties therein listed. Instead, the properties remained under the management of Lorenzo T.
Oña who used said properties in business by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners'
properties and investments gradually increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can
be gleaned from the following year-end balances:
Y Invest Lan Buil
e ment d din
a g
r
Acco Acc Acc
Page 80 of 102
unt oun oun

t t
1949 — P87,860.00 P17,590.00
1950 P24,657.65 128,566.72 96,076.26
1951 51,301.31 120,349.28 110,605.11
1952 67,927.52 87,065.28 152,674.39
1953 61,258.27 84,925.68 161,463.83
1954 63,623.37 99,001.20 167,962.04
1955 100,786.00 120,249.78 169,262.52
1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits from installment sales of
subdivided lots, profits from sales of stocks, dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32,
BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of account kept by Lorenzo T.
Oña where the corresponding shares of the petitioners in the net income for the year are also known.
Every year, petitioners returned for income tax purposes their shares in the net income derived from said
properties and securities and/or from transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-26).
However, petitioners did not actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98,
100). The income was always left in the hands of Lorenzo T. Oña who, as heretofore pointed out,
invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership and therefore, subject to the corporate income tax, pursuant
to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed against the
petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956,
respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested
against the assessment and asked for reconsideration of the ruling of respondent that they have formed an
unregistered partnership. Finding no merit in petitioners' request, respondent denied it (See Exhibit 17, p.
86, BIR rec.). (See pp. 1-4, Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89
Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of the
Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the
questioned assessment refers solely to the income tax proper for the years 1955 and 1956 and the
"Compromise for non-filing," the latter item obviously referring to the compromise in lieu of the criminal
liability for failure of petitioners to file the corporate income tax returns for said years. (See Exh. 17, page
86, BIR records). (Pp. 1-3, Annex C to Petition)
Page 81 of 102
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE
CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM
TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR
CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED
PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT
THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE
LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT
OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE
PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE
PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM THE
DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the Court of Tax
Appeals, should petitioners be considered as co-owners of the properties inherited by them from the deceased Julia
Buñales and the profits derived from transactions involving the same, or, must they be deemed to have formed an
unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2) Assuming
they have formed an unregistered partnership, should this not be only in the sense that they invested as a common fund the
profits earned by the properties owned by them in common and the loans granted to them upon the security of the said
properties, with the result that as far as their respective shares in the inheritance are concerned, the total income thereof
should be considered as that of co-owners and not of the unregistered partnership? And (3) assuming again that they are
taxable as an unregistered partnership, should not the various amounts already paid by them for the same years 1955 and
1956 as individual income taxes on their respective shares of the profits accruing from the properties they owned in
common be deducted from the deficiency corporate taxes, herein involved, assessed against such unregistered partnership
by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in interest
died way back on March 23, 1944 and the project of partition of her estate was judicially approved as early as May 16,
1949, and presumably petitioners have been holding their respective shares in their inheritance since those dates
admittedly under the administration or management of the head of the family, the widower and father Lorenzo T. Oña, the
assessment in question refers to the later years 1955 and 1956. We believe this point to be important because, apparently,
at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal Revenue did treat petitioners as co-
owners, not liable to corporate tax, and it was only from 1955 that he considered them as having formed an unregistered
partnership. At least, there is nothing in the record indicating that an earlier assessment had already been made. Such
being the case, and We see no reason how it could be otherwise, it is easily understandable why petitioners' position that
they are co-owners and not unregistered co-partners, for the purposes of the impugned assessment, cannot be upheld.
Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed earlier by the Bureau of
Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to the
project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oña who used said
properties in business by leasing or selling them and investing the income derived therefrom and the proceed from the
sales thereof in real properties and securities," as a result of which said properties and investments steadily increased
yearly from P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to P175,028.68 in "investment
account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956. And all these became possible
because, admittedly, petitioners never actually received any share of the income or profits from Lorenzo T. Oña and
instead, they allowed him to continue using said shares as part of the common fund for their ventures, even as they paid
Page 82 of 102
the corresponding income taxes on the basis of their respective shares of the profits of their common business as reported
by the said Lorenzo T. Oña.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the
properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said
properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the
purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided
among petitioners proportionately in accordance with their respective shares in the inheritance. In these circumstances, it
is Our considered view that from the moment petitioners allowed not only the incomes from their respective shares of the
inheritance but even the inherited properties themselves to be used by Lorenzo T. Oña as a common fund in undertaking
several transactions or in business, with the intention of deriving profit to be shared by them proportionally, such act was
tantamonut to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered
partnership within the purview of the above-mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners rather
than unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the partition and
distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs, obviously, without
them becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-owners continues
until the inheritance is actually and physically distributed among the heirs, for it is easily conceivable that after knowing
their respective shares in the partition, they might decide to continue holding said shares under the common management
of the administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if this were to
be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render meaningless Sections 24
and 84(b) of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the appellants
therein to be unregistered co-partners for tax purposes, that their common fund "was not something they found already in
existence" and that "it was not a property inherited by them pro indiviso," but it is certainly far fetched to argue therefrom,
as petitioners are doing here, that ergo, in all instances where an inheritance is not actually divided, there can be no
unregistered co-partnership. As already indicated, for tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the said common properties and/or the incomes
derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or
approved by the court in the corresponding testate or intestate proceeding. The reason for this is simple. From the moment
of such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for
each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly
he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held
in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion
to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed. This is exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The sharing of
gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common
right or interest in any property from which the returns are derived," and, for that matter, on any other provision of said
code on partnerships is unavailing. In Evangelista, supra, this Court clearly differentiated the concept of partnerships
under the Civil Code from that of unregistered partnerships which are considered as "corporations" under Sections 24 and
84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice, elucidated on this point
thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations
which are not necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24
of said Code exempts from the aforementioned tax "duly registered general partnerships," which
constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined
in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or
organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any
of the standard forms, or in confirmity with the usual requirements of the law on partnerships, in order
that one could be deemed constituted for purposes of the tax on corporation. Again, pursuant to said
section 84(b),the term "corporation" includes, among others, "joint accounts,(cuentas en participacion)"
and "associations", none of which has a legal personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that personality as a condition essential to the
Page 83 of 102
existence of the partnerships therein referred to. In fact, as above stated, "duly registered general co-
partnerships" — which are possessed of the aforementioned personality — have been expressly excluded
by law (sections 24 and 84[b]) from the connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it includes not
only a partnership as known in common law but, as well, a syndicate, group, pool, joint
venture, or other unincorporated organization which carries on any business, financial
operation, or venture, and which is not, within the meaning of the Code, a trust, estate, or
a corporation. ... . (7A Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on. ... . (8 Merten's Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships — with the exception only of duly registered general copartnerships — within the purview
of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership,
insofar as said Code is concerned, and are subject to the income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L-24020-
21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the corporate taxes in
question, of their inherited properties from those acquired by them subsequently, We consider as justified the following
ratiocination of the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered partnership, the
holding should be limited to the business engaged in apart from the properties inherited by petitioners. In
other words, the taxable income of the partnership should be limited to the income derived from the
acquisition and sale of real properties and corporate securities and should not include the income derived
from the inherited properties. It is admitted that the inherited properties and the income derived therefrom
were used in the business of buying and selling other real properties and corporate securities.
Accordingly, the partnership income must include not only the income derived from the purchase and sale
of other properties but also the income of the inherited properties.
Besides, as already observed earlier, the income derived from inherited properties may be considered as individual income
of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but the moment
their respective known shares are used as part of the common assets of the heirs to be used in making profits, it is but
proper that the income of such shares should be considered as the part of the taxable income of an unregistered
partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court. Pertinently, the
court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the herein
petitioners have formed an unregistered partnership and, therefore, have to be taxed as
such, it might be recalled that the petitioners in their individual income tax returns
reported their shares of the profits of the unregistered partnership. We think it only fair
and equitable that the various amounts paid by the individual petitioners as income tax on
their respective shares of the unregistered partnership should be deducted from the
deficiency income tax found by this Honorable Court against the unregistered
partnership. (page 7, Memorandum for the Petitioner in Support of Their Motion for
Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the partnership must be reduced
by the amounts of income tax paid by each petitioner on his share of partnership profits. This is not
correct; rather, it should be the other way around. The partnership profits distributable to the partners
(petitioners herein) should be reduced by the amounts of income tax assessed against the partnership.
Consequently, each of the petitioners in his individual capacity overpaid his income tax for the years in
question, but the income tax due from the partnership has been correctly assessed. Since the individual
Page 84 of 102
income tax liabilities of petitioners are not in issue in this proceeding, it is not proper for the Court to pass
upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as individual
income tax cannot be credited as part payment of the taxes herein in question. It is argued that to sanction the view of the
Tax Court is to oblige petitioners to pay double income tax on the same income, and, worse, considering the time that has
lapsed since they paid their individual income taxes, they may already be barred by prescription from recovering their
overpayments in a separate action. We do not agree. As We see it, the case of petitioners as regards the point under
discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the failure to pay the corporate taxes in
question was not deliberate. Of course, such taxpayer has the right to be reimbursed what he has erroneously paid, but the
law is very clear that the claim and action for such reimbursement are subject to the bar of prescription. And since the
period for the recovery of the excess income taxes in the case of herein petitioners has already lapsed, it would not seem
right to virtually disregard prescription merely upon the ground that the reason for the delay is precisely because the
taxpayers failed to make the proper return and payment of the corporate taxes legally due from them. In principle, it is but
proper not to allow any relaxation of the tax laws in favor of persons who are not exactly above suspicion in their conduct
vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with costs
against petitioners.
Page 85 of 102

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 172690 March 3, 2010
HEIRS OF JOSE LIM, represented by ELENITO LIM, Petitioners,
vs.
JULIET VILLA LIM, Respondent.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of Civil Procedure, assailing the Court
of Appeals (CA) Decision2 dated June 29, 2005, which reversed and set aside the decision 3 of the Regional Trial Court
(RTC) of Lucena City, dated April 12, 2004.
The facts of the case are as follows:
Petitioners are the heirs of the late Jose Lim (Jose), namely: Jose's widow Cresencia Palad (Cresencia); and their children
Elenito, Evelia, Imelda, Edelyna and Edison, all surnamed Lim (petitioners), represented by Elenito Lim (Elenito). They
filed a Complaint4 for Partition, Accounting and Damages against respondent Juliet Villa Lim (respondent), widow of the
late Elfledo Lim (Elfledo), who was the eldest son of Jose and Cresencia.
Petitioners alleged that Jose was the liaison officer of Interwood Sawmill in Cagsiay, Mauban, Quezon. Sometime in
1980, Jose, together with his friends Jimmy Yu (Jimmy) and Norberto Uy (Norberto), formed a partnership to engage in
the trucking business. Initially, with a contribution of ₱50,000.00 each, they purchased a truck to be used in the hauling
and transport of lumber of the sawmill. Jose managed the operations of this trucking business until his death on August
15, 1981. Thereafter, Jose's heirs, including Elfledo, and partners agreed to continue the business under the management
of Elfledo. The shares in the partnership profits and income that formed part of the estate of Jose were held in trust by
Elfledo, with petitioners' authority for Elfledo to use, purchase or acquire properties using said funds.
Petitioners also alleged that, at that time, Elfledo was a fresh commerce graduate serving as his father’s driver in the
trucking business. He was never a partner or an investor in the business and merely supervised the purchase of additional
trucks using the income from the trucking business of the partners. By the time the partnership ceased, it had nine trucks,
which were all registered in Elfledo's name. Petitioners asseverated that it was also through Elfledo’s management of the
partnership that he was able to purchase numerous real properties by using the profits derived therefrom, all of which
were registered in his name and that of respondent. In addition to the nine trucks, Elfledo also acquired five other motor
vehicles.
On May 18, 1995, Elfledo died, leaving respondent as his sole surviving heir. Petitioners claimed that respondent took
over the administration of the aforementioned properties, which belonged to the estate of Jose, without their consent and
approval. Claiming that they are co-owners of the properties, petitioners required respondent to submit an accounting of
all income, profits and rentals received from the estate of Elfledo, and to surrender the administration thereof. Respondent
refused; thus, the filing of this case.
Respondent traversed petitioners' allegations and claimed that Elfledo was himself a partner of Norberto and Jimmy.
Respondent also claimed that per testimony of Cresencia, sometime in 1980, Jose gave Elfledo ₱50,000.00 as the latter's
capital in an informal partnership with Jimmy and Norberto. When Elfledo and respondent got married in 1981, the
partnership only had one truck; but through the efforts of Elfledo, the business flourished. Other than this trucking
business, Elfledo, together with respondent, engaged in other business ventures. Thus, they were able to buy real
properties and to put up their own car assembly and repair business. When Norberto was ambushed and killed on July 16,
1993, the trucking business started to falter. When Elfledo died on May 18, 1995 due to a heart attack, respondent talked
to Jimmy and to the heirs of Norberto, as she could no longer run the business. Jimmy suggested that three out of the nine
trucks be given to him as his share, while the other three trucks be given to the heirs of Norberto. However, Norberto's
wife, Paquita Uy, was not interested in the vehicles. Thus, she sold the same to respondent, who paid for them in
installments.
Respondent also alleged that when Jose died in 1981, he left no known assets, and the partnership with Jimmy and
Norberto ceased upon his demise. Respondent also stressed that Jose left no properties that Elfledo could have held in
trust. Respondent maintained that all the properties involved in this case were purchased and acquired through her and her
husband’s joint efforts and hard work, and without any participation or contribution from petitioners or from Jose.
Respondent submitted that these are conjugal partnership properties; and thus, she had the right to refuse to render an
accounting for the income or profits of their own business.
Trial on the merits ensued. On April 12, 2004, the RTC rendered its decision in favor of petitioners, thus:
Page 86 of 102
WHEREFORE, premises considered, judgment is hereby rendered:

1) Ordering the partition of the above-mentioned properties equally between the plaintiffs and heirs of Jose Lim
and the defendant Juliet Villa-Lim; and
2) Ordering the defendant to submit an accounting of all incomes, profits and rentals received by her from said
properties.
SO ORDERED.
Aggrieved, respondent appealed to the CA.
On June 29, 2005, the CA reversed and set aside the RTC's decision, dismissing petitioners' complaint for lack of merit.
Undaunted, petitioners filed their Motion for Reconsideration, 5 which the CA, however, denied in its Resolution6 dated
May 8, 2006.
Hence, this Petition, raising the sole question, viz.:
IN THE APPRECIATION BY THE COURT OF THE EVIDENCE SUBMITTED BY THE PARTIES, CAN THE
TESTIMONY OF ONE OF THE PETITIONERS BE GIVEN GREATER WEIGHT THAN THAT BY A FORMER
PARTNER ON THE ISSUE OF THE IDENTITY OF THE OTHER PARTNERS IN THE PARTNERSHIP? 7
In essence, petitioners argue that according to the testimony of Jimmy, the sole surviving partner, Elfledo was not a
partner; and that he and Norberto entered into a partnership with Jose. Thus, the CA erred in not giving that testimony
greater weight than that of Cresencia, who was merely the spouse of Jose and not a party to the partnership. 8
Respondent counters that the issue raised by petitioners is not proper in a petition for review on certiorari under Rule 45 of
the Rules of Civil Procedure, as it would entail the review, evaluation, calibration, and re-weighing of the factual findings
of the CA. Moreover, respondent invokes the rationale of the CA decision that, in light of the admissions of Cresencia and
Edison and the testimony of respondent, the testimony of Jimmy was effectively refuted; accordingly, the CA's reversal of
the RTC's findings was fully justified.9
We resolve first the procedural matter regarding the propriety of the instant Petition.
Verily, the evaluation and calibration of the evidence necessarily involves consideration of factual issues — an exercise
that is not appropriate for a petition for review on certiorari under Rule 45. This rule provides that the parties may raise
only questions of law, because the Supreme Court is not a trier of facts. Generally, we are not duty-bound to analyze again
and weigh the evidence introduced in and considered by the tribunals below. 10 When supported by substantial evidence,
the findings of fact of the CA are conclusive and binding on the parties and are not reviewable by this Court, unless the
case falls under any of the following recognized exceptions:
(1) When the conclusion is a finding grounded entirely on speculation, surmises and conjectures;
(2) When the inference made is manifestly mistaken, absurd or impossible;
(3) Where there is a grave abuse of discretion;
(4) When the judgment is based on a misapprehension of facts;
(5) When the findings of fact are conflicting;
(6) When the Court of Appeals, in making its findings, went beyond the issues of the case and the same is
contrary to the admissions of both appellant and appellee;
(7) When the findings are contrary to those of the trial court;
(8) When the findings of fact are conclusions without citation of specific evidence on which they are based;
(9) When the facts set forth in the petition as well as in the petitioners' main and reply briefs are not disputed by
the respondents; and
(10) When the findings of fact of the Court of Appeals are premised on the supposed absence of evidence and
contradicted by the evidence on record.11
We note, however, that the findings of fact of the RTC are contrary to those of the CA. Thus, our review of such findings
is warranted.
On the merits of the case, we find that the instant Petition is bereft of merit.
A partnership exists when two or more persons agree to place their money, effects, labor, and skill in lawful commerce or
business, with the understanding that there shall be a proportionate sharing of the profits and losses among them. A
contract of partnership is defined by the Civil Code as one where two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits among themselves. 12
Undoubtedly, the best evidence would have been the contract of partnership or the articles of partnership. Unfortunately,
there is none in this case, because the alleged partnership was never formally organized. Nonetheless, we are asked to
determine who between Jose and Elfledo was the "partner" in the trucking business.
A careful review of the records persuades us to affirm the CA decision. The evidence presented by petitioners falls short
of the quantum of proof required to establish that: (1) Jose was the partner and not Elfledo; and (2) all the properties
acquired by Elfledo and respondent form part of the estate of Jose, having been derived from the alleged partnership.
Page 87 of 102
Petitioners heavily rely on Jimmy's testimony. But that testimony is just one piece of evidence against respondent. It must
be considered and weighed along with petitioners' other evidence vis-à-vis respondent's contrary evidence. In civil cases,
the party having the burden of proof must establish his case by a preponderance of evidence. "Preponderance of evidence"
is the weight, credit, and value of the aggregate evidence on either side and is usually considered synonymous with the
term "greater weight of the evidence" or "greater weight of the credible evidence." "Preponderance of evidence" is a
phrase that, in the last analysis, means probability of the truth. It is evidence that is more convincing to the court as worthy
of belief than that which is offered in opposition thereto. 13 Rule 133, Section 1 of the Rules of Court provides the
guidelines in determining preponderance of evidence, thus:
SECTION I. Preponderance of evidence, how determined. In civil cases, the party having burden of proof must establish
his case by a preponderance of evidence. In determining where the preponderance or superior weight of evidence on the
issues involved lies, the court may consider all the facts and circumstances of the case, the witnesses' manner of testifying,
their intelligence, their means and opportunity of knowing the facts to which they are testifying, the nature of the facts to
which they testify, the probability or improbability of their testimony, their interest or want of interest, and also their
personal credibility so far as the same may legitimately appear upon the trial. The court may also consider the number of
witnesses, though the preponderance is not necessarily with the greater number.
At this juncture, our ruling in Heirs of Tan Eng Kee v. Court of Appeals 14 is enlightening. Therein, we cited Article 1769
of the Civil Code, which provides:
Art. 1769. In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third
persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-
have a joint or common right or interest in any property from which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a partner in
the business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a business or other property by installments or
otherwise.
Applying the legal provision to the facts of this case, the following circumstances tend to prove that Elfledo was himself
the partner of Jimmy and Norberto: 1) Cresencia testified that Jose gave Elfledo ₱50,000.00, as share in the partnership,
on a date that coincided with the payment of the initial capital in the partnership; 15 (2) Elfledo ran the affairs of the
partnership, wielding absolute control, power and authority, without any intervention or opposition whatsoever from any
of petitioners herein;16 (3) all of the properties, particularly the nine trucks of the partnership, were registered in the name
of Elfledo; (4) Jimmy testified that Elfledo did not receive wages or salaries from the partnership, indicating that what he
actually received were shares of the profits of the business; 17 and (5) none of the petitioners, as heirs of Jose, the alleged
partner, demanded periodic accounting from Elfledo during his lifetime. As repeatedly stressed in Heirs of Tan Eng
Kee,18 a demand for periodic accounting is evidence of a partnership.
Furthermore, petitioners failed to adduce any evidence to show that the real and personal properties acquired and
registered in the names of Elfledo and respondent formed part of the estate of Jose, having been derived from Jose's
alleged partnership with Jimmy and Norberto. They failed to refute respondent's claim that Elfledo and respondent
engaged in other businesses. Edison even admitted that Elfledo also sold Interwood lumber as a sideline. 19 Petitioners
could not offer any credible evidence other than their bare assertions. Thus, we apply the basic rule of evidence that
between documentary and oral evidence, the former carries more weight. 20
Finally, we agree with the judicious findings of the CA, to wit:
The above testimonies prove that Elfledo was not just a hired help but one of the partners in the trucking business, active
and visible in the running of its affairs from day one until this ceased operations upon his demise. The extent of his
control, administration and management of the partnership and its business, the fact that its properties were placed in his
name, and that he was not paid salary or other compensation by the partners, are indicative of the fact that Elfledo was a
partner and a controlling one at that. It is apparent that the other partners only contributed in the initial capital but had no
say thereafter on how the business was ran. Evidently it was through Elfredo’s efforts and hard work that the partnership
was able to acquire more trucks and otherwise prosper. Even the appellant participated in the affairs of the partnership by
acting as the bookkeeper sans salary.1avvphi1
Page 88 of 102
It is notable too that Jose Lim died when the partnership was barely a year old, and the partnership and its business not
only continued but also flourished. If it were true that it was Jose Lim and not Elfledo who was the partner, then upon his
death the partnership should have
been dissolved and its assets liquidated. On the contrary, these were not done but instead its operation continued under the
helm of Elfledo and without any participation from the heirs of Jose Lim.
Whatever properties appellant and her husband had acquired, this was through their own concerted efforts and hard work.
Elfledo did not limit himself to the business of their partnership but engaged in other lines of businesses as well.
In sum, we find no cogent reason to disturb the findings and the ruling of the CA as they are amply supported by the law
and by the evidence on record.
WHEREFORE, the instant Petition is DENIED. The assailed Court of Appeals Decision dated June 29, 2005 is
AFFIRMED. Costs against petitioners.
SO ORDERED.
Page 89 of 102

SUPREME COURT
Manila
EN BANC
G.R. No. L-24193 June 28, 1968
MAURICIO AGAD, plaintiff-appellant,
vs.
SEVERINO MABATO and MABATO and AGAD COMPANY, defendants-appellees.
Angeles, Maskarino and Associates for plaintiff-appellant.
Victorio S. Advincula for defendants-appellees.
CONCEPCION, C.J.:
In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of the Court of First Instance of Davao, we are
called upon to determine the applicability of Article 1773 of our Civil Code to the contract of partnership on which the
complaint herein is based.
Alleging that he and defendant Severino Mabato are — pursuant to a public instrument dated August 29, 1952, copy of
which is attached to the complaint as Annex "A" — partners in a fishpond business, to the capital of which Agad
contributed P1,000, with the right to receive 50% of the profits; that from 1952 up to and including 1956, Mabato who
handled the partnership funds, had yearly rendered accounts of the operations of the partnership; and that, despite repeated
demands, Mabato had failed and refused to render accounts for the years 1957 to 1963, Agad prayed in his complaint
against Mabato and Mabato & Agad Company, filed on June 9, 1964, that judgment be rendered sentencing Mabato to
pay him (Agad) the sum of P14,000, as his share in the profits of the partnership for the period from 1957 to 1963, in
addition to P1,000 as attorney's fees, and ordering the dissolution of the partnership, as well as the winding up of its
affairs by a receiver to be appointed therefor.
In his answer, Mabato admitted the formal allegations of the complaint and denied the existence of said partnership, upon
the ground that the contract therefor had not been perfected, despite the execution of Annex "A", because Agad had
allegedly failed to give his P1,000 contribution to the partnership capital. Mabato prayed, therefore, that the complaint be
dismissed; that Annex "A" be declared void ab initio; and that Agad be sentenced to pay actual, moral and exemplary
damages, as well as attorney's fees.
Subsequently, Mabato filed a motion to dismiss, upon the ground that the complaint states no cause of action and that the
lower court had no jurisdiction over the subject matter of the case, because it involves principally the determination of
rights over public lands. After due hearing, the court issued the order appealed from, granting the motion to dismiss the
complaint for failure to state a cause of action. This conclusion was predicated upon the theory that the contract of
partnership, Annex "A", is null and void, pursuant to Art. 1773 of our Civil Code, because an inventory of the fishpond
referred in said instrument had not been attached thereto. A reconsideration of this order having been denied, Agad
brought the matter to us for review by record on appeal.
Articles 1771 and 1773 of said Code provide:
Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if inventory of
said property is not made, signed by the parties; and attached to the public instrument.
The issue before us hinges on whether or not "immovable property or real rights" have been contributed to the partnership
under consideration. Mabato alleged and the lower court held that the answer should be in the affirmative, because "it is
really inconceivable how a partnership engaged in the fishpond business could exist without said fishpond property
(being) contributed to the partnership." It should be noted, however, that, as stated in Annex "A" the partnership was
established "to operate a fishpond", not to "engage in a fishpond business". Moreover, none of the partners contributed
either a fishpond or a real right to any fishpond. Their contributions were limited to the sum of P1,000 each. Indeed,
Paragraph 4 of Annex "A" provides:
That the capital of the said partnership is Two Thousand (P2,000.00) Pesos Philippine Currency, of which One
Thousand (P1,000.00) pesos has been contributed by Severino Mabato and One Thousand (P1,000.00) Pesos has
been contributed by Mauricio Agad.
xxx xxx xxx
The operation of the fishpond mentioned in Annex "A" was the purpose of the partnership. Neither said fishpond nor a
real right thereto was contributed to the partnership or became part of the capital thereof, even if a fishpond or a real right
thereto could become part of its assets.
Page 90 of 102
WHEREFORE, we find that said Article 1773 of the Civil Code is not in point and that, the order appealed from should
be, as it is hereby set aside and the case remanded to the lower court for further proceedings, with the costs of this instance
against defendant-appellee, Severino Mabato. It is so ordered.
Page 91 of 102

SUPREME COURT
THIRD DIVISION
G.R. NOS. 166299-300 December 13, 2005
AURELIO K. LITONJUA, JR., Petitioner,
vs.
EDUARDO K. LITONJUA, SR., ROBERT T. YANG, ANGLO PHILS. MARITIME, INC., CINEPLEX, INC.,
DDM GARMENTS, INC., EDDIE K. LITONJUA SHIPPING AGENCY, INC., EDDIE K. LITONJUA SHIPPING
CO., INC., LITONJUA SECURITIES, INC. (formerly E. K. Litonjua Sec), LUNETA THEATER, INC., E & L
REALTY, (formerly E & L INT’L SHIPPING CORP.), FNP CO., INC., HOME ENTERPRISES, INC.,
BEAUMONT DEV. REALTY CO., INC., GLOED LAND CORP., EQUITY TRADING CO., INC., 3D CORP.,
"L" DEV. CORP, LCM THEATRICAL ENTERPRISES, INC., LITONJUA SHIPPING CO. INC., MACOIL
INC., ODEON REALTY CORP., SARATOGA REALTY, INC., ACT THEATER INC. (formerly General
Theatrical & Film Exchange, INC.), AVENUE REALTY, INC., AVENUE THEATER, INC. and LVF
PHILIPPINES, INC., (Formerly VF PHILIPPINES),Respondents.
DECISION
GARCIA, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioner Aurelio K. Litonjua, Jr. seeks to nullify and set
aside the Decision of the Court of Appeals (CA) dated March 31, 2004 1 in consolidated cases C.A. G.R. Sp. No.
76987 and C.A. G.R. SP. No 78774 and its Resolution dated December 07, 2004, 2 denying petitioner’s motion for
reconsideration.
The recourse is cast against the following factual backdrop:
Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K. Litonjua, Sr. (Eduardo) are brothers. The
legal dispute between them started when, on December 4, 2002, in the Regional Trial Court (RTC) at Pasig City, Aurelio
filed a suit against his brother Eduardo and herein respondent Robert T. Yang (Yang) and several corporations for specific
performance and accounting. In his complaint, 3 docketed as Civil Case No. 69235 and eventually raffled to Branch 68 of
the court,4 Aurelio alleged that, since June 1973, he and Eduardo are into a joint venture/partnership arrangement in the
Odeon Theater business which had expanded thru investment in Cineplex, Inc., LCM Theatrical Enterprises, Odeon
Realty Corporation (operator of Odeon I and II theatres), Avenue Realty, Inc., owner of lands and buildings, among other
corporations. Yang is described in the complaint as petitioner’s and Eduardo’s partner in their Odeon Theater
investment.5 The same complaint also contained the following material averments:
3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered into a joint venture/partnership for the continuation of their
family business and common family funds ….
3.01.1 This joint venture/[partnership] agreement was contained in a memorandum addressed by Eduardo to his siblings,
parents and other relatives. Copy of this memorandum is attached hereto and made an integral part as Annex "A" and the
portion referring to [Aurelio] submarked as Annex "A-1".
3.02 It was then agreed upon between [Aurelio] and Eduardo that in consideration of [Aurelio’s] retaining his share in the
remaining family businesses (mostly, movie theaters, shipping and land development) and contributing his industry to the
continued operation of these businesses, [Aurelio] will be given P1 Million or 10% equity in all these businesses and
those to be subsequently acquired by them whichever is greater. . . .
4.01 … from 22 June 1973 to about August 2001, or [in] a span of 28 years, [Aurelio] and Eduardo had accumulated in
their joint venture/partnership various assets including but not limited to the corporate defendants and [their] respective
assets.
4.02 In addition . . . the joint venture/partnership … had also acquired [various other assets], but Eduardo caused to be
registered in the names of other parties….
xxx xxx xxx
4.04 The substantial assets of most of the corporate defendants consist of real properties …. A list of some of these real
properties is attached hereto and made an integral part as Annex "B".
xxx xxx xxx
5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo became sour so that [Aurelio] requested for an
accounting and liquidation of his share in the joint venture/partnership [but these demands for complete accounting and
liquidation were not heeded].
xxx xxx xxx
5.05 What is worse, [Aurelio] has reasonable cause to believe that Eduardo and/or the corporate defendants as well as
Bobby [Yang], are transferring . . . various real properties of the corporations belonging to the joint venture/partnership to
Page 92 of 102
other parties in fraud of [Aurelio]. In consequence, [Aurelio] is therefore causing at this time the annotation on the titles of
these real properties… a notice of lis pendens …. (Emphasis in the original; underscoring and words in bracket added.)
For ease of reference, Annex "A-1" of the complaint, which petitioner asserts to have been meant for him by his brother
Eduardo, pertinently reads:
10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:
You have now your own life to live after having been married. ….
I am trying my best to mold you the way I work so you can follow the pattern …. You will be the only one left with the
company, among us brothers and I will ask you to stay as I want you to run this office every time I am away. I want you to
run it the way I am trying to run it because I will be all alone and I will depend entirely to you (sic). My sons will not be
ready to help me yet until about maybe 15/20 years from now. Whatever is left in the corporation, I will make sure that
you get ONE MILLION PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is greater. We two will gamble
the whole thing of what I have and what you are entitled to. …. It will be you and me alone on this. If ever I pass away, I
want you to take care of all of this. You keep my share for my two sons are ready take over but give them the chance to
run the company which I have built.
xxx xxx xxx
Because you will need a place to stay, I will arrange to give you first ONE HUNDRED THOUSANDS PESOS: (P100,
000.00) in cash or asset, like Lt. Artiaga so you can live better there. The rest I will give you in form of stocks which you
can keep. This stock I assure you is good and saleable. I will also gladly give you the share of Wack-Wack …and Valley
Golf … because you have been good. The rest will be in stocks from all the corporations which I repeat, ten percent
(10%) equity. 6
On December 20, 2002, Eduardo and the corporate respondents, as defendants a quo, filed a joint ANSWER With
Compulsory Counterclaim denying under oath the material allegations of the complaint, more particularly that portion
thereof depicting petitioner and Eduardo as having entered into a contract of partnership. As affirmative defenses,
Eduardo, et al., apart from raising a jurisdictional matter, alleged that the complaint states no cause of action, since no
cause of action may be derived from the actionable document, i.e., Annex "A-1", being void under the terms of Article
1767 in relation to Article 1773 of the Civil Code, infra. It is further alleged that whatever undertaking Eduardo agreed to
do, if any, under Annex "A-1", are unenforceable under the provisions of the Statute of Frauds. 7
For his part, Yang - who was served with summons long after the other defendants submitted their answer – moved to
dismiss on the ground, inter alia, that, as to him, petitioner has no cause of action and the complaint does not state
any.8 Petitioner opposed this motion to dismiss.
On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative Defenses. 9 To this motion, petitioner
interposed an Opposition with ex-Parte Motion to Set the Case for Pre-trial. 10
Acting on the separate motions immediately adverted to above, the trial court, in an Omnibus Order dated March 5, 2003,
denied the affirmative defenses and, except for Yang, set the case for pre-trial on April 10, 2003. 11
In another Omnibus Order of April 2, 2003, the same court denied the motion of Eduardo, et al., for reconsideration12 and
Yang’s motion to dismiss. The following then transpired insofar as Yang is concerned:
1. On April 14, 2003, Yang filed his ANSWER, but expressly reserved the right to seek reconsideration of the April 2,
2003 Omnibus Order and to pursue his failed motion to dismiss13 to its full resolution.
2. On April 24, 2003, he moved for reconsideration of the Omnibus Order of April 2, 2003, but his motion was denied in
an Order of July 4, 2003.14
3. On August 26, 2003, Yang went to the Court of Appeals (CA) in a petition for certiorari under Rule 65 of the Rules of
Court, docketed as CA-G.R. SP No. 78774,15 to nullify the separate orders of the trial court, the first denying his motion to
dismiss the basic complaint and, the second, denying his motion for reconsideration.
Earlier, Eduardo and the corporate defendants, on the contention that grave abuse of discretion and injudicious haste
attended the issuance of the trial court’s aforementioned Omnibus Orders dated March 5, and April 2, 2003, sought relief
from the CA via similar recourse. Their petition for certiorari was docketed as CA G.R. SP No. 76987.
Per its resolution dated October 2, 2003, 16 the CA’s 14th Division ordered the consolidation of CA G.R. SP No.
78774 with CA G.R. SP No. 76987.
Following the submission by the parties of their respective Memoranda of Authorities, the appellate court came out with
the herein assailed Decision dated March 31, 2004, finding for Eduardo and Yang, as lead petitioners therein, disposing
as follows:
WHEREFORE, judgment is hereby rendered granting the issuance of the writ of certiorari in these consolidated cases
annulling, reversing and setting aside the assailed orders of the court a quo dated March 5, 2003, April 2, 2003 and July 4,
2003 and the complaint filed by private respondent [now petitioner Aurelio] against all the petitioners [now herein
respondents Eduardo, et al.] with the court a quo is hereby dismissed.
SO ORDERED.17 (Emphasis in the original; words in bracket added.)
Page 93 of 102
Explaining its case disposition, the appellate court stated, inter alia, that the alleged partnership, as evidenced by the
actionable documents, Annex "A" and "A-1" attached to the complaint, and upon which petitioner solely predicates his
right/s allegedly violated by Eduardo, Yang and the corporate defendants a quo is "void or legally inexistent".
In time, petitioner moved for reconsideration but his motion was denied by the CA in its equally assailed Resolution of
December 7, 2004.18 .
Hence, petitioner’s present recourse, on the contention that the CA erred:
A. When it ruled that there was no partnership created by the actionable document because this was not a public
instrument and immovable properties were contributed to the partnership.
B. When it ruled that the actionable document did not create a demandable right in favor of petitioner.
C. When it ruled that the complaint stated no cause of action against [respondent] Robert Yang; and
D. When it ruled that petitioner has changed his theory on appeal when all that Petitioner had done was to support his
pleaded cause of action by another legal perspective/argument.
The petition lacks merit.
Petitioner’s demand, as defined in the petitory portion of his complaint in the trial court, is for delivery or payment to him,
as Eduardo’s and Yang’s partner, of his partnership/joint venture share, after an accounting has been duly conducted of
what he deems to be partnership/joint venture property. 19
A partnership exists when two or more persons agree to place their money, effects, labor, and skill in lawful commerce or
business, with the understanding that there shall be a proportionate sharing of the profits and losses between them. 20 A
contract of partnership is defined by the Civil Code as one where two or more persons bound themselves to contribute
money, property, or industry to a common fund with the intention of dividing the profits among themselves. 21 A joint
venture, on the other hand, is hardly distinguishable from, and may be likened to, a partnership since their elements are
similar, i.e., community of interests in the business and sharing of profits and losses. Being a form of partnership, a joint
venture is generally governed by the law on partnership. 22
The underlying issue that necessarily comes to mind in this proceedings is whether or not petitioner and respondent
Eduardo are partners in the theatre, shipping and realty business, as one claims but which the other denies. And the issue
bearing on the first assigned error relates to the question of what legal provision is applicable under the premises,
petitioner seeking, as it were, to enforce the actionable document - Annex "A-1" - which he depicts in his complaint to be
the contract of partnership/joint venture between himself and Eduardo. Clearly, then, a look at the legal provisions
determinative of the existence, or defining the formal requisites, of a partnership is indicated. Foremost of these are the
following provisions of the Civil Code:
Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed
thereto, in which case a public instrument shall be necessary.
Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall
appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission.
Failure to comply with the requirement of the preceding paragraph shall not affect the liability of the partnership and the
members thereof to third persons.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said
property is not made, signed by the parties, and attached to the public instrument.
Annex "A-1", on its face, contains typewritten entries, personal in tone, but is unsigned and undated. As an unsigned
document, there can be no quibbling that Annex "A-1" does not meet the public instrumentation requirements exacted
under Article 1771 of the Civil Code. Moreover, being unsigned and doubtless referring to a partnership involving more
than P3,000.00 in money or property, Annex "A-1" cannot be presented for notarization, let alone registered with the
Securities and Exchange Commission (SEC), as called for under the Article 1772 of the Code. And inasmuch as the
inventory requirement under the succeeding Article 1773 goes into the matter of validity when immovable property is
contributed to the partnership, the next logical point of inquiry turns on the nature of petitioner’s contribution, if any, to
the supposed partnership.
The CA, addressing the foregoing query, correctly stated that petitioner’s contribution consisted of immovables and real
rights. Wrote that court:
A further examination of the allegations in the complaint would show that [petitioner’s] contribution to the so-called
"partnership/joint venture" was his supposed share in the family business that is consisting of movie theaters, shipping and
land development under paragraph 3.02 of the complaint. In other words, his contribution as a partner in the alleged
partnership/joint venture consisted of immovable properties and real rights. …. 23
Significantly enough, petitioner matter-of-factly concurred with the appellate court’s observation that, prescinding from
what he himself alleged in his basic complaint, his contribution to the partnership consisted of his share in the Litonjua
family businesses which owned variable immovable properties. Petitioner’s assertion in his motion for reconsideration 24 of
the CA’s decision, that "what was to be contributed to the business [of the partnership] was [petitioner’s] industry and
Page 94 of 102
his share in the family [theatre and land development] business" leaves no room for speculation as to what petitioner
contributed to the perceived partnership.
Lest it be overlooked, the contract-validating inventory requirement under Article 1773 of the Civil Code applies as long
real property or real rights are initially brought into the partnership. In short, it is really of no moment which of the
partners, or, in this case, who between petitioner and his brother Eduardo, contributed immovables. In context, the more
important consideration is that real property was contributed, in which case an inventory of the contributed property duly
signed by the parties should be attached to the public instrument, else there is legally no partnership to speak of.
Petitioner, in an obvious bid to evade the application of Article 1773, argues that the immovables in question were not
contributed, but were acquired after the formation of the supposed partnership. Needless to stress, the Court cannot accord
cogency to this specious argument. For, as earlier stated, petitioner himself admitted contributing his share in the
supposed shipping, movie theatres and realty development family businesses which already owned immovables even
before Annex "A-1" was allegedly executed.
Considering thus the value and nature of petitioner’s alleged contribution to the purported partnership, the Court, even if
so disposed, cannot plausibly extend Annex "A-1" the legal effects that petitioner so desires and pleads to be given.
Annex "A-1", in fine, cannot support the existence of the partnership sued upon and sought to be enforced. The legal and
factual milieu of the case calls for this disposition. A partnership may be constituted in any form, save when immovable
property or real rights are contributed thereto or when the partnership has a capital of at least ₱3,000.00, in which case a
public instrument shall be necessary.25 And if only to stress what has repeatedly been articulated, an inventory to be signed
by the parties and attached to the public instrument is also indispensable to the validity of the partnership whenever
immovable property is contributed to it.
Given the foregoing perspective, what the appellate court wrote in its assailed Decision 26 about the probative value and
legal effect of Annex "A-1" commends itself for concurrence:
Considering that the allegations in the complaint showed that [petitioner] contributed immovable properties to the alleged
partnership, the "Memorandum" (Annex "A" of the complaint) which purports to establish the said "partnership/joint
venture" is NOT a public instrument and there was NO inventory of the immovable property duly signed by the parties.
As such, the said "Memorandum" … is null and void for purposes of establishing the existence of a valid contract of
partnership. Indeed, because of the failure to comply with the essential formalities of a valid contract, the purported
"partnership/joint venture" is legally inexistent and it produces no effect whatsoever. Necessarily, a void or legally
inexistent contract cannot be the source of any contractual or legal right. Accordingly, the allegations in the complaint,
including the actionable document attached thereto, clearly demonstrates that [petitioner] has NO valid contractual or
legal right which could be violated by the [individual respondents] herein. As a consequence, [petitioner’s] complaint
does NOT state a valid cause of action because NOT all the essential elements of a cause of action are
present. (Underscoring and words in bracket added.)
Likewise well-taken are the following complementary excerpts from the CA’s equally assailed Resolution of December 7,
200427 denying petitioner’s motion for reconsideration:
Further, We conclude that despite glaring defects in the allegations in the complaint as well as the actionable document
attached thereto (Rollo, p. 191), the [trial] court did not appreciate and apply the legal provisions which were brought to
its attention by herein [respondents] in the their pleadings. In our evaluation of [petitioner’s] complaint, the latter
alleged inter alia to have contributed immovable properties to the alleged partnership but the actionable document is not a
public document and there was no inventory of immovable properties signed by the parties. Both the allegations in the
complaint and the actionable documents considered, it is crystal clear that [petitioner] has no valid or legal right which
could be violated by [respondents]. (Words in bracket added.)
Under the second assigned error, it is petitioner’s posture that Annex "A-1", assuming its inefficacy or nullity as a
partnership document, nevertheless created demandable rights in his favor. As petitioner succinctly puts it in this petition:
43. Contrariwise, this actionable document, especially its above-quoted provisions, established an actionable contract even
though it may not be a partnership. This actionable contract is what is known as an innominate contract (Civil Code,
Article 1307).
44. It may not be a contract of loan, or a mortgage or whatever, but surely the contract does create rights and obligations
of the parties and which rights and obligations may be enforceable and demandable. Just because the relationship created
by the agreement cannot be specifically labeled or pigeonholed into a category of nominate contract does not mean it is
void or unenforceable.
Petitioner has thus thrusted the notion of an innominate contract on this Court - and earlier on the CA after he experienced
a reversal of fortune thereat - as an afterthought. The appellate court, however, cannot really be faulted for not yielding to
petitioner’s dubious stratagem of altering his theory of joint venture/partnership to an innominate contract. For, at bottom,
the appellate court’s certiorari jurisdiction was circumscribed by what was alleged to have been the order/s issued by the
trial court in grave abuse of discretion. As respondent Yang pointedly observed, 28since the parties’ basic position had been
Page 95 of 102
well-defined, that of petitioner being that the actionable document established a partnership/joint venture, it is on those
positions that the appellate court exercised its certiorari jurisdiction. Petitioner’s act of changing his original theory is an
impermissible practice and constitutes, as the CA aptly declared, an admission of the untenability of such theory in the
first place.
[Petitioner] is now humming a different tune . . . . In a sudden twist of stance, he has now contended that the actionable
instrument may be considered an innominate contract. xxx Verily, this now changes [petitioner’s] theory of the case
which is not only prohibited by the Rules but also is an implied admission that the very theory he himself … has adopted,
filed and prosecuted before the respondent court is erroneous.
Be that as it may . …. We hold that this new theory contravenes [petitioner’s] theory of the actionable document being a
partnership document. If anything, it is so obvious we do have to test the sufficiency of the cause of action on the basis of
partnership law xxx.29 (Emphasis in the original; Words in bracket added).
But even assuming in gratia argumenti that Annex "A-1" partakes of a perfected innominate contract, petitioner’s
complaint would still be dismissible as against Eduardo and, more so, against Yang. It cannot be over-emphasized that
petitioner points to Eduardo as the author of Annex "A-1". Withal, even on this consideration alone, petitioner’s claim
against Yang is doomed from the very start.
As it were, the only portion of Annex "A-1" which could perhaps be remotely regarded as vesting petitioner with a right to
demand from respondent Eduardo the observance of a determinate conduct, reads:
xxx You will be the only one left with the company, among us brothers and I will ask you to stay as I want you to run this
office everytime I am away. I want you to run it the way I am trying to run it because I will be alone and I will depend
entirely to you, My sons will not be ready to help me yet until about maybe 15/20 years from now. Whatever is left in the
corporation, I will make sure that you get ONE MILLION PESOS (P1,000,000.00) or ten percent (10%) equity,
whichever is greater. (Underscoring added)
It is at once apparent that what respondent Eduardo imposed upon himself under the above passage, if he indeed wrote
Annex "A-1", is a promise which is not to be performed within one year from "contract" execution on June 22, 1973.
Accordingly, the agreement embodied in Annex "A-1" is covered by the Statute of Frauds and ergounenforceable for non-
compliance therewith.30 By force of the statute of frauds, an agreement that by its terms is not to be performed within a
year from the making thereof shall be unenforceable by action, unless the same, or some note or memorandum thereof, be
in writing and subscribed by the party charged. Corollarily, no action can be proved unless the requirement exacted by the
statute of frauds is complied with.31
Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10% equity of the family businesses
supposedly promised by Eduardo to give in the near future. Any suggestion that the stated amount or the equity
component of the promise was intended to go to a common fund would be to read something not written in Annex"A-1".
Thus, even this angle alone argues against the very idea of a partnership, the creation of which requires two or more
contracting minds mutually agreeing to contribute money, property or industry to a common fund with the intention of
dividing the profits between or among themselves. 32
In sum then, the Court rules, as did the CA, that petitioner’s complaint for specific performance anchored on an actionable
document of partnership which is legally inexistent or void or, at best, unenforceable does not state a cause of action as
against respondent Eduardo and the corporate defendants. And if no of action can successfully be maintained against
respondent Eduardo because no valid partnership existed between him and petitioner, the Court cannot see its way clear
on how the same action could plausibly prosper against Yang. Surely, Yang could not have become a partner in, or could
not have had any form of business relationship with, an inexistent partnership.
As may be noted, petitioner has not, in his complaint, provide the logical nexus that would tie Yang to him as his partner.
In fact, attendant circumstances would indicate the contrary. Consider:
1. Petitioner asserted in his complaint that his so-called joint venture/partnership with Eduardo was "for the continuation
of their family business and common family funds which were theretofore being mainly managed by Eduardo." 33 But
Yang denies kinship with the Litonjua family and petitioner has not disputed the disclaimer.
2. In some detail, petitioner mentioned what he had contributed to the joint venture/partnership with Eduardo and what his
share in the businesses will be. No allegation is made whatsoever about what Yang contributed, if any, let alone his
proportional share in the profits. But such allegation cannot, however, be made because, as aptly observed by the CA, the
actionable document did not contain such provision, let alone mention the name of Yang. How, indeed, could a person be
considered a partner when the document purporting to establish the partnership contract did not even mention his name.
3. Petitioner states in par. 2.01 of the complaint that "[he] and Eduardo are business partners in the [respondent]
corporations," while "Bobby is his and Eduardo’s partner in their Odeon Theater investment’ (par. 2.03). This means that
the partnership between petitioner and Eduardo came first; Yang became their partner in their Odeon Theater investment
thereafter. Several paragraphs later, however, petitioner would contradict himself by alleging that his "investment and that
of Eduardo and Yang in the Odeon theater business has expanded through a reinvestment of profit income and direct
Page 96 of 102
investments in several corporation including but not limited to [six] corporate respondents" This simply means that the
"Odeon Theatre business" came before the corporate respondents. Significantly enough, petitioner refers to the corporate
respondents as "progeny" of the Odeon Theatre business. 34
Needless to stress, petitioner has not sufficiently established in his complaint the legal vinculum whence he sourced his
right to drag Yang into the fray. The Court of Appeals, in its assailed decision, captured and formulated the legal situation
in the following wise:
[Respondent] Yang, … is impleaded because, as alleged in the complaint, he is a "partner" of [Eduardo] and the
[petitioner] in the Odeon Theater Investment which expanded through reinvestments of profits and direct investments in
several corporations, thus:
xxx xxx xxx
Clearly, [petitioner’s] claim against … Yang arose from his alleged partnership with petitioner and the …respondent.
However, there was NO allegation in the complaint which directly alleged how the supposed contractual relation was
created between [petitioner] and …Yang. More importantly, however, the foregoing ruling of this Court that the purported
partnership between [Eduardo] is void and legally inexistent directly affects said claim against …Yang. Since [petitioner]
is trying to establish his claim against … Yang by linking him to the legally inexistent partnership . . . such attempt had
become futile because there was NOTHING that would contractually connect [petitioner] and … Yang. To establish a
valid cause of action, the complaint should have a statement of fact upon which to connect [respondent] Yang to the
alleged partnership between [petitioner] and respondent [Eduardo], including their alleged investment in the Odeon
Theater. A statement of facts on those matters is pivotal to the complaint as they would constitute the ultimate facts
necessary to establish the elements of a cause of action against … Yang. 35
Pressing its point, the CA later stated in its resolution denying petitioner’s motion for reconsideration the following:
xxx Whatever the complaint calls it, it is the actionable document attached to the complaint that is controlling. Suffice it
to state, We have not ignored the actionable document … As a matter of fact, We emphasized in our decision … that
insofar as [Yang] is concerned, he is not even mentioned in the said actionable document. We are therefore puzzled how a
person not mentioned in a document purporting to establish a partnership could be considered a partner. 36 (Words in
bracket ours).
The last issue raised by petitioner, referring to whether or not he changed his theory of the case, as peremptorily
determined by the CA, has been discussed at length earlier and need not detain us long. Suffice it to say that after the CA
has ruled that the alleged partnership is inexistent, petitioner took a different tack. Thus, from a joint venture/partnership
theory which he adopted and consistently pursued in his complaint, petitioner embraced the innominate contract theory.
Illustrative of this shift is petitioner’s statement in par. #8 of his motion for reconsideration of the CA’s decision
combined with what he said in par. # 43 of this petition, as follows:
8. Whether or not the actionable document creates a partnership, joint venture, or whatever, is a legal matter. What is
determinative for purposes of sufficiency of the complainant’s allegations, is whether the actionable document bears out
an actionable contract – be it a partnership, a joint venture or whatever or some innominate contract … It may be noted
that one kind of innominate contract is what is known as du ut facias (I give that you may do).37
43. Contrariwise, this actionable document, especially its above-quoted provisions, established an actionable contract even
though it may not be a partnership. This actionable contract is what is known as an innominate contract (Civil Code,
Article 1307).38
Springing surprises on the opposing party is offensive to the sporting idea of fair play, justice and due process; hence, the
proscription against a party shifting from one theory at the trial court to a new and different theory in the appellate
court.39 On the same rationale, an issue which was neither averred in the complaint cannot be raised for the first time on
appeal.40 It is not difficult, therefore, to agree with the CA when it made short shrift of petitioner’s innominate contract
theory on the basis of the foregoing basic reasons.
Petitioner’s protestation that his act of introducing the concept of innominate contract was not a case of changing theories
but of supporting his pleaded cause of action – that of the existence of a partnership - by another legal
perspective/argument, strikes the Court as a strained attempt to rationalize an untenable position. Paragraph 12 of his
motion for reconsideration of the CA’s decision virtually relegates partnership as a fall-back theory. Two paragraphs later,
in the same notion, petitioner faults the appellate court for reading, with myopic eyes, the actionable document solely as
establishing a partnership/joint venture. Verily, the cited paragraphs are a study of a party hedging on whether or not to
pursue the original cause of action or altogether abandoning the same, thus:
12. Incidentally, assuming that the actionable document created a partnership between [respondent] Eduardo, Sr. and
[petitioner], no immovables were contributed to this partnership. xxx
14. All told, the Decision takes off from a false premise that the actionable document attached to the complaint does not
establish a contractual relationship between [petitioner] and … Eduardo, Sr. and Roberto T Yang simply because his
document does not create a partnership or a joint venture. This is … a myopic reading of the actionable document.
Page 97 of 102
Per the Court’s own count, petitioner used in his complaint the mixed words "joint venture/partnership" nineteen (19)
times and the term "partner" four (4) times. He made reference to the "law of joint venture/partnership [being applicable]
to the business relationship … between [him], Eduardo and Bobby [Yang]" and to his "rights in all specific properties of
their joint venture/partnership". Given this consideration, petitioner’s right of action against respondents Eduardo and
Yang doubtless pivots on the existence of the partnership between the three of them, as purportedly evidenced by the
undated and unsigned Annex "A-1". A void Annex "A-1", as an actionable document of partnership, would strip
petitioner of a cause of action under the premises. A complaint for delivery and accounting of partnership property based
on such void or legally non-existent actionable document is dismissible for failure to state of action. So, in gist, said the
Court of Appeals. The Court agrees.
WHEREFORE, the instant petition is DENIED and the impugned Decision and Resolution of the Court of
Appeals AFFIRMED.
Cost against the petitioner.
SO ORDERED.
Page 98 of 102

SUPREME COURT
Manila
EN BANC
G.R. No. L-25532 February 28, 1969
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special
Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.
REYES, J.B.L., J.:
A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947 by herein
respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the limited partners. The
partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership. On 1 October 1947, the
limited partnership was registered with the Securities and Exchange Commission. The firm engaged, among other
activities, in the importation, marketing, distribution and operation of automatic phonographs, radios, television sets and
amusement machines, their parts and accessories. It had an office and held itself out as a limited partnership, handling and
carrying merchandise, using invoices, bills and letterheads bearing its trade-name, maintaining its own books of accounts
and bank accounts, and had a quota allocation with the Central Bank.
In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18 December 1948,
limited partner Carlson sold his share in the partnership to Suter and his wife. The sale was duly recorded with the
Securities and Exchange Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a corporation, without objection by the herein petitioner,
Commissioner of Internal Revenue, until in 1959 when the latter, in an assessment, consolidated the income of the firm
and the individual incomes of the partners-spouses Suter and Spirig resulting in a determination of a deficiency income
tax against respondent Suter in the amount of P2,678.06 for 1954 and P4,567.00 for 1955.
Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not in accordance with law,
but his request was denied. Unable to secure a reconsideration, he appealed to the Court of Tax Appeals, which court,
after trial, rendered a decision, on 11 November 1965, reversing that of the Commissioner of Internal Revenue.
The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax court's aforesaid
decision. It raises these issues:
(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be disregarded for income
tax purposes, considering that respondent William J. Suter and his wife, Julia Spirig Suter actually formed a single taxable
unit; and
(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent William J. Suter and Julia
Spirig Suter and the subsequent sale to them by the remaining partner, Gustav Carlson, of his participation of P2,000.00 in
the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig and their
subsequent acquisition of the interests of remaining partner Carlson in the partnership dissolved the limited partnership,
and if they did not, the fiction of juridical personality of the partnership should be disregarded for income tax purposes
because the spouses have exclusive ownership and control of the business; consequently the income tax return of
respondent Suter for the years in question should have included his and his wife's individual incomes and that of the
limited partnership, in accordance with Section 45 (d) of the National Internal Revenue Code, which provides as follows:
(d) Husband and wife. — In the case of married persons, whether citizens, residents or non-residents, only one
consolidated return for the taxable year shall be filed by either spouse to cover the income of both spouses; ....
In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his marriage with
limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948 is not a ground for dissolution
of the partnership, either in the Code of Commerce or in the New Civil Code, and that since its juridical personality had
not been affected and since, as a limited partnership, as contra distinguished from a duly registered general partnership, it
is taxable on its income similarly with corporations, Suter was not bound to include in his individual return the income of
the limited partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by operation of law
because of the marriage of the only general partner, William J. Suter to the originally limited partner, Julia Spirig one year
Page 99 of 102
after the partnership was organized is rested by the appellant upon the opinion of now Senator Tolentino in Commentaries
and Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:
A husband and a wife may not enter into a contract of general copartnership, because under the Civil Code, which
applies in the absence of express provision in the Code of Commerce, persons prohibited from making donations
to each other are prohibited from entering into universal partnerships. (2 Echaverri 196) It follows that the
marriage of partners necessarily brings about the dissolution of a pre-existing partnership. (1 Guy de Montella 58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd. was not a
universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the Spanish Civil Code, of 1889
(which was the law in force when the subject firm was organized in 1947), a universal partnership requires either that the
object of the association be all the present property of the partners, as contributed by them to the common fund, or else
"all that the partners may acquire by their industry or work during the existence of the partnership". William J. Suter
"Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the partners were fixed sums of
money, P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of them was an industrial partner. It
follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses were forbidden to enter by Article
1677 of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th Edition, 1952, Volume
4, page 546, footnote 1, says with regard to the prohibition contained in the aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero o podran constituir
sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos a la tesis permisiva de los contratos
de sociedad particular entre esposos, ya que ningun precepto de nuestro Codigo los prohibe, y hay que estar a la
norma general segun la que toda persona es capaz para contratar mientras no sea declarado incapaz por la ley. La
jurisprudencia de la Direccion de los Registros fue favorable a esta misma tesis en su resolution de 3 de febrero de
1936, mas parece cambiar de rumbo en la de 9 de marzo de 1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one of the causes
provided for that purpose either by the Spanish Civil Code or the Code of Commerce.
The appellant's view, that by the marriage of both partners the company became a single proprietorship, is equally
erroneous. The capital contributions of partners William J. Suter and Julia Spirig were separately owned and contributed
by them before their marriage; and after they were joined in wedlock, such contributions remained their respective
separate property under the Spanish Civil Code (Article 1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become common property of
both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its own, distinct
and separate from that of its partners (unlike American and English law that does not recognize such separate juridical
personality), the bypassing of the existence of the limited partnership as a taxpayer can only be done by ignoring or
disregarding clear statutory mandates and basic principles of our law. The limited partnership's separate individuality
makes it impossible to equate its income with that of the component members. True, section 24 of the Internal Revenue
Code merges registered general co-partnerships (compañias colectivas) with the personality of the individual partners for
income tax purposes. But this rule is exceptional in its disregard of a cardinal tenet of our partnership laws, and can not be
extended by mere implication to limited partnerships.
The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-13554, Resolution of 30
October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for disregarding the fiction of legal personality
of the corporations involved therein are not applicable to the present case. In the cited cases, the corporations were
already subject to tax when the fiction of their corporate personality was pierced; in the present case, to do so
would exempt the limited partnership from income taxation but would throw the tax burden upon the partners-spouses in
their individual capacities. The corporations, in the cases cited, merely served as business conduits or alter egos of the
stockholders, a factor that justified a disregard of their corporate personalities for tax purposes. This is not true in the
present case. Here, the limited partnership is not a mere business conduit of the partner-spouses; it was organized for
legitimate business purposes; it conducted its own dealings with its customers prior to appellee's marriage, and had been
filing its own income tax returns as such independent entity. The change in its membership, brought about by the marriage
of the partners and their subsequent acquisition of all interest therein, is no ground for withdrawing the partnership from
the coverage of Section 24 of the tax code, requiring it to pay income tax. As far as the records show, the partners did not
enter into matrimony and thereafter buy the interests of the remaining partner with the premeditated scheme or design to
use the partnership as a business conduit to dodge the tax laws. Regularity, not otherwise, is presumed.
Page 100 of 102

As the limited partnership under consideration is taxable on its income, to require that income to be included in the
individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would even conflict
with what it specifically provides in its Section 24: for the appellant Commissioner's stand results in equal treatment, tax
wise, of a general copartnership (compañia colectiva) and a limited partnership, when the code plainly differentiates the
two. Thus, the code taxes the latter on its income, but not the former, because it is in the case of compañias colectivas that
the members, and not the firm, are taxable in their individual capacities for any dividend or share of the profit derived
from the duly registered general partnership (Section 26, N.I.R.C.; Arañas, Anno. & Juris. on the N.I.R.C., As Amended,
Vol. 1, pp. 88-89).lawphi1.nêt
But it is argued that the income of the limited partnership is actually or constructively the income of the spouses and
forms part of the conjugal partnership of gains. This is not wholly correct. As pointed out in Agapito vs. Molo 50 Phil.
779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the fruits of the wife's parapherna become conjugal
only when no longer needed to defray the expenses for the administration and preservation of the paraphernal capital of
the wife. Then again, the appellant's argument erroneously confines itself to the question of the legal personality of the
limited partnership, which is not essential to the income taxability of the partnership since the law taxes the income of
even joint accounts that have no personality of their own. 1 Appellant is, likewise, mistaken in that it assumes that the
conjugal partnership of gains is a taxable unit, which it is not. What is taxable is the "income of both spouses" (Section 45
[d] in their individual capacities. Though the amount of income (income of the conjugal partnership vis-a-vis the joint
income of husband and wife) may be the same for a given taxable year, their consequences would be different, as their
contributions in the business partnership are not the same.
The difference in tax rates between the income of the limited partnership being consolidated with, and when split from the
income of the spouses, is not a justification for requiring consolidation; the revenue code, as it presently stands, does not
authorize it, and even bars it by requiring the limited partnership to pay tax on its own income.
FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.
Page 101 of 102


SUPREME COURT
Manila
EN BANC
G.R. No. L-33580 February 6, 1931
MAXIMILIANO SANCHO, plaintiff-appellant,
vs.
SEVERIANO LIZARRAGA, defendant-appellee.
Jose Perez Cardenas and Jose M. Casal for appellant.
Celso B. Jamora and Antonio Gonzalez for appellee.
ROMUALDEZ, J.:
The plaintiff brought an action for the rescission of a partnership contract between himself and the defendant, entered into
on October 15, 1920, the reimbursement by the latter of his 50,000 peso investment therein, with interest at 12 per cent
per annum form October 15, 1920, with costs, and any other just and equitable remedy against said defendant.
The defendant denies generally and specifically all the allegations of the complaint which are incompatible with his
special defenses, cross-complaint and counterclaim, setting up the latter and asking for the dissolution of the partnership,
and the payment to him as its manager and administrator of P500 monthly from October 15, 1920, until the final
dissolution, with interest, one-half of said amount to be charged to the plaintiff. He also prays for any other just and
equitable remedy.
The Court of First Instance of Manila, having heard the cause, and finding it duly proved that the defendant had not
contributed all the capital he had bound himself to invest, and that the plaintiff had demanded that the defendant liquidate
the partnership, declared it dissolved on account of the expiration of the period for which it was constituted, and ordered
the defendant, as managing partner, to proceed without delay to liquidate it, submitting to the court the result of the
liquidation together with the accounts and vouchers within the period of thirty days from receipt of notice of said
judgment, without costs.
The plaintiff appealed from said decision making the following assignments of error:
1. In holding that the plaintiff and appellant is not entitled to the rescission of the partnership contract, Exhibit A,
and that article 1124 of the Civil Code is not applicable to the present case.
2. In failing to order the defendant to return the sum of P50,000 to the plaintiff with interest from October 15,
1920, until fully paid.
3. In denying the motion for a new trial.
In the brief filed by counsel for the appellee, a preliminary question is raised purporting to show that this appeal is
premature and therefore will not lie. The point is based on the contention that inasmuch as the liquidation ordered by the
trial court, and the consequent accounts, have not been made and submitted, the case cannot be deemed terminated in said
court and its ruling is not yet appealable. In support of this contention counsel cites section 123 of the Code of Civil
Procedure, and the decision of this court in the case of Natividad vs. Villarica (31 Phil., 172).
This contention is well founded. Until the accounts have been rendered as ordered by the trial court, and until they have
been either approved or disapproved, the litigation involved in this action cannot be considered as completely decided;
and, as it was held in said case of Natividad vs .Villarica, also with reference to an appeal taken from a decision ordering
the rendition of accounts following the dissolution of partnership, the appeal in the instant case must be deemed
premature.
But even going into the merits of the case, the affirmation of the judgment appealed from is inevitable. In view of the
lower court's findings referred to above, which we cannot revise because the parol evidence has not been forwarded to this
court, articles 1681 and 1682 of the Civil Code have been properly applied. Owing to the defendant's failure to pay to the
partnership the whole amount which he bound himself to pay, he became indebted to it for the remainder, with interest
and any damages occasioned thereby, but the plaintiff did not thereby acquire the right to demand rescission of the
partnership contract according to article 1124 of the Code. This article cannot be applied to the case in question, because it
refers to the resolution of obligations in general, whereas article 1681 and 1682 specifically refer to the contract of
partnership in particular. And it is a well known principle that special provisions prevail over general provisions.
By virtue of the foregoing, this appeal is hereby dismissed, leaving the decision appealed from in full force, without
special pronouncement of costs. So ordered.
Page 102 of 102

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Republic of the Philippines

7. Federico Jarantilla, Jr. (FIVE THOUSAND)……….. 5,000.00

Republic of the Philippines

G.R. No. 134559 December 9, 1999

of an Earlier Illegal Contract

Republic of the Philippines

G.R. No. 136448 November 3, 1999

Republic of the Philippines

G.R. No. 112675 January 25, 1999

Republic of the Philippines

Republic of the Philippines

G.R. No. 127347 November 25, 1999

(c) Costs of suit."

Republic of the Philippines

Republic of the Philippines

Republic of the Philippines

Republic of the Philippines

Republic of the Philippines

Republic of the Philippines

Total including surcharge and P6,157.09

REAL ESTATE DEALER'S FIXED TAX

Total including penalty P527.00

RESIDENCE TAXES OF CORPORATION

Total including surcharge P193.75

TOTAL TAXES DUE P6,878.34.

Republic of the Philippines

Acco Acc Acc

unt oun oun

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

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

Republic of the Philippines

WHEREFORE, premises considered, judgment is hereby rendered:

Republic of the Philippines

Republic of the Philippines

Republic of the Philippines

Page 100 of 102

Page 101 of 102

Republic of the Philippines

Page 102 of 102

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