FEDERICO JARANTILLA, JR. vs.

ANTONIETA JARANTILLA, BUENAVENTURA REMOTIGUE, substituted

by CYNTHIA REMOTIGUE, DOROTEO JARANTILLA and TOMAS JARANTILLA

G.R. No. 154486               December 1, 2010

PARTIES:

The spouses Andres Jarantilla and Felisa Jaleco were survived by eight children: Federico, Delfin, Benjamin,
Conchita, Rosita, Pacita, Rafael and Antonieta. 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.

FACTS:

In 1948, the Jarantilla heirs extrajudicially partitioned amongst themselves the real properties of their deceased
parents. 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.

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 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. 18
1avvphi1

The RTC approved the Joint Motion to Approve Compromise Agreement 20 and on December 18, 1992, decided in
favor of Antonieta, to wit:
WHEREFORE, premises above-considered, the Court renders judgment in favor of the plaintiff Antonieta Jarantilla
and against defendants Cynthia Remotigue, Doroteo Jarantilla and Tomas Jarantilla ordering the latter:
1. to deliver to the plaintiff her 8% share or its equivalent amount on the real properties covered by TCT Nos.
35655, 338398, 338399 & 335395, all of the Registry of Deeds of Quezon City; TCT Nos. (18303)23341,
142882 & 490007(4615), all of the Registry of Deeds of Rizal; and TCT No. T-6309 of the Registry of Deeds
of Cotabato based on their present market value;
2. to deliver to the plaintiff her 8% share or its equivalent amount on the Remotigue Agro-Industrial
Corporation, Manila Athletic Supply, Inc., MAS Rubber Products, Inc. and Buendia Recapping Corporation
based on the shares of stocks present book value;
3. to account for the assets and income of the co-ownership and deliver to plaintiff her rightful share thereof
equivalent to 8%;
4. to pay plaintiff, jointly and severally, the sum of ₱50,000.00 as moral damages;
5. to pay, jointly and severally, the sum of ₱50,000.00 as attorney’s fees; and
6. to pay, jointly and severally, the costs of the suit. 21

Both the petitioner and the respondents appealed this decision to the Court of Appeals. The petitioner claimed
that the RTC "erred in not rendering a complete judgment and ordering the partition of the co-ownership and
giving to [him] six per centum (6%) of the properties." 22

While the Court of Appeals agreed to some of the RTC’s factual findings, it also established that Antonieta
Jarantilla was not part of the partnership formed in 1946, and that her 8% share was limited to the businesses
enumerated in the Acknowledgement of Participating Capital. On July 30, 2002, the Court of Appeals rendered
the herein challenged decision setting aside the RTC’s decision, as follows:

WHEREFORE, the decision of the trial court, dated 18 December 1992 is SET ASIDE and a new one is hereby
entered ordering that:
(1) after accounting, plaintiff Antonieta Jarantilla be given her share of 8% in the assets and profits of Manila
Athletic Supply, Remotigue Trading in Iloilo City and Remotigue Trading in Cotabato City;
(2) after accounting, defendant Federico Jarantilla, Jr. be given his share of 6% of the assets and profits of the
above-mentioned enterprises; and, holding that
(3) plaintiff Antonieta Jarantilla is a stockholder in the following corporations to the extent stated in their
Articles of Incorporation:
(a) Rural Bank of Barotac Nuevo, Inc.;
(b) MAS Rubber Products, Inc.;
(c) Manila Athletic Supply, Inc.; and
(d) B. Remotigue Agro-Industrial Development Corp.
(4) No costs.23
The respondents, on August 20, 2002, filed a Motion for Partial Reconsideration but the Court of Appeals denied this
in a Resolution24 dated March 21, 2003.

Antonieta Jarantilla filed before this Court her own petition for review on certiorari25 dated September 16, 2002,
assailing the Court of Appeals’ decision on "similar grounds and similar assignments of errors as this present
case"26 but it was dismissed on November 20, 2002 for failure to file the appeal within the reglementary period of
fifteen (15) days in accordance with Section 2, Rule 45 of the Rules of Court. 27

Petitioner filed before us this petition for review on the sole ground that the honorable court of appeals seriously
erred in not ruling that petitioner federico jarantilla, jr. Is entitled to a six per centum (6%) share of the ownership
of the real properties acquired by the other defendants using common funds from the businesses where he had
owned such share.28
Petitioner asserts that he was in a partnership with the Remotigue spouses, the Deocampo spouses, Rosita
Jarantilla, Rafael Jarantilla, Antonieta Jarantilla and Quintin Vismanos, as evidenced by the Acknowledgement
of Participating Capital the Remotigue spouses executed in 1957. He contends that from this partnership,
several other corporations and businesses were established and several real properties were acquired. In this
petition, he is essentially asking for his 6% share in the subject real properties. He is relying on the
Acknowledgement of Participating Capital, on his own testimony, and Antonieta Jarantilla’s testimony to support
this contention.

ISSUE:

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?

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.

HELD:

In this case, we find no error in the ruling of the Court of Appeals.

Both the petitioner and Antonieta Jarantilla characterize their relationship with the respondents as a co-
ownership, but in the same breath, assert that a verbal partnership was formed in 1946 and was affirmed in the
1957 Acknowledgement of Participating Capital.

There is a co-ownership when an undivided thing or right belongs to different persons. 34 It is a partnership when
two or more persons bind themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves.

The Court, in Pascual v. The Commissioner of Internal Revenue, quoted the concurring opinion of Mr. Justice
Angelo Bautista in Evangelista v. The Collector of Internal Revenue to further elucidate on the distinctions
between a co-ownership and a partnership, to wit:

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.

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. It is not denied that all the parties in this case have agreed to contribute capital to a
common fund to be able to later on share its profits. They have admitted this fact, agreed to its veracity, and
even submitted one common documentary evidence to prove such partnership - the Acknowledgement of
Participating Capital.

As this case revolves around the legal effects of the Acknowledgement of Participating Capital, it would be
instructive to examine the pertinent portions of this document:

ACKNOWLEDGEMENT OF PARTICIPATING CAPITAL

KNOW ALL MEN BY THESE PRESENTS:

That we, the spouses Buenaventura Remotigue and Conchita Jarantilla de Remotigue, both of legal age, Filipinos and
residents of Loyola Heights, Quezon City, P.I. hereby state:
That the Manila Athletic Supply at 712 Raon, Manila, the Remotigue Trading of Calle Real, Iloilo City and the
Remotigue Trading, Cotabato Branch, Cotabato, P.I., all dealing in athletic goods and equipments, and general
merchandise are recorded in their respective books with Buenaventura Remotigue as the registered owner and are
being operated by them as such:

That they are not the only owners of the capital of the three establishments and their participation in the capital of the
three establishments together with the other co-owners as of the year 1952 are stated as follows:

1. Buenaventura Remotigue (TWENTY-FIVE THOUSAND)₱25,000.00

2. Conchita Jarantilla de Remotigue (TWENTY-FIVE THOUSAND)… 25,000.00
3. Vicencio Deocampo (FIFTEEN THOUSAND)…… 15,000.00
4. Rosita J. Deocampo (FIFTEEN THOUSAND)….... 15,000.00
5. Antonieta Jarantilla (EIGHT THOUSAND)……….. 8,000.00
6. Rafael Jarantilla (SIX THOUSAND)…………….. ... 6,000.00
7. Federico Jarantilla, Jr. (FIVE THOUSAND)……….. 5,000.00
8. Quintin Vismanos (TWO THOUSAND)…………... 2,000.00

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
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.

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, the Court held that since a partnership is a separate juridical entity, the shares to be paid
out to the partners is necessarily limited only to its total resources, to wit:

Since it is the partnership, as a separate and distinct entity, that must refund the shares of the partners, the
amount to be refunded is necessarily limited to its total resources. In other words, it can only pay out what it has
in its coffers, which consists of all its assets. However, before the partners can be paid their shares, the creditors
of the partnership must first be compensated. After all the creditors have been paid, whatever is left of the
partnership assets becomes available for the payment of the partners’ shares. 42

There is no evidence that the subject real properties were assets of the partnership referred to in the
Acknowledgement of Participating Capital.

The petitioner further asserts that he is entitled to respondents’ properties based on the concept of trust. He
claims that since the subject real properties were purchased using funds of the partnership, wherein he has a
6% share, then "law and equity mandates that he should be considered as a co-owner of those properties in
such proportion."

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.

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."

The petitioner has failed to prove that there exists a trust over the subject real properties. Aside from his bare
allegations, he has failed to show that the respondents used the partnership’s money to purchase the said
properties. Even assuming arguendo that some partnership income was used to acquire these properties, the
petitioner should have successfully shown that these funds came from his share in the partnership profits. After
all, by his own admission, and as stated in the Acknowledgement of Participating Capital, he owned a mere 6%
equity in the partnership.

In essence, the petitioner is claiming his 6% share in the subject real properties, by relying on his own self-
serving testimony and the equally biased testimony of Antonieta Jarantilla. Petitioner has not presented
evidence, other than these unsubstantiated testimonies, to prove that the respondents did not have the means to
fund their other businesses and real properties without the partnership’s income.

On the other hand, the respondents have not only, by testimonial evidence, proven their case against the
petitioner, but have also presented sufficient documentary evidence to substantiate their claims, allegations and
defenses. They presented preponderant proof on how they acquired and funded such properties in addition to
tax receipts and tax declarations. 47 It has been held that "while tax declarations and realty tax receipts do not
conclusively prove ownership, they may constitute strong evidence of ownership when accompanied by
possession for a period sufficient for prescription." 48 Moreover, it is a rule in this jurisdiction that testimonial
evidence cannot prevail over documentary evidence. 49 This Court had on several occasions, expressed our
disapproval on using mere self-serving testimonies to support one’s claim. In Ocampo v. Ocampo, 50 a case on
partition of a co-ownership, we held that:

Petitioners assert that their claim of co-ownership of the property was sufficiently proved by their witnesses --
Luisa Ocampo-Llorin and Melita Ocampo. We disagree. Their testimonies cannot prevail over the array of
documents presented by Belen. A claim of ownership cannot be based simply on the testimonies of witnesses;
much less on those of interested parties, self-serving as they are. 51

It is true that a certificate of title is merely an evidence of ownership or title over the particular property described
therein. Registration in the Torrens system does not create or vest title as registration is not a mode of acquiring
ownership; hence, this cannot deprive an aggrieved party of a remedy in law. 52 However, petitioner asserts
ownership over portions of the subject real properties on the strength of his own admissions and on the
testimony of Antonieta Jarantilla.  As held by this Court in Republic of the Philippines v. Orfinada, Sr.53:
1avvphi1

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.

[G.R. No. 142293. February 27, 2003.]

VICENTE SY, TRINIDAD PAULINO, 6B’S TRUCKING CORPORATION, and SBT 1 TRUCKING
CORPORATION v. HON. COURT OF APPEALS, and JAIME SAHOT

Sometime in 1958, private respondent Jaime Sahot 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, HPM, UTI, Osteoarthritis, and heart enlargement. 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
petitioners’ 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. v. 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 materia and
Sahot’s complaint ought also to be dismissed.

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

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

Hence, the instant petition anchored on the following contentions:

1. 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.

2. 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).

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

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.

HELD:

Before a case for illegal dismissal can prosper, an employer-employee relationship must first be established.
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.

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.

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.

As found by the appellate court, petitioners owned and operated a trucking business since the 1950s and by
their own allegations, they determined private respondent’s wages and rest day. 20 Records of the case show
that private respondent actually engaged in work as an employee. During the entire course of his employment
he did not have the freedom to determine where he would go, what he would do, and how he would do it. He
merely followed instructions of petitioners and was content to do so, as long as he was paid his wages. Indeed,
said the CA, private respondent had worked as a truck helper and driver of petitioners not for his own pleasure
but under the latter’s control.

Article 1767 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.

 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 fact 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.

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

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

While it was 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.

In termination cases, the burden is upon the employer to show by substantial evidence that the termination was
for lawful cause and validly made. Article 277(b) of the Labor Code puts the burden of proving that the dismissal
of an employee was for a valid or authorized cause on the employer, without distinction whether the employer
admits or does not admit the dismissal. For an employee’s dismissal to be valid, (a) the dismissal must be for a
valid cause and (b) the employee must be afforded due process.

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:

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

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

As this Court stated in Triple Eight Integrated Services, Inc. v. 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 v. 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.

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

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

[G.R. No. 134559. December 9, 1999.]

ANTONIA. TORRES assisted by her husband, ANGELO TORRES; and EMETERIA BARING v. COURT OF
APPEALS and MANUEL TORRES

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.

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. 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.
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.

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:

"Article 1797 — The losses and profits shall be distributed in conformity with the agreement. If only the share of
each partner in the profits has been agreed upon, the share of each in the losses shall be in the same
proportion."

The CA elucidated further:

"In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what he
may have contributed, but the industrial partner shall not be liable for the losses. As for the profits, the industrial
partner shall receive such share as may be just and equitable under the circumstances. If besides his services
he has contributed capital, he shall also receive a share in the profits in proportion to his capital."

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."

HELD:

The Petition is bereft of merit.

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.

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.

"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."

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:

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

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:

ARTICLE 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only
to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law.

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:

ARTICLE 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an
inventory of said property is not made, signed by the parties, and attached to the public instrument.

They contend that since the parties did not make, sign or attach to the public instrument an inventory of the real
property contributed, the partnership is void.

We clarify.

First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo M. Tolentino states
that under the aforecited provision which is a complement of Article 1771, 12 "the execution of a public
instrument would be useless if there is no inventory of the property contributed, because without its designation
and description, they cannot be subject to inscription in the Registry of Property, and their contribution cannot
prejudice third persons. This will result in fraud to those who contract with the partnership in the belief [in] the
efficacy of the guaranty in which the immovables may consist. Thus, the contract is declared void by the law
when no such inventory is made." The case at bar does not involve third parties who may be prejudiced.

Second, petitioners themselves invoke the allegedly void contract as basis for their claim that respondent should
pay them 60 percent of the value of the property. 13 They cannot in one breath deny the contract and in another
recognize it, depending on what momentarily suits their purpose. Parties cannot adopt inconsistent positions in
regard to a contract and courts will not tolerate, much less approve, such practice.

In short, the alleged nullity of the partnership will not prevent courts from considering the Joint Venture
Agreement an ordinary contract from which the parties’ rights and obligations to each other may be inferred and
enforced.
Partnership Agreement Not the Result of an Earlier Illegal Contract

Petitioners also contend that the Joint Venture Agreement is void under Article 1422 14 of the Civil Code,
because it is the direct result of an earlier illegal contract, which was for the sale of the land without valid
consideration.

This argument is puerile.

The Joint Venture Agreement clearly states that the consideration for the sale was the expectation of profits from
the subdivision project. Its first stipulation states that petitioners did not actually receive payment for the parcel of
land sold to Respondent. Consideration, more properly denominated as cause, can take different forms, such as
the prestation or promise of a thing or service by another.

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 respondent was solely responsible for the failure of the subdivision project, petitioners maintain
that he should be made to pay damages equivalent to 60 percent of the value of the property, which was their
share in the profits under the Joint Venture Agreement.

We are not persuaded.

True, the Court of Appeals held that petitioners’ acts were not the cause of the failure of the project. But it also
ruled that neither was respondent responsible therefor. 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. Accordingly, we
find no reversible error in the CA’s ruling that petitioners are not entitled to damages.

WHEREFORE, the Petition is hereby DENIED and the challenged Decision AFFIRMED. Costs against petitioners.

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES, INC.

A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to
divide the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital
of their own to a "common fund." Their contribution may be in the form of credit or industry, not necessarily cash
or fixed assets. Being partners, they are all liable for debts incurred by or on behalf of the partnership. The
liability for a contract entered into on behalf of an unincorporated association or ostensible corporation may lie in
a person who may not have directly transacted on its behalf, but reaped benefits from that contract.

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.

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent filed a collection
suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit
was brought against the three in their capacities as general partners, on the allegation that "Ocean Quest
Fishing Corporation" was a nonexistent corporation as shown by a Certification from the Securities and
Exchange Commission. 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.

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.

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.

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."

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.

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

Ruling of the Court of Appeals

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

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

Hence, petitioner brought this recourse before this Court.

Issues

1. 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.

2. 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.
 3. 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 purchased from respondent,
the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have
entered into a partnership.

HELD:

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

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

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

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

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

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

5. That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry docking and other
expenses for the boats would be shouldered by Chua and Yao;

6. That because of the "unavailability of funds," Jesus Lim again extended a loan to the partnership in the
amount of P1 million secured by a check, because of which, Yao and Chua entrusted the ownership
papers of two other boats, Chua’s FB Lady Anne Mel and Yao’s FB Tracy to Lim Tong Lim.

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

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

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

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

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

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

Compromise Agreement Not the Sole Basis of Partnership

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

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

Petitioner Was a Partner, Not a Lessor

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

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

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

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

Corporation by Estoppel

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

Section 21 of the Corporation Code of the Philippines provides:

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

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

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."

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:

"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."

Validity of Attachment

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

Afisco Insurance Corp. vs. Court of Appeals

G.R. No. 112675, January 25, 1999

Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into a "pool" in order to
facilitate the handling of business contracted with a nonresident foreign reinsurance company. May the "clearing
house" or "insurance pool" so formed be deemed a partnership or an association that is taxable as a corporation
under the National Internal Revenue Code (NIRC)? Should the 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 government’s right to
assess and collect said tax prescribed?

FACTS:

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 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 4/5/79 545,193.60

––––––––––––
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 ==========

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."

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.

HELD:
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.

Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool or 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 risks thus reinsured. Hence, the pool did not act or earn income as a reinsurer. Its
role was limited to its principal function of "allocating and distributing the risk(s) arising from the original
insurance among the signatories to the treaty or the members of the pool based on their ability to absorb the
risk(s) ceded[;] as well as the performance of incidental functions, such as records, maintenance, collection and
custody of funds, etc."

Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share the
same risk or solidary liability; (2) there was no common fund; (3) the executive board of the pool did not exercise
control and management of its funds, unlike the board of directors of a corporation; 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."

The Court is not persuaded.

The opinion or ruling of the Commission of Internal Revenue, the agency tasked with the enforcement of tax
laws, is accorded much weight and even finality, when there is no showing that it is patently wrong, 18
particularly in this case where the findings and conclusions of the internal revenue commissioner were
subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of reviewing tax cases,
and the Court of Appeals.

Indeed, it 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.

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:

SECTION 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 NLRC’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:

SECTION 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 . . ."

SECTION 22. Definition. — When used in this Title:

(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.

Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered these unregistered
partnerships and even associations or joint accounts, which had no legal personalities apart from their individual
members. The Court of Appeals astutely applied Evangelista:

". . . 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)’"

Article 1767 of the Civil Code recognizes the creation of a contract of partnership when "two or more persons
bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the
profits among themselves."

Its requisites are:

(1) mutual contribution to a common stock, and

(2) a joint interest in the profits.

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." Meanwhile, an association
implies associates who enter into a "joint enterprise . . . for the transaction of business."

In the case before us, the ceding companies entered into a Pool Agreement or an association that would handle
all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty
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. This common fund pays for the administration and operation expenses of the pool.

(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.
 (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. 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."

The petitioner’s reliance on Pascual 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. 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.

Pool’s Remittance Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not
dividends subject to tax. They insist that taxing such remittances contravene Sections 24 (b) (I) and 263 of the
1977 NIRC and "would be tantamount to an illegal double taxation, as it would result in taxing the same premium
income twice in the hands of the same taxpayer." 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. 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, as well as Article 7 of paragraph 1 and Article 5 of paragraph 5 of the RP-
West German Tax Treaty.

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." 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." Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC which
they cite are inapplicable, because these were not yet in effect when the income was earned and when the
subject information return for the year ending 1975 was filed.

Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the
exemptions claimed. Section 255 provides that no tax shall." . . 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) pertains to tax on foreign corporations; hence, it cannot be claimed by the
ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted
exemption based solely on this provision of the Tax Code, because the same subsection specifically taxes
dividends, the type of remittances forwarded to it by the pool. Although not a signatory to the Pool Agreement,
Munich is patently an associate of the ceding companies in the entity formed, pursuant to their reinsurance
treaties which required the creation of said pool.

Under its pool arrangement with the ceding companies, Munich shared in their income and loss. This is manifest
from a reading of Articles 3 and 10 of the Quota-Share Reinsurance Treaty and Articles 3 and 10 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.
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.

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.

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, 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." 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."

PHILEX MINING CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE

G.R. No. 148187             April 16, 2008

FACTS:

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.

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.

16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the future, may
incur other obligations in favor of the MANAGERS. This Power of Attorney has been executed as
security for the payment and satisfaction of all such obligations of the PRINCIPAL in favor of the
MANAGERS and as a means to fulfill the same. Therefore, this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS’
account. After all obligations of the PRINCIPAL in favor of the MANAGERS have been paid and satisfied
in full, this Agency shall be revocable by the PRINCIPAL upon 36-month notice to the MANAGERS.

17. Notwithstanding any agreement or understanding between the PRINCIPAL and the MANAGERS to
the contrary, the MANAGERS may withdraw from this Agency by giving 6-month notice to the
PRINCIPAL. The MANAGERS shall not in any manner be held liable to the PRINCIPAL by reason alone
of such withdrawal. Paragraph 5(d) hereof shall be operative in case of the MANAGERS’ withdrawal.

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" 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.

The CTA rejected petitioner’s assertion that the advances it made for the Sto. Nino mine were in the nature of a
loan. It instead characterized the advances as petitioner’s investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The CTA held that the "Power of Attorney" executed by
petitioner and Baguio Gold was actually a partnership agreement. Since the advanced amount partook of the
nature of an investment, it could not be deducted as a bad debt from petitioner’s gross income.

The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio Gold could
not be allowed as a bad debt deduction. At the time the payments were made, Baguio Gold was not in default
since its loans were not yet due and demandable. What petitioner did was to pre-pay the loans as evidenced by
the notice sent by Bank of America showing that it was merely demanding payment of the installment and
interests due. Moreover, Citibank imposed and collected a "pre-termination penalty" for the pre-payment.

The Court of Appeals affirmed the decision of the CTA. 12 Hence, upon denial of its motion for
reconsideration,13 petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:

I. The Court of Appeals erred in construing that the advances made by Philex in the management of the Sto. Nino
Mine pursuant to the Power of Attorney partook of the nature of an investment rather than a loan.

II. The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. Nino Mine indicates
that Philex is a partner of Baguio Gold in the development of the Sto. Nino Mine notwithstanding the clear
absence of any intent on the part of Philex and Baguio Gold to form a partnership.

III. The Court of Appeals erred in relying only on the Power of Attorney and in completely disregarding the
Compromise Agreement and the Amended Compromise Agreement when it construed the nature of the
advances made by Philex.
 IV. The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad debts write-off.

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.

HELD:

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.

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.

 In this case, the non-revocation or non-withdrawal under paragraph 5(c) applies to the advances made
by petitioner who is supposedly the agent and not the principal under the contract. Thus, it cannot be
inferred from the stipulation that the parties’ relation under the agreement is one of agency coupled with
an interest and not a partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the parties was one
of agency and not a partnership. Although the said provision states that "this Agency shall be irrevocable while
any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS’
account," it does not necessarily follow that the parties entered into an agency contract coupled with an interest
that cannot be withdrawn by Baguio Gold.

It should be stressed that the main object of the "Power of Attorney" was not to confer a power in favor of
petitioner to contract with third persons on behalf of Baguio Gold but to create a business relationship between
petitioner and Baguio Gold, in which the former was to manage and operate the latter’s mine through the parties’
mutual contribution of material resources and industry.

 The essence of an agency, even one that is coupled with interest, is the agent’s ability to represent his
principal and bring about business relations between the latter and third persons. 20 Where representation
for and in behalf of the principal is merely incidental or necessary for the proper discharge of one’s
paramount undertaking under a contract, the latter may not necessarily be a contract of agency, but
some other agreement depending on the ultimate undertaking of the parties. 21

In this case, the totality of the circumstances and the stipulations in the parties’ agreement indubitably lead to the
conclusion that a partnership was formed between petitioner and Baguio Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by
petitioner under the agreement. Paragraph 5 (d) thereof provides that upon termination of the parties’ business
relations, "the ratio which the MANAGER’S account has to the owner’s account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding the claims" shall be transferred
to petitioner.22 As pointed out by the Court of Tax Appeals, petitioner was merely entitled to a proportionate
return of the mine’s assets upon dissolution of the parties’ business relations. There was nothing in the
agreement that would require Baguio Gold to make payments of the advances to petitioner as would be
recognized as an item of obligation or "accounts payable" for Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the Sto. Niño
mine upon termination, a provision that is more consistent with a partnership than a creditor-debtor relationship.
It should be pointed out that in a contract of loan, a person who receives a loan or money or any fungible thing
acquires ownership thereof and is bound to pay the creditor an equal amount of the same kind and quality. 23 In
this case, however, there was no stipulation for Baguio Gold to actually repay petitioner the cash and property
that it had advanced, but only the return of an amount pegged at a ratio which the manager’s account had to the
owner’s account.
In this connection, we find no contractual basis for the execution of the two compromise agreements in which
Baguio Gold recognized a debt in favor of petitioner, which supposedly arose from the termination of their
business relations over the Sto. Nino mine. The "Power of Attorney" clearly provides that petitioner would only
be entitled to the return of a proportionate share of the mine assets to be computed at a ratio that the manager’s
account had to the owner’s account. Except to provide a basis for claiming the advances as a bad debt
deduction, there is no reason for Baguio Gold to hold itself liable to petitioner under the compromise
agreements, for any amount over and above the proportion agreed upon in the "Power of Attorney".

Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds of millions
of pesos to another corporation with neither security, or collateral, nor a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide a specific maturity date for the advances to become
due and demandable, and the manner of payment was unclear. All these point to the inevitable conclusion that
the advances were not loans but capital contributions to a partnership.

The strongest indication that petitioner was a partner in the Sto Niño mine is the fact that it would receive 50% of
the net profits as "compensation" under paragraph 12 of the agreement. The entirety of the parties’ contractual
stipulations simply leads to no other conclusion than that petitioner’s "compensation" is actually its share in the
income of the joint venture.

Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a share in the profits of a
business is prima facie evidence that he is a partner in the business."

Petitioner asserts, however, that no such inference can be drawn against it since its share in the profits of the
Sto Niño project was in the nature of compensation or "wages of an employee", under the exception provided in
Article 1769 (4) (b).

On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who will be paid
"wages" pursuant to an employer-employee relationship. To begin with, petitioner was the manager of the
project and had put substantial sums into the venture in order to ensure its viability and profitability. By pegging
its compensation to profits, petitioner also stood not to be remunerated in case the mine had no income. It is
hard to believe that petitioner would take the risk of not being paid at all for its services, if it were truly just an
ordinary employee.

Consequently, we find that petitioner’s "compensation" under paragraph 12 of the agreement actually constitutes
its share in the net profits of the partnership. Indeed, petitioner would not be entitled to an equal share in the
income of the mine if it were just an employee of Baguio Gold. 25 It is not surprising that petitioner was to receive
a 50% share in the net profits, considering that the "Power of Attorney" also provided for an almost equal
contribution of the parties to the St. Nino mine. The "compensation" agreed upon only serves to reinforce the
notion that the parties’ relations were indeed of partners and not employer-employee.

All told, the lower courts did not err in treating petitioner’s advances as investments in a partnership known as
the Sto. Nino mine. The advances were not "debts" of Baguio Gold to petitioner inasmuch as the latter was
under no unconditional obligation to return the same to the former under the "Power of Attorney". As for the
amounts that petitioner paid as guarantor to Baguio Gold’s creditors, we find no reason to depart from the tax
court’s factual finding that Baguio Gold’s debts were not yet due and demandable at the time that petitioner paid
the same. Verily, petitioner pre-paid Baguio Gold’s outstanding loans to its bank creditors and this conclusion is
supported by the evidence on record.26

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions for
income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer,
who must prove by convincing evidence that he is entitled to the deduction claimed. 27 In this case, petitioner
failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be
deducted from its gross income. Consequently, it could not claim the advances as a valid bad debt deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No. 49385 dated June 30,
2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case No. 5200 is  AFFIRMED. Petitioner
Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982 income in the amount of
P62,811,161.31, with 20% delinquency interest computed from February 10, 1995, which is the due date given for the
payment of the deficiency income tax, up to the actual date of payment.
 G.R. No. 193138 August 20, 2018

ANICETO G. SALUDO, JR. vs. PHILIPPINE NATIONAL BANK

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.

FACTS:

Petitioner Aniceto G. Saludo, Jr. (Saludo) filed this petition for review on certiorari1 assailing the February 8,
2010 Decision2 and August 2, 2010 Resolution 3 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 ₱l89,600.00. 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 ₱l,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 letter 10 dated July 17, 2003 for SAFA Law Office to pay its
outstanding unpaid rents in the amount of ₱4,648,086.34. PNB sent another letter 11 demanding the payment of
unpaid rents in the amount of ₱5,856,803.53 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 ₱13,457,622.56 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 letter 14 dated July 7,
2005 requiring the firm to pay its rental arrears in the total amount of ₱l0,951,948.32. 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 letter 16 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 ₱25,587,838.09.

On September 1, 2006, Saludo, in his capacity as managing partner of SAFA Law Office, filed an amended
complaint17 for accounting and/or recomputation of unpaid rentals and damages against PNB in relation to the
Contract of Lease.

On October 4, 2006, PNB filed a motion to include an indispensable party as plaintiff, 18 praying that Saludo be
ordered to amend anew his complaint to include SAFA Law Office as principal plaintiff. PNB argued that the
lessee in the Contract of Lease is not Saludo but SAFA Law Office, and that Saludo merely signed the Contract
of Lease as the managing partner of the law firm. Thus, SAFA Law Office must be joined as a plaintiff in the
complaint because it is considered an indispensable party under Section 7, Rule 3 of the Rules of Court. 19

On October 13, 2006, PNB filed its answer. 20 By way of compulsory counterclaim, it sought payment from SAFA
Law Office in the sum of ₱25,587,838.09, 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 reconsideration 26 dated February 5, 2007, alleging that SAFA Law Office should be
included as a co-plaintiff because it is the principal party to the contract of lease, the one that occupied the
leased premises, and paid the monthly rentals and security deposit. In other words, it was the main actor and
direct beneficiary of the contract. Hence, it is the real party-in-interest. 27 The RTC, however, denied the motion
for reconsideration in an Order28 dated March 8, 2007.

Consequently, PNB filed a petition for certiorari 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.

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 Understanding (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).

On the question of whether SAFA Law Office is an indispensable party, the CA held that it is not. As a
partnership, it may sue or be sued in its name or by its duly authorized representative. Saludo, as managing
partner, may execute all acts of administration, including the right to sue. Furthermore, the CA found that SAFA
Law Office is not a legal entity. A partnership for the practice of law is not a legal entity but a mere relationship or
association for a particular purpose. Thus, SAFA Law Office cannot file an action in court. Based on these
premises, the CA held that the RTC did not gravely abuse its discretion in denying PNB's motion to include an
indispensable party as plaintiff.35

Nonetheless, the CA ruled that PNB's counterclaims against SAFA Law Office should not be dismissed. While
SAFA Law Office is not a legal entity, it can still be sued under Section 15, 36 Rule 3 of the Rules of Court
considering that it entered into the Contract of Lease with PNB.37

The CA further ruled that while it is true that SAFA Law Office's liability is not in solidum with Saludo as PNB
asserts, it does not necessarily follow that both of them cannot be made parties to PNB's counterclaims. Neither
should the counterclaims be dismissed on the ground that the nature of the alleged liability is solidary. According
to the CA, the presence of SAFA 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.

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.

HELD:

The petition is bereft of merit.

We hold that SAFA Law Office is a juridical entity and the real party-in- interest in the suit filed with the RTC by
Saludo against PNB. Hence, it should be joined as plaintiff in that case.

I. Contrary to Saludo's submission, SAFA Law Office is a partnership and not a single proprietorship.
Article 1767 of the Civil Code provides that by a contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the profits among
themselves. Two or more persons may also form a partnership for the exercise of a profession. Under Article
1771, a partnership may be constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary. Article 1784, on the other hand,
provides that a partnership begins from the moment of the execution of the contract, unless it is otherwise
stipulated.

Here, absent evidence of an earlier agreement, SAFA Law Office was constituted as a partnership at the time its
partners signed the Articles of Partnership45 wherein they bound themselves to establish a partnership for the
practice of law, contribute capital and industry for the purpose, and receive compensation and benefits in the
course of its operation. The opening paragraph of the Articles of Partnership reveals the unequivocal intention of
its signatories to form a partnership, to wit:

WE, the undersigned ANICETO G. SALUDO, JR., RUBEN E. AGPALO, FILEMON L. FERNANDEZ, AND
AMADO D. AQUINO, all of legal age, Filipino citizens and members of the Philippine Bar, have this day
voluntarily associated ourselves for the purpose of forming a partnership engaged in the practice of law,
effective this date, under the terms and conditions hereafter set forth, and subject to the provisions of existing
laws[.]

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
₱500,000.00.47 Said provision states:

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.

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."

Moreover, it provided for the cause and manner of dissolution of the partnership. 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. Saluda, Jr. and all liabilities shall be solely for his
account.

WHEREAS, the SEC has not approved the registration of the Articles of Incorporation and its Examiner required that
the phrase "shall not in any way be liable for any loss or liability that may be incurred by the law firm in the course of
its operation" in Article VII be deleted;
WHEREAS, the SEC Examiner likewise required that the sentence "All remaining assets upon dissolution shall accrue
exclusively to A. G. Saluda, 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. Saluda, 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 contracts which may be entered into in the name and for the
account of the partnership, under its signature and by a person authorized to act for the partnership. However,
any partner may enter into a separate obligation to perform a partnership contract.

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 prov1s1on. Consequently, the sole liability being
undertaken by Saludo serves to bind only the parties to the MOU, but never third persons like PNB.

Considering that the MOU is sanctioned by the law on partnership, it cannot change the nature of a duly-
constituted partnership. Hence, we cannot sustain Saludo's position that SAFA Law Office is a sole
proprietorship.
II.

Having settled that SAFA Law Office is a partnership, we hold that it acquired juridical personality by operation
of law. The perfection and validity of a contract of partnership brings about the creation of a juridical person
separate and distinct from the individuals comprising the partnership. Thus, Article 1768 of the Civil Code
provides:

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

Article 44 of the Civil Code likewise provides that partnerships are juridical persons, to wit:

Art. 44. The following are juridical persons:

(1) The State and its political subdivisions;

(2) Other corporations, institutions and entities for public interest or purpose, created by law; their
personality begins as soon as they have been constituted according to law;

(3) Corporations, partnerships and associations for private interest or purpose to which the law grants a
juridical personality, separate and distinct from that of each shareholder, partner or member. 54

It is this juridical personality that allows a partnership to enter into business transactions to fulfill its purposes.
Article 46 of the Civil Code provides that "[j]uridical persons may acquire and possess property of all kinds, as
well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their
organization."

SAFA Law Office entered into a contract of lease with PNB as a juridical person to pursue the objectives of the
partnership.1awp++i1 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 of PNB 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 58 the
case of Petition for Authority to Continue Use of the Firm Name "Sycip, Salazar, Feliciano, Hernandez &
Castillo" (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.

The main issue raised for the court's determination in the Sycip case is whether the two petitioner law firms may
continue using the names of their deceased partners in their respective firm names. The court decided the issue
in the negative on the basis of "legal and ethical impediments." 64 To be sure, the pronouncement that a
partnership for the practice of law is not a legal entity does not bear on either the legal or ethical obstacle for the
continued use of a deceased partner's name, inasmuch as it merely describes the nature of a law firm. The
pronouncement is not determinative of the main issue. As a matter of fact, if deleted from the judgment, the
rationale of the decision is neither affected nor altered.

Moreover, reference of the Sycip case to the In re Crawford's Estate case was made without a full consideration
of the nature of a law firm as a partnership possessed with legal personality under our Civil Code. First, we note
that while the Court mentioned that a partnership for the practice of law is not a legal entity, it also identified
petitioner law firms as partnerships over whom Civil Code provisions on partnership apply. 65 The Court thus
cannot hold that a partnership for the practice of law is not a legal entity without running into conflict with Articles
44 and 1768 of the Civil Code which provide that a partnership has a juridical personality separate and distinct
from that of each of the partners.

Second, our law on partnership does not exclude partnerships for the practice of law from its coverage. Article
1767 of the Civil Code provides that "[t]wo or more persons may also form a partnership for the exercise of a
profession." Article 1783, on the other hand, states that "[a] particular partnership has for its object determinate
things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation." Since the law
uses the word "profession" in the general sense, and does not distinguish which professional partnerships are
covered by its provisions and which are not, then no valid distinction may be made.

Finally, we stress that unlike Philippine law, American law does not treat of partnerships as forming a separate
juridical personality for all purposes. In the case of Bellis v. United States,66 the US Supreme Court stated that
law firms, as a form of partnership, are generally regarded as distinct entities for specific purposes, such as
employment, capacity to be sued, capacity to hold title to property, and more. 67 State and federal laws, however,
do not treat partnerships as distinct entities for all purposes. 68

Our jurisprudence has long recognized that American common law does not treat of partnerships as a separate
juridical entity unlike Philippine law. Hence, in the case of Campos Rueda & Co. v. Pacific Commercial
Co.,69 which was decided under the old Civil Code, we held:

Unlike the common law, the Philippine statutes consider a limited partnership as a juridical entity for all intents
and purposes, which personality is recognized in all its acts and contracts (art. 116, Code of Commerce). This
being so and the juridical personality of a limited partnership being different from that of its members, it must, on
general principle, answer for, and suffer, the consequence of its acts as such an entity capable of being the
subject of rights and obligations.

On the other hand, in the case of Commissioner of Internal Revenue v. Suter, 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.

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 SAPA 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]-plaintiff is one who has a legal right[,] while a real fparty-in-interest]-defendant is
one who has a correlative legal obligation whose act or omission violates the legal rights of the former." 74

SAFA Law Office is the party that would be benefited or injured by the judgment in the suit before the RTC.
Particularly, it is the party interested in the accounting and/or recomputation of unpaid rentals and damages in
relation to the contract of lease. It is also the party that would be liable for payment to PNB of overdue rentals, if
that claim would be proven. This is because it is the one that entered into the contract of lease with PNB. As an
entity possessed of a juridical personality, it has concomitant rights and obligations with respect to the
transactions it enters into. Equally important, the general rule under Article 1816 of the Civil Code is that
partnership assets are primarily liable for the contracts entered into in the name of the partnership and by a
person authorized to act on its behalf. All partners, including industrial ones, are only liable pro rata with all their
property after all the partnership assets have been exhausted.

In Guy v. Gacott,75 we held that under Article 1816 of the Civil Code, the partners' obligation with respect to the
partnership liabilities is subsidiary in nature. It is merely secondary and only arises if the one primarily liable fails
to sufficiently satisfy the obligation. Resort to the properties of a partner may be made only after efforts in
exhausting partnership assets have failed or if such partnership assets are insufficient to cover the entire
obligation.76

Consequently, considering that SAPA 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, SAPA 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 imp leaded 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 SAPA 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.1âwphi1

Accordingly, the complaint filed by Saludo should be amended to include SAPA 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 terms as are just. We have also held in several cases 80 that 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.
 [G.R. No. 127347. November 25, 1999.]

ALFREDO N. AGUILA, JR. v. COURT OF APPEALS and FELICIDAD S. VDA. DE ABROGAR

FACTS:

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.

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.

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.

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.

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.

On appeal, the Court of Appeals reversed. It held:

The facts and evidence show that the transaction between plaintiff-appellant and defendant-appellee is
indubitably an equitable mortgage. Article 1602 of the New Civil Code finds strong application in the case at bar
in the light of the following circumstances.

First: The purchase price for the alleged sale with right to repurchase is unusually inadequate. The property is a
two hundred forty (240) sq. m. lot. On said lot, the residential house of plaintiff-appellant stands. The property is
inside a subdivision/village. The property is situated in Marikina which is already part of Metro Manila. The
alleged sale took place in 1991 when the value of the land had considerably increased.

For this property, defendant-appellee pays only a measly P200,000.00 or P833.33 per square meter for both the
land and for the house.

Second: The disputed Memorandum of Agreement specifically provides that plaintiff-appellant is obliged to
deliver peacefully the possession of the property to the SECOND PARTY within fifteen (15) days after the
expiration of the said ninety (90) day grace period. Otherwise stated, plaintiff-appellant is to retain physical
possession of the thing allegedly sold.

In fact, plaintiff-appellant retained possession of the property "sold" as if they were still the absolute owners.
There was no provision for maintenance or expenses, much less for payment of rent.

Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the property "sold." It is well-
known that payment of taxes accompanied by actual possession of the land covered by the tax declaration,
constitute evidence of great weight that a person under whose name the real taxes were declared has a claim of
right over the land.

It is well-settled that the presence of even one of the circumstances in Article 1602 of the New Civil Code is
sufficient to declare a contract of sale with right to repurchase an equitable mortgage.

Considering that plaintiff-appellant, as vendor, was paid a price which is unusually inadequate, has retained
possession of the subject property and has continued paying the realty taxes over the subject property,
(circumstances mentioned in par. (1) (2) and (5) of Article 1602 of the New Civil Code), it must be conclusively
presumed that the transaction the parties actually entered into is an equitable mortgage, not a sale with right to
repurchase. The factors cited are in support to the finding that the Deed of Sale/Memorandum of Agreement with
right to repurchase is in actuality an equitable mortgage.
Moreover, it is undisputed that the deed of sale with right of repurchase was executed by reason of the loan
extended by defendant-appellee to plaintiff-appellant. The amount of loan being the same with the amount of the
purchase price.

Since the real intention of the party is to secure the payment of debt, now deemed to be repurchase price: the
transaction shall then be considered to be an equitable mortgage.

Being a mortgage, the transaction entered into by the parties is in the nature of a pactum commissorium which is
clearly prohibited by Article 2088 of the New Civil Code. Article 2088 of the New Civil Code reads:

ARTICLE 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should
be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of
principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the
thing pledged and mortgaged in the event of non-payment of the principal obligation within the stipulated period.

In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiff-appellant secured by a

mortgage on the property of plaintiff-appellant. The loan was payable within ninety (90) days, the period within
which plaintiff-appellant can repurchase the property. Plaintiff-appellant will pay P230,000.00 and not
P200,000.00, the P30,000.00 excess is the interest for the loan extended. Failure of plaintiff-appellee to pay the
P230,000.00 within the ninety (90) days period, the property shall automatically belong to defendant-appellee by
virtue of the deed of sale executed.

Clearly, the agreement entered into by the parties is in the nature of pactum commissorium. Therefore, the deed
of sale should be declared void as we hereby so declare to be invalid, for being violative of law.

WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET ASIDE. The questioned Deed
of Sale and the cancellation of the TCT No. 195101 issued in favor of plaintiff-appellant and the issuance of TCT No. 267073
issued in favor of defendant-appellee pursuant to the questioned Deed of Sale is hereby declared VOID and is hereby
ANNULLED. Transfer Certificate of Title No. 195101 of the Registry of Marikina is hereby ordered REINSTATED. The loan
in the amount of P230,000.00 shall be paid within ninety (90) days from the finality of this decision. In case of failure to pay
the amount of P230,000.00 from the period therein stated, the property shall be sold at public auction to satisfy the mortgage
debt and costs and if there is an excess, the same is to be given to the owner.

Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila & Co., against which this case
should have been brought; (2) the judgment in the ejectment case is a bar to the filing of the complaint for
declaration of nullity of a deed of sale in this case; and (3) the contract between A.C. Aguila & Sons, Co. and
private respondent is a pacto de retro sale and not an equitable mortgage as held by the appellate court.

HELD:
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.

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. 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.

G. R. No. 144214 - July 14, 2003

LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO JOSE vs. DONALDO EFREN C.

RAMIREZ and Spouses CESAR G. RAMIREZ JR. and CARMELITA C. RAMIREZ

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

FACTS:

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

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

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

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

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

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

Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently filed a Complaint 11 dated
November 10, 1987, for the collection of a sum of money from petitioners.

In their Answer, petitioners contended that respondents had expressed a desire to withdraw from the partnership
and had called for its dissolution under Articles 1830 and 1831 of the Civil Code; that respondents had been
paid, upon the turnover to them of furniture and equipment worth over P400,000; and that the latter had no right
to demand a return of their equity because their share, together with the rest of the capital of the partnership,
had been spent as a result of irreversible business losses.12

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

Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose of Restaurant Furniture and
Equipment14 on July 8, 1988. The furniture and the equipment stored in their house were inventoried and
appraised at P29,000.15 The display freezer was sold for P5,000 and the proceeds were paid to them. 16
After trial, the RTC 17 ruled that the parties had voluntarily entered into a partnership, which could be dissolved
at any time. Petitioners clearly intended to dissolve it when they stopped operating the restaurant.

The CA Ruling

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

Issues

(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.

HELD:

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

What Must Be Returned?

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

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

First, it seems that the appellate court was under the misapprehension that the total capital contribution was
equivalent to the gross assets to be distributed to the partners at the time of the dissolution of the partnership.
We cannot sustain the underlying idea that the capital contribution at the beginning of the partnership remains
intact, unimpaired and available for distribution or return to the partners. Such idea is speculative, conjectural
and totally without factual or legal support.
Generally, in the pursuit of a partnership business, its capital is either increased by profits earned or decreased
by losses sustained. It does not remain static and unaffected by the changing fortunes of the business. In the
present case, the financial statements presented before the trial court showed that the business had made
meager profits.26 However, notable therefrom is the omission of any provision for the depreciation 27 of the
furniture and the equipment. The amortization of the goodwill 28 (initially valued at P500,000) is not reflected
either. Properly taking these non-cash items into account will show that the partnership was actually sustaining
substantial losses, which consequently decreased the capital of the partnership. Both the trial and the appellate
courts in fact recognized the decrease of the partnership assets to almost nil, but the latter failed to recognize
the consequent corresponding decrease of the capital.

Second, the CA's finding that the partnership had an outstanding obligation in the amount of P240,658 was not
supported by evidence. We sustain the contrary finding of the RTC, which had rejected the contention that the
obligation belonged to the partnership for the following reason:

"Evidence on record failed to show the exact loan owed by the partnership to its creditors. The balance sheet
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 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.

Costs

SECTION 1, Rule 142. 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.
Note: A party to a contract cannot just evade compliance with his contractual obligations by the simple expedient
of denying the execution of such contract.