A.

Definitions/Elements/Existence – 6 cases 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
1. G.R. No. 144214 July 14, 2003 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
LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO JOSE, petitioners, business losses.12
vs.
DONALDO EFREN C. RAMIREZ and Spouses CESAR G. RAMIREZ JR. and CARMELITA C. In their Reply, respondents alleged that they did not know of any loan encumbrance on the
RAMIREZ, respondents. 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
PANGANIBAN, J.: 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
A share in a partnership can be returned only after the completion of the latter's dissolution, furniture stored in their house to be removed by petitioners as soon as the latter found a better
liquidation and winding up of the business. location for the restaurant.13

The Case 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
The Petition for Review on Certiorari before us challenges the March 23, 2000 Decision1 and the were inventoried and appraised at P29,000.15 The display freezer was sold for P5,000 and the
July 26, 2000 Resolution2 of the Court of Appeals3 (CA) in CA-GR CV No. 41026. The assailed proceeds were paid to them.16
Decision disposed as follows:
After trial, the RTC 17 ruled that the parties had voluntarily entered into a partnership, which could
"WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992 rendered by the be dissolved at any time. Petitioners clearly intended to dissolve it when they stopped operating
Regional Trial Court, Branch 148, Makati City is hereby SET ASIDE and NULLIFIED and in lieu the restaurant. Hence, the trial court, in its July 21, 1992 Decision, held there liable as follows:18
thereof a new decision is rendered ordering the [petitioners] jointly and severally to pay and
reimburse to [respondents] the amount of P253,114.00. No pronouncement as to costs."4 "WHEREFORE, judgment is hereby rendered in favor of [respondents] and against the [petitioners]
ordering the [petitioners] to pay jointly and severally the following:
Reconsideration was denied in the impugned Resolution.
(a) Actual damages in the amount of P250,000.00
The Facts
(b) Attorney's fee in the amount of P30,000.00
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 (c) Costs of suit."
"Aquarius Food House and Catering Services."5 Villareal was appointed general manager and
Carmelito Jose, operations manager. The CA Ruling

Respondent Donaldo Efren C. Ramirez joined as a partner in the business on September 5, 1984. The CA held that, although respondents had no right to demand the return of their capital
His capital contribution of P250,000 was paid by his parents, Respondents Cesar and Carmelita contribution, the partnership was nonetheless dissolved when petitioners lost interest in continuing
Ramirez.6 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
After Jesus Jose withdrew from the partnership in January 1987, his capital contribution of to show financial losses, the CA. computed their liability as follows:
P250,000 was refunded to him in cash by agreement of the partners.7
"Consequently, since what has been proven is only the outstanding obligation of the partnership in
In the same month, without prior knowledge of respondents, petitioners closed down the the amount of P240,658.00, although contracted by the partnership before [respondents'] have
restaurant, allegedly because of increased rental. The restaurant furniture and equipment were joined the partnership but in accordance with Article 1826 of the New Civil Code, they are liable
deposited in the respondents' house for storage.8 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
On March 1, 1987, respondent spouses wrote petitioners, saying that they were no longer share of [respondents], this amount of P759,342.00 must be divided into three (3) shares or in the
interested in continuing their partnership or in reopening the restaurant, and that they were amount of P253,114.00 for each share and which is the only amount which [petitioner] will return to
accepting the latter's offer to return their capital contribution.9 [respondents'] representing the contribution to the partnership minus the outstanding debt
thereof."19
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 Hence, this Petition.20
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 Issues

Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently filed a In their Memorandum,21 petitioners submit the following issues for our consideration:
Complaint11 dated November 10, 1987, for the collection of a sum of money from petitioners.
1
"9.1. Whether the Honorable Court of Appeals' decision ordering the distribution of the capital Generally, in the pursuit of a partnership business, its capital is either increased by profits earned
contribution, instead of the net capital after the dissolution and liquidation of a partnership, thereby or decreased by losses sustained. It does not remain static and unaffected by the changing
treating the capital contribution like a loan, is in accordance with law and jurisprudence; 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
"9.2. Whether the Honorable Court of Appeals' decision ordering the petitioners to jointly and omission of any provision for the depreciation27 of the furniture and the equipment. The
severally pay and reimburse the amount of [P]253,114.00 is supported by the evidence on record; amortization of the goodwill28 (initially valued at P500,000) is not reflected either. Properly taking
and 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
"9.3. Whether the Honorable Court of Appeals was correct in making [n]o pronouncement as to the appellate courts in fact recognized the decrease of the partnership assets to almost nil, but the
costs."22 latter failed to recognize the consequent corresponding decrease of the capital.

On closer scrutiny, the issues are as follows: (1) whether petitioners are liable to respondents for Second, the CA's finding that the partnership had an outstanding obligation in the amount of
the latter's share in the partnership; (2) whether the CA's computation of P253,114 as respondents' P240,658 was not supported by evidence. We sustain the contrary finding of the RTC, which had
share is correct; and (3) whether the CA was likewise correct in not assessing costs. rejected the contention that the obligation belonged to the partnership for the following reason:

This Court's Ruling "x x x [E]vidence on record failed to show the exact loan owed by the partnership to its creditors.
The balance sheet (Exh. '4') does not reveal the total loan. The Agreement (Exh. 'A') par. 6 shows
The Petition has merit. an outstanding obligation of P240,055.00 which the partnership owes to different creditors, while
the Certification issued by Mercator Finance (Exh. '8') shows that it was Sps. Diogenes P. Villareal
First Issue: and Luzviminda J. Villareal, the former being the nominal party defendant in the instant case, who
Share in Partnership obtained a loan of P355,000.00 on Oct. 1983, when the original partnership was not yet formed."

Both the trial and the appellate courts found that a partnership had indeed existed, and that it was Third, the CA failed to reduce the capitalization by P250,000, which was the amount paid by the
dissolved on March 1, 1987. They found that the dissolution took place when respondents partnership to Jesus Jose when he withdrew from the partnership.
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 Because of the above-mentioned transactions, the partnership capital was actually reduced. When
supported by the evidence on record. Respondents consequently demanded from petitioners the petitioners and respondents ventured into business together, they should have prepared for the
return of their one-third equity in the partnership. 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
We hold that respondents have no right to demand from petitioners the return of their equity share. could no longer be returned to them, because one third of the partnership properties at the time of
Except as managers of the partnership, petitioners did not personally hold its equity or assets. dissolution did not amount to that much.
"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 It is a long established doctrine that the law does not relieve parties from the effects of unwise,
partnership that must refund the equity of the retiring partners.24 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
Second Issue: have voluntarily assumed, simply because their contracts turn out to be disastrous deals or unwise
What Must Be Returned? investments.29

Since it is the partnership, as a separate and distinct entity, that must refund the shares of the Petitioners further argue that respondents acted negligently by permitting the partnership assets in
partners, the amount to be refunded is necessarily limited to its total resources. In other words, it their custody to deteriorate to the point of being almost worthless. Supposedly, the latter should
can only pay out what it has in its coffers, which consists of all its assets. However, before the have liquidated these sole tangible assets of the partnership and considered the proceeds as
partners can be paid their shares, the creditors of the partnership must first be compensated.25 payment of their net capital. Hence, petitioners argue that the turnover of the remaining
After all the creditors have been paid, whatever is left of the partnership assets becomes available partnership assets to respondents was precisely the manner of liquidating the partnership and fully
for the payment of the partners' shares. settling the latter's share in the partnership.

Evidently, in the present case, the exact amount of refund equivalent to respondents' one-third We disagree. The delivery of the store furniture and equipment to private respondents was for the
share in the partnership cannot be determined until all the partnership assets will have been purpose of storage. They were unaware that the restaurant would no longer be reopened by
liquidated — in other words, sold and converted to cash — and all partnership creditors, if any, petitioners. Hence, the former cannot be faulted for not disposing of the stored items to recover
paid. The CA's computation of the amount to be refunded to respondents as their share was thus their capital investment.
erroneous.
Third Issue:
First, it seems that the appellate court was under the misapprehension that the total capital Costs
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 Section 1, Rule 142, provides:
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. "SECTION 1. Costs ordinarily follow results of suit. — Unless otherwise provided in these rules,
costs shall be allowed to the prevailing party as a matter of course, but the court shall have power,
for special reasons, to adjudge that either party shall pay the costs of an action, or that the same
2
be divided, as may be equitable. No costs shall be allowed against the Republic of the Philippines "In July, 1986, x x x Nieves introduced Cesar Gragera to [petitioner]. Gragera, as chairman of the
unless otherwise provided by law." Monte Maria Development Corporation6 (Monte Maria, for brevity), sought short-term loans for
members of the corporation. [Petitioner] and Gragera executed an agreement providing funds for
Although, as a rule, costs are adjudged against the losing party, courts have discretion, "for special Monte Maria's members. Under the agreement, Monte Maria, represented by Gragera, was
reasons," to decree otherwise. When a lower court is reversed, the higher court normally does not entitled to P1.31 commission per thousand paid daily to [petitioner] (Exh. 'A')x x x . Nieves kept the
award costs, because the losing party relied on the lower court's judgment which is presumed to books as representative of [petitioner] while [Respondent] Arsenio, husband of Nieves, acted as
have been issued in good faith, even if found later on to be erroneous. Unless shown to be credit investigator.
patently capricious, the award shall not be disturbed by a reviewing tribunal.
"On August 6, 1986, [petitioner], x x x [Nieves] and Zabat executed the 'Article of Agreement'
WHEREFORE, the Petition is GRANTED, and the assailed Decision and Resolution SET ASIDE. which formalized their earlier verbal arrangement.
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. "[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in the same lending
business in competition with their partnership[.] Zabat was thereby expelled from the partnership.
SO ORDERED. The operations with Monte Maria continued.

"On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money and damages.
2. G.R. No. 135813 October 25, 2001 [Petitioner] charged [respondents], allegedly in their capacities as employees of [petitioner], with
having misappropriated funds intended for Gragera for the period July 8, 1986 up to March 31,
FERNANDO SANTOS, petitioner, 1987. Upon Gragera's complaint that his commissions were inadequately remitted, [petitioner]
vs. entrusted P200,000.00 to x x x Nieves to be given to Gragerax x x . Nieves allegedly failed to
SPOUSES ARSENIO and NIEVES REYES, respondents. account for the amount. [Petitioner] asserted that after examination of the records, he found that of
the total amount of P4,623,201.90 entrusted to [respondents], only P3,068,133.20 was remitted to
PANGANIBAN, J.: Gragera, thereby leaving the balance of P1,555,065.70 unaccounted for.

As a general rule, the factual findings of the Court of Appeals affirming those of the trial court are "In their answer, [respondents] asserted that they were partners and not mere employees of
binding on the Supreme Court. However, there are several exceptions to this principle. In the [petitioner]. The complaint, they alleged, was filed to preempt and prevent them from claiming their
present case, we find occasion to apply both the rule and one of the exceptions. rightful share to the profits of the partnership.

The Case "x x x Arsenio alleged that he was enticed by [petitioner] to take the place of Zabat after [petitioner]
learned of Zabat's activities. Arsenio resigned from his job at the Asian Development Bank to join
Before us is a Petition for Review on Certiorari assailing the November 28, 1997 Decision,1 as well the partnership.
as the August 17, 1998 and the October 9, 1998 Resolutions,2 issued by the Court of Appeals
(CA) in CA-GR CV No. 34742. The Assailed Decision disposed as follows: "For her part, x x x Nieves claimed that she participated in the business as a partner, as the
lending activity with Monte Maria originated from her initiative. Except for the limited period of July
"WHEREFORE, the decision appealed from is AFFIRMED save as for the counterclaim which is 8, 1986 through August 20, 1986, she did not handle sums intended for Gragera. Collections were
hereby DISMISSED. Costs against [petitioner]."3 turned over to Gragera because he guaranteed 100% payment of all sums loaned by Monte Maria.
Entries she made on worksheets were based on this assumptive 100% collection of all loans. The
Resolving respondent's Motion for Reconsideration, the August 17, 1998 Resolution ruled as loan releases were made less Gragera's agreed commission. Because of this arrangement, she
follows: neither received payments from borrowers nor remitted any amount to Gragera. Her job was
merely to make worksheets (Exhs. '15' to '15-DDDDDDDDDD') to convey to [petitioner] how much
"WHEREFORE, [respondents'] motion for reconsideration is GRANTED. Accordingly, the court's he would earn if all the sums guaranteed by Gragera were collected.
decision dated November 28, 1997 is hereby MODIFIED in that the decision appealed from is
AFFIRMED in toto, with costs against [petitioner]."4 "[Petitioner] on the other hand insisted that [respondents] were his mere employees and not
partners with respect to the agreement with Gragera. He claimed that after he discovered Zabat's
The October 9, 1998 Resolution denied "for lack of merit" petitioner's Motion for Reconsideration of activities, he ceased infusing funds, thereby causing the extinguishment of the partnership. The
the August 17, 1998 Resolution.5 agreement with Gragera was a distinct partnership [from] that of [respondent] and Zabat.
[Petitioner] asserted that [respondents] were hired as salaried employees with respect to the
The Facts partnership between [petitioner] and Gragera.

The events that led to this case are summarized by the CA as follows: "[Petitioner] further asserted that in Nieves' capacity as bookkeeper, she received all payments
from which Nieves deducted Gragera's commission. The commission would then be remitted to
"Sometime in June, 1986, [Petitioner] Fernando Santos and [Respondent] Nieves Reyes were Gragera. She likewise determined loan releases.
introduced to each other by one Meliton Zabat regarding a lending business venture proposed by
Nieves. It was verbally agreed that [petitioner would] act as financier while [Nieves] and Zabat "During the pre-trial, the parties narrowed the issues to the following points: whether [respondents]
[would] take charge of solicitation of members and collection of loan payments. The venture was were employees or partners of [petitioner], whether [petitioner] entrusted money to [respondents]
launched on June 13, 1986, with the understanding that [petitioner] would receive 70% of the for delivery to Gragera, whether the P1,555,068.70 claimed under the complaint was actually
profits while x x x Nieves and Zabat would earn 15% each. remitted to Gragera and whether [respondents] were entitled to their counterclaim for share in the
profits."7
3
Ruling of the Trial Court 39.3.2.

In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere Six(6) percent of P2,899,739.50
employees, of petitioner. It further ruled that Gragera was only a commission agent of petitioner,
not his partner. Petitioner moreover failed to prove that he had entrusted any money to Nieves. - As damages from August 3, 1987 until the P2,899,739.50 is fully paid.
Thus, respondents' counterclaim for their share in the partnership and for damages was granted.
The trial court disposed as follows: 39.3.3.

"39. P25,000.00

WHEREFORE, the Court hereby renders judgment as follows: - As moral damages

39.1. 39.3.4.

THE SECOND AMENDED COMPLAINT dated July 26, 1989 is DISMISSED. P10,000.00

39.2. - As exemplary damages

The [Petitioner] FERNANDO J. SANTOS is ordered to pay the [Respondent] NIEVES S. REYES, 39.4.
the following:
The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondents]:
39.2.1.
39.4.1.
P3,064,428.00
P50,000.00
- The 15 percent share of the [respondent] NIEVES S. REYES in the profits of her joint venture
with the [petitioner]. - As attorney's fees; and

39.2.2. 39.4.2.

Six(6) percent of P3,064,428.00 The cost of the suit."8

- As damages from August 3, 1987 until the P3,064,428.00 is fully paid. Ruling of the Court of Appeals

39.2.3. On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents was
dismissed. Upon the latter's Motion for Reconsideration, however, the trial court's Decision was
P50,000.00 reinstated in toto. Subsequently, petitioner's own Motion for Reconsideration was denied in the CA
Resolution of October 9, 1998.
- As moral damages
The CA ruled that the following circumstances indicated the existence of a partnership among the
39.2.4. parties: (1) it was Nieves who broached to petitioner the idea of starting a money-lending business
and introduced him to Gragera; (2) Arsenio received "dividends" or "profit-shares" covering the
P10,000.00 period July 15 to August 7, 1986 (Exh. "6"); and (3) the partnership contract was executed after the
Agreement with Gragera and petitioner and thus showed the parties' intention to consider it as a
- As exemplary damages transaction of the partnership. In their common venture, petitioner invested capital while
respondents contributed industry or services, with the intention of sharing in the profits of the
39.3. business.

The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondent] ARSENIO REYES, the The CA disbelieved petitioner's claim that Nieves had misappropriated a total of P200,000 which
following: was supposed to be delivered to Gragera to cover unpaid commissions. It was his task to collect
the amounts due, while hers was merely to prepare the daily cash flow reports (Exhs. "15-
39.3.1. 15DDDDDDDDDD") to keep track of his collections.

P2,899,739.50 Hence, this Petition.9

- The balance of the 15 percent share of the [respondent] ARSENIO REYES in the profits of his Issue
joint venture with the [petitioner].
4
Petitioner asks this Court to rule on the following issues:10 took over and continued the business of the former partnership with Zabat, one of the incidents of
which was the lending operations with Monte Maria.
"Whether or not Respondent Court of Appeals acted with grave abuse of discretion tantamount to
excess or lack of jurisdiction in: xxx xxx xxx

1. Holding that private respondents were partners/joint venturers and not employees of Santos in "Gragera and [petitioner] were not partners. The money-lending activities undertaken with Monte
connection with the agreement between Santos and Monte Maria/Gragera; Maria was done in pursuit of the business for which the partnership between [petitioner], Nieves
and Zabat (later Arsenio) was organized. Gragera who represented Monte Maria was merely paid
2. Affirming the findings of the trial court that the phrase 'Received by' on documents signed by commissions in exchange for the collection of loans. The commissions were fixed on gross returns,
Nieves Reyes signified receipt of copies of the documents and not of the sums shown thereon; regardless of the expenses incurred in the operation of the business. The sharing of gross returns
does not in itself establish a partnership."11
3. Affirming that the signature of Nieves Reyes on Exhibit 'E' was a forgery;
We agree with both courts on this point. By the contract of partnership, two or more persons bind
4. Finding that Exhibit 'H' [did] not establish receipt by Nieves Reyes of P200,000.00 for delivery to themselves to contribute money, property or industry to a common fund, with the intention of
Gragera; dividing the profits among themselves.12 The "Articles of Agreement" stipulated that the
signatories shall share the profits of the business in a 70-15-15 manner, with petitioner getting the
5 Affirming the dismissal of Santos' [Second] Amended Complaint; lion's share.13 This stipulation clearly proved the establishment of a partnership.

6. Affirming the decision of the trial court, upholding private respondents' counterclaim; We find no cogent reason to disagree with the lower courts that the partnership continued lending
money to the members of the Monte Maria Community Development Group, Inc., which later on
7. Denying Santos' motion for reconsideration dated September 11, 1998." changed its business name to Private Association for Community Development, Inc. (PACDI).
Nieves was not merely petitioner's employee. She discharged her bookkeeping duties in
Succinctly put, the following were the issues raised by petitioner: (1) whether the parties' accordance with paragraphs 2 and 3 of the Agreement, which states as follows:
relationship was one of partnership or of employer employee; (2) whether Nieves misappropriated
the sums of money allegedly entrusted to her for delivery to Gragera as his commissions; and (3) "2. That the SECOND PARTY and THIRD PARTY shall handle the solicitation and screening of
whether respondents were entitled to the partnership profits as determined by the trial court. prospective borrowers, and shall x x x each be responsible in handling the collection of the loan
payments of the borrowers that they each solicited.
The Court's Ruling
"3. That the bookkeeping and daily balancing of account of the business operation shall be
The Petition is partly meritorious. handled by the SECOND PARTY."14

First Issue: The "Second Party" named in the Agreement was none other than Nieves Reyes. On the other
Business Relationship hand, Arsenio's duties as credit investigator are subsumed under the phrase "screening of
prospective borrowers." Because of this Agreement and the disbursement of monthly "allowances"
Petitioner maintains that he employed the services of respondent spouses in the money-lending and "profit shares" or "dividends" (Exh. "6") to Arsenio, we uphold the factual finding of both courts
venture with Gragera, with Nieves as bookkeeper and Arsenio as credit investigator. That Nieves that he replaced Zabat in the partnership.
introduced Gragera to Santos did not make her a partner. She was only a witness to the
Agreement between the two. Separate from the partnership between petitioner and Gragera was Indeed, the partnership was established to engage in a money-lending business, despite the fact
that which existed among petitioner, Nieves and Zabat, a partnership that was dissolved when that it was formalized only after the Memorandum of Agreement had been signed by petitioner and
Zabat was expelled. Gragera. Contrary to petitioner's contention, there is no evidence to show that a different business
venture is referred to in this Agreement, which was executed on August 6, 1986, or about a month
On the other hand, both the CA and the trial court rejected petitioner's contentions and ruled that after the Memorandum had been signed by petitioner and Gragera on July 14, 1986. The
the business relationship was one of partnership. We quote from the CA Decision, as follows: Agreement itself attests to this fact:

"[Respondents] were industrial partners of [petitioner]x x x . Nieves herself provided the initiative in "WHEREAS, the parties have decided to formalize the terms of their business relationship in order
the lending activities with Monte Maria. In consonance with the agreement between appellant, that their respective interests may be properly defined and established for their mutual benefit and
Nieves and Zabat (later replaced by Arsenio), [respondents] contributed industry to the common understanding."15
fund with the intention of sharing in the profits of the partnership. [Respondents] provided services
without which the partnership would not have [had] the wherewithal to carry on the purpose for Second Issue:
which it was organized and as such [were] considered industrial partners (Evangelista v. Abad No Proof of Misappropriation of Gragera's Unpaid Commission
Santos, 51 SCRA 416 [1973]).
Petitioner faults the CA finding that Nieves did not misappropriate money intended for Gragera's
"While concededly, the partnership between [petitioner,] Nieves and Zabat was technically commission. According to him, Gragera remitted his daily collection to Nieves. This is shown by
dissolved by the expulsion of Zabat therefrom, the remaining partners simply continued the Exhibit "B." (the "Schedule of Daily Payments"), which bears her signature under the words
business of the partnership without undergoing the procedure relative to dissolution. Instead, they "received by." For the period July 1986 to March 1987, Gragera should have earned a total
invited Arsenio to participate as a partner in their operations. There was therefore, no intent to commission of P4,282,429.30. However, only P3,068,133.20 was received by him. Thus, petitioner
dissolve the earlier partnership. The partnership between [petitioner,] Nieves and Arsenio simply infers that she misappropriated the difference of P1,214,296.10, which represented the unpaid

5
commissions. Exhibit "H." is an untitled tabulation which, according to him, shows that Gragera Nieves merely prepared the daily cash flow reports (Exh. '15' to '15 DDDDDDDDDD') to enable
was also entitled to a commission of P200,000, an amount that was never delivered by Nieves.16 [petitioner] to keep track of Gragera's operations. Gragera on the other hand devised the schedule
of daily payment (Exhs. 'B' and 'F') to record the projected gross daily collections.
On this point, the CA ruled that Exhibits "B," "F," "E" and "H" did not show that Nieves received for
delivery to Gragera any amount from which the P1,214,296.10 unpaid commission was supposed "As aptly observed by the court a quo:
to come, and that such exhibits were insufficient proof that she had embezzled P200,000. Said the
CA: '26.1. As between the versions of SANTOS and NIEVES on how the commissions of GRAGERA
[were] paid to him[,] that of NIEVES is more logical and practical and therefore, more believable.
"The presentation of Exhibit "D" vaguely denominated as 'members ledger' does not clearly SANTOS' version would have given rise to this improbable situation: GRAGERA would collect the
establish that Nieves received amounts from Monte Maria's members. The document does not daily amortizations and then give them to NIEVES; NIEVES would get GRAGERA's commissions
clearly state what amounts the entries thereon represent. More importantly, Nieves made the from the amortizations and then give such commission to GRAGERA."'17
entries for the limited period of January 11, 1987 to February 17, 1987 only while the rest were
made by Gragera's own staff. These findings are in harmony with the trial court's ruling, which we quote below:

"Neither can we give probative value to Exhibit 'E' which allegedly shows acknowledgment of the "21. Exh. H does not prove that SANTOS gave to NIEVES and the latter received P200,000.00 for
remittance of commissions to Verona Gonzales. The document is a private one and its due delivery to GRAGERA. Exh. H shows under its sixth column 'ADDITIONAL CASH' that the
execution and authenticity have not been duly proved as required in [S]ection 20, Rule 132 of the additional cash was P240,000.00. If Exh. H were the liquidation of the P200,000.00 as alleged by
Rules of Court which states: SANTOS, then his claim is not true. This is so because it is a liquidation of the sum of
P240,000.00.
'SECTION 20. Proof of Private Document — Before any private document offered as authentic is
received in evidence, its due execution and authenticity must be proved either: "21.1. SANTOS claimed that he learned of NIEVES' failure to give the P200,000.00 to GRAGERA
when he received the latter's letter complaining of its delayed release. Assuming as true SANTOS'
(a) By anyone who saw the document executed or written; or claim that he gave P200,000.00 to GRAGERA, there is no competent evidence that NIEVES did
not give it to GRAGERA. The only proof that NIEVES did not give it is the letter. But SANTOS did
(b) By evidence of the genuineness of the signature or handwriting of the maker. not even present the letter in evidence. He did not explain why he did not.

'Any other private document need only be identified as that which it is claimed to be.' "21.2. The evidence shows that all money transactions of the money-lending business of SANTOS
were covered by petty cash vouchers. It is therefore strange why SANTOS did not present any
"The court a quo even ruled that the signature thereon was a forgery, as it found that: voucher or receipt covering the P200,000.00."18

'x x x . But NIEVES denied that Exh. E-1 is her signature; she claimed that it is a forgery. The initial In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70 from the
stroke of Exh. E-1 starts from up and goes downward. The initial stroke of the genuine signatures partnership. She did not remit P1,214,296.10 to Gragera, because he had deducted his
of NIEVES (Exhs. A-3, B-1, F-1, among others) starts from below and goes upward. This commissions before remitting his collections. Exhibits "B" and "F" are merely computations of what
difference in the start of the initial stroke of the signatures Exhs. E-1 and of the genuine signatures Gragera should collect for the day; they do not show that Nieves received the amounts stated
lends credence to Nieves' claim that the signature Exh. E-1 is a forgery.' therein. Neither is there sufficient proof that she misappropriated P200,000, because Exhibit "H."
does not indicate that such amount was received by her; in fact, it shows a different figure.
xxx xxx xxx
Petitioner has utterly failed to demonstrate why a review of these factual findings is warranted.
"Nieves' testimony that the schedules of daily payment (Exhs. 'B' and 'F') were based on the Well-entrenched is the basic rule that factual findings of the Court of Appeals affirming those of the
predetermined 100% collection as guaranteed by Gragera is credible and clearly in accord with the trial court are binding and conclusive on the Supreme Court.19 Although there are exceptions to
evidence. A perusal of Exhs. "B" and "F" as well as Exhs. '15' to 15-DDDDDDDDDD' reveal that this rule, petitioner has not satisfactorily shown that any of them is applicable to this issue.
the entries were indeed based on the 100% assumptive collection guaranteed by Gragera. Thus,
the total amount recorded on Exh. 'B' is exactly the number of borrowers multiplied by the Third Issue:
projected collection of P150.00 per borrower. This holds true for Exh. 'F.' Accounting of Partnership

"Corollarily, Nieves' explanation that the documents were pro forma and that she signed them not Petitioner refuses any liability for respondents' claims on the profits of the partnership. He
to signify that she collected the amounts but that she received the documents themselves is more maintains that "both business propositions were flops," as his investments were "consumed and
believable than [petitioner's] assertion that she actually handled the amounts. eaten up by the commissions orchestrated to be due Gragera" — a situation that "could not have
been rendered possible without complicity between Nieves and Gragera."
"Contrary to [petitioner's] assertion, Exhibit 'H' does not unequivocally establish that x x x Nieves
received P200,000.00 as commission for Gragera. As correctly stated by the court a quo, the Respondent spouses, on the other hand, postulate that petitioner instituted the action below to
document showed a liquidation of P240.000 00 and not P200,000.00. avoid payment of the demands of Nieves, because sometime in March 1987, she "signified to
petitioner that it was about time to get her share of the profits which had already accumulated to
"Accordingly, we find Nieves' testimony that after August 20, 1986, all collections were made by some P3 million." Respondents add that while the partnership has not declared dividends or
Gragera believable and worthy of credence. Since Gragera guaranteed a daily 100% payment of liquidated its earnings, the profits are already reflected on paper. To prove the counterclaim of
the loans, he took charge of the collections. As [petitioner's] representative, Nieves, the spouses show that from June 13, 1986 up to April 19, 1987, the profit totaled
P20,429,520 (Exhs. "10" et seq. and "15" et seq.). Based on that income, her 15 percent share

6
under the joint venture amounts to P3,064,428 (Exh. "10-I-3"); and Arsenio's, P2,026,000 minus this "net profit" and not from the "gross income" or "total income" reflected in Exhibit "10-I," which
the P30,000 which was already advanced to him (Petty Cash Vouchers, Exhs. "6, 6-A to 6-B"). the two courts invariably referred to as "cash flow" sheets.

The CA originally held that respondents' counterclaim was premature, pending an accounting of Similarly, Exhibits "15" et seq.,24 which are the "Daily Cashflow Reports," do not reflect the
the partnership. However, in its assailed Resolution of August 17, 1998, it turned volte face. business expenses incurred by the parties, because they show only the daily cash collections.
Affirming the trial court's ruling on the counterclaim, it held as follows: Contrary to the rulings of both the trial and the appellate courts, respondents' exhibits do not reflect
the complete financial condition of the money-lending business. The lower courts obviously
"We earlier ruled that there is still need for an accounting of the profits and losses of the labored over a mistaken notion that Exhibit " 10-I-1" represented the "net profits" earned by the
partnership before we can rule with certainty as to the respective shares of the partners. Upon a partnership.
further review of the records of this case, however, there appears to be sufficient basis to
determine the amount of shares of the parties and damages incurred by [respondents]. The fact is For the purpose of determining the profit that should go to an industrial partner (who shares in the
that the court a quo already made such a determination [in its] decision dated August 13, 1991 on profits but is not liable for the losses), the gross income from all the transactions carried on by the
the basis of the facts on record."20 firm must be added together, and from this sum must be subtracted the expenses or the losses
sustained in the business. Only in the difference representing the net profits does the industrial
The trial court's ruling alluded to above is quoted below: partner share. But if, on the contrary, the losses exceed the income, the industrial partner does not
share in the losses.25
"27. The defendants' counterclaim for the payment of their share in the profits of their joint venture
with SANTOS is supported by the evidence. When the judgment of the CA is premised on a misapprehension of facts or a failure to notice
certain relevant facts that would otherwise justify a different conclusion, as in this particular issue,
"27.1. NIEVES testified that: Her claim to a share in the profits is based on the agreement (Exhs. a review of its factual findings may be conducted, as an exception to the general rule applied to the
5, 5-A and 5-B). The profits are shown in the working papers (Exhs. 10 to 10-I, inclusive) which first two issues.26
she prepared. Exhs. 10 to 10-I (inclusive) were based on the daily cash flow reports of which Exh.
3 is a sample. The originals of the daily cash flow reports (Exhs. 3 and 15 to 15-D(10) were given The trial court has the advantage of observing the witnesses while they are testifying, an
to SANTOS. The joint venture had a net profit of P20,429,520.00 (Exh. 10-I-1), from its operations opportunity not available to appellate courts. Thus, its assessment of the credibility of witnesses
from June 13, 1986 to April 19, 1987 (Exh. 1-I-4). She had a share of P3,064,428.00 (Exh. 10-I-3) and their testimonies are accorded great weight, even finality, when supported by substantial
and ARSENIO, about P2,926,000.00, in the profits. evidence; more so when such assessment is affirmed by the CA. But when the issue involves the
evaluation of exhibits or documents that are attached to the case records, as in the third issue, the
"27.1.1 SANTOS never denied NIEVES' testimony that the money-lending business he was rule may be relaxed. Under that situation, this Court has a similar opportunity to inspect, examine
engaged in netted a profit and that the originals of the daily case flow reports were furnished to and evaluate those records, independently of the lower courts. Hence, we deem the award of the
him. SANTOS however alleged that the money-lending operation of his joint venture with NIEVES partnership share, as computed by the trial court and adopted by the CA, to be incomplete and not
and ZABAT resulted in a loss of about half a million pesos to him. But such loss, even if true, does binding on this Court.
not negate NIEVES' claim that overall, the joint venture among them — SANTOS, NIEVES and
ARSENIO — netted a profit. There is no reason for the Court to doubt the veracity of [the WHEREFORE, the Petition is partly GRANTED. The assailed November 28, 1997 Decision is
testimony of] NIEVES. AFFIRMED, but the challenged Resolutions dated August 17, 1998 and October 9, 1998 are
REVERSED and SET ASIDE. No costs.
"27.2 The P26,260.50 which ARSENIO received as part of his share in the profits (Exhs. 6, 6-A
and 6-B) should be deducted from his total share."21 SO ORDERED.

After a close examination of respondents' exhibits, we find reason to disagree with the CA. Exhibit
"10-I"22 shows that the partnership earned a "total income" of P20,429,520 for the period June 13,
1986 until April 19, 1987. This entry is derived from the sum of the amounts under the following 3. G.R. No. 127405 October 4, 2000
column headings: "2-Day Advance Collection," "Service Fee," "Notarial Fee," "Application Fee,"
"Net Interest Income" and "Interest Income on Investment." Such entries represent the collections MARJORIE TOCAO and WILLIAM T. BELO, petitioners,
of the money-lending business or its gross income. vs.
COURT OF APPEALS and NENITA A. ANAY, respondents.
The "total income" shown on Exhibit "10-I" did not consider the expenses sustained by the
partnership. For instance, it did not factor in the "gross loan releases" representing the money DECISION
loaned to clients. Since the business is money-lending, such releases are comparable with the
inventory or supplies in other business enterprises. YNARES-SANTIAGO, J.:

Noticeably missing from the computation of the "total income" is the deduction of the weekly This is a petition for review of the Decision of the Court of Appeals in CA-G.R. CV No. 41616,1
allowance disbursed to respondents. Exhibits "I" et seq. and "J" et seq.23 show that Arsenio affirming the Decision of the Regional Trial Court of Makati, Branch 140, in Civil Case No. 88-509.2
received allowances from July 19, 1986 to March 27, 1987 in the aggregate amount of P25,500;
and Nieves, from July 12, 1986 to March 27, 1987, in the total amount of P25,600. These Fresh from her stint as marketing adviser of Technolux in Bangkok, Thailand, private respondent
allowances are different from the profit already received by Arsenio. They represent expenses that Nenita A. Anay met petitioner William T. Belo, then the vice-president for operations of Ultra Clean
should have been deducted from the business profits. The point is that all expenses incurred by Water Purifier, through her former employer in Bangkok. Belo introduced Anay to petitioner
the money-lending enterprise of the parties must first be deducted from the "total income" in order Marjorie Tocao, who conveyed her desire to enter into a joint venture with her for the importation
to arrive at the "net profit" of the partnership. The share of each one of them should be based on and local distribution of kitchen cookwares. Belo volunteered to finance the joint venture and
7
assigned to Anay the job of marketing the product considering her experience and established plaintiff also prayed for an audit of the finances of Geminesse Enterprise from the inception of its
relationship with West Bend Company, a manufacturer of kitchen wares in Wisconsin, U.S.A. business operation until she was "illegally dismissed" to determine her ten percent (10%) share in
Under the joint venture, Belo acted as capitalist, Tocao as president and general manager, and the net profits. She further prayed that she be paid the five percent (5%) "overriding commission"
Anay as head of the marketing department and later, vice-president for sales. Anay organized the on the remaining 150 West Bend cookware sets before her "dismissal."
administrative staff and sales force while Tocao hired and fired employees, determined
commissions and/or salaries of the employees, and assigned them to different branches. The In their answer,9 Marjorie Tocao and Belo asserted that the "alleged agreement" with Anay that
parties agreed that Belo’s name should not appear in any documents relating to their transactions was "neither reduced in writing, nor ratified," was "either unenforceable or void or inexistent." As
with West Bend Company. Instead, they agreed to use Anay’s name in securing distributorship of far as Belo was concerned, his only role was to introduce Anay to Marjorie Tocao. There could not
cookware from that company. The parties agreed further that Anay would be entitled to: (1) ten have been a partnership because, as Anay herself admitted, Geminesse Enterprise was the sole
percent (10%) of the annual net profits of the business; (2) overriding commission of six percent proprietorship of Marjorie Tocao. Because Anay merely acted as marketing demonstrator of
(6%) of the overall weekly production; (3) thirty percent (30%) of the sales she would make; and Geminesse Enterprise for an agreed remuneration, and her complaint referred to either her
(4) two percent (2%) for her demonstration services. The agreement was not reduced to writing on compensation or dismissal, such complaint should have been lodged with the Department of Labor
the strength of Belo’s assurances that he was sincere, dependable and honest when it came to and not with the regular court.
financial commitments.
Petitioners (defendants therein) further alleged that Anay filed the complaint on account of "ill-will
Anay having secured the distributorship of cookware products from the West Bend Company and and resentment" because Marjorie Tocao did not allow her to "lord it over in the Geminesse
organized the administrative staff and the sales force, the cookware business took off successfully. Enterprise." Anay had acted like she owned the enterprise because of her experience and
They operated under the name of Geminesse Enterprise, a sole proprietorship registered in expertise. Hence, petitioners were the ones who suffered actual damages "including unreturned
Marjorie Tocao’s name, with office at 712 Rufino Building, Ayala Avenue, Makati City. Belo made and unaccounted stocks of Geminesse Enterprise," and "serious anxiety, besmirched reputation in
good his monetary commitments to Anay. Thereafter, Roger Muencheberg of West Bend the business world, and various damages not less than P500,000.00." They also alleged that, to
Company invited Anay to the distributor/dealer meeting in West Bend, Wisconsin, U.S.A., from July "vindicate their names," they had to hire counsel for a fee of P23,000.00.
19 to 21, 1987 and to the southwestern regional convention in Pismo Beach, California, U.S.A.,
from July 25-26, 1987. Anay accepted the invitation with the consent of Marjorie Tocao who, as At the pre-trial conference, the issues were limited to: (a) whether or not the plaintiff was an
president and general manager of Geminesse Enterprise, even wrote a letter to the Visa Section of employee or partner of Marjorie Tocao and Belo, and (b) whether or not the parties are entitled to
the U.S. Embassy in Manila on July 13, 1987. A portion of the letter reads: damages.10

"Ms. Nenita D. Anay (sic), who has been patronizing and supporting West Bend Co. for twenty (20) In their defense, Belo denied that Anay was supposed to receive a share in the profit of the
years now, acquired the distributorship of Royal Queen cookware for Geminesse Enterprise, is the business. He, however, admitted that the two had agreed that Anay would receive a three to four
Vice President Sales Marketing and a business partner of our company, will attend in response to percent (3-4%) share in the gross sales of the cookware. He denied contributing capital to the
the invitation." (Italics supplied.)3 business or receiving a share in its profits as he merely served as a guarantor of Marjorie Tocao,
who was new in the business. He attended and/or presided over business meetings of the venture
Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook the task of saving in his capacity as a guarantor but he never participated in decision-making. He claimed that he
the business on account of the unsatisfactory sales record in the Makati and Cubao offices. On wrote the memo granting the plaintiff thirty-seven percent (37%) commission upon her dismissal
August 31, 1987, she received a plaque of appreciation from the administrative and sales people from the business venture at the request of Tocao, because Anay had no other income.
through Marjorie Tocao4 for her excellent job performance. On October 7, 1987, in the presence of
Anay, Belo signed a memo5 entitling her to a thirty-seven percent (37%) commission for her For her part, Marjorie Tocao denied having entered into an oral partnership agreement with Anay.
personal sales "up Dec 31/87." Belo explained to her that said commission was apart from her ten However, she admitted that Anay was an expert in the cookware business and hence, they agreed
percent (10%) share in the profits. On October 9, 1987, Anay learned that Marjorie Tocao had to grant her the following commissions: thirty-seven percent (37%) on personal sales; five percent
signed a letter6 addressed to the Cubao sales office to the effect that she was no longer the vice- (5%) on gross sales; two percent (2%) on product demonstrations, and two percent (2%) for
president of Geminesse Enterprise. The following day, October 10, she received a note from Lina recruitment of personnel. Marjorie denied that they agreed on a ten percent (10%) commission on
T. Cruz, marketing manager, that Marjorie Tocao had barred her from holding office and the net profits. Marjorie claimed that she got the capital for the business out of the sale of the
conducting demonstrations in both Makati and Cubao offices.7 Anay attempted to contact Belo. sewing machines used in her garments business and from Peter Lo, a Singaporean friend-
She wrote him twice to demand her overriding commission for the period of January 8, 1988 to financier who loaned her the funds with interest. Because she treated Anay as her "co-equal,"
February 5, 1988 and the audit of the company to determine her share in the net profits. When her Marjorie received the same amounts of commissions as her. However, Anay failed to account for
letters were not answered, Anay consulted her lawyer, who, in turn, wrote Belo a letter. Still, that stocks valued at P200,000.00.
letter was not answered.
On April 22, 1993, the trial court rendered a decision the dispositive part of which is as follows:
Anay still received her five percent (5%) overriding commission up to December 1987. The
following year, 1988, she did not receive the same commission although the company netted a "WHEREFORE, in view of the foregoing, judgment is hereby rendered:
gross sales of P13,300,360.00.
1. Ordering defendants to submit to the Court a formal account as to the partnership affairs for the
On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum of money with years 1987 and 1988 pursuant to Art. 1809 of the Civil Code in order to determine the ten percent
damages8 against Marjorie D. Tocao and William Belo before the Regional Trial Court of Makati, (10%) share of plaintiff in the net profits of the cookware business;
Branch 140.
2. Ordering defendants to pay five percent (5%) overriding commission for the one hundred and
In her complaint, Anay prayed that defendants be ordered to pay her, jointly and severally, the fifty (150) cookware sets available for disposition when plaintiff was wrongfully excluded from the
following: (1) P32,00.00 as unpaid overriding commission from January 8, 1988 to February 5, partnership by defendants;
1988; (2) P100,000.00 as moral damages, and (3) P100,000.00 as exemplary damages. The
8
3. Ordering defendants to pay plaintiff overriding commission on the total production which for the a quo.14 In this case, both the trial court and the Court of Appeals are one in ruling that petitioners
period covering January 8, 1988 to February 5, 1988 amounted to P32,000.00; and private respondent established a business partnership. This Court finds no reason to rule
otherwise.
4. Ordering defendants to pay P100,000.00 as moral damages and P100,000.00 as exemplary
damages, and To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or more
persons bind themselves to contribute money, property or industry to a common fund; and (2)
5. Ordering defendants to pay P50,000.00 as attorney’s fees and P20,000.00 as costs of suit. intention on the part of the partners to divide the profits among themselves.15 It may be
constituted in any form; a public instrument is necessary only where immovable property or real
SO ORDERED." rights are contributed thereto.16 This implies that since a contract of partnership is consensual, an
oral contract of partnership is as good as a written one. Where no immovable property or real
The trial court held that there was indeed an "oral partnership agreement between the plaintiff and rights are involved, what matters is that the parties have complied with the requisites of a
the defendants," based on the following: (a) there was an intention to create a partnership; (b) a partnership. The fact that there appears to be no record in the Securities and Exchange
common fund was established through contributions consisting of money and industry, and (c) Commission of a public instrument embodying the partnership agreement pursuant to Article 1772
there was a joint interest in the profits. The testimony of Elizabeth Bantilan, Anay’s cousin and the of the Civil Code17 did not cause the nullification of the partnership. The pertinent provision of the
administrative officer of Geminesse Enterprise from August 21, 1986 until it was absorbed by Civil Code on the matter states:
Royal International, Inc., buttressed the fact that a partnership existed between the parties. The
letter of Roger Muencheberg of West Bend Company stating that he awarded the distributorship to Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the
Anay and Marjorie Tocao because he was convinced that with Marjorie’s financial contribution and partners, even in case of failure to comply with the requirements of article 1772, first paragraph.
Anay’s experience, the combination of the two would be invaluable to the partnership, also
supported that conclusion. Belo’s claim that he was merely a "guarantor" has no basis since there Petitioners admit that private respondent had the expertise to engage in the business of
was no written evidence thereof as required by Article 2055 of the Civil Code. Moreover, his acts of distributorship of cookware. Private respondent contributed such expertise to the partnership and
attending and/or presiding over meetings of Geminesse Enterprise plus his issuance of a memo hence, under the law, she was the industrial or managing partner. It was through her reputation
giving Anay 37% commission on personal sales belied this. On the contrary, it demonstrated his with the West Bend Company that the partnership was able to open the business of distributorship
involvement as a partner in the business. of that company’s cookware products; it was through the same efforts that the business was
propelled to financial success. Petitioner Tocao herself admitted private respondent’s
The trial court further held that the payment of commissions did not preclude the existence of the indispensable role in putting up the business when, upon being asked if private respondent held
partnership inasmuch as such practice is often resorted to in business circles as an impetus to the positions of marketing manager and vice-president for sales, she testified thus:
bigger sales volume. It did not matter that the agreement was not in writing because Article 1771
of the Civil Code provides that a partnership may be "constituted in any form." The fact that "A: No, sir at the start she was the marketing manager because there were no one to sell yet, it’s
Geminesse Enterprise was registered in Marjorie Tocao’s name is not determinative of whether or only me there then her and then two (2) people, so about four (4). Now, after that when she
not the business was managed and operated by a sole proprietor or a partnership. What was recruited already Oscar Abella and Lina Torda-Cruz these two (2) people were given the
registered with the Bureau of Domestic Trade was merely the business name or style of designation of marketing managers of which definitely Nita as superior to them would be the Vice
Geminesse Enterprise. President."18

The trial court finally held that a partner who is excluded wrongfully from a partnership is an By the set-up of the business, third persons were made to believe that a partnership had indeed
innocent partner. Hence, the guilty partner must give him his due upon the dissolution of the been forged between petitioners and private respondents. Thus, the communication dated June 4,
partnership as well as damages or share in the profits "realized from the appropriation of the 1986 of Missy Jagler of West Bend Company to Roger Muencheberg of the same company states:
partnership business and goodwill." An innocent partner thus possesses "pecuniary interest in
every existing contract that was incomplete and in the trade name of the co-partnership and assets "Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the operations.
at the time he was wrongfully expelled." Marge does not have cookware experience. Nita Anay has started to gather former managers,
Lina Torda and Dory Vista. She has also gathered former demonstrators, Betty Bantilan, Eloisa
Petitioners’ appeal to the Court of Appeals11 was dismissed, but the amount of damages awarded Lamela, Menchu Javier. They will continue to gather other key people and build up the
by the trial court were reduced to P50,000.00 for moral damages and P50,000.00 as exemplary organization. All they need is the finance and the products to sell."19
damages. Their Motion for Reconsideration was denied by the Court of Appeals for lack of
merit.12 Petitioners Belo and Marjorie Tocao are now before this Court on a petition for review on On the other hand, petitioner Belo’s denial that he financed the partnership rings hollow in the face
certiorari, asserting that there was no business partnership between them and herein private of the established fact that he presided over meetings regarding matters affecting the operation of
respondent Nenita A. Anay who is, therefore, not entitled to the damages awarded to her by the the business. Moreover, his having authorized in writing on October 7, 1987, on a stationery of his
Court of Appeals. own business firm, Wilcon Builders Supply, that private respondent should receive thirty-seven
(37%) of the proceeds of her personal sales, could not be interpreted otherwise than that he had a
Petitioners Tocao and Belo contend that the Court of Appeals erroneously held that a partnership proprietary interest in the business. His claim that he was merely a guarantor is belied by that
existed between them and private respondent Anay because Geminesse Enterprise "came into personal act of proprietorship in the business. Moreover, if he was indeed a guarantor of future
being" exactly a year before the "alleged partnership" was formed, and that it was very unlikely that debts of petitioner Tocao under Article 2053 of the Civil Code,20 he should have presented
petitioner Belo would invest the sum of P2,500,000.00 with petitioner Tocao contributing nothing, documentary evidence therefor. While Article 2055 of the Civil Code simply provides that guaranty
without any "memorandum whatsoever regarding the alleged partnership."13 must be "express," Article 1403, the Statute of Frauds, requires that "a special promise to answer
for the debt, default or miscarriage of another" be in writing.21
The issue of whether or not a partnership exists is a factual matter which are within the exclusive
domain of both the trial and appellate courts. This Court cannot set aside factual findings of such Petitioner Tocao, a former ramp model,22 was also a capitalist in the partnership. She claimed that
courts absent any showing that there is no evidence to support the conclusion drawn by the court she herself financed the business. Her and petitioner Belo’s roles as both capitalists to the
9
partnership with private respondent are buttressed by petitioner Tocao’s admissions that petitioner
Belo was her boyfriend and that the partnership was not their only business venture together. They A: Yes, sir.
also established a firm that they called "Wiji," the combination of petitioner Belo’s first name,
William, and her nickname, Jiji.23 The special relationship between them dovetails with petitioner Q: I am calling again your attention to Exh. ‘Y’ ‘Overrides Makati the other one is ---
Belo’s claim that he was acting in behalf of petitioner Tocao. Significantly, in the early stage of the
business operation, petitioners requested West Bend Company to allow them to "utilize their A: That is the same thing, sir.
banking and trading facilities in Singapore" in the matter of importation and payment of the
cookware products.24 The inevitable conclusion, therefore, was that petitioners merged their Q: With ending August 21, words and figure ‘Overrides Marjorie Ann Tocao P15,314.25’ the
respective capital and infused the amount into the partnership of distributing cookware with private amount there you will acknowledge you have received that?
respondent as the managing partner.
A: Yes, sir.
The business venture operated under Geminesse Enterprise did not result in an employer-
employee relationship between petitioners and private respondent. While it is true that the receipt Q: Again in concept of commission, representation, promotion, etc.?
of a percentage of net profits constitutes only prima facie evidence that the recipient is a partner in
the business,25 the evidence in the case at bar controverts an employer-employee relationship A: Yes, sir.
between the parties. In the first place, private respondent had a voice in the management of the
affairs of the cookware distributorship,26 including selection of people who would constitute the Q: Okey. Below your name is the name of Nita Anay P15,314.25 that is also an indication that she
administrative staff and the sales force. Secondly, petitioner Tocao’s admissions militate against received the same amount?
an employer-employee relationship. She admitted that, like her who owned Geminesse
Enterprise,27 private respondent received only commissions and transportation and representation A: Yes, sir.
allowances28 and not a fixed salary.29 Petitioner Tocao testified:
Q: And, as in your previous statement it is not by coincidence that these two (2) are the same?
"Q: Of course. Now, I am showing to you certain documents already marked as Exhs. ‘X’ and ‘Y.’
Please go over this. Exh. ‘Y’ is denominated `Cubao overrides’ 8-21-87 with ending August 21, A: No, sir.
1987, will you please go over this and tell the Honorable Court whether you ever came across this
document and know of your own knowledge the amount --- Q: It is again in concept of you treating Miss Anay as your equal?

A: Yes, sir this is what I am talking about earlier. That’s the one I am telling you earlier a certain A: Yes, sir." (Italics supplied.)30
percentage for promotions, advertising, incentive.
If indeed petitioner Tocao was private respondent’s employer, it is difficult to believe that they shall
Q: I see. Now, this promotion, advertising, incentive, there is a figure here and words which I receive the same income in the business. In a partnership, each partner must share in the profits
quote: ‘Overrides Marjorie Ann Tocao P21,410.50’ this means that you have received this amount? and losses of the venture, except that the industrial partner shall not be liable for the losses.31 As
an industrial partner, private respondent had the right to demand for a formal accounting of the
A: Oh yes, sir. business and to receive her share in the net profit.32

Q: I see. And, by way of amplification this is what you are saying as one representing commission, The fact that the cookware distributorship was operated under the name of Geminesse Enterprise,
representation, advertising and promotion? a sole proprietorship, is of no moment. What was registered with the Bureau of Domestic Trade on
August 19, 1987 was merely the name of that enterprise.33 While it is true that in her undated
A: Yes, sir. application for renewal of registration of that firm name, petitioner Tocao indicated that it would be
engaged in retail of "kitchenwares, cookwares, utensils, skillet,"34 she also admitted that the
Q: I see. Below your name is the words and figure and I quote ‘Nita D. Anay P21,410.50’, what is enterprise was only "60% to 70% for the cookware business," while 20% to 30% of its business
this? activity was devoted to the sale of water sterilizer or purifier.35 Indubitably then, the business
name Geminesse Enterprise was used only for practical reasons - it was utilized as the common
A: That’s her overriding commission. name for petitioner Tocao’s various business activities, which included the distributorship of
cookware.
Q: Overriding commission, I see. Of course, you are telling this Honorable Court that there being
the same P21,410.50 is merely by coincidence? Petitioners underscore the fact that the Court of Appeals did not return the "unaccounted and
unremitted stocks of Geminesse Enterprise amounting to P208,250.00."36 Obviously a ploy to
A: No, sir, I made it a point that we were equal because the way I look at her kasi, you know in a offset the damages awarded to private respondent, that claim, more than anything else, proves the
sense because of her expertise in the business she is vital to my business. So, as part of the existence of a partnership between them. In Idos v. Court of Appeals, this Court said:
incentive I offer her the same thing.
"The best evidence of the existence of the partnership, which was not yet terminated (though in the
Q: So, in short you are saying that this you have shared together, I mean having gotten from the winding up stage), were the unsold goods and uncollected receivables, which were presented to
company P21,140.50 is your way of indicating that you were treating her as an equal? the trial court. Since the partnership has not been terminated, the petitioner and private
complainant remained as co-partners. x x x."37
A: As an equal.

Q: As an equal, I see. You were treating her as an equal?

10
It is not surprising then that, even after private respondent had been unceremoniously booted out dissolution. The appealed decisions of the Regional Trial Court and the Court of Appeals are
of the partnership in October 1987, she still received her overriding commission until December AFFIRMED with MODIFICATIONS, as follows ---
1987.
1. Petitioners are ordered to submit to the Regional Trial Court a formal account of the partnership
Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the partnership to affairs for the years 1987 and 1988, pursuant to Article 1809 of the Civil Code, in order to
reap for herself and/or for petitioner Belo financial gains resulting from private respondent’s efforts determine private respondent’s ten percent (10%) share in the net profits of the partnership;
to make the business venture a success. Thus, as petitioner Tocao became adept in the business
operation, she started to assert herself to the extent that she would even shout at private 2. Petitioners are ordered, jointly and severally, to pay private respondent five percent (5%)
respondent in front of other people.38 Her instruction to Lina Torda Cruz, marketing manager, not overriding commission for the one hundred and fifty (150) cookware sets available for disposition
to allow private respondent to hold office in both the Makati and Cubao sales offices concretely since the time private respondent was wrongfully excluded from the partnership by petitioners;
spoke of her perception that private respondent was no longer necessary in the business
operation,39 and resulted in a falling out between the two. However, a mere falling out or 3. Petitioners are ordered, jointly and severally, to pay private respondent overriding commission
misunderstanding between partners does not convert the partnership into a sham organization.40 on the total production which, for the period covering January 8, 1988 to February 5, 1988,
The partnership exists until dissolved under the law. Since the partnership created by petitioners amounted to P32,000.00;
and private respondent has no fixed term and is therefore a partnership at will predicated on their
mutual desire and consent, it may be dissolved by the will of a partner. Thus: 4. Petitioners are ordered, jointly and severally, to pay private respondent moral damages in the
amount of P50,000.00, exemplary damages in the amount of P50,000.00 and attorney’s fees in the
"x x x. The right to choose with whom a person wishes to associate himself is the very foundation amount of P25,000.00.
and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of
that mutual resolve, along with each partner’s capability to give it, and the absence of cause for SO ORDERED.
dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure,
dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the
attendance of bad faith can prevent the dissolution of the partnership but that it can result in a 4. G.R. No. 75875 December 15, 1989
liability for damages."41
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES
An unjustified dissolution by a partner can subject him to action for damages because by the CHAMSAY, petitioners,
mutual agency that arises in a partnership, the doctrine of delectus personae allows the partners to vs.
have the power, although not necessarily the right to dissolve the partnership.42 SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A.
In this case, petitioner Tocao’s unilateral exclusion of private respondent from the partnership is BONCAN, BALDWIN YOUNG and AVELINO V. CRUZ, respondents.
shown by her memo to the Cubao office plainly stating that private respondent was, as of October
9, 1987, no longer the vice-president for sales of Geminesse Enterprise.43 By that memo, G.R. No. 75951 December 15, 1989
petitioner Tocao effected her own withdrawal from the partnership and considered herself as
having ceased to be associated with the partnership in the carrying on of the business. SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO,
Nevertheless, the partnership was not terminated thereby; it continues until the winding up of the ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and
business.44 AVELINO V. CRUX, petitioners,
vs.
The winding up of partnership affairs has not yet been undertaken by the partnership.1âwphi1 This THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P.
is manifest in petitioners’ claim for stocks that had been entrusted to private respondent in the WHITTINGHAM, CHARLES CHAMSAY and LUCIANO SALAZAR, respondents.
pursuit of the partnership business.
G.R. Nos. 75975-76 December 15, 1989
The determination of the amount of damages commensurate with the factual findings upon which it
is based is primarily the task of the trial court.45 The Court of Appeals may modify that amount LUCIANO E. SALAZAR, petitioner,
only when its factual findings are diametrically opposed to that of the lower court,46 or the award is vs.
palpably or scandalously and unreasonably excessive.47 However, exemplary damages that are SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO,
awarded "by way of example or correction for the public good,"48 should be reduced to ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A.
P50,000.00, the amount correctly awarded by the Court of Appeals. Concomitantly, the award of BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and the COURT OF APPEALS,
moral damages of P100,000.00 was excessive and should be likewise reduced to P50,000.00. respondents.
Similarly, attorney’s fees that should be granted on account of the award of exemplary damages
and petitioners’ evident bad faith in refusing to satisfy private respondent’s plainly valid, just and
demandable claims,49 appear to have been excessively granted by the trial court and should GUTIERREZ, JR., J.:
therefore be reduced to P25,000.00.
These consolidated petitions seek the review of the amended decision of the Court of Appeals in
WHEREFORE, the instant petition for review on certiorari is DENIED. The partnership among CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the
petitioners and private respondent is ordered dissolved, and the parties are ordered to effect the then Intermediate Appellate Court and directed that in all subsequent elections for directors of
winding up and liquidation of the partnership pursuant to the pertinent provisions of the Civil Code. Sanitary Wares Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot
This case is remanded to the Regional Trial Court for proper proceedings relative to said nominate more than three (3) directors; that the Filipino stockholders shall not interfere in ASI's
choice of its three (3) nominees; that, on the other hand, the Filipino stockholders can nominate
11
only six (6) candidates and in the event they cannot agree on the six (6) nominees, they shall vote Salazar, who in turn nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the last
only among themselves to determine who the six (6) nominees will be, with cumulative voting to be two nominations out of order on the basis of section 5 (a) of the Agreement, the consistent practice
allowed but without interference from ASI. of the parties during the past annual stockholders' meetings to nominate only nine persons as
nominees for the nine-member board of directors, and the legal advice of Saniwares' legal
The antecedent facts can be summarized as follows: counsel. The following events then, transpired:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of ... There were protests against the action of the Chairman and heated arguments ensued. An
manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went appeal was made by the ASI representative to the body of stockholders present that a vote be
abroad to look for foreign partners, European or American who could help in its expansion plans. taken on the ruling of the Chairman. The Chairman, Baldwin Young, declared the appeal out of
On August 15, 1962, ASI, a foreign corporation domiciled in Delaware, United States entered into order and no vote on the ruling was taken. The Chairman then instructed the Corporate Secretary
an Agreement with Saniwares and some Filipino investors whereby ASI and the Filipino investors to cast all the votes present and represented by proxy equally for the 6 nominees of the Philippine
agreed to participate in the ownership of an enterprise which would engage primarily in the Investors and the 3 nominees of ASI, thus effectively excluding the 2 additional persons
business of manufacturing in the Philippines and selling here and abroad vitreous china and nominated, namely, Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua
sanitary wares. The parties agreed that the business operations in the Philippines shall be carried protested the decision of the Chairman and announced that all votes accruing to ASI shares, a
on by an incorporated enterprise and that the name of the corporation shall initially be "Sanitary total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being cumulatively voted for the
Wares Manufacturing Corporation." three ASI nominees and Charles Chamsay, and instructed the Secretary to so vote. Luciano E.
Salazar and other proxy holders announced that all the votes owned by and or represented by
The Agreement has the following provisions relevant to the issues in these cases on the them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being voted cumulatively in favor
nomination and election of the directors of the corporation: of Luciano E. Salazar. The Chairman, Baldwin Young, nevertheless instructed the Secretary to
cast all votes equally in favor of the three ASI nominees, namely, Wolfgang Aurbach, John Griffin
3. Articles of Incorporation and David Whittingham and the six originally nominated by Rogelio Vinluan, namely, Ernesto
Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, and
(a) The Articles of Incorporation of the Corporation shall be substantially in the form annexed Baldwin Young. The Secretary then certified for the election of the following Wolfgang Aurbach,
hereto as Exhibit A and, insofar as permitted under Philippine law, shall specifically provide for John Griffin, David Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. The representative of ASI then
(1) Cumulative voting for directors: moved to recess the meeting which was duly seconded. There was also a motion to adjourn (p.
28, Rollo, AC-G.R. SP No. 05617). This motion to adjourn was accepted by the Chairman, Baldwin
xxx xxx xxx Young, who announced that the motion was carried and declared the meeting adjourned. Protests
against the adjournment were registered and having been ignored, Mr. Jaqua the ASI
5. Management representative, stated that the meeting was not adjourned but only recessed and that the meeting
would be reconvened in the next room. The Chairman then threatened to have the stockholders
(a) The management of the Corporation shall be vested in a Board of Directors, which shall consist who did not agree to the decision of the Chairman on the casting of votes bodily thrown out. The
of nine individuals. As long as American-Standard shall own at least 30% of the outstanding stock ASI Group, Luciano E. Salazar and other stockholders, allegedly representing 53 or 54% of the
of the Corporation, three of the nine directors shall be designated by American-Standard, and the shares of Saniwares, decided to continue the meeting at the elevator lobby of the American
other six shall be designated by the other stockholders of the Corporation. (pp. 51 & 53, Rollo of Standard Building. The continued meeting was presided by Luciano E. Salazar, while Andres
75875) Gatmaitan acted as Secretary. On the basis of the cumulative votes cast earlier in the meeting, the
ASI Group nominated its four nominees; Wolfgang Aurbach, John Griffin, David Whittingham and
At the request of ASI, the agreement contained provisions designed to protect it as a minority Charles Chamsay. Luciano E. Salazar voted for himself, thus the said five directors were certified
group, including the grant of veto powers over a number of corporate acts and the right to as elected directors by the Acting Secretary, Andres Gatmaitan, with the explanation that there
designate certain officers, such as a member of the Executive Committee whose vote was required was a tie among the other six (6) nominees for the four (4) remaining positions of directors and
for important corporate transactions. that the body decided not to break the tie. (pp. 37-39, Rollo of 75975-76)

Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered These incidents triggered off the filing of separate petitions by the parties with the Securities and
with the Board of Investments for availment of incentives with the condition that at least 60% of the Exchange Commission (SEC). The first petition filed was for preliminary injunction by Saniwares,
capital stock of the corporation shall be owned by Philippine nationals. Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique
Lagdameo and George F. Lee against Luciano Salazar and Charles Chamsay. The case was
The joint enterprise thus entered into by the Filipino investors and the American corporation denominated as SEC Case No. 2417. The second petition was for quo warranto and application
prospered. Unfortunately, with the business successes, there came a deterioration of the initially for receivership by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E. Salazar and
harmonious relations between the two groups. According to the Filipino group, a basic Charles Chamsay against the group of Young and Lagdameo (petitioners in SEC Case No. 2417)
disagreement was due to their desire to expand the export operations of the company to which ASI and Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of parties except
objected as it apparently had other subsidiaries of joint joint venture groups in the countries where for Avelino Cruz claimed to be the legitimate directors of the corporation.
Philippine exports were contemplated. On March 8, 1983, the annual stockholders' meeting was
held. The meeting was presided by Baldwin Young. The minutes were taken by the Secretary, The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision
Avelino Cruz. After disposing of the preliminary items in the agenda, the stockholders then upholding the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar
proceeded to the election of the members of the board of directors. The ASI group nominated and Chamsay. The ASI Group and Salazar appealed the decision to the SEC en banc which
three persons namely; Wolfgang Aurbach, John Griffin and David P. Whittingham. The Philippine affirmed the hearing officer's decision.
investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo,
Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E.
12
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by
Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. The rule is that whether the parties to a particular contract have thereby established among
SP No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions themselves a joint venture or some other relation depends upon their actual intention which is
were consolidated and the appellate court in its decision ordered the remand of the case to the determined in accordance with the rules governing the interpretation and construction of contracts.
Securities and Exchange Commission with the directive that a new stockholders' meeting of (Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales
Saniwares be ordered convoked as soon as possible, under the supervision of the Commission. Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)

Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of
(Court of Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, the parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly
John Griffin, David P. Whittingham and Charles Chamsay in G.R. No. 75875 assign the following stated that the parties' intention was to form a corporation and not a joint venture.
errors:
They specifically mention number 16 under Miscellaneous Provisions which states:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF PRIVATE
RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES WHEN IN xxx xxx xxx
FACT THERE WAS NO ELECTION AT ALL.
c) nothing herein contained shall be construed to constitute any of the parties hereto partners or
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING THEIR joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR No. 75875)
FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN SANIWARES,
THUS DEPRIVING PETITIONERS AND THE CORPORATION THEY REPRESENT OF THEIR They object to the admission of other evidence which tends to show that the parties' agreement
PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW. was to establish a joint venture presented by the Lagdameo and Young Group on the ground that
it contravenes the parol evidence rule under section 7, Rule 130 of the Revised Rules of Court.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO THE According to them, the Lagdameo and Young Group never pleaded in their pleading that the
AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH ACTION IT CANNOT "Agreement" failed to express the true intent of the parties.
LEGALLY DO. (p. 17, Rollo-75875)
The parol evidence Rule under Rule 130 provides:
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the
following grounds: Evidence of written agreements-When the terms of an agreement have been reduced to writing, it
is to be considered as containing all such terms, and therefore, there can be, between the parties
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual agreements and their successors in interest, no evidence of the terms of the agreement other than the contents
entered into by stockholders and the replacement of the conditions of such agreements with terms of the writing, except in the following cases:
never contemplated by the stockholders but merely dictated by the CA .
(a) Where a mistake or imperfection of the writing, or its failure to express the true intent and
11.2. The Amended decision would likewise sanction the deprivation of the property rights of agreement of the parties or the validity of the agreement is put in issue by the pleadings.
stockholders without due process of law in order that a favored group of stockholders may be
illegally benefitted and guaranteed a continuing monopoly of the control of a corporation. (pp. 14- (b) When there is an intrinsic ambiguity in the writing.
15, Rollo-75975-76)
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and
On the other hand, the petitioners in G.R. No. 75951 contend that: Answer to Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent
of the parties, to wit:
I
xxx xxx xxx
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING THAT THE
STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO FULLY 4. While certain provisions of the Agreement would make it appear that the parties thereto disclaim
ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE LAW. being partners or joint venturers such disclaimer is directed at third parties and is not inconsistent
with, and does not preclude, the existence of two distinct groups of stockholders in Saniwares one
II of which (the Philippine Investors) shall constitute the majority, and the other ASI shall constitute
the minority stockholder. In any event, the evident intention of the Philippine Investors and ASI in
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE entering into the Agreement is to enter into ajoint venture enterprise, and if some words in the
PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8 MARCH Agreement appear to be contrary to the evident intention of the parties, the latter shall prevail over
1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo-75951) the former (Art. 1370, New Civil Code). The various stipulations of a contract shall be interpreted
together attributing to the doubtful ones that sense which may result from all of them taken jointly
The issues raised in the petitions are interrelated, hence, they are discussed jointly. (Art. 1374, New Civil Code). Moreover, in order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally considered. (Art. 1371, New Civil
The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 Code). (Part I, Original Records, SEC Case No. 2417)
during its annual stockholders' meeting held on March 8, 1983. To answer this question the
following factors should be determined: (1) the nature of the business established by the parties It has been ruled:
whether it was a joint venture or a corporation and (2) whether or not the ASI Group may vote their
additional 10% equity during elections of Saniwares' board of directors.
13
In an action at law, where there is evidence tending to prove that the parties joined their efforts in Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing
furtherance of an enterprise for their joint profit, the question whether they intended by their capacities of a local firm are constrained to seek the technology and marketing assistance of huge
agreement to create a joint adventure, or to assume some other relation is a question of fact for multinational corporations of the developed world. Arrangements are formalized where a foreign
the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.) group becomes a minority owner of a firm in exchange for its manufacturing expertise, use of its
238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871) brand names, and other such assistance. However, there is always a danger from such
arrangements. The foreign group may, from the start, intend to establish its own sole or
In the instant cases, our examination of important provisions of the Agreement as well as the monopolistic operations and merely uses the joint venture arrangement to gain a foothold or test
testimonial evidence presented by the Lagdameo and Young Group shows that the parties agreed the Philippine waters, so to speak. Or the covetousness may come later. As the Philippine firm
to establish a joint venture and not a corporation. The history of the organization of Saniwares and enlarges its operations and becomes profitable, the foreign group undermines the local majority
the unusual arrangements which govern its policy making body are all consistent with a joint ownership and actively tries to completely or predominantly take over the entire company. This
venture and not with an ordinary corporation. As stated by the SEC: undermining of joint ventures is not consistent with fair dealing to say the least. To the extent that
such subversive actions can be lawfully prevented, the courts should extend protection especially
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the Agreement with in industries where constitutional and legal requirements reserve controlling ownership to Filipino
ASI in behalf of the Philippine nationals. He testified that ASI agreed to accept the role of minority citizens.
vis-a-vis the Philippine National group of investors, on the condition that the Agreement should
contain provisions to protect ASI as the minority. The Lagdameo Group stated in their appellees' brief in the Court of Appeal

An examination of the Agreement shows that certain provisions were included to protect the In fact, the Philippine Corporation Code itself recognizes the right of stockholders to enter into
interests of ASI as the minority. For example, the vote of 7 out of 9 directors is required in certain agreements regarding the exercise of their voting rights.
enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is contractually entitled to
designate a member of the Executive Committee and the vote of this member is required for Sec. 100. Agreements by stockholders.-
certain transactions [Sec. 3 (b) (i)].
xxx xxx xxx
The Agreement also requires a 75% super-majority vote for the amendment of the articles and by-
laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to designate the president 2. An agreement between two or more stockholders, if in writing and signed by the parties thereto,
and plant manager [Sec. 5 (6)]. The Agreement further provides that the sales policy of Saniwares may provide that in exercising any voting rights, the shares held by them shall be voted as therein
shall be that which is normally followed by ASI [Sec. 13 (a)] and that Saniwares should not export provided, or as they may agree, or as determined in accordance with a procedure agreed upon by
"Standard" products otherwise than through ASI's Export Marketing Services [Sec. 13 (6)]. Under them.
the Agreement, ASI agreed to provide technology and know-how to Saniwares and the latter paid
royalties for the same. (At p. 2). Appellants contend that the above provision is included in the Corporation Code's chapter on close
corporations and Saniwares cannot be a close corporation because it has 95 stockholders. Firstly,
xxx xxx xxx although Saniwares had 95 stockholders at the time of the disputed stockholders meeting, these
95 stockholders are not separate from each other but are divisible into groups representing a
It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of the board single Identifiable interest. For example, ASI, its nominees and lawyers count for 13 of the 95
of directors for certain actions, in effect gave ASI (which designates 3 directors under the stockholders. The YoungYutivo family count for another 13 stockholders, the Chamsay family for 8
Agreement) an effective veto power. Furthermore, the grant to ASI of the right to designate certain stockholders, the Santos family for 9 stockholders, the Dy family for 7 stockholders, etc. If the
officers of the corporation; the super-majority voting requirements for amendments of the articles members of one family and/or business or interest group are considered as one (which, it is
and by-laws; and most significantly to the issues of tms case, the provision that ASI shall respectfully submitted, they should be for purposes of determining how closely held Saniwares is
designate 3 out of the 9 directors and the other stockholders shall designate the other 6, clearly there were as of 8 March 1983, practically only 17 stockholders of Saniwares. (Please refer to
indicate that there are two distinct groups in Saniwares, namely ASI, which owns 40% of the discussion in pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11 December 1984 and Annex
capital stock and the Philippine National stockholders who own the balance of 60%, and that 2) "A" thereof).
ASI is given certain protections as the minority stockholder.
Secondly, even assuming that Saniwares is technically not a close corporation because it has
Premises considered, we believe that under the Agreement there are two groups of stockholders more than 20 stockholders, the undeniable fact is that it is a close-held corporation. Surely,
who established a corporation with provisions for a special contractual relationship between the appellants cannot honestly claim that Saniwares is a public issue or a widely held corporation.
parties, i.e., ASI and the other stockholders. (pp. 4-5)
In the United States, many courts have taken a realistic approach to joint venture corporations and
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the have not rigidly applied principles of corporation law designed primarily for public issue
selection of the nine directors on a six to three ratio. Each group is assured of a fixed number of corporations. These courts have indicated that express arrangements between corporate joint
directors in the board. ventures should be construed with less emphasis on the ordinary rules of law usually applied to
corporate entities and with more consideration given to the nature of the agreement between the
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young joint venturers (Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335; Chicago,
also testified that Section 16(c) of the Agreement that "Nothing herein contained shall be construed M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic
to constitute any of the parties hereto partners or joint venturers in respect of any transaction Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d 903;
hereunder" was merely to obviate the possibility of the enterprise being treated as partnership for Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138
tax purposes and liabilities to third parties. U.S. 262; "The Legal Status of Joint Venture Corporations", 11 Vand Law Rev. p. 680,1958).
These American cases dealt with legal questions as to the extent to which the requirements arising
from the corporate form of joint venture corporations should control, and the courts ruled that
14
substantial justice lay with those litigants who relied on the joint venture agreement rather than the pursue and implement specific purposes, as in joint venture relationships between foreign and
litigants who relied on the orthodox principles of corporation law. local stockholders, so long as such agreements do not adversely affect third parties.

As correctly held by the SEC Hearing Officer: In any event, it is believed that we are not here called upon to make a general rule on this
question. Rather, all that needs to be done is to give life and effect to the particular contractual
It is said that participants in a joint venture, in organizing the joint venture deviate from the rights and obligations which the parties have assumed for themselves.
traditional pattern of corporation management. A noted authority has pointed out that just as in
close corporations, shareholders' agreements in joint venture corporations often contain provisions On the one hand, the clearly established minority position of ASI and the contractual allocation of
which do one or more of the following: (1) require greater than majority vote for shareholder and board seats Cannot be disregarded. On the other hand, the rights of the stockholders to
director action; (2) give certain shareholders or groups of shareholders power to select a specified cumulative voting should also be protected.
number of directors; (3) give to the shareholders control over the selection and retention of
employees; and (4) set up a procedure for the settlement of disputes by arbitration (See I O' Neal, In our decision sought to be reconsidered, we opted to uphold the second over the first. Upon
Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC Hearing Officer, P. 16) further reflection, we feel that the proper and just solution to give due consideration to both factors
suggests itself quite clearly. This Court should recognize and uphold the division of the
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that stockholders into two groups, and at the same time uphold the right of the stockholders within each
agreements regarding the exercise of voting rights are allowed only in close corporations. As group to cumulative voting in the process of determining who the group's nominees would be. In
Campos and Lopez-Campos explain: practical terms, as suggested by appellant Luciano E. Salazar himself, this means that if the
Filipino stockholders cannot agree who their six nominees will be, a vote would have to be taken
Paragraph 2 refers to pooling and voting agreements in particular. Does this provision necessarily among the Filipino stockholders only. During this voting, each Filipino stockholder can cumulate
imply that these agreements can be valid only in close corporations as defined by the Code? his votes. ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Suppose that a corporation has twenty five stockholders, and therefore cannot qualify as a close Otherwise, ASI would be able to designate more than the three directors it is allowed to designate
corporation under section 96, can some of them enter into an agreement to vote as a unit in the under the Agreement, and may even be able to get a majority of the board seats, a result which is
election of directors? It is submitted that there is no reason for denying stockholders of clearly contrary to the contractual intent of the parties.
corporations other than close ones the right to enter into not voting or pooling agreements to
protect their interests, as long as they do not intend to commit any wrong, or fraud on the other Such a ruling will give effect to both the allocation of the board seats and the stockholder's right to
stockholders not parties to the agreement. Of course, voting or pooling agreements are perhaps cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by the
more useful and more often resorted to in close corporations. But they may also be found appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108, as
necessary even in widely held corporations. Moreover, since the Code limits the legal meaning of amended) and the nationalization requirements of the Constitution and the laws if ASI is allowed to
close corporations to those which comply with the requisites laid down by section 96, it is entirely nominate more than three directors. (Rollo-75875, pp. 38-39)
possible that a corporation which is in fact a close corporation will not come within the definition. In
such case, its stockholders should not be precluded from entering into contracts like voting The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right
agreements if these are otherwise valid. (Campos & Lopez-Campos, op cit, p. 405) to vote their additional equity pursuant to Section 24 of the Corporation Code which gives the
stockholders of a corporation the right to cumulate their votes in electing directors. Petitioner
In short, even assuming that sec. 5(a) of the Agreement relating to the designation or nomination Salazar adds that this right if granted to the ASI Group would not necessarily mean a violation of
of directors restricts the right of the Agreement's signatories to vote for directors, such contractual the Anti-Dummy Act (Commonwealth Act 108, as amended). He cites section 2-a thereof which
provision, as correctly held by the SEC, is valid and binding upon the signatories thereto, which provides:
include appellants. (Rollo No. 75951, pp. 90-94)
And provided finally that the election of aliens as members of the board of directors or governing
In regard to the question as to whether or not the ASI group may vote their additional equity during body of corporations or associations engaging in partially nationalized activities shall be allowed in
elections of Saniwares' board of directors, the Court of Appeals correctly stated: proportion to their allowable participation or share in the capital of such entities. (amendments
introduced by Presidential Decree 715, section 1, promulgated May 28, 1975)
As in other joint venture companies, the extent of ASI's participation in the management of the
corporation is spelled out in the Agreement. Section 5(a) hereof says that three of the nine The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The
directors shall be designated by ASI and the remaining six by the other stockholders, i.e., the point of query, however, is whether or not that provision is applicable to a joint venture with clearly
Filipino stockholders. This allocation of board seats is obviously in consonance with the minority defined agreements:
position of ASI.
The legal concept of ajoint venture is of common law origin. It has no precise legal definition but it
Having entered into a well-defined contractual relationship, it is imperative that the parties should has been generally understood to mean an organization formed for some temporary purpose.
honor and adhere to their respective rights and obligations thereunder. Appellants seem to (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly distinguishable from the partnership,
contend that any allocation of board seats, even in joint venture corporations, are null and void to since their elements are similar community of interest in the business, sharing of profits and
the extent that such may interfere with the stockholder's rights to cumulative voting as provided in losses, and a mutual right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau v.
Section 24 of the Corporation Code. This Court should not be prepared to hold that any agreement Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d.
which curtails in any way cumulative voting should be struck down, even if such agreement has 242 [1955]). The main distinction cited by most opinions in common law jurisdictions is that the
been freely entered into by experienced businessmen and do not prejudice those who are not partnership contemplates a general business with some degree of continuity, while the joint
parties thereto. It may well be that it would be more cogent to hold, as the Securities and venture is formed for the execution of a single transaction, and is thus of a temporary nature.
Exchange Commission has held in the decision appealed from, that cumulative voting rights may (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d.
be voluntarily waived by stockholders who enter into special relationships with each other to 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a
15
particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code). It On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a
would seem therefore that under Philippine law, a joint venture is a form of partnership and should cumulative voting during the election of the board of directors of the enterprise as ruled by the
thus be governed by the law of partnerships. The Supreme Court has however recognized a appellate court and submits that the six (6) directors allotted the Filipino stockholders should be
distinction between these two business forms, and has held that although a corporation cannot selected by consensus pursuant to section 5 (a) of the Agreement which uses the word
enter into a partnership contract, it may however engage in a joint venture with others. (At p. 12, "designate" meaning "nominate, delegate or appoint."
Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981) They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot
Moreover, the usual rules as regards the construction and operations of contracts generally apply determined by the majority of their group.
to a contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors
Bearing these principles in mind, the correct view would be that the resolution of the question of should not be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the
whether or not the ASI Group may vote their additional equity lies in the agreement of the parties. Agreement. As we stated earlier, section 3(a) (1) relates to the manner of voting for these
nominees which is cumulative voting while section 5(a) relates to the manner of nominating the
Necessarily, the appellate court was correct in upholding the agreement of the parties as regards members of the board of directors. The petitioners in G.R. No. 75951 agreed to this procedure,
the allocation of director seats under Section 5 (a) of the "Agreement," and the right of each group hence, they cannot now impugn its legality.
of stockholders to cumulative voting in the process of determining who the group's nominees
would be under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the The insinuation that the ASI Group may be able to control the enterprise under the cumulative
Agreement relates to the manner of nominating the members of the board of directors while voting procedure cannot, however, be ignored. The validity of the cumulative voting procedure is
Section 3 (a) (1) relates to the manner of voting for these nominees. dependent on the directors thus elected being genuine members of the Filipino group, not voters
whose interest is to increase the ASI share in the management of Saniwares. The joint venture
This is the proper interpretation of the Agreement of the parties as regards the election of character of the enterprise must always be taken into account, so long as the company exists
members of the board of directors. under its original agreement. Cumulative voting may not be used as a device to enable ASI to
achieve stealthily or indirectly what they cannot accomplish openly. There are substantial
To allow the ASI Group to vote their additional equity to help elect even a Filipino director who safeguards in the Agreement which are intended to preserve the majority status of the Filipino
would be beholden to them would obliterate their minority status as agreed upon by the parties. As investors as well as to maintain the minority status of the foreign investors group as earlier
aptly stated by the appellate court: discussed. They should be maintained.

... ASI, however, should not be allowed to interfere in the voting within the Filipino group. WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the
Otherwise, ASI would be able to designate more than the three directors it is allowed to designate petition in G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is
under the Agreement, and may even be able to get a majority of the board seats, a result which is MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V.
clearly contrary to the contractual intent of the parties. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and
George F. Lee are declared as the duly elected directors of Saniwares at the March 8,1983 annual
Such a ruling will give effect to both the allocation of the board seats and the stockholder's right to stockholders' meeting. In all other respects, the questioned decision is AFFIRMED. Costs against
cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by the the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements of the Constitution and the laws if ASI is allowed to SO ORDERED.
nominate more than three directors. (At p. 39, Rollo, 75875)

Equally important as the consideration of the contractual intent of the parties is the consideration
as regards the possible domination by the foreign investors of the enterprise in violation of the G.R. No. L-9996 October 15, 1957
nationalization requirements enshrined in the Constitution and circumvention of the Anti-Dummy
Act. In this regard, petitioner Salazar's position is that the Anti-Dummy Act allows the ASI group to EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA,
elect board directors in proportion to their share in the capital of the entity. It is to be noted, petitioners,
however, that the same law also limits the election of aliens as members of the board of directors vs.
in proportion to their allowance participation of said entity. In the instant case, the foreign Group THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
ASI was limited to designate three directors. This is the allowable participation of the ASI Group.
Hence, in future dealings, this limitation of six to three board seats should always be maintained as Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
long as the joint venture agreement exists considering that in limiting 3 board seats in the 9-man Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and
board of directors there are provisions already agreed upon and embodied in the parties' Solicitor Felicisimo R. Rosete for Respondents.
Agreement to protect the interests arising from the minority status of the foreign investors.
CONCEPCION, J.:
With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly
affirmed by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for
Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., review of a decision of the Court of Tax Appeals, the dispositive part of which reads:
Enrique Lagdameo, and George F. Lee as the duly elected directors of Saniwares at the March
8,1983 annual stockholders' meeting. FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate
dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the
16
respondent's assessment for the same in the total amount of P6,878.34, which is hereby affirmed
and the petition for review filed by petitioner is hereby dismissed with costs against petitioners. After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the
respondent, and a petition for reconsideration and new trial having been subsequently denied, the
It appears from the stipulation submitted by the parties: case is now before Us for review at the instance of the petitioners.

1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together The issue in this case whether petitioners are subject to the tax on corporations provided for in
with their personal monies was used by them for the purpose of buying real properties,. section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue
Code, as well as to the residence tax for corporations and the real estate dealers fixed tax. With
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of respect to the tax on corporations, the issue hinges on the meaning of the terms "corporation" and
3,713.40 sq. m. including improvements thereon from the sum of P100,000.00; this property has "partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:
an assessed value of P57,517.00 as of 1948;
SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an annually upon the total net income received in the preceding taxable year from all sources by
aggregate area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this property every corporation organized in, or existing under the laws of the Philippines, no matter how
has an assessed value of P82,255.00 as of 1948; created or organized but not including duly registered general co-partnerships (compañias
colectivas), a tax upon such income equal to the sum of the following: . . .
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m.
including improvements thereon for P108,825.00. This property has an assessed value of SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized,
P4,983.00 as of 1948; joint-stock companies, joint accounts (cuentas en participacion), associations or insurance
companies, but does not include duly registered general copartnerships. (compañias colectivas).
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.34. This property has an assessed value of P59,140.00 as of Article 1767 of the Civil Code of the Philippines provides:
1948;
By the contract of partnership two or more persons bind themselves to contribute money, properly,
6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to or industry to a common fund, with the intention of dividing the profits among themselves.
'manage their properties with full power to lease; to collect and receive rents; to issue receipts
therefor; in default of such payment, to bring suits against the defaulting tenants; to sign all letters, Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement
contracts, etc., for and in their behalf, and to endorse and deposit all notes and checks for them; 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,
7. That after having bought the above-mentioned real properties the petitioners had the same admittedly, petitioners have agreed to, and did, contribute money and property to a common fund.
rented or leases to various tenants; Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the
facts and circumstances surrounding the case, we are fully satisfied that their purpose was to
8. That from the month of March, 1945 up to an including December, 1945, the total amount engage in real estate transactions for monetary gain and then divide the same among themselves,
collected as rents on their real properties was P9,599.00 while the expenses amounted to because:
P3,650.00 thereby leaving them a net rental income of P5,948.33;
1. Said common fund was not something they found already in existence. It was not property
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
amount was deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental substantial portion thereof in order to establish said common fund.
income of P7,498.13;
2. They invested the same, not merely not merely in one transaction, but in a series of
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they
deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income of purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the acquisition of
P12,615.35. another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the brief
It further appears that on September 24, 1954 respondent Collector of Internal Revenue interregnum between each, particularly the last three purchases, is strongly indicative of a pattern
demanded the payment of income tax on corporations, real estate dealer's fixed tax and or common design that was not limited to the conservation and preservation of the aforementioned
corporation residence tax for the years 1945-1949, computed, according to assessment made by common fund or even of the property acquired by the petitioners in February, 1943. In other words,
said officer, as follows: one cannot but perceive a character of habitually peculiar to business transactions engaged in the
purpose of gain.
TOTAL TAXES DUE
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
P6,878.34. petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
Said letter of demand and corresponding assessments were delivered to petitioners on December being so let, for petitioners do not even suggest that there has been any change in the utilization
3, 1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that thereof.
"the decision of the respondent contained in his letter of demand dated September 24, 1954" be
reversed, and that they be absolved from the payment of the taxes in question, with costs against 4. Since August, 1945, the properties have been under the management of one person, namely
the respondent. Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to
17
sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative 'investment' trust (whether of the fixed or the management type), an interinsuarance exchange
to said properties have been handled as if the same belonged to a corporation or business and operating through an attorney in fact, a partnership association, and any other type of organization
enterprise operated for profit. (by whatever name known) which is not, within the meaning of the Code, a trust or an estate, or a
partnership. (7A Mertens Law of Federal Income Taxation, p. 788; emphasis supplied.).
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
(15) years, since the first property was acquired, and over twelve (12) years, since Simeon Similarly, the American Law.
Evangelista became the manager.
. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the partnership as known at common law but, as well, a syndicate, group, pool, joint venture or other
set up already adverted to, or on the causes for its continued existence. They did not even try to unincorporated organizations which carries on any business financial operation, or venture, and
offer an explanation therefor. which is not, within the meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's Law
of Federal Income taxation, p. 789; emphasis supplied.)
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated
the existence of said intent in petitioners herein. Only one or two of the aforementioned organization, through or by means of which any business, financial operation, or venture is carried
circumstances were present in the cases cited by petitioners herein, and, hence, those cases are on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis supplied.) .
not in point.
For purposes of the tax on corporations, our National Internal Revenue Code, includes these
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of partnerships — with the exception only of duly registered general copartnerships — within the
the acts performed by them, a legal entity, with a personality independent of that of its members, purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute
did not come into existence, and some of the characteristics of partnerships are lacking in the case a partnership, insofar as said Code is concerned and are subject to the income tax for
at bar. This pretense was correctly rejected by the Court of Tax Appeals. corporations.

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships" in part:
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for Entities liable to residence tax.-Every corporation, no matter how created or organized, whether
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual
partnerships which constitute precisely one of the most typical forms of partnerships in this residence tax of five pesos and an annual additional tax which in no case, shall exceed one
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes thousand pesos, in accordance with the following schedule: . . .
partnerships, no matter how created or organized." This qualifying expression clearly indicates that
a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account
requirements of the law on partnerships, in order that one could be deemed constituted for (cuentas en participacion), association or insurance company, no matter how created or
purposes of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" organized. (emphasis supplied.)
includes, among other, joint accounts, (cuentas en participation)" and "associations," none of
which has a legal personality of its own, independent of that of its members. Accordingly, the Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of
lawmaker could not have regarded that personality as a condition essential to the existence of the our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was
partnerships therein referred to. In fact, as above stated, "duly registered general copartnerships" approved on June 15, 1939, the day immediately after the approval of said Commonwealth Act No.
— which are possessed of the aforementioned personality — have been expressly excluded by 465 (June 14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both
law (sections 24 and 84 [b] from the connotation of the term "corporation" It may not be amiss to statutes with substantially the same meaning. Consequently, petitioners are subject, also, to the
add that petitioners' allegation to the effect that their liability in connection with the leasing of the residence tax for corporations.
lots above referred to, under the management of one person — even if true, on which we express
no opinion — tends to increase the similarity between the nature of their venture and that Lastly, the records show that petitioners have habitually engaged in leasing the properties above
corporations, and is, therefore, an additional argument in favor of the imposition of said tax on mentioned for a period of over twelve years, and that the yearly gross rentals of said properties
corporations. from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided
in section 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as,
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from pursuant to section 194 (s) thereof:
"partnerships". By specific provisions of said laws, such "corporations" include "associations, joint-
stock companies and insurance companies." However, the term "association" is not used in the 'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging,
aforementioned laws. leasing, or renting property or his own account as principal and holding himself out as a full or part
time dealer in real estate or as an owner of rental property or properties rented or offered to rent
. . . in any narrow or technical sense. It includes any organization, created for the transaction of for an aggregate amount of three thousand pesos or more a year. . . (emphasis supplied.)
designed affairs, or the attainment of some object, which like a corporation, continues
notwithstanding that its members or participants change, and the affairs of which, like corporate Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against
affairs, are conducted by a single individual, a committee, a board, or some other group, acting in the petitioners herein. It is so ordered.
a representative capacity. It is immaterial whether such organization is created by an agreement, a
declaration of trust, a statute, or otherwise. It includes a voluntary association, a joint-stock Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.
corporation or company, a 'business' trusts a 'Massachusetts' trust, a 'common law' trust, and
18
 parties, whatever relation may have been as to third parties. (Magee vs. Magee, 123 N. E. 6763,
BAUTISTA ANGELO, J., concurring: 233 Mass. 341.)

I agree with the opinion that petitioners have actually contributed money to a common fund with In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
express purpose of engaging in real estate business for profit. The series of transactions which generally a participating in both profits and losses; (c) and such a community of interest, as far as
they had undertaken attest to this. This appears in the following portion of the decision: third persons are concerned as enables each party to make contract, manage the business, and
dispose of the whole property. (Municipal Paving Co. vs Herring, 150 P. 1067, 50 Ill. 470.)
2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000. On April 3, 1944, they purchase 21 lots for The common ownership of property does not itself create a partnership between the owners,
P18,000. This was soon followed on April 23, 1944, by the acquisition of another real state for though they may use it for purpose of making gains; and they may, without becoming partners,
P108,825. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of agree among themselves as to the management and use of such property and the application of
lots (24) acquired and transactions undertaken, as well as the brief interregnum between each, the proceeds therefrom. (Spurlock vs. Wilson, 142 S. W. 363, 160 No. App. 14.)
particularly the last three purchases, is strongly indicative of a pattern or common design that was
not limited to the conservation and preservation of the aforementioned common fund or even of This is impliedly recognized in the following portion of the decision: "Although, taken singly, they
the property acquired by the petitioner in February, 1943, In other words, we cannot but perceive a might not suffice to establish the intent necessary to constitute a partnership, the collective effect
character of habitually peculiar to business transactions engaged in for purposes of gain. of these circumstances (referring to the series of transactions) such as to leave no room for doubt
on the existence of said intent in petitioners herein."
I wish however to make to make the following observation:

Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be 5. G.R. No. 78133 October 18, 1988
deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides:
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co- vs.
owners or co-possessors do or do not share any profits made by the use of the property; THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS,
respondents.
(3) The sharing of gross returns does not of itself establish partnership, whether or not the person
sharing them have a joint or common right or interest in any property from which the returns are
derived; GANCAYCO, J.:

From the above it appears that the fact that those who agree to form a co-ownership shared or do The distinction between co-ownership and an unregistered partnership or joint venture for income
not share any profits made by the use of property held in common does not convert their venture tax purposes is the issue in this petition.
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. On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and
This only means that, aside from the circumstance of profit, the presence of other elements on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two
constituting partnership is necessary, such as the clear intent to form a partnership, the existence parcels of land were sold by petitioners in 1968 toMarenir Development Corporation, while the
of a judicial personality different from that of the individual partners, and the freedom to transfer or three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on March
assign any interest in the property by one with the consent of the others (Padilla, Civil Code of the 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70,
Philippines Annotated, Vol. I, 1953 ed., pp. 635- 636). while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding capital
gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in
It is evident that an isolated transaction whereby two or more persons contribute funds to buy the said years.
certain real estate for profit in the absence of other circumstances showing a contrary intention
cannot be considered a partnership. However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.70 as alleged deficiency
Persons who contribute property or funds for a common enterprise and agree to share the gross corporate income taxes for the years 1968 and 1970.
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, Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had
and no community of interest as principal proprietors in the business itself which the proceeds availed of tax amnesties way back in 1974.
derived. (Elements of the law of Partnership by Floyd R. Mechem, 2n Ed., section 83, p. 74.)
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years
A joint venture purchase of land, by two, does not constitute a copartnership in respect thereto; nor 1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
does not agreement to share the profits and loses on the sale of land create a partnership; the partnership or joint venture taxable as a corporation under Section 20(b) and its income was
parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682, 12 S Ct. 327, 35 L. Ed., subject to the taxes prescribed under Section 24, both of the National Internal Revenue Code 1
1157.) that the unregistered partnership was subject to corporate income tax as distinguished from profits
derived from the partnership by them which is subject to individual income tax; and that the
Where plaintiff, his brother, and another agreed to become owners of a single tract of reality, availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of
holding as tenants in common, and to divide the profits of disposing of it, the brother and the other their individual income tax liabilities but did not relieve them from the tax liability of the unregistered
not being entitled to share in plaintiff's commissions, no partnership existed as between the partnership. Hence, the petitioners were required to pay the deficiency income tax assessed.

19
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA created or organized but not including duly registered general co-partnerships (companies
Case No. 3045. In due course, the respondent court by a majority decision of March 30, 1987, 2 collectives), a tax upon such income equal to the sum of the following: ...
affirmed the decision and action taken by respondent commissioner with costs against petitioners.
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized,
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership joint-stock companies, joint accounts (cuentas en participation), associations or insurance
was in fact formed by petitioners which like a corporation was subject to corporate income tax companies, but does not include duly registered general co-partnerships (companies colectivas).
distinct from that imposed on the partners.
Article 1767 of the Civil Code of the Philippines provides:
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the petitioners, By the contract of partnership two or more persons bind themselves to contribute money, property,
there was no adequate basis for the conclusion that they thereby formed an unregistered or industry to a common fund, with the intention of dividing the profits among themselves.
partnership which made "hem liable for corporate income tax under the Tax Code.
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the to contribute money, property or industry to a common fund; and (b) intent to divide the profits
respondent court: among the contracting parties. The first element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and property to a common fund.
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN facts and circumstances surrounding the case, we are fully satisfied that their purpose was to
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE engage in real estate transactions for monetary gain and then divide the same among themselves,
BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE because:
PETITIONERS.
1. Said common fund was not something they found already in existence. It was not a property
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS substantial portion thereof in order to establish said common fund.
LAID DOWN BY LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS. 2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real estate for
THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE. P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The
number of lots (24) acquired and transcations undertaken, as well as the brief interregnum
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM between each, particularly the last three purchases, is strongly indicative of a pattern or common
PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, design that was not limited to the conservation and preservation of the aforementioned common
Rollo.) fund or even of the property acquired by petitioners in February, 1943. In other words, one cannot
but perceive a character of habituality peculiar to business transactions engaged in for purposes of
The petition is meritorious. gain.

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of
4 petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
In the said case, petitioners borrowed a sum of money from their father which together with their being so let, for petitioners do not even suggest that there has been any change in the utilization
own personal funds they used in buying several real properties. They appointed their brother to thereof.
manage their properties with full power to lease, collect, rent, issue receipts, etc. They had the real
properties rented or leased to various tenants for several years and they gained net profits from 4. Since August, 1945, the properties have been under the management of one person, namely,
the rental income. Thus, the Collector of Internal Revenue demanded the payment of income tax Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to
on a corporation, among others, from them. sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the same belonged to a corporation or business
In resolving the issue, this Court held as follows: enterprise operated for profit.

The issue in this case is whether petitioners are subject to the tax on corporations provided for in 5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue (15) years, since the first property was acquired, and over twelve (12) years, since Simeon
Code, as well as to the residence tax for corporations and the real estate dealers' fixed tax. With Evangelists became the manager.
respect to the tax on corporations, the issue hinges on the meaning of the terms corporation and
partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read: 6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the
set up already adverted to, or on the causes for its continued existence. They did not even try to
Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected, and paid offer an explanation therefor.
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on
20
the existence of said intent in petitioners herein. Only one or two of the aforementioned and no community of interest as principal proprietors in the business itself which the proceeds
circumstances were present in the cases cited by petitioners herein, and, hence, those cases are derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)
not in point. 5
A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does
In the present case, there is no evidence that petitioners entered into an agreement to contribute an agreement to share the profits and losses on the sale of land create a partnership; the parties
money, property or industry to a common fund, and that they intended to divide the profits among are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
themselves. Respondent commissioner and/ or his representative just assumed these conditions
to be present on the basis of the fact that petitioners purchased certain parcels of land and Where plaintiff, his brother, and another agreed to become owners of a single tract of realty,
became co-owners thereof. holding as tenants in common, and to divide the profits of disposing of it, the brother and the other
not being entitled to share in plaintiffs commission, no partnership existed as between the three
In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots parties, whatever their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673,
showing that the purpose was not limited to the conservation or preservation of the common fund 233 Mass. 341.)
or even the properties acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present. In 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
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same third persons are concerned as enables each party to make contract, manage the business, and
nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
one seller. It was only 1968 when they sold the two (2) parcels of land after which they did not
make any additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The common ownership of property does not itself create a partnership between the owners,
The transactions were isolated. The character of habituality peculiar to business transactions for though they may use it for the purpose of making gains; and they may, without becoming partners,
the purpose of gain was not present. agree among themselves as to the management, and use of such property and the application of
the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6
In Evangelista, the properties were leased out to tenants for several years. The business was
under the management of one of the partners. Such condition existed for over fifteen (15) years. The sharing of returns does not in itself establish a partnership whether or not the persons sharing
None of the circumstances are present in the case at bar. The co-ownership started only in 1965 therein have a joint or common right or interest in the property. There must be a clear intent to form
and ended in 1970. a partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
In the present case, there is clear evidence of co-ownership between the petitioners. There is no
I wish however to make the following observation Article 1769 of the new Civil Code lays down the adequate basis to support the proposition that they thereby formed an unregistered partnership.
rule for determining when a transaction should be deemed a partnership or a co-ownership. Said The two isolated transactions whereby they purchased properties and sold the same a few years
article paragraphs 2 and 3, provides; thereafter did not thereby make them partners. They shared in the gross profits as co- owners and
paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the
(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners circumstances, they cannot be considered to have formed an unregistered partnership which is
or co-possessors do or do not share any profits made by the use of the property; thereby liable for corporate income tax, as the respondent commissioner proposes.

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the And even assuming for the sake of argument that such unregistered partnership appears to have
persons sharing them have a joint or common right or interest in any property from which the been formed, since there is no such existing unregistered partnership with a distinct personality
returns are derived; nor with assets that can be held liable for said deficiency corporate income tax, then petitioners
can be held individually liable as partners for this unpaid obligation of the partnership p. 7
From the above it appears that the fact that those who agree to form a co- ownership share or do However, as petitioners have availed of the benefits of tax amnesty as individual taxpayers in
not share any profits made by the use of the property held in common does not convert their these transactions, they are thereby relieved of any further tax liability arising therefrom.
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 WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax
the property. This only means that, aside from the circumstance of profit, the presence of other Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby
elements constituting partnership is necessary, such as the clear intent to form a partnership, the rendered relieving petitioners of the corporate income tax liability in this case, without
existence of a juridical personality different from that of the individual partners, and the freedom to pronouncement as to costs.
transfer or assign any interest in the property by one with the consent of the others (Padilla, Civil
Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636) SO ORDERED.

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,

21
B. Formal Requirements (Articles 1771-1773) – 3 cases to comply with their duty to account, and continued to benefit from the assets and income of
Shellite to the damage and prejudice of respondent.
6. G.R. No. 143340 August 15, 2001
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities and
LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners, Exchange Commission (SEC) in Manila, not the Regional Trial Court in Zamboanga del Norte had
vs. jurisdiction over the action. Respondent opposed the motion to dismiss.
LAMBERTO T. CHUA, respondent.
On January 12, 1993, the trial court finding the complaint sufficient in from and substance denied
GONZAGA-REYES, J.: the motion to dismiss.

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the Decision1 On January 30, 1993, petitioners filed their Answer with Compulsory Counter-claims, contending
of the Court of Appeals dated January 31, 2000 in the case entitled "Lamberto T. Chua vs. Lilibeth that they are not liable for partnership shares, unreceived income/profits, interests, damages and
Sunga Chan and Cecilia Sunga" and of the Resolution dated May 23, 2000 denying the motion for attorney's fees, that respondent does not have a cause of action against them, and that the trial
reconsideration of herein petitioners Lilibeth Sunga and Cecilia Sunga (hereafter collectively court has no jurisdiction over the nature of the action, the SEC being the agency that has original
referred to as petitioners). and exclusive jurisdiction over the case. As counterclaim, petitioner sought attorney's fees and
expenses of litigation.
The pertinent facts of this case are as follows:
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth claim for winding up of partnership affairs, accounting and recovery of shares in partnership affairs,
Sunga Chan (hereafter petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia), accounting and recovery of shares in partnership assets/properties should be dismissed and
daughter and wife, respectively of the deceased Jacinto L. Sunga (hereafter Jacinto), for "Winding prosecuted against the estate of deceased Jacinto in a probate or intestate proceeding.
Up of Partnership Affairs, Accounting, Appraisal and Recovery of Shares and Damages with Writ
of Preliminary Attachment" with the Regional Trial Court, Branch 11, Sindangan, Zamboanga del On August 16, 1993, the trial denied the second motion to dismiss for lack of merit.
Norte.
On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and Mandamus
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the with the Court of Appeals docketed as CA-G.R. SP No. 32499 questioning the denial of the motion
distribution of Shellane Liquefied Petroleum Gas (LPG) in Manila. For business convenience, to dismiss.
respondent and Jacinto allegedly agreed to register the business name of their partnership,
SHELLITE GAS APPLIANCE CENTER (hereafter Shellite), under the name of Jacinto as a sole On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial
proprietorship. Respondent allegedly delivered his initial capital contribution of P100,000.00 to Conference.
Jacinto while the latter in turn produced P100,000.00 as his counterpart contribution, with the
intention that the profits would be equally divided between them. The partnership allegedly had On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.
Jacinto as manager, assisted by Josephine Sy (hereafter Josephine), a sister of the wife
respondent, Erlinda Sy. As compensation, Jacinto would receive a manager's fee or remuneration On November 15, 1994, the Court of Appeals denied the petition for lack of merit.
of 10% of the gross profit and Josephine would receive 10% of the net profits, in addition to her
wages and other remuneration from the business. On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner, "as
petitioners failed to show that a reversible error was committed by the appellate court."2
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation
went quite and was profitable. Respondent claimed that he could attest to success of their On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was
business because of the volume of orders and deliveries of filled Shellane cylinder tanks supplied remanded to the trial court on April 26, 1995.
by Pilipinas Shell Petroleum Corporation. While Jacinto furnished respondent with the
merchandise inventories, balance sheets and net worth of Shellite from 1977 to 1989, respondent On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of
however suspected that the amount indicated in these documents were understated and the case of January 17, 1996. Respondent presented his evidence while petitioners were
undervalued by Jacinto and Josephine for their own selfish reasons and for tax avoidance. considered to have waived their right to present evidence for their failure to attend the scheduled
date for reception of evidence despite notice.
Upon Jacinto's death in the later part of 1989, his surviving wife, petitioner Cecilia and particularly
his daughter, petitioner Lilibeth, took over the operations, control, custody, disposition and On October 7, 1997, the trial court rendered its Decision ruling for respondent. The dispositive of
management of Shellite without respondent's consent. Despite respondent's repeated demands the Decision reads:
upon petitioners for accounting, inventory, appraisal, winding up and restitution of his net shares in
the partnership, petitioners failed to comply. Petitioner Lilibeth allegedly continued the operations "WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
of Shellite, converting to her own use and advantage its properties. as follows:

On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out the alibis and reasons (1) DIRECTING them to render an accounting in acceptable form under accounting procedures
to evade respondent's demands, she disbursed out of the partnership funds the amount of and standards of the properties, assets, income and profits of the Shellite Gas Appliance Center
P200,000.00 and partially paid the same to respondent. Petitioner Lilibeth allegedly informed Since the time of death of Jacinto L. Sunga, from whom they continued the business operations
respondent that the P200,000.00 represented partial payment of the latter's share in the including all businesses derived from Shellite Gas Appliance Center, submit an inventory, and
partnership, with a promise that the former would make the complete inventory and winding up of appraisal of all these properties, assets, income, profits etc. to the Court and to plaintiff for
the properties of the business establishment. Despite such commitment, petitioners allegedly failed approval or disapproval;
22
 petitioners argues that these courts were proscribes from hearing the testimonies of respondent
(2) ORDERING them to return and restitute to the partnership any and all properties, assets, and his witness, Josephine, to prove the alleged partnership three years after Jacinto's death. To
income and profits they misapplied and converted to their own use and advantage the legally support this argument, petitioners invoke the "Dead Man's Statute' or "Survivorship Rule" under
pertain to the plaintiff and account for the properties mentioned in pars. A and B on pages 4-5 of Section 23, Rule 130 of the Rules of Court that provides:
this petition as basis;
"SEC. 23. Disqualification by reason of death or insanity of adverse party. – Parties or assignors of
(3) DIRECTING them to restitute and pay to the plaintiff ½ shares and interest of the plaintiff in the parties to a case, or persons in whose behalf a case is prosecuted, against an executor or
partnership of the listed properties, assets and good will (sic) in schedules A, B and C, on pages 4- administrator or other representative of a deceased person, or against a person of unsound mind,
5 of the petition; upon a claim or demand against the estate of such deceased person, or against such person of
unsound mind, cannot testify as to any matter of fact occurring before the death of such deceased
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the person or before such person became of unsound mind."
partnership from 1988 to May 30, 1992, when the plaintiff learned of the closure of the store the
sum of P35,000.00 per month, with legal rate of interest until fully paid; Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego,
Josephine, should not have been admitted to prove certain claims against a deceased person
(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities (Jacinto), now represented by petitioners.
pursuant to law, after delivering to the plaintiff all the ½ interest, shares, participation and equity in
the partnership, or the value thereof in money or money's worth, if the properties are not physically We are not persuaded.
divisible;
A partnership may be constituted in any form, except where immovable property of real rights are
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and contributed thereto, in which case a public instrument shall necessary.6 Hence, based on the
hold them liable to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and, intention of the parties, as gathered from the facts and ascertained from their language and
conduct, a verbal contract of partnership may arise.7 The essential profits that must be proven to
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorney's (sic) and that a partnership was agreed upon are (1) mutual contribution to a common stock, and (2) a joint
P25,000.00 as litigation expenses. interest in the profits.8 Understandably so, in view of the absence of the written contract of
partnership between respondent and Jacinto, respondent resorted to the introduction of
NO special pronouncements as to COSTS. documentary and testimonial evidence to prove said partnership. The crucial issue to settle then is
to whether or not the "Dead Man's Statute" applies to this case so as to render inadmissible
SO ORDERED."3 respondent's testimony and that of his witness, Josephine.

On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case to The "Dead Man's Statute" provides that if one party to the alleged transaction is precluded from
the Court of Appeals. testifying by death, insanity, or other mental disabilities, the surviving party is not entitled to the
undue advantage of giving his own uncontradicted and unexplained account of the transaction.9
On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the But before this rule can be successfully invoked to bar the introduction of testimonial evidence, it is
Decision reads: necessary that:

"WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all "1. The witness is a party or assignor of a party to case or persons in whose behalf a case in
respects."4 prosecuted.

On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner. 2. The action is against an executor or administrator or other representative of a deceased person
or a person of unsound mind;
Hence, this petition wherein petitioner relies upon following grounds:
3. The subject-matter of the action is a claim or demand against the estate of such deceased
"1. The Court of Appeals erred in making a legal conclusion that there existed a partnership person or against person of unsound mind;
between respondent Lamberto T. Chua and the late Jacinto L. Sunga upon the latter'' invitation
and offer and that upon his death the partnership assets and business were taken over by 4. His testimony refers to any matter of fact of which occurred before the death of such deceased
petitioners. person or before such person became of unsound mind."10

2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did Two reasons forestall the application of the "Dead Man's Statute" to this case.
not apply in the instant case.
First, petitioners filed a compulsory counterclaim11 against respondents in their answer before the
3. The Court of Appeals erred in making the legal conclusion that there was competent and trial court, and with the filing of their counterclaim, petitioners themselves effectively removed this
credible evidence to warrant the finding of a partnership, and assuming arguendo that indeed there case from the ambit of the "Dead Man's Statute".12 Well entrenched is the rule that when it is the
was a partnership, the finding of highly exaggerated amounts or values in the partnership assets executor or administrator or representatives of the estates that sets up the counterclaim, the
and profits."5 plaintiff, herein respondent, may testify to occurrences before the death of the deceased to defeat
the counterclaim.13 Moreover, as defendant in the counterclaim, respondent is not disqualified
Petitioners question the correctness of the finding of the trial court and the Court of Appeals that a from testifying as to matters of facts occurring before the death of the deceased, said action not
partnership existed between respondent and Jacinto from 1977 until Jacinto's death. In the having been brought against but by the estate or representatives of the deceased.14
absence of any written document to show such partnership between respondent and Jacinto,
23
Second, the testimony of Josephine is not covered by the "Dead Man's Statute" for the simple assumed that the members themselves knew of the contents of their contract.26 In the case at
reason that she is not "a party or assignor of a party to a case or persons in whose behalf a case is bar, non-compliance with this directory provision of the law will not invalidate the partnership
prosecuted." Records show that respondent offered the testimony of Josephine to establish the considering that the totality of the evidence proves that respondent and Jacinto indeed forged the
existence of the partnership between respondent and Jacinto. Petitioners' insistence that partnership in question.
Josephine is the alter ego of respondent does not make her an assignor because the term
"assignor" of a party means "assignor of a cause of action which has arisen, and not the assignor WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is
of a right assigned before any cause of action has arisen."15 Plainly then, Josephine is merely a AFFIRMED.
witness of respondent, the latter being the party plaintiff.
SO ORDERED.
We are not convinced by petitioners' allegation that Josephine's testimony lacks probative value
because she was allegedly coerced coerced by respondent, her brother-in-law, to testify in his
favor, Josephine merely declared in court that she was requested by respondent to testify and that 7. G.R. No. 127405 October 4, 2000
if she were not requested to do so she would not have testified. We fail to see how we can
conclude from this candid admission that Josephine's testimony is involuntary when she did not in MARJORIE TOCAO and WILLIAM T. BELO, petitioners,
any way categorically say that she was forced to be a witness of respondent. vs.
COURT OF APPEALS and NENITA A. ANAY, respondents.
Also, the fact that Josephine is the sister of the wife of respondent does not diminish the value of
her testimony since relationship per se, without more, does not affect the credibility of DECISION
witnesses.16
YNARES-SANTIAGO, J.:
Petitioners' reliance alone on the "Dead Man's Statute" to defeat respondent's claim cannot prevail
over the factual findings of the trial court and the Court of Appeals that a partnership was This is a petition for review of the Decision of the Court of Appeals in CA-G.R. CV No. 41616,1
established between respondent and Jacinto. Based not only on the testimonial evidence, but the affirming the Decision of the Regional Trial Court of Makati, Branch 140, in Civil Case No. 88-509.2
documentary evidence as well, the trial court and the Court of Appeals considered the evidence for
respondent as sufficient to prove the formation of partnership, albeit an informal one. Fresh from her stint as marketing adviser of Technolux in Bangkok, Thailand, private respondent
Nenita A. Anay met petitioner William T. Belo, then the vice-president for operations of Ultra Clean
Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial Water Purifier, through her former employer in Bangkok. Belo introduced Anay to petitioner
precedents, a factual matter like the finding of the existence of a partnership between respondent Marjorie Tocao, who conveyed her desire to enter into a joint venture with her for the importation
and Jacinto cannot be inquired into by this Court on review.17 This Court can no longer be tasked and local distribution of kitchen cookwares. Belo volunteered to finance the joint venture and
to go over the proofs presented by the parties and analyze, assess and weigh them to ascertain if assigned to Anay the job of marketing the product considering her experience and established
the trial court and the appellate court were correct in according superior credit to this or that piece relationship with West Bend Company, a manufacturer of kitchen wares in Wisconsin, U.S.A.
of evidence of one party or the other.18 It must be also pointed out that petitioners failed to attend Under the joint venture, Belo acted as capitalist, Tocao as president and general manager, and
the presentation of evidence of respondent. Petitioners cannot now turn to this Court to question Anay as head of the marketing department and later, vice-president for sales. Anay organized the
the admissibility and authenticity of the documentary evidence of respondent when petitioners administrative staff and sales force while Tocao hired and fired employees, determined
failed to object to the admissibility of the evidence at the time that such evidence was offered.19 commissions and/or salaries of the employees, and assigned them to different branches. The
parties agreed that Belo’s name should not appear in any documents relating to their transactions
With regard to petitioners' insistence that laches and/or prescription should have extinguished with West Bend Company. Instead, they agreed to use Anay’s name in securing distributorship of
respondent's claim, we agree with the trial court and the Court of Appeals that the action for cookware from that company. The parties agreed further that Anay would be entitled to: (1) ten
accounting filed by respondents three (3) years after Jacinto's death was well within the prescribed percent (10%) of the annual net profits of the business; (2) overriding commission of six percent
period. The Civil Code provides that an action to enforce an oral contract prescribes in six (6) (6%) of the overall weekly production; (3) thirty percent (30%) of the sales she would make; and
years20 while the right to demand an accounting for a partner's interest as against the person (4) two percent (2%) for her demonstration services. The agreement was not reduced to writing on
continuing the business accrues at the date of dissolution, in the absence of any contrary the strength of Belo’s assurances that he was sincere, dependable and honest when it came to
agreement.21 Considering that the death of a partner results in the dissolution of the partnership22 financial commitments.
, in this case, it was Jacinto's death that respondent as the surviving partner had the right to an
account of his interest as against petitioners. It bears stressing that while Jacinto's death dissolved Anay having secured the distributorship of cookware products from the West Bend Company and
the partnership, the dissolution did not immediately terminate the partnership. The Civil Code23 organized the administrative staff and the sales force, the cookware business took off successfully.
expressly provides that upon dissolution, the partnership continues and its legal personality is They operated under the name of Geminesse Enterprise, a sole proprietorship registered in
retained until the complete winding up of its business, culminating in its termination.24 Marjorie Tocao’s name, with office at 712 Rufino Building, Ayala Avenue, Makati City. Belo made
good his monetary commitments to Anay. Thereafter, Roger Muencheberg of West Bend
In a desperate bid to cast doubt on the validity of the oral partnership between respondent and Company invited Anay to the distributor/dealer meeting in West Bend, Wisconsin, U.S.A., from July
Jacinto, petitioners maintain that said partnership that had initial capital of P200,000.00 should 19 to 21, 1987 and to the southwestern regional convention in Pismo Beach, California, U.S.A.,
have been registered with the Securities and Exchange Commission (SEC) since registration is from July 25-26, 1987. Anay accepted the invitation with the consent of Marjorie Tocao who, as
mandated by the Civil Code, True, Article 1772 of the Civil Code requires that partnerships with a president and general manager of Geminesse Enterprise, even wrote a letter to the Visa Section of
capital of P3,000.00 or more must register with the SEC, however, this registration requirement is the U.S. Embassy in Manila on July 13, 1987. A portion of the letter reads:
not mandatory. Article 1768 of the Civil Code25 explicitly provides that the partnership retains its
juridical personality even if it fails to register. The failure to register the contract of partnership does "Ms. Nenita D. Anay (sic), who has been patronizing and supporting West Bend Co. for twenty (20)
not invalidate the same as among the partners, so long as the contract has the essential years now, acquired the distributorship of Royal Queen cookware for Geminesse Enterprise, is the
requisites, because the main purpose of registration is to give notice to third parties, and it can be
24
Vice President Sales Marketing and a business partner of our company, will attend in response to percent (3-4%) share in the gross sales of the cookware. He denied contributing capital to the
the invitation." (Italics supplied.)3 business or receiving a share in its profits as he merely served as a guarantor of Marjorie Tocao,
who was new in the business. He attended and/or presided over business meetings of the venture
Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook the task of saving in his capacity as a guarantor but he never participated in decision-making. He claimed that he
the business on account of the unsatisfactory sales record in the Makati and Cubao offices. On wrote the memo granting the plaintiff thirty-seven percent (37%) commission upon her dismissal
August 31, 1987, she received a plaque of appreciation from the administrative and sales people from the business venture at the request of Tocao, because Anay had no other income.
through Marjorie Tocao4 for her excellent job performance. On October 7, 1987, in the presence of
Anay, Belo signed a memo5 entitling her to a thirty-seven percent (37%) commission for her For her part, Marjorie Tocao denied having entered into an oral partnership agreement with Anay.
personal sales "up Dec 31/87." Belo explained to her that said commission was apart from her ten However, she admitted that Anay was an expert in the cookware business and hence, they agreed
percent (10%) share in the profits. On October 9, 1987, Anay learned that Marjorie Tocao had to grant her the following commissions: thirty-seven percent (37%) on personal sales; five percent
signed a letter6 addressed to the Cubao sales office to the effect that she was no longer the vice- (5%) on gross sales; two percent (2%) on product demonstrations, and two percent (2%) for
president of Geminesse Enterprise. The following day, October 10, she received a note from Lina recruitment of personnel. Marjorie denied that they agreed on a ten percent (10%) commission on
T. Cruz, marketing manager, that Marjorie Tocao had barred her from holding office and the net profits. Marjorie claimed that she got the capital for the business out of the sale of the
conducting demonstrations in both Makati and Cubao offices.7 Anay attempted to contact Belo. sewing machines used in her garments business and from Peter Lo, a Singaporean friend-
She wrote him twice to demand her overriding commission for the period of January 8, 1988 to financier who loaned her the funds with interest. Because she treated Anay as her "co-equal,"
February 5, 1988 and the audit of the company to determine her share in the net profits. When her Marjorie received the same amounts of commissions as her. However, Anay failed to account for
letters were not answered, Anay consulted her lawyer, who, in turn, wrote Belo a letter. Still, that stocks valued at P200,000.00.
letter was not answered.
On April 22, 1993, the trial court rendered a decision the dispositive part of which is as follows:
Anay still received her five percent (5%) overriding commission up to December 1987. The
following year, 1988, she did not receive the same commission although the company netted a "WHEREFORE, in view of the foregoing, judgment is hereby rendered:
gross sales of P13,300,360.00.
1. Ordering defendants to submit to the Court a formal account as to the partnership affairs for the
On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum of money with years 1987 and 1988 pursuant to Art. 1809 of the Civil Code in order to determine the ten percent
damages8 against Marjorie D. Tocao and William Belo before the Regional Trial Court of Makati, (10%) share of plaintiff in the net profits of the cookware business;
Branch 140.
2. Ordering defendants to pay five percent (5%) overriding commission for the one hundred and
In her complaint, Anay prayed that defendants be ordered to pay her, jointly and severally, the fifty (150) cookware sets available for disposition when plaintiff was wrongfully excluded from the
following: (1) P32,00.00 as unpaid overriding commission from January 8, 1988 to February 5, partnership by defendants;
1988; (2) P100,000.00 as moral damages, and (3) P100,000.00 as exemplary damages. The
plaintiff also prayed for an audit of the finances of Geminesse Enterprise from the inception of its 3. Ordering defendants to pay plaintiff overriding commission on the total production which for the
business operation until she was "illegally dismissed" to determine her ten percent (10%) share in period covering January 8, 1988 to February 5, 1988 amounted to P32,000.00;
the net profits. She further prayed that she be paid the five percent (5%) "overriding commission"
on the remaining 150 West Bend cookware sets before her "dismissal." 4. Ordering defendants to pay P100,000.00 as moral damages and P100,000.00 as exemplary
damages, and
In their answer,9 Marjorie Tocao and Belo asserted that the "alleged agreement" with Anay that
was "neither reduced in writing, nor ratified," was "either unenforceable or void or inexistent." As 5. Ordering defendants to pay P50,000.00 as attorney’s fees and P20,000.00 as costs of suit.
far as Belo was concerned, his only role was to introduce Anay to Marjorie Tocao. There could not
have been a partnership because, as Anay herself admitted, Geminesse Enterprise was the sole SO ORDERED."
proprietorship of Marjorie Tocao. Because Anay merely acted as marketing demonstrator of
Geminesse Enterprise for an agreed remuneration, and her complaint referred to either her The trial court held that there was indeed an "oral partnership agreement between the plaintiff and
compensation or dismissal, such complaint should have been lodged with the Department of Labor the defendants," based on the following: (a) there was an intention to create a partnership; (b) a
and not with the regular court. common fund was established through contributions consisting of money and industry, and (c)
there was a joint interest in the profits. The testimony of Elizabeth Bantilan, Anay’s cousin and the
Petitioners (defendants therein) further alleged that Anay filed the complaint on account of "ill-will administrative officer of Geminesse Enterprise from August 21, 1986 until it was absorbed by
and resentment" because Marjorie Tocao did not allow her to "lord it over in the Geminesse Royal International, Inc., buttressed the fact that a partnership existed between the parties. The
Enterprise." Anay had acted like she owned the enterprise because of her experience and letter of Roger Muencheberg of West Bend Company stating that he awarded the distributorship to
expertise. Hence, petitioners were the ones who suffered actual damages "including unreturned Anay and Marjorie Tocao because he was convinced that with Marjorie’s financial contribution and
and unaccounted stocks of Geminesse Enterprise," and "serious anxiety, besmirched reputation in Anay’s experience, the combination of the two would be invaluable to the partnership, also
the business world, and various damages not less than P500,000.00." They also alleged that, to supported that conclusion. Belo’s claim that he was merely a "guarantor" has no basis since there
"vindicate their names," they had to hire counsel for a fee of P23,000.00. was no written evidence thereof as required by Article 2055 of the Civil Code. Moreover, his acts of
attending and/or presiding over meetings of Geminesse Enterprise plus his issuance of a memo
At the pre-trial conference, the issues were limited to: (a) whether or not the plaintiff was an giving Anay 37% commission on personal sales belied this. On the contrary, it demonstrated his
employee or partner of Marjorie Tocao and Belo, and (b) whether or not the parties are entitled to involvement as a partner in the business.
damages.10
The trial court further held that the payment of commissions did not preclude the existence of the
In their defense, Belo denied that Anay was supposed to receive a share in the profit of the partnership inasmuch as such practice is often resorted to in business circles as an impetus to
business. He, however, admitted that the two had agreed that Anay would receive a three to four bigger sales volume. It did not matter that the agreement was not in writing because Article 1771
25
of the Civil Code provides that a partnership may be "constituted in any form." The fact that "A: No, sir at the start she was the marketing manager because there were no one to sell yet, it’s
Geminesse Enterprise was registered in Marjorie Tocao’s name is not determinative of whether or only me there then her and then two (2) people, so about four (4). Now, after that when she
not the business was managed and operated by a sole proprietor or a partnership. What was recruited already Oscar Abella and Lina Torda-Cruz these two (2) people were given the
registered with the Bureau of Domestic Trade was merely the business name or style of designation of marketing managers of which definitely Nita as superior to them would be the Vice
Geminesse Enterprise. President."18

The trial court finally held that a partner who is excluded wrongfully from a partnership is an By the set-up of the business, third persons were made to believe that a partnership had indeed
innocent partner. Hence, the guilty partner must give him his due upon the dissolution of the been forged between petitioners and private respondents. Thus, the communication dated June 4,
partnership as well as damages or share in the profits "realized from the appropriation of the 1986 of Missy Jagler of West Bend Company to Roger Muencheberg of the same company states:
partnership business and goodwill." An innocent partner thus possesses "pecuniary interest in
every existing contract that was incomplete and in the trade name of the co-partnership and assets "Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the operations.
at the time he was wrongfully expelled." Marge does not have cookware experience. Nita Anay has started to gather former managers,
Lina Torda and Dory Vista. She has also gathered former demonstrators, Betty Bantilan, Eloisa
Petitioners’ appeal to the Court of Appeals11 was dismissed, but the amount of damages awarded Lamela, Menchu Javier. They will continue to gather other key people and build up the
by the trial court were reduced to P50,000.00 for moral damages and P50,000.00 as exemplary organization. All they need is the finance and the products to sell."19
damages. Their Motion for Reconsideration was denied by the Court of Appeals for lack of
merit.12 Petitioners Belo and Marjorie Tocao are now before this Court on a petition for review on On the other hand, petitioner Belo’s denial that he financed the partnership rings hollow in the face
certiorari, asserting that there was no business partnership between them and herein private of the established fact that he presided over meetings regarding matters affecting the operation of
respondent Nenita A. Anay who is, therefore, not entitled to the damages awarded to her by the the business. Moreover, his having authorized in writing on October 7, 1987, on a stationery of his
Court of Appeals. own business firm, Wilcon Builders Supply, that private respondent should receive thirty-seven
(37%) of the proceeds of her personal sales, could not be interpreted otherwise than that he had a
Petitioners Tocao and Belo contend that the Court of Appeals erroneously held that a partnership proprietary interest in the business. His claim that he was merely a guarantor is belied by that
existed between them and private respondent Anay because Geminesse Enterprise "came into personal act of proprietorship in the business. Moreover, if he was indeed a guarantor of future
being" exactly a year before the "alleged partnership" was formed, and that it was very unlikely that debts of petitioner Tocao under Article 2053 of the Civil Code,20 he should have presented
petitioner Belo would invest the sum of P2,500,000.00 with petitioner Tocao contributing nothing, documentary evidence therefor. While Article 2055 of the Civil Code simply provides that guaranty
without any "memorandum whatsoever regarding the alleged partnership."13 must be "express," Article 1403, the Statute of Frauds, requires that "a special promise to answer
for the debt, default or miscarriage of another" be in writing.21
The issue of whether or not a partnership exists is a factual matter which are within the exclusive
domain of both the trial and appellate courts. This Court cannot set aside factual findings of such Petitioner Tocao, a former ramp model,22 was also a capitalist in the partnership. She claimed that
courts absent any showing that there is no evidence to support the conclusion drawn by the court she herself financed the business. Her and petitioner Belo’s roles as both capitalists to the
a quo.14 In this case, both the trial court and the Court of Appeals are one in ruling that petitioners partnership with private respondent are buttressed by petitioner Tocao’s admissions that petitioner
and private respondent established a business partnership. This Court finds no reason to rule Belo was her boyfriend and that the partnership was not their only business venture together. They
otherwise. also established a firm that they called "Wiji," the combination of petitioner Belo’s first name,
William, and her nickname, Jiji.23 The special relationship between them dovetails with petitioner
To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or more Belo’s claim that he was acting in behalf of petitioner Tocao. Significantly, in the early stage of the
persons bind themselves to contribute money, property or industry to a common fund; and (2) business operation, petitioners requested West Bend Company to allow them to "utilize their
intention on the part of the partners to divide the profits among themselves.15 It may be banking and trading facilities in Singapore" in the matter of importation and payment of the
constituted in any form; a public instrument is necessary only where immovable property or real cookware products.24 The inevitable conclusion, therefore, was that petitioners merged their
rights are contributed thereto.16 This implies that since a contract of partnership is consensual, an respective capital and infused the amount into the partnership of distributing cookware with private
oral contract of partnership is as good as a written one. Where no immovable property or real respondent as the managing partner.
rights are involved, what matters is that the parties have complied with the requisites of a
partnership. The fact that there appears to be no record in the Securities and Exchange The business venture operated under Geminesse Enterprise did not result in an employer-
Commission of a public instrument embodying the partnership agreement pursuant to Article 1772 employee relationship between petitioners and private respondent. While it is true that the receipt
of the Civil Code17 did not cause the nullification of the partnership. The pertinent provision of the of a percentage of net profits constitutes only prima facie evidence that the recipient is a partner in
Civil Code on the matter states: the business,25 the evidence in the case at bar controverts an employer-employee relationship
between the parties. In the first place, private respondent had a voice in the management of the
Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the affairs of the cookware distributorship,26 including selection of people who would constitute the
partners, even in case of failure to comply with the requirements of article 1772, first paragraph. administrative staff and the sales force. Secondly, petitioner Tocao’s admissions militate against
an employer-employee relationship. She admitted that, like her who owned Geminesse
Petitioners admit that private respondent had the expertise to engage in the business of Enterprise,27 private respondent received only commissions and transportation and representation
distributorship of cookware. Private respondent contributed such expertise to the partnership and allowances28 and not a fixed salary.29 Petitioner Tocao testified:
hence, under the law, she was the industrial or managing partner. It was through her reputation
with the West Bend Company that the partnership was able to open the business of distributorship "Q: Of course. Now, I am showing to you certain documents already marked as Exhs. ‘X’ and ‘Y.’
of that company’s cookware products; it was through the same efforts that the business was Please go over this. Exh. ‘Y’ is denominated `Cubao overrides’ 8-21-87 with ending August 21,
propelled to financial success. Petitioner Tocao herself admitted private respondent’s 1987, will you please go over this and tell the Honorable Court whether you ever came across this
indispensable role in putting up the business when, upon being asked if private respondent held document and know of your own knowledge the amount ---
the positions of marketing manager and vice-president for sales, she testified thus:

26
A: Yes, sir this is what I am talking about earlier. That’s the one I am telling you earlier a certain A: Yes, sir." (Italics supplied.)30
percentage for promotions, advertising, incentive.
If indeed petitioner Tocao was private respondent’s employer, it is difficult to believe that they shall
Q: I see. Now, this promotion, advertising, incentive, there is a figure here and words which I receive the same income in the business. In a partnership, each partner must share in the profits
quote: ‘Overrides Marjorie Ann Tocao P21,410.50’ this means that you have received this amount? and losses of the venture, except that the industrial partner shall not be liable for the losses.31 As
an industrial partner, private respondent had the right to demand for a formal accounting of the
A: Oh yes, sir. business and to receive her share in the net profit.32

Q: I see. And, by way of amplification this is what you are saying as one representing commission, The fact that the cookware distributorship was operated under the name of Geminesse Enterprise,
representation, advertising and promotion? a sole proprietorship, is of no moment. What was registered with the Bureau of Domestic Trade on
August 19, 1987 was merely the name of that enterprise.33 While it is true that in her undated
A: Yes, sir. application for renewal of registration of that firm name, petitioner Tocao indicated that it would be
engaged in retail of "kitchenwares, cookwares, utensils, skillet,"34 she also admitted that the
Q: I see. Below your name is the words and figure and I quote ‘Nita D. Anay P21,410.50’, what is enterprise was only "60% to 70% for the cookware business," while 20% to 30% of its business
this? activity was devoted to the sale of water sterilizer or purifier.35 Indubitably then, the business
name Geminesse Enterprise was used only for practical reasons - it was utilized as the common
A: That’s her overriding commission. name for petitioner Tocao’s various business activities, which included the distributorship of
cookware.
Q: Overriding commission, I see. Of course, you are telling this Honorable Court that there being
the same P21,410.50 is merely by coincidence? Petitioners underscore the fact that the Court of Appeals did not return the "unaccounted and
unremitted stocks of Geminesse Enterprise amounting to P208,250.00."36 Obviously a ploy to
A: No, sir, I made it a point that we were equal because the way I look at her kasi, you know in a offset the damages awarded to private respondent, that claim, more than anything else, proves the
sense because of her expertise in the business she is vital to my business. So, as part of the existence of a partnership between them. In Idos v. Court of Appeals, this Court said:
incentive I offer her the same thing.
"The best evidence of the existence of the partnership, which was not yet terminated (though in the
Q: So, in short you are saying that this you have shared together, I mean having gotten from the winding up stage), were the unsold goods and uncollected receivables, which were presented to
company P21,140.50 is your way of indicating that you were treating her as an equal? the trial court. Since the partnership has not been terminated, the petitioner and private
complainant remained as co-partners. x x x."37
A: As an equal.
It is not surprising then that, even after private respondent had been unceremoniously booted out
Q: As an equal, I see. You were treating her as an equal? of the partnership in October 1987, she still received her overriding commission until December
1987.
A: Yes, sir.
Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the partnership to
Q: I am calling again your attention to Exh. ‘Y’ ‘Overrides Makati the other one is --- reap for herself and/or for petitioner Belo financial gains resulting from private respondent’s efforts
to make the business venture a success. Thus, as petitioner Tocao became adept in the business
A: That is the same thing, sir. operation, she started to assert herself to the extent that she would even shout at private
respondent in front of other people.38 Her instruction to Lina Torda Cruz, marketing manager, not
Q: With ending August 21, words and figure ‘Overrides Marjorie Ann Tocao P15,314.25’ the to allow private respondent to hold office in both the Makati and Cubao sales offices concretely
amount there you will acknowledge you have received that? spoke of her perception that private respondent was no longer necessary in the business
operation,39 and resulted in a falling out between the two. However, a mere falling out or
A: Yes, sir. misunderstanding between partners does not convert the partnership into a sham organization.40
The partnership exists until dissolved under the law. Since the partnership created by petitioners
Q: Again in concept of commission, representation, promotion, etc.? and private respondent has no fixed term and is therefore a partnership at will predicated on their
mutual desire and consent, it may be dissolved by the will of a partner. Thus:
A: Yes, sir.
"x x x. The right to choose with whom a person wishes to associate himself is the very foundation
Q: Okey. Below your name is the name of Nita Anay P15,314.25 that is also an indication that she and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of
received the same amount? that mutual resolve, along with each partner’s capability to give it, and the absence of cause for
dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure,
A: Yes, sir. dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the
attendance of bad faith can prevent the dissolution of the partnership but that it can result in a
Q: And, as in your previous statement it is not by coincidence that these two (2) are the same? liability for damages."41

A: No, sir. An unjustified dissolution by a partner can subject him to action for damages because by the
mutual agency that arises in a partnership, the doctrine of delectus personae allows the partners to
Q: It is again in concept of you treating Miss Anay as your equal? have the power, although not necessarily the right to dissolve the partnership.42

27
In this case, petitioner Tocao’s unilateral exclusion of private respondent from the partnership is 8. G.R. No. 134559 December 9, 1999
shown by her memo to the Cubao office plainly stating that private respondent was, as of October
9, 1987, no longer the vice-president for sales of Geminesse Enterprise.43 By that memo, ANTONIA TORRES assisted by her husband, ANGELO TORRES; and EMETERIA BARING,
petitioner Tocao effected her own withdrawal from the partnership and considered herself as petitioners,
having ceased to be associated with the partnership in the carrying on of the business. vs.
Nevertheless, the partnership was not terminated thereby; it continues until the winding up of the COURT OF APPEALS and MANUEL TORRES, respondents.
business.44

The winding up of partnership affairs has not yet been undertaken by the partnership.1âwphi1 This PANGANIBAN, J.:
is manifest in petitioners’ claim for stocks that had been entrusted to private respondent in the
pursuit of the partnership business. 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
The determination of the amount of damages commensurate with the factual findings upon which it obligations therein. The lack of an inventory of real property will not ipso facto release the
is based is primarily the task of the trial court.45 The Court of Appeals may modify that amount contracting partners from their respective obligations to each other arising from acts executed in
only when its factual findings are diametrically opposed to that of the lower court,46 or the award is accordance with their agreement.
palpably or scandalously and unreasonably excessive.47 However, exemplary damages that are
awarded "by way of example or correction for the public good,"48 should be reduced to The Case
P50,000.00, the amount correctly awarded by the Court of Appeals. Concomitantly, the award of
moral damages of P100,000.00 was excessive and should be likewise reduced to P50,000.00. The Petition for Review on Certiorari before us assails the March 5, 1998 Decision 1 of the Court
Similarly, attorney’s fees that should be granted on account of the award of exemplary damages of Appeals 2 (CA) in CA-GR CV No. 42378 and its June 25, 1998 Resolution denying
and petitioners’ evident bad faith in refusing to satisfy private respondent’s plainly valid, just and reconsideration. The assailed Decision affirmed the ruling of the Regional Trial Court (RTC) of
demandable claims,49 appear to have been excessively granted by the trial court and should Cebu City in Civil Case No. R-21208, which disposed as follows:
therefore be reduced to P25,000.00.
WHEREFORE, for all the foregoing considerations, the Court, finding for the defendant and
WHEREFORE, the instant petition for review on certiorari is DENIED. The partnership among against the plaintiffs, orders the dismissal of the plaintiffs complaint. The counterclaims of the
petitioners and private respondent is ordered dissolved, and the parties are ordered to effect the defendant are likewise ordered dismissed. No pronouncement as to costs. 3
winding up and liquidation of the partnership pursuant to the pertinent provisions of the Civil Code.
This case is remanded to the Regional Trial Court for proper proceedings relative to said The Facts
dissolution. The appealed decisions of the Regional Trial Court and the Court of Appeals are
AFFIRMED with MODIFICATIONS, as follows --- 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
1. Petitioners are ordered to submit to the Regional Trial Court a formal account of the partnership subdivision. Pursuant to the contract, they executed a Deed of Sale covering the said parcel of
affairs for the years 1987 and 1988, pursuant to Article 1809 of the Civil Code, in order to land in favor of respondent, who then had it registered in his name. By mortgaging the property,
determine private respondent’s ten percent (10%) share in the net profits of the partnership; respondent obtained from Equitable Bank a loan of P40,000 which, under the Joint Venture
Agreement, was to be used for the development of the subdivision. 4 All three of them also agreed
2. Petitioners are ordered, jointly and severally, to pay private respondent five percent (5%) to share the proceeds from the sale of the subdivided lots.
overriding commission for the one hundred and fifty (150) cookware sets available for disposition
since the time private respondent was wrongfully excluded from the partnership by petitioners; The project did not push through, and the land was subsequently foreclosed by the bank.

3. Petitioners are ordered, jointly and severally, to pay private respondent overriding commission According to petitioners, the project failed because of "respondent's lack of funds or means and
on the total production which, for the period covering January 8, 1988 to February 5, 1988, skills." They add that respondent used the loan not for the development of the subdivision, but in
amounted to P32,000.00; furtherance of his own company, Universal Umbrella Company.

4. Petitioners are ordered, jointly and severally, to pay private respondent moral damages in the On the other hand, respondent alleged that he used the loan to implement the Agreement. With
amount of P50,000.00, exemplary damages in the amount of P50,000.00 and attorney’s fees in the the said amount, he was able to effect the survey and the subdivision of the lots. He secured the
amount of P25,000.00. 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
SO ORDERED. a contract with an engineering firm for the building of sixty low-cost housing units and actually even
set up a model house on one of the subdivision lots. He did all of these for a total expense of
P85,000.

Respondent claimed that the subdivision project failed, however, because petitioners and their
relatives had separately caused the annotations of adverse claims on the title to the land, which
eventually scared away prospective buyers. Despite his requests, petitioners refused to cause the
clearing of the claims, thereby forcing him to give up on the project. 5

Subsequently, petitioners filed a criminal case for estafa against respondent and his wife, who
were however acquitted. Thereafter, they filed the present civil case which, upon respondent's
28
motion, was later dismissed by the trial court in an Order dated September 6, 1982. On appeal, This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of March,
however, the appellate court remanded the case for further proceedings. Thereafter, the RTC 1969, by and between MR. MANUEL R. TORRES, . . . the FIRST PARTY, likewise, MRS.
issued its assailed Decision, which, as earlier stated, was affirmed by the CA. ANTONIA B. TORRES, and MISS EMETERIA BARING, . . . the SECOND PARTY:

Hence, this Petition. 6 WITNESSETH:

Ruling of the Court of Appeals 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
In affirming the trial court, the Court of Appeals held that petitioners and respondent had formed a area of 17,009 square meters, to be sub-divided by the FIRST PARTY;
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. Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY THOUSAND
Disagreeing with the trial court's pronouncement that losses as well as profits in a joint venture (P20,000.00) Pesos, Philippine Currency upon the execution of this contract for the property
should be distributed equally, 7 the CA invoked Article 1797 of the Civil Code which provides: entrusted by the SECOND PARTY, for sub-division projects and development purposes;

Art. 1797 — The losses and profits shall be distributed in conformity with the agreement. If only the NOW THEREFORE, for and in consideration of the above covenants and promises herein
share of each partner in the profits has been agreed upon, the share of each in the losses shall be contained the respective parties hereto do hereby stipulate and agree as follows:
in the same proportion.
ONE: That the SECOND PARTY signed an absolute Deed of Sale . . . dated March 5, 1969, in the
The CA elucidated further: 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
In the absence of stipulation, the share of each partner in the profits and losses shall be in Currency, in favor of the FIRST PARTY, but the SECOND PARTY did not actually receive the
proportion to what he may have contributed, but the industrial partner shall not be liable for the payment.
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 SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the necessary
receive a share in the profits in proportion to his capital. 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
The Issue for the property mentioned to be sub-divided and to be deducted from the sales.

Petitioners impute to the Court of Appeals the following error: 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
. . . [The] Court of Appeals erred in concluding that the transaction Currency, until the sub-division project is terminated and ready for sale to any interested parties,
. . . between the petitioners and respondent was that of a joint venture/partnership, ignoring and the amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, will be
outright the provision of Article 1769, and other related provisions of the Civil Code of the deducted accordingly.
Philippines. 8
FOURTH: That all general expense[s] and all cost[s] involved in the sub-division project should be
The Court's Ruling 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.
The Petition is bereft of merit.
FIFTH: That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM 60% for the
Main Issue: 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
Existence of a Partnership [agreed upon] by both parties.

Petitioners deny having formed a partnership with respondent. They contend that the Joint Venture SIXTH: That the intended sub-division project of the property involved will start the work and all
Agreement and the earlier Deed of Sale, both of which were the bases of the appellate court's improvements upon the adjacent lots will be negotiated in both parties['] favor and all sales shall
finding of a partnership, were void. [be] decided by both parties.

In the same breath, however, they assert that under those very same contracts, respondent is SEVENTH: That the SECOND PARTIES, should be given an option to get back the property
liable for his failure to implement the project. Because the agreement entitled them to receive 60 mentioned provided the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine
percent of the proceeds from the sale of the subdivision lots, they pray that respondent pay them Currency, borrowed by the SECOND PARTY, will be paid in full to the FIRST PARTY, including all
damages equivalent to 60 percent of the value of the property. 9 necessary improvements spent by the FIRST PARTY, and-the FIRST PARTY will be given a grace
period to turnover the property mentioned above.
The pertinent portions of the Joint Venture Agreement read as follows:
That this AGREEMENT shall be binding and obligatory to the parties who executed same freely
KNOW ALL MEN BY THESE PRESENTS: and voluntarily for the uses and purposes therein stated. 10

A reading of the terms embodied in the Agreement indubitably shows the existence of a
partnership pursuant to Article 1767 of the Civil Code, which provides:
29
 property contributed, because without its designation and description, they cannot be subject to
Art. 1767. By the contract of partnership two or more persons bind themselves to contribute inscription in the Registry of Property, and their contribution cannot prejudice third persons. This
money, property, or industry to a common fund, with the intention of dividing the profits among will result in fraud to those who contract with the partnership in the belief [in] the efficacy of the
themselves. 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
Under the above-quoted Agreement, petitioners would contribute property to the partnership in the prejudiced.
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, Second, petitioners themselves invoke the allegedly void contract as basis for their claim that
the income from the said project would be divided according to the stipulated percentage. Clearly, respondent should pay them 60 percent of the value of the property. 13 They cannot in one breath
the contract manifested the intention of the parties to form a partnership. 11 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,
It should be stressed that the parties implemented the contract. Thus, petitioners transferred the much less approve, such practice.
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 In short, the alleged nullity of the partnership will not prevent courts from considering the Joint
subdivision of the land. As noted earlier, he developed the roads, the curbs and the gutters of the Venture Agreement an ordinary contract from which the parties' rights and obligations to each
subdivision and entered into a contract to construct low-cost housing units on the property. other may be inferred and enforced.

Respondent's actions clearly belie petitioners' contention that he made no contribution to the Partnership Agreement Not the Result
partnership. Under Article 1767 of the Civil Code, a partner may contribute not only money or
property, but also industry. of an Earlier Illegal Contract

Petitioners Bound by 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
Terms of Contract without valid consideration.

Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been This argument is puerile. The Joint Venture Agreement clearly states that the consideration for the
expressly stipulated, but also to all necessary consequences thereof, as follows: 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.
Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound Consideration, more properly denominated as cause, can take different forms, such as the
not only to the fulfillment of what has been expressly stipulated but also to all the consequences prestation or promise of a thing or service by another. 15
which, according to their nature, may be in keeping with good faith, usage and law.
In this case, the cause of the contract of sale consisted not in the stated peso value of the land, but
It is undisputed that petitioners are educated and are thus presumed to have understood the terms in the expectation of profits from the subdivision project, for which the land was intended to be
of the contract they voluntarily signed. If it was not in consonance with their expectations, they used. As explained by the trial court, "the land was in effect given to the partnership as
should have objected to it and insisted on the provisions they wanted. [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
Courts are not authorized to extricate parties from the necessary consequences of their acts, and sixty percent of the net profits."
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 Liability of the Parties
such agreement due to their supposed misunderstanding of its terms.
Claiming that rerpondent was solely responsible for the failure of the subdivision project,
Alleged Nullity of the 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.
Partnership Agreement
We are not persuaded. True, the Court of Appeals held that petitioners' acts were not the cause of
Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code, the failure of the project. 16 But it also ruled that neither was respondent responsible therefor. 17
which provides: 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
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if resolved in a petition for review under Rule 45, as in this case. Petitioners have not alleged, not to
an inventory of said property is not made, signed by the parties, and attached to the public say shown, that their Petition constitutes one of the exceptions to this doctrine. 18 Accordingly, we
instrument. find no reversible error in the CA's ruling that petitioners are not entitled to damages.

They contend that since the parties did not make, sign or attach to the public instrument an WHEREFORE, the Perition is hereby DENIED and the challenged Decision AFFIRMED. Costs
inventory of the real property contributed, the partnership is void. against petitioners.

We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the eminent SO ORDERED
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
30
C. Characteristics (Articles 1768, 1775, 1804-1805) – 2 cases 10. G.R. No. L-55397 February 29, 1988

9. G.R. No. L-414 November 9, 1903 TAI TONG CHUACHE & CO., petitioner,
vs.
HONGKONG BANK, plaintiffs-appellants, THE INSURANCE COMMISSION and TRAVELLERS MULTI-INDEMNITY CORPORATION,
vs. respondents.
JURADO & CO., defendants-appellees.

ON MOTION TO BE MADE A CODEFENDANT. GANCAYCO, J.:

This petition for review on certiorari seeks the reversal of the decision of the Insurance
WILLARD, J.: Commission in IC Case #367 1 dismissing the complaint 2 for recovery of the alleged unpaid
balance of the proceeds of the Fire Insurance Policies issued by herein respondent insurance
By the order of April 16, 1895, Don Ricardo Regidor was expressly included in the bankruptcy as a company in favor of petitioner-intervenor.
general partner of Jurado & Co. No order setting aside this order has been called to the court's
attention, except the order of December 12, 1898, dismissing the entire proceeding. The order of The facts of the case as found by respondent Insurance Commission are as follows:
April 6, 1898, upon which Señor Regidor relies, simply decided that this motion, in which he
claimed that he was not properly included in the bankruptcy, should come up for hearing in the Complainants acquired from a certain Rolando Gonzales a parcel of land and a building located at
ordinary way. It expressly stated that the merits of said motion were not passes upon. We have San Rafael Village, Davao City. Complainants assumed the mortgage of the building in favor of
seen nothing in the progress of this suit to show that this order of April 16, 1895, was not correct. S.S.S., which building was insured with respondent S.S.S. Accredited Group of Insurers for
On the contrary, it appears from the records of the court that, in the hearing on October 15, 1903, P25,000.00.
Señor Regidor as one of such partners, in open court, appointed an attorney to argue for the firm
the motion then before this court. On April 19, 1975, Azucena Palomo obtained a loan from Tai Tong Chuache Inc. in the amount of
P100,000.00. To secure the payment of the loan, a mortgage was executed over the land and the
As a partner of Jurado & Co. he is represented by the firm and has no right to appear as an building in favor of Tai Tong Chuache & Co. (Exhibit "1" and "1-A"). On April 25, 1975, Arsenio
individual separate from the firm. If he has this right, then every partner would have the same right. Chua, representative of Thai Tong Chuache & Co. insured the latter's interest with Travellers Multi-
We see nothing in the case to indicate that his rights will not be protected by the lawyers whom the Indemnity Corporation for P100,000.00 (P70,000.00 for the building and P30,000.00 for the
firm may see fit to employ. His motion to be made a codefendant is denied. contents thereof) (Exhibit "A-a," contents thereof) (Exhibit "A-a").

Torres, Cooper, Mapa, McDonough, and Johnson, JJ., concur. On June 11, 1975, Pedro Palomo secured a Fire Insurance Policy No. F- 02500 (Exhibit "A"),
Arellano, C.J., did not sit in this case. covering the building for P50,000.00 with respondent Zenith Insurance Corporation. On July 16,
1975, another Fire Insurance Policy No. 8459 (Exhibit "B") was procured from respondent
ON SUGGESTION OF DEATH OF LIQUIDATOR OF DEFENDANT FIRM. Philippine British Assurance Company, covering the same building for P50,000.00 and the
contents thereof for P70,000.00.
WILLARD, J.:
On July 31, 1975, the building and the contents were totally razed by fire.
In this case the plaintiff, in April, 1903, made a motion that the court assign a day for the hearing of
the case. This motion was resubmitted on the 15th day of October, 1903, and is now us for Adjustment Standard Corporation submitted a report as follow…
decision.
Based on the computation of the loss, including the Travellers Multi- Indemnity, respondents,
The firm Jurado & Co. being in liquidation, Don Basilio Teodoro, said the defendants to the Zenith Insurance, Phil. British Assurance and S.S.S. Accredited Group of Insurers, paid their
liquidator, died on July 12, 1903. This fact can not interfere with the progress of this suit. With the corresponding shares of the loss. Complainants were paid the following: P41,546.79 by Philippine
appointment of a new liquidator the court has nothing to do. The defendants are Jurado & Co. and British Assurance Co., P11,877.14 by Zenith Insurance Corporation, and P5,936.57 by S.S.S.
not the liquidator. If they do not see fit to appoint a new liquidator, or to select attorneys in place of Group of Accredited Insurers (Par. 6. Amended Complaint). Demand was made from respondent
those who it said were appointed only by the deceased liquidator, any notices required to be Travellers Multi-Indemnity for its share in the loss but the same was refused. Hence, complainants
served upon the defendants by the plaintiff, or usually given by the clerk, can be served upon and demanded from the other three (3) respondents the balance of each share in the loss based on the
given to any partner of Jurado & Co, who may be found in the Islands.lawphi1.net computation of the Adjustment Standards Report excluding Travellers Multi-Indemnity in the
amount of P30,894.31 (P5,732.79-Zenith Insurance: P22,294.62, Phil. British: and P2,866.90, SSS
The court, on March 8, 1902, made an order providing the procedure to be pursued in the case. If Accredited) but the same was refused, hence, this action.
this order had been followed by the parties, it would be resulted in a trial of the case on its merits in
August, 1902. It appears that the proofs, pleadings, and briefs of the plaintiffs have been filed, but In their answers, Philippine British Assurance and Zenith Insurance Corporation admitted the
no proofs nor brief of the defendant have been presented. It is ordered that the defendant deliver material allegations in the complaint, but denied liability on the ground that the claim of the
to the plaintiffs on or before the 15th day of December, 1903, three copies of their printed complainants had already been waived, extinguished or paid. Both companies set up counterclaim
pleadings, proofs, and brief, and file ten copies thereof in the clerk's office on or before that date, in the total amount of P 91,546.79.
and that this case be placed on the calendar of the January term, 1904, for hearing on its merits.
Instead of filing an answer, SSS Accredited Group of Insurers informed the Commission in its letter
of July 22, 1977 that the herein claim of complainants for the balance had been paid in the amount

31
of P 5,938.57 in full, based on the Adjustment Standards Corporation Report of September 22, amount of evidence as required by law to obtain favorable judgment.7 Thus, petitioner who is
1975. claiming a right over the insurance must prove its case. Likewise, respondent insurance company
to avoid liability under the policy by setting up an affirmative defense of lack of insurable interest
Travellers Insurance, on its part, admitted the issuance of the Policy No. 599 DV and alleged as its on the part of the petitioner must prove its own affirmative allegations.
special and affirmative defenses the following, to wit: that Fire Policy No. 599 DV, covering the
furniture and building of complainants was secured by a certain Arsenio Chua, mortgage creditor, It will be recalled that respondent insurance company did not assail the validity of the insurance
for the purpose of protecting his mortgage credit against the complainants; that the said policy was policy taken out by petitioner over the mortgaged property. Neither did it deny that the said
issued in the name of Azucena Palomo, only to indicate that she owns the insured premises; that property was totally razed by fire within the period covered by the insurance. Respondent, as
the policy contains an endorsement in favor of Arsenio Chua as his mortgage interest may appear mentioned earlier advanced an affirmative defense of lack of insurable interest on the part of the
to indicate that insured was Arsenio Chua and the complainants; that the premium due on said fire petitioner that before the occurrence of the peril insured against the Palomos had already paid
policy was paid by Arsenio Chua; that respondent Travellers is not liable to pay complainants. their credit due the petitioner. Respondent having admitted the material allegations in the
complaint, has the burden of proof to show that petitioner has no insurable interest over the
On May 31, 1977, Tai Tong Chuache & Co. filed a complaint in intervention claiming the proceeds insured property at the time the contingency took place. Upon that point, there is a failure of proof.
of the fire Insurance Policy No. F-559 DV, issued by respondent Travellers Multi-Indemnity. Respondent, it will be noted, exerted no effort to present any evidence to substantiate its claim,
while petitioner did. For said respondent's failure, the decision must be adverse to it.
Travellers Insurance, in answer to the complaint in intervention, alleged that the Intervenor is not
entitled to indemnity under its Fire Insurance Policy for lack of insurable interest before the loss of However, as adverted to earlier, respondent Insurance Commission absolved respondent
the insured premises and that the complainants, spouses Pedro and Azucena Palomo, had insurance company from liability on the basis of the certification issued by the then Court of First
already paid in full their mortgage indebtedness to the intervenor. 3 Instance of Davao, Branch II, that in a certain civil action against the Palomos, Arsenio Lopez
Chua stands as the complainant and not Tai Tong Chuache. From said evidence respondent
As adverted to above respondent Insurance Commission dismissed spouses Palomos' complaint commission inferred that the credit extended by herein petitioner to the Palomos secured by the
on the ground that the insurance policy subject of the complaint was taken out by Tai Tong insured property must have been paid. Such is a glaring error which this Court cannot sanction.
Chuache & Company, petitioner herein, for its own interest only as mortgagee of the insured Respondent Commission's findings are based upon a mere inference.
property and thus complainant as mortgagors of the insured property have no right of action
against herein respondent. It likewise dismissed petitioner's complaint in intervention in the The record of the case shows that the petitioner to support its claim for the insurance proceeds
following words: offered as evidence the contract of mortgage (Exh. 1) which has not been cancelled nor released.
It has been held in a long line of cases that when the creditor is in possession of the document of
We move on the issue of liability of respondent Travellers Multi-Indemnity to the Intervenor- credit, he need not prove non-payment for it is presumed. 8 The validity of the insurance policy
mortgagee. The complainant testified that she was still indebted to Intervenor in the amount of taken b petitioner was not assailed by private respondent. Moreover, petitioner's claim that the
P100,000.00. Such allegation has not however, been sufficiently proven by documentary evidence. loan extended to the Palomos has not yet been paid was corroborated by Azucena Palomo who
The certification (Exhibit 'E-e') issued by the Court of First Instance of Davao, Branch 11, indicate testified that they are still indebted to herein petitioner. 9
that the complainant was Antonio Lopez Chua and not Tai Tong Chuache & Company. 4
Public respondent argues however, that if the civil case really stemmed from the loan granted to
From the above decision, only intervenor Tai Tong Chuache filed a motion for reconsideration but Azucena Palomo by petitioner the same should have been brought by Tai Tong Chuache or by its
it was likewise denied hence, the present petition. representative in its own behalf. From the above premise respondent concluded that the obligation
secured by the insured property must have been paid.
It is the contention of the petitioner that respondent Insurance Commission decided an issue not
raised in the pleadings of the parties in that it ruled that a certain Arsenio Lopez Chua is the one The premise is correct but the conclusion is wrong. Citing Rule 3, Sec. 2 10 respondent pointed
entitled to the insurance proceeds and not Tai Tong Chuache & Company. out that the action must be brought in the name of the real party in interest. We agree. However, it
should be borne in mind that petitioner being a partnership may sue and be sued in its name or by
This Court cannot fault petitioner for the above erroneous interpretation of the decision appealed its duly authorized representative. The fact that Arsenio Lopez Chua is the representative of
from considering the manner it was written. 5 As correctly pointed out by respondent insurance petitioner is not questioned. Petitioner's declaration that Arsenio Lopez Chua acts as the managing
commission in their comment, the decision did not pronounce that it was Arsenio Lopez Chua who partner of the partnership was corroborated by respondent insurance company. 11 Thus Chua as
has insurable interest over the insured property. Perusal of the decision reveals however that it the managing partner of the partnership may execute all acts of administration 12 including the
readily absolved respondent insurance company from liability on the basis of the commissioner's right to sue debtors of the partnership in case of their failure to pay their obligations when it
conclusion that at the time of the occurrence of the peril insured against petitioner as mortgagee became due and demandable. Or at the very least, Chua being a partner of petitioner Tai Tong
had no more insurable interest over the insured property. It was based on the inference that the Chuache & Company is an agent of the partnership. Being an agent, it is understood that he acted
credit secured by the mortgaged property was already paid by the Palomos before the said for and in behalf of the firm.13 Public respondent's allegation that the civil case flied by Arsenio
property was gutted down by fire. The foregoing conclusion was arrived at on the basis of the Chua was in his capacity as personal creditor of spouses Palomo has no basis.
certification issued by the then Court of First Instance of Davao, Branch II that in a certain civil
action against the Palomos, Antonio Lopez Chua stands as the complainant and not petitioner Tai The respondent insurance company having issued a policy in favor of herein petitioner which
Tong Chuache & Company. policy was of legal force and effect at the time of the fire, it is bound by its terms and conditions.
Upon its failure to prove the allegation of lack of insurable interest on the part of the petitioner,
We find the petition to be impressed with merit. It is a well known postulate that the case of a party respondent insurance company is and must be held liable.
is constituted by his own affirmative allegations. Under Section 1, Rule 1316 each party must
prove his own affirmative allegations by the amount of evidence required by law which in civil IN VIEW OF THE FOREGOING, the decision appealed from is hereby SET ASIDE and ANOTHER
cases as in the present case is preponderance of evidence. The party, whether plaintiff or judgment is rendered order private respondent Travellers Multi-Indemnity Corporation to pay
defendant, who asserts the affirmative of the issue has the burden of presenting at the trial such
32
petitioner the face value of Insurance Policy No. 599-DV in the amount of P100,000.00. Costs
against said private respondent. All this being so, the alleged partnership never had any legal existence nor has it acquired any
judicial personality in the acts and contracts executed and made by it. (Art. 116, par. 2.)
SO ORDERED.
But as the said partnership was a partnership de facto, although it had no legal standing, and
contracted obligations in favor of the plaintiff, the liability arising from such obligations must
enforcible against some one.lawphil.net
D. Classification of Partnerships (Articles 1776-1781, 1783, 1825) – 3 cases
The partnership in question not being included in any of the classes of partnership defined by the
Code of Commerce there should be applied to it the general provisions applicable to all
11. G.R. No. L-2888 October 23, 1906 partnerships contained in article 120 of the Code of Commerce, which reads as follows:

HUNG-MAN-YOC, in the name of KWONG-WO-SING, plaintiff-appellee, The persons in charge of the management of the association who do not comply with the
vs. provisions of the foregoing article (art. 119, which requires that the articles of partnership be
KIENG-CHIONG-SENG, ET AL., defendants-appellants. recorded in a public instrument, and that the partnership be registered in the Mercantile Register)
shall be responsible together with the persons not members of the association with whom they
ARELLANO, J.: may have transacted business in the name of the same.

The court below entered judgment against each and all of the defendants, Chua-Che-Co, Yu-Yec- The defendant, Chua-Che-Co, was in charge of the management of the association, nor did he
Pin, and Ang-Chu-Keng for the sum of 7,962.14 pesos, Mexican, equivalent to 7,372.75 pesos, make any contract at all with the plaintiff, as clearly appears from the testimony of the various
Philippine currency, with interest at the rate 6 per cent per annum from December 7, 1903, and witnesses, the agent of the partnership, Yu-Yec-Pin, being the person who made all the contracts
costs. for the partnership; also Kieng-Tiao-Eng according to two of the witnesses. It is evident, therefore,
that he has incurred no liability and that he can not be held individually responsible for the payment
Chua-Che-Co is the only one who appealed. of plaintiff's claims as the court below found.

The court below found that Chu-Che-Co, Yu-Yec-Pin, and Ang-Chu-Keng were partners of Kiong- We accordingly reverse the judgment of the court below and acquit the defendant, Chua-Che-Co,
Tiao-Eng, under the firm name of Kieng-Chiong-Seng. without special condemnation as to costs in both instances.

It has been not proved that Kieng-Chiong-Seng was the firm name, but rather the designation of After the expiration of ten days from the date of final judgment the record will be remanded to the
the partnership. Court of First Instance for execution. So ordered.

It can not be the firm name of a general partnership because this should contain the names of all
the partners, or some of them, or at least one of them to be, followed in the two latter cases by the 12. G.R. No. L-7991 January 29, 1914
words "and company" (art. 126 of the Code of Commerce), whereas in this case none of the four
names of those it is alleged were members of the firm appear in the firm name of the partnership. LEON J. LAMBERT, plaintiff-appellant,
Neither can it be considered as the firm name of a limited partnership for the reason that this vs.
should contain the same requisites as the firm name of a general partnership, and in addition T. J. FOX, defendant-appellee.
thereto the word "limited." (Art. 146.) The firm name in question has absolutely none of these
requisites.
MORELAND, J.:
Anonymous partnership (corporations) do not require a firm name or signature; a designation
adequate, for the object or objects of the business to which it is dedicated, is sufficient. (Art. 151 This is an action brought to recover a penalty prescribed on a contract as punishment for the
and 152.) breach thereof.

The fact is, as alleged by the plaintiff and appellee in his brief, that "there is no doubt that the Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book and stationery
partnership of Kieng-Chiong-Seng was a mercantile partnership organized for the purpose of business, found itself in such condition financially that its creditors, including the plaintiff and the
engaging in commercial pursuits, although such organization was not evidenced by any public defendant, together with many others, agreed to take over the business, incorporate it and accept
document as required by article 119 of the Code of Commerce, nor was it registered as required stock therein in payment of their respective credits. This was done, the plaintiff and the defendant
by article 17 of the said code" (p.5). becoming the two largest stockholders in the new corporation called John R. Edgar & Co.,
Incorporated. A few days after the incorporation was completed plaintiff and defendant entered into
All these statements are correct. the following agreement:

The partnership in question was a mercantile one, as it was engaged in the importation of goods Whereas the undersigned are, respectively, owners of large amounts of stock in John R. Edgar
for sale here at a profit. It was so testified to by its manager, Yu-Yec-Pin, and Kiong-Tiao-Eng. But and Co, Inc; and,
its organization is not evidenced by any public document. The agent Yu-Yec-Pin himself and some
of his so-called partners have merely noted in the books of the partnership, which by the way, Whereas it is recognized that the success of said corporation depends, now and for at least one
were not introduced in evidence, the capital which each had contributed. The agent further testified year next following, in the larger stockholders retaining their respective interests in the business of
that the partnership was not record in the Mercantile Registry but in the Internal Revenue office. said corporation:
33
 In this jurisdiction penalties provided in contracts of this character are enforced . It is the rule that
Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or otherwise parties who are competent to contract may make such agreements within the limitations of the law
dispose of any part of their present holdings of stock in said John R. Edgar & Co. Inc., till after one and public policy as they desire, and that the courts will enforce them according to their terms.
year from the date hereof. (Civil Code, articles 1152, 1153, 1154, and 1155; Fornow vs. Hoffmeister, 6 Phil. Rep., 33;
Palacios vs. Municipality of Cavite, 12 Phil. Rep., 140; Gsell vs. Koch, 16 Phil. Rep., 1.) The only
Either party violating this agreement shall pay to the other the sum of one thousand (P1,000) case recognized by the Civil Code in which the court is authorized to intervene for the purpose of
pesos as liquidated damages, unless previous consent in writing to such sale, transfer, or other reducing a penalty stipulated in the contract is when the principal obligation has been partly or
disposition be obtained. irregularly fulfilled and the court can see that the person demanding the penalty has received the
benefit of such or irregular performance. In such case the court is authorized to reduce the penalty
Notwithstanding this contract the defendant Fox on October 19, 1911, sold his stock in the said to the extent of the benefits received by the party enforcing the penalty.
corporation to E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong
competitor of the said John R. Edgar & Co., Inc. In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as legal
results are concerned. Whatever differences exists between them as a matter of language, they
This sale was made by the defendant against the protest of the plaintiff and with the warning that are treated the same legally. In either case the party to whom payment is to be made is entitled to
he would be held liable under the contract hereinabove set forth and in accordance with its terms. recover the sum stipulated without the necessity of proving damages. Indeed one of the primary
In fact, the defendant Foz offered to sell his shares of stock to the plaintiff for the same sum that purposes in fixing a penalty or in liquidating damages, is to avoid such necessity.
McCullough was paying them less P1,000, the penalty specified in the contract.
It is also urged by the appelle in this case that the stipulation in the contract suspending the power
The learned trial court decided the case in favor of the defendant upon the ground that the to sell the stock referred to therein is an illegal stipulation, is in restraint of trade and, therefore,
intention of the parties as it appeared from the contract in question was to the effect that the offends public policy. We do not so regard it. The suspension of the power to sell has a beneficial
agreement should be good and continue only until the corporation reached a sound financial basis, purpose, results in the protection of the corporation as well as of the individual parties to the
and that that event having occurred some time before the expiration of the year mentioned in the contract, and is reasonable as to the length of time of the suspension. We do not here undertake
contract, the purpose for which the contract was made and had been fulfilled and the defendant to discuss the limitations to the power to suspend the right of alienation of stock, limiting ourselves
accordingly discharged of his obligation thereunder. The complaint was dismissed upon the merits. to the statement that the suspension in this particular case is legal and valid.

It is argued here that the court erred in its construction of the contract. We are of the opinion that The judgment is reversed, the case remanded with instructions to enter a judgment in favor of the
the contention is sound. The intention of parties to a contract must be determined, in the first plaintiff and against the defendant for P1,000, with interest; without costs in this instance.
instance, from the words of the contract itself. It is to be presumed that persons mean what they
say when they speak plain English. Interpretation and construction should by the instruments last
resorted to by a court in determining what the parties agreed to. Where the language used by the 13. G.R. No. 84197 July 28, 1989
parties is plain, then construction and interpretation are unnecessary and, if used, result in making
a contract for the parties. (Lizarraga Hermanos vs. Yap Tico, 24 Phil. Rep., 504.) PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
In the case cited the court said with reference to the construction and interpretation of statutes: "As THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
for us, we do not construe or interpret this law. It does not need it. We apply it. By applying the law, (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.
we conserve both provisions for the benefit of litigants. The first and fundamental duty of courts, in
our judgment, is to apply the law. Construction and interpretation come only after it has been G.R. No. 84157 July 28, 1989
demonstrated that application is impossible or inadequate without them. They are the very last
functions which a court should exercise. The majority of the law need no interpretation or JACOB S. LIM, petitioner,
construction. They require only application, and if there were more application and less vs.
construction, there would be more stability in the law, and more people would know what the law COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER
is." MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES
and CONSTANCIO MAGLANA, respondents.
What we said in that case is equally applicable to contracts between persons. In the case at bar
the parties expressly stipulated that the contract should last one year. No reason is shown for
saying that it shall last only nine months. Whatever the object was in specifying the year, it was GUTIERREZ, JR., J.:
their agreement that the contract should last a year and it was their judgment and conviction that
their purposes would not be subversed in any less time. What reason can give for refusing to The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-
follow the plain words of the men who made the contract? We see none. G.R. CV No. 66195 which modified the decision of the then Court of First Instance of Manila in
Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants
The appellee urges that the plaintiff cannot recover for the reason that he did not prove damages, (respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision
and cites numerous American authorities to the effect that because stipulations for liquidated was affirmed.
damages are generally in excess of actual damages and so work a hardship upon the party in
default, courts are strongly inclined to treat all such agreements as imposing a penalty and to allow The dispositive portion of the trial court's decision reads as follows:
a recovery for actual damages only. He also cites authorities holding that a penalty, as such, will
not be enforced and that the party suing, in spite of the penalty assigned, will be put to his proof to WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff
demonstrate the damages actually suffered by reason of defendants wrongful act or omission. the amount of P311,056.02, with interest at the rate of 12% per annum compounded monthly; plus

34
15% of the amount awarded to plaintiff as attorney's fees from July 2,1966, until full payment is themselves jointly and severally to indemnify and hold and save harmless Pioneer from and
made; plus P70,000.00 moral and exemplary damages. against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of
whatever kind and nature which Pioneer may incur in consequence of having become surety upon
It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses the bond/note and to pay, reimburse and make good to Pioneer, its successors and assigns, all
aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is further required sums and amounts of money which it or its representatives should or may pay or cause to be paid
to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half, the or become liable to pay on them of whatever kind and nature.
amount of Pl84,878.74 with interest from the filing of the cross-complaints until the amount is fully
paid; plus moral and exemplary damages in the amount of P184,878.84 with interest from the filing On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of
of the cross-complaints until the amount is fully paid; plus moral and exemplary damages in the Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It
amount of P50,000.00 for each of the two Cervanteses. was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed
(Exhibit D) was duly registered with the Office of the Register of Deeds of the City of Manila and
Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another with the Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil
P20,000.00 to Constancio B. Maglana as attorney's fees. Aeronautics Law (Republic Act No. 776), respectively.

xxx xxx xxx Lim defaulted on his subsequent installment payments prompting JDA to request payments from
the surety. Pioneer paid a total sum of P298,626.12.
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants
Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the
required to indemnify the defendants Bormaheco and the Cervanteses the amount of P20,000.00 Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging
as attorney's fees and the amount of P4,379.21, per year from 1966 with legal rate of interest up to that they are co-owners of the aircrafts,
the time it is paid.
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of
Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.
attorney's fees and costs.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim
No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith. alleging that they were not privies to the contracts signed by Lim and, by way of counterclaim,
The fact that the properties of the Bormaheco and the Cervanteses were attached and that they sought for damages for being exposed to litigation and for recovery of the sums of money they
were required to file a counterbond in order to dissolve the attachment, is not an act of bad faith. advanced to Lim for the purchase of the aircrafts in question.
When a man tries to protect his rights, he should not be saddled with moral or exemplary
damages. Furthermore, the rights exercised were provided for in the Rules of Court, and it was the After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
court that ordered it, in the exercise of its discretion. Pioneer's complaint against all other defendants.

No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for it As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs
only secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would be complaint against all the defendants was dismissed. In all other respects the trial court's decision
liable for damages in performing an act which is clearly within its power and which is the reason for was affirmed.
its being, then nobody would engage in the insurance business. No further claim or counter-claim
for or against anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16) We first resolve G.R. No. 84197.

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as Petitioner Pioneer Insurance and Surety Corporation avers that:
owner-operator of Southern Air Lines (SAL) a single proprietorship.
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY
executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA
and one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM
installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No.
the other aircraft, arrived in Manila on July 18,1965. 84197, p. 10)

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. The petitioner questions the following findings of the appellate court:
84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in
behalf of its principal, Lim, for the balance price of the aircrafts and spare parts. We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of
liability under the surety bond in favor of JDA and subsequently collected the proceeds of such
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco reinsurance in the sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts to
and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) P295,000.00, hence, plaintiffs instant action for the recovery of the amount of P298,666.28 from
contributed some funds used in the purchase of the above aircrafts and spare parts. The funds defendants will no longer prosper. Plaintiff Pioneer is not the real party in interest to institute the
were supposed to be their contributions to a new corporation proposed by Lim to expand his airline instant action as it does not stand to be benefited or injured by the judgment.
business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of
Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from
Cervanteses. The indemnity agreements stipulated that the indemnitors principally agree and bind defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present
35
any evidence that it is the attorney-in-fact of the reinsurance company, authorized to institute an
action for and in behalf of the latter. To qualify a person to be a real party in interest in whose On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for
name an action must be prosecuted, he must appear to be the present real owner of the right the amount paid to it by the reinsurers, notwithstanding that the cause of action pertains to the
sought to be enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has latter, Pioneer says: The reinsurers opted instead that the Pioneer Insurance & Surety Corporation
been held that the real party in interest is the party who would be benefited or injured by the shall pursue alone the case.. . . . Pioneer Insurance & Surety Corporation is representing the
judgment or the party entitled to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 reinsurers to recover the amount.' In other words, insofar as the amount paid to it by the reinsurers
Phil. 125, 131). By real party in interest is meant a present substantial interest as distinguished Pioneer is suing defendants as their attorney-in-fact.
from a mere expectancy or a future, contingent, subordinate or consequential interest (Garcia v.
David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as
Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35). attorney-in- fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has no
right to institute and maintain in its own name an action for the benefit of the reinsurers. It is well-
Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in settled that an action brought by an attorney-in-fact in his own name instead of that of the principal
interest as it has already been paid by the reinsurer the sum of P295,000.00 — the bulk of will not prosper, and this is so even where the name of the principal is disclosed in the complaint.
defendants' alleged obligation to Pioneer.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be prosecuted in the
In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer, name of the real party in interest.' This provision is mandatory. The real party in interest is the
the former was able to foreclose extra-judicially one of the subject airplanes and its spare engine, party who would be benefitted or injured by the judgment or is the party entitled to the avails of the
realizing the total amount of P37,050.00 from the sale of the mortgaged chattels. Adding the sum suit.
of P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it is patent that
plaintiff has been overpaid in the amount of P33,383.72 considering that the total amount it had This Court has held in various cases that an attorney-in-fact is not a real party in interest, that
paid to JDA totals to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the there is no law permitting an action to be brought by an attorney-in-fact. Arroyo v. Granada and
amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has already Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial
been paid by the reinsurance company of the amount plaintiff has paid to JDA as surety of Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.
defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New Civil Code). (Rollo- The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected
84197, pp. 24-25). P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the difference
between the two amounts, or P3,666.28. This is the amount for which Pioneer may sue
The petitioner contends that-(1) it is at a loss where respondent court based its finding that defendants, assuming that the indemnity agreement is still valid and effective. But since the
petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never been raised amount realized from the sale of the mortgaged chattels are P35,000.00 for one of the airplanes
by any of the parties herein both in their answers in the court below and in their respective briefs and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is still overpaid by P33,383.72.
with respondent court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its Therefore, Pioneer has no more claim against defendants. (Record on Appeal, pp. 360-363).
reinsurer, still none of the respondents had any interest in the matter since the reinsurance is
strictly between the petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3) The payment to the petitioner made by the reinsurers was not disputed in the appellate court.
pursuant to the indemnity agreements, the petitioner is entitled to recover from respondents Considering this admitted payment, the only issue that cropped up was the effect of payment
Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable considering made by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents
that whatever amount he would recover from the co-indemnitor will be paid to the reinsurer. had no interest in the reinsurance contract as this is strictly between the petitioner as insured and
the reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has
The records belie the petitioner's contention that the issue on the reinsurance money was never no basis.
raised by the parties.
In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are
A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time
were: Molasses Co. C.C.A. La., 46 F 2nd 925).

xxx xxx xxx The rules of practice in actions on original insurance policies are in general applicable to actions or
contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA.
1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to 380, 7 Ann. Con. 1134).
JDA as has been paid with reinsurance money?
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
2. If the answer to the preceding question is in the negative, has Pioneer still any claim against
defendants, considering the amount it has realized from the sale of the mortgaged properties? Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the
(Record on Appeal, p. 359, Annex B of G.R. No. 84157). insurance company for the injury or loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer
In resolving these issues, the trial court made the following findings: or the person who has violated the contract. If the amount paid by the insurance company does
not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from
It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor the person causing the loss or injury.
of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid with the said
amount the bulk of its alleged liability to JDA under the said surety bond, it is plain that on this
score it no longer has any right to collect to the extent of the said amount.
36
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Independently of the preceding proposition Pioneer's election of the remedy of foreclosure
Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing precludes any further action to recover any unpaid balance of the price.
Corporation v. Court of Appeals (154 SCRA 650 [1987]):
SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer
Note that if a property is insured and the owner receives the indemnity from the insurer, it is as surety having made of the payments to JDA, the alternative remedies open to Pioneer were as
provided in said article that the insurer is deemed subrogated to the rights of the insured against provided in Article 1484 of the New Civil Code, known as the Recto Law.
the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the
aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision, Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial
the real party in interest with regard to the portion of the indemnity paid is the insurer and not the foreclosure and the instant suit. Such being the case, as provided by the aforementioned
insured. (Emphasis supplied). provisions, Pioneer shall have no further action against the purchaser to recover any unpaid
balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance
It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.
reinsurer.
The operation of the foregoing provision cannot be escaped from through the contention that
Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of
complaint as against the respondents for the reason that the petitioner was not the real party in JDA as vendor, having subrogated it in such rights. Nor may the application of the provision be
interest in the complaint and, therefore, has no cause of action against the respondents. validly opposed on the ground that these defendants and defendant Maglana are not the vendee
but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974,
Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not 61 SCRA 124.
have been dismissed on the premise that the evidence on record shows that it is entitled to
recover from the counter indemnitors. It does not, however, cite any grounds except its allegation The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates
that respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up discharged these defendants from any liability as alleged indemnitors. The change of the maturity
its contention. dates of the obligations of Lim, or SAL extinguish the original obligations thru novations thus
discharging the indemnitors.
On the other hand, we find the trial court's findings on the matter replete with evidence to
substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court The principal hereof shall be paid in eight equal successive three months interval installments, the
stated: first of which shall be due and payable 25 August 1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding three months and the last of which shall be due
Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective and payable 26th May 1967.
after the execution of the chattel mortgage.
However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and
Testimonies of defendants Francisco Cervantes and Modesto Cervantes. JDA, modifying the maturity dates of the obligations, as follows:

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue The principal hereof shall be paid in eight equal successive three month interval installments the
the bond provided that the same would be mortgaged to it, but this was not possible because the first of which shall be due and payable 4 September 1965, the remainder of which ... shall be due
planes were still in Japan and could not be mortgaged here in the Philippines. As soon as the and payable on the 4th day ... of each succeeding months and the last of which shall be due and
aircrafts were brought to the Philippines, they would be mortgaged to Pioneer Insurance to cover payable 4th June 1967.
the bond, and this indemnity agreement would be cancelled.
Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates
The following is averred under oath by Pioneer in the original complaint: different from that fixed in the aforesaid memorandum; the due date of the first installment appears
as October 15, 1965, and those of the rest of the installments, the 15th of each succeeding three
The various conflicting claims over the mortgaged properties have impaired and rendered months, that of the last installment being July 15, 1967.
insufficient the security under the chattel mortgage and there is thus no other sufficient security for
the claim sought to be enforced by this action. These restructuring of the obligations with regard to their maturity dates, effected twice, were done
without the knowledge, much less, would have it believed that these defendants Maglana (sic).
This is judicial admission and aside from the chattel mortgage there is no other security for the Pioneer's official Numeriano Carbonel would have it believed that these defendants and defendant
claim sought to be enforced by this action, which necessarily means that the indemnity agreement Maglana knew of and consented to the modification of the obligations. But if that were so, there
had ceased to have any force and effect at the time this action was instituted. Sec 2, Rule 129, would have been the corresponding documents in the form of a written notice to as well as written
Revised Rules of Court. conformity of these defendants, and there are no such document. The consequence of this was
the extinguishment of the obligations and of the surety bond secured by the indemnity agreement
Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and which was thereby also extinguished. Applicable by analogy are the rulings of the Supreme Court
spare parts, no longer has any further action against the defendants as indemnitors to recover any in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic
unpaid balance of the price. The indemnity agreement was ipso jure extinguished upon the Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
foreclosure of the chattel mortgage. These defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make payments to the latter. Articles 2067 and 2080 Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor
of the New Civil Code of the Philippines. extinguishes the guaranty The mere failure on the part of the creditor to demand payment after the
debt has become due does not of itself constitute any extension time referred to herein, (New Civil
Code).'
37
 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. corporation and who carry on business under the corporate name occupy the position of partners
Climacom et al. (C.A.) 36 O.G. 1571. inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase property to carry on a business,
Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same. and their organization is so defective as to come short of creating a corporation within the statute,
Consequently, Pioneer has no more cause of action to recover from these defendants, as they become in legal effect partners inter se, and their rights as members of the company to the
supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the surety property acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A.
bond, the failure of JDA to present its claim to Pioneer within ten days from default of Lim or SAL 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain persons associated
on every installment, released Pioneer from liability from the claim. themselves as a corporation for the development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them contracted to pay a third the difference in the
Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the proportionate value of the land conveyed by him, and no stock was ever issued in the corporation,
indemnity. it was treated as a trustee for the associates in an action between them for an accounting, and its
capital stock was treated as partnership assets, sold, and the proceeds distributed among them in
Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors proportion to the value of the property contributed by each (Shorb v. Beaudry, 56 Cal. 446).
if such payment is made after the obligation has prescribed or became illegal. However, such a relation does not necessarily exist, for ordinarily persons cannot be made to
assume the relation of partners, as between themselves, when their purpose is that no partnership
These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688),
by reason of the filing of the instant case against them and the attachment and garnishment of and it should be implied only when necessary to do justice between the parties; thus, one who
their properties. The instant action is clearly unfounded insofar as plaintiff drags these defendants takes no part except to subscribe for stock in a proposed corporation which is never legally formed
and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157). does not become a partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of the alleged
We find no cogent reason to reverse or modify these findings. partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between
certain stockholders and other stockholders, who were also directors, will not be implied in the
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious. absence of an agreement, so as to make the former liable to contribute for payment of debts
illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris
We now discuss the merits of G.R. No. 84157. Secundum, Vol. 68, p. 464). (Italics supplied).

Petitioner Jacob S. Lim poses the following issues: In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to
appear during the pretrial despite notification. In his answer, the petitioner denied having received
l. What legal rules govern the relationship among co-investors whose agreement was to do any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the
business through the corporate vehicle but who failed to incorporate the entity in which they had appellate court, however, found through Exhibit 58, that the petitioner received the amount of
chosen to invest? How are the losses to be treated in situations where their contributions to the P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the
intended 'corporation' were invested not through the corporate form? This Petition presents these ownership of the subject airplanes and spare parts. The record shows that defendant Maglana
fundamental questions which we believe were resolved erroneously by the Court of Appeals ('CA'). gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
(Rollo, p. 6).
It is therefore clear that the petitioner never had the intention to form a corporation with the
These questions are premised on the petitioner's theory that as a result of the failure of respondents despite his representations to them. This gives credence to the cross-claims of the
respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to respondents to the effect that they were induced and lured by the petitioner to make contributions
incorporate, a de facto partnership among them was created, and that as a consequence of such to a proposed corporation which was never formed because the petitioner reneged on their
relationship all must share in the losses and/or gains of the venture in proportion to their agreement. Maglana alleged in his cross-claim:
contribution. The petitioner, therefore, questions the appellate court's findings ordering him to
reimburse certain amounts given by the respondents to the petitioner as their contributions to the ... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to
intended corporation, to wit: expand his airline business. Lim was to procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the required permits for the operation
However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total thereof. Maglana sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to
amount of P184,878.74 as correctly found by the trial court, with interest from the filing of the Lim which Cervantes did and Lim acknowledged receipt thereof. Cervantes, likewise, delivered his
cross-complaints until the amount is fully paid. Defendant Lim should pay one-half of the said share of the undertaking. Lim in an undertaking sometime on or about August 9,1965, promised to
amount to Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is incorporate his airline in accordance with their agreement and proceeded to acquire the planes on
established in the records that defendant Lim had duly received the amount of Pl51,000.00 from his own account. Since then up to the filing of this answer, Lim has refused, failed and still refuses
defendants Bormaheco and Maglana representing the latter's participation in the ownership of the to set up the corporation or return the money of Maglana. (Record on Appeal, pp. 337-338).
subject airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74. while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-
claim and third party complaint:
We first state the principles.
Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase
While it has been held that as between themselves the rights of the stockholders in a defectively two airplanes and spare parts from Japan which the latter considered as their lawful contribution
incorporated association should be governed by the supposed charter and the laws of the state and participation in the proposed corporation to be known as SAL. Arrangements and negotiations
relating thereto and not by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121, were undertaken by defendant Lim. Down payments were advanced by defendants Bormaheco
38
and the Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement among the On November 15, 1955, plaintiff Mauro Lozana brought an action against the defendant, alleging
defendants, defendant Lim in connivance with the plaintiff, signed and executed the alleged chattel that he is the owner of the Generator Buda (Diesel), valued at P8,000 and 70 wooden posts with
mortgage and surety bond agreement in his personal capacity as the alleged proprietor of the SAL. the wires connecting the generator to the different houses supplied by electric current in the
The answering defendants learned for the first time of this trickery and misrepresentation of the Municipality of Dumangas, and that he is entitled to the possession thereof, but that the defendant
other, Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant has wrongfully detained them as a consequence of which plaintiff suffered damages. Plaintiff
Lim, thereby forcing them to file an adverse claim in the form of third party claim. Notwithstanding prayed that said properties be delivered back to him. Three days after the filing of the complaint,
repeated oral demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to that is on November 18, 1955, Judge Pantaleon A. Pelayo issued an order in said case authorizing
surrender the possession of the two planes and their accessories and or return the amount the sheriff to take possession of the generator and 70 wooden posts, upon plaintiff's filing of a
advanced by the former amounting to an aggregate sum of P 178,997.14 as evidenced by a bond in the amount of P16,000 in favor of the defendant (for subsequent delivery to the plaintiff).
statement of accounts, the latter ignored, omitted and refused to comply with them. (Record on On December 5, 1955, defendant filed an answer, denying that the generator and the equipment
Appeal, pp. 341-342). mentioned in the complaint belong to the plaintiff and alleging that the same had been contributed
by the plaintiff to the partnership entered into between them in the same manner that defendant
Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de had contributed equipments also, and therefore that he is not unlawfully detaining them. By way of
facto partnership was created among the parties which would entitle the petitioner to a counterclaim, defendant alleged that under the partnership agreement the parties were to
reimbursement of the supposed losses of the proposed corporation. The record shows that the contribute equipments, plaintiff contributing the generator and the defendant, the wires for the
petitioner was acting on his own and not in behalf of his other would-be incorporators in purpose of installing the main and delivery lines; that the plaintiff sold his contribution to the
transacting the sale of the airplanes and spare parts. partnership, in violation of the terms of their agreement. He, therefore, prayed that the complaint
against him be dismissed; that plaintiff be adjudged guilty of violating the partnership contract and
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of be ordered to pay the defendant the sum of P3,000, as actual damages, P600.00 as attorney's
Appeals is AFFIRMED. fees and P2,600 annually as actual damages; that the court order dissolution of the partnership,
after the accounting and liquidation of the same.
SO ORDERED.
On September 27, 1956, the defendant filed a motion to declare plaintiff in default on his
counterclaim, but this was denied by the court. Hearings on the case were conducted on October
25, 1956 and November 5, 1956, and on the latter date the judge entered a decision declaring
plaintiff owner of the equipment and entitled to the possession thereof, with costs against
I. Obligations of the Partners (Articles 1784-1827) defendant. It is against this judgment that the defendant has appealed.

A. Obligations of the Partners among Themselves (Section 1) The above judgment of the court was rendered on a stipulation of facts, which is as follows:
1. Contributions (Articles 1784-1796, 1808) – 2 cases
1. That on November 16, 1954, in the City of Iloilo, the aforementioned plaintiff, and the defendant
entered into a contract of Partnership, a copy of which is attached as Annex "A" of defendant's
14. G.R. No. L-13680 April 27, 1960
answer and counterclaim, for the purpose set forth therein and under the national franchise
granted to Mrs. Piadosa Buenaflor;
MAURO LOZANA, plaintiff-appellee,
vs.
2. That according to the aforementioned Partnership Contract, the plaintiff Mr. Mauro Lozana,
SERAFIN DEPAKAKIBO, defendant-appellant.
contributed the amount of Eighteen Thousand Pesos (P18,000.00); said contributions of both
parties being the appraised values of their respective properties brought into the partnership;
LABRADOR, J.:
3. That the said Certificate of Public Convenience and Necessity was revoked and cancelled by
This is an appeal from a judgment of the Court of First Instance of Iloilo, certified to us by the Court
order of the Public Service Commission dated March 15, 1955, promulgated in case No. 58188,
of Appeals, for the reason that only questions of law are involved in said appeal.
entitled, "Piadosa Buenaflor, applicant", which order has been appealed to the Supreme Court by
Mrs. Buenaflor;
The record discloses that on November 16, 1954 plaintiff Mauro Lozana entered into a contract
with defendant Serafin Depakakibo wherein they established a partnership capitalized at the sum
4. That on October 30, 1955, the plaintiff sold properties brought into by him to the said partnership
of P30,000, plaintiff furnishing 60% thereof and the defendant, 40%, for the purpose of
in favor of Olimpia Decolongon in the amount of P10,000.00 as per Deed of Sale dated October
maintaining, operating and distributing electric light and power in the Municipality of Dumangas,
30, 1955 executed and ratified before Notary Public, Delfin Demaisip, in and for the Municipality of
Province of Iloilo, under a franchise issued to Mrs. Piadosa Buenaflor. However, the franchise or
Dumangas, Iloilo and entered in his Notarial Registry as Doc. No. 832; Page No. 6; Book No. XIII;
certificate of public necessity and convenience in favor of the said Mrs. Piadosa Buenaflor was
and Series of 1955, a copy thereof is made as Annex "B" of defendant's answer and counterclaim;
cancelled and revoked by the Public Service Commission on May 15, 1955. But the decision of the
Public Service Commission was appealed to Us on October 21, 1955. A temporary certificate of
5. That there was no liquidation of partnership and that at the time of said Sale on October 30,
public convenience was issued in the name of Olimpia D. Decolongon on December 22, 1955
1955, defendant was the manager thereof;
(Exh. "B"). Evidently because of the cancellation of the franchise in the name of Mrs. Piadosa
Buenaflor, plaintiff herein Mauro Lozana sold a generator, Buda (diesel), 75 hp. 30 KVA capacity,
6. That by virtue of the Order of this Honorable Court dated November 18, 1955, those properties
Serial No. 479, to the new grantee Olimpia D. Decolongon, by a deed dated October 30, 1955
sold were taken by the Provincial Sheriff on November 20, 1955 and delivered to the plaintiff on
(Exhibit "C"). Defendant Serafin Depakakibo, on the other hand, sold one Crossly Diesel Engine,
November 25, 1955 upon the latter posting the required bond executed by himself and the Luzon
25 h. p., Serial No. 141758, to the spouses Felix Jimenea and Felina Harder, by a deed dated July
Surety Co., dated November 17, 1955 and ratified before the Notary Public, Eleuterio del Rosario
10, 1956.

39
in and for the province of Iloilo known as Doc. No. 200; Page 90; Book No. VII; and Series of 1955;
of said Notary Public; This is a petition for review on certiorari of the decision of the respondent Court of Appeals which
ordered petitioner Isabelo Moran, Jr. to pay damages to respondent Mariano E, Pecson.
7. That the said properties sold are now in the possession of Olimpia Decolongon, the purchaser,
who is presently operating an electric light plant in Dumangas, Iloilo; As found by the respondent Court of Appeals, the undisputed facts indicate that

8. That the defendant sold certain properties in favor of the spouses, Felix Jimenea and Felisa xxx xxx xxx
Harder contributed by him to the partnership for P3,500.00 as per Deed of Sale executed and
ratified before the Notary Public Rodrigo J. Harder in and for the Province of Iloilo, known as Doc. ... on February 22, 1971 Pecson and Moran entered into an agreement whereby both would
No. 76; Page 94; Book No. V; and Series of 1955, a certified copy of which is hereto attached contribute P15,000 each for the purpose of printing 95,000 posters (featuring the delegates to the
marked as Annex "A", and made an integral part hereof; (pp, 27-29 ROA). 1971 Constitutional Convention), with Moran actually supervising the work; that Pecson would
receive a commission of P l,000 a month starting on April 15, 1971 up to December 15, 1971; that
As it appears from the above stipulation of facts that the plaintiff and the defendant entered into the on December 15, 1971, a liquidation of the accounts in the distribution and printing of the 95,000
contract of partnership, plaintiff contributing the amount of P18,000, and as it is not stated therein posters would be made, that Pecson gave Moran P10,000 for which the latter issued a receipt; that
that there bas been a liquidation of the partnership assets at the time plaintiff sold the Buda Diesel only a few posters were printed; that on or about May 28, 1971, Moran executed in favor of
Engine on October 15, 1955, and since the court below had found that the plaintiff had actually Pecson a promissory note in the amount of P20,000 payable in two equal installments (P10,000
contributed one engine and 70 posts to the partnership, it necessarily follows that the Buda diesel payable on or before June 15, 1971 and P10,000 payable on or before June 30, 1971), the whole
engine contributed by the plaintiff had become the property of the partnership. As properties of the sum becoming due upon default in the payment of the first installment on the date due, complete
partnership, the same could not be disposed of by the party contributing the same without the with the costs of collection.
consent or approval of the partnership or of the other partner. (Clemente vs. Galvan, 67 Phil., 565).
Private respondent Pecson filed with the Court of First Instance of Manila an action for the
The lower court declared that the contract of partnership was null and void, because by the recovery of a sum of money and alleged in his complaint three (3) causes of action, namely: (1) on
contract of partnership, the parties thereto have become dummies of the owner of the franchise. the alleged partnership agreement, the return of his contribution of P10,000.00, payment of his
The reason for this holding was the admission by defendant when being cross-examined by the share in the profits that the partnership would have earned, and, payment of unpaid commission;
court that he and the plaintiff are dummies. We find that this admission by the defendant is an error (2) on the alleged promissory note, payment of the sum of P20,000.00; and, (3) moral and
of law, not a statement of a fact. The Anti-Dummy law has not been violated as parties plaintiff and exemplary damages and attorney's fees.
defendant are not aliens but Filipinos. The Anti-Dummy law refers to aliens only (Commonwealth
Act 108 as amended). After the trial, the Court of First Instance held that:

Upon examining the contract of partnership, especially the provision thereon wherein the parties From the evidence presented it is clear in the mind of the court that by virtue of the partnership
agreed to maintain, operate and distribute electric light and power under the franchise belonging to agreement entered into by the parties-plaintiff and defendant the plaintiff did contribute
Mrs. Buenaflor, we do not find the agreement to be illegal, or contrary to law and public policy such P10,000.00, and another sum of P7,000.00 for the Voice of the Veteran or Delegate Magazine. Of
as to make the contract of partnership, null and void ab initio. The agreement could have been the expected 95,000 copies of the posters, the defendant was able to print 2,000 copies only
submitted to the Public Service Commission if the rules of the latter require them to be so authorized of which, however, were sold at P5.00 each. Nothing more was done after this and it
presented. But the fact of furnishing the current to the holder of the franchise alone, without the can be said that the venture did not really get off the ground. On the other hand, the plaintiff failed
previous approval of the Public Service Commission, does not per se make the contract of to give his full contribution of P15,000.00. Thus, each party is entitled to rescind the contract which
partnership null and void from the beginning and render the partnership entered into by the parties right is implied in reciprocal obligations under Article 1385 of the Civil Code whereunder 'rescission
for the purpose also void and non-existent. Under the circumstances, therefore, the court erred in creates the obligation to return the things which were the object of the contract ...
declaring that the contract was illegal from the beginning and that parties to the partnership are not
bound therefor, such that the contribution of the plaintiff to the partnership did not pass to it as its WHEREFORE, the court hereby renders judgment ordering defendant Isabelo C. Moran, Jr. to
property. It also follows that the claim of the defendant in his counterclaim that the partnership be return to plaintiff Mariano E. Pecson the sum of P17,000.00, with interest at the legal rate from the
dissolved and its assets liquidated is the proper remedy, not for each contributing partner to claim filing of the complaint on June 19, 1972, and the costs of the suit.
back what he had contributed.
For insufficiency of evidence, the counterclaim is hereby dismissed.
For the foregoing considerations, the judgment appealed from as well as the order of the court for
the taking of the property into custody by the sheriff must be, as they hereby are set aside and the From this decision, both parties appealed to the respondent Court of Appeals. The latter likewise
case remanded to the court below for further proceedings in accordance with law. rendered a decision against the petitioner. The dispositive portion of the decision reads:

PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a new one is
hereby rendered, ordering defendant-appellant Isabelo C. Moran, Jr. to pay plaintiff- appellant
G.R. No. L-59956 October 31, 1984 Mariano E. Pecson:

15. ISABELO MORAN, JR., petitioner, (a) Forty-seven thousand five hundred (P47,500) (the amount that could have accrued to Pecson
vs. under their agreement);
THE HON. COURT OF APPEALS and MARIANO E. PECSON, respondents.
(b) Eight thousand (P8,000), (the commission for eight months);

GUTIERREZ, JR., J.:ñé+.£ªwph!1 (c) Seven thousand (P7,000) (as a return of Pecson's investment for the Veteran's Project);
40
 5. That upon the termination of the partnership on December 15, 1971, a liquidation of the account
(d) Legal interest on (a), (b) and (c) from the date the complaint was filed (up to the time payment pertaining to the distribution and printing of the said 95,000 posters shall be made.
is made)
The petitioner on the other hand admitted in his answer the existence of the partnership.
The petitioner contends that the respondent Court of Appeals decided questions of substance in a
way not in accord with law and with Supreme Court decisions when it committed the following The rule is, when a partner who has undertaken to contribute a sum of money fails to do so, he
errors: becomes a debtor of the partnership for whatever he may have promised to contribute (Art. 1786,
Civil Code) and for interests and damages from the time he should have complied with his
I obligation (Art. 1788, Civil Code). Thus in Uy v. Puzon (79 SCRA 598), which interpreted Art. 2200
of the Civil Code of the Philippines, we allowed a total of P200,000.00 compensatory damages in
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER favor of the appellee because the appellant therein was remiss in his obligations as a partner and
ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF as prime contractor of the construction projects in question. This case was decided on a particular
P47,500 AS THE SUPPOSED EXPECTED PROFITS DUE HIM. set of facts. We awarded compensatory damages in the Uy case because there was a finding that
the constructing business is a profitable one and that the UP construction company derived some
II profits from its contractors in the construction of roads and bridges despite its deficient capital."
Besides, there was evidence to show that the partnership made some profits during the periods
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER from July 2, 1956 to December 31, 1957 and from January 1, 1958 up to September 30, 1959. The
ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF profits on two government contracts worth P2,327,335.76 were not speculative. In the instant case,
P8,000, AS SUPPOSED COMMISSION IN THE PARTNERSHIP ARISING OUT OF PECSON'S there is no evidence whatsoever that the partnership between the petitioner and the private
INVESTMENT. respondent would have been a profitable venture. In fact, it was a failure doomed from the start.
There is therefore no basis for the award of speculative damages in favor of the private
III respondent.

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER Furthermore, in the Uy case, only Puzon failed to give his full contribution while Uy contributed
ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF much more than what was expected of him. In this case, however, there was mutual breach.
P7,000 AS A SUPPOSED RETURN OF INVESTMENT IN A MAGAZINE VENTURE. Private respondent failed to give his entire contribution in the amount of P15,000.00. He
contributed only P10,000.00. The petitioner likewise failed to give any of the amount expected of
IV him. He further failed to comply with the agreement to print 95,000 copies of the posters. Instead,
he printed only 2,000 copies.
ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT,
THE HONORABLE COURT OF APPEALS DID NOT EVEN OFFSET PAYMENTS ADMITTEDLY Article 1797 of the Civil Code provides:
RECEIVED BY PECSON FROM MORAN.
The losses and profits shall be distributed in conformity with the agreement. If only the share of
V each partner in the profits has been agreed upon, the share of each in the losses shall be in the
same proportion.
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT GRANTING THE
PETITIONER'S COMPULSORY COUNTERCLAIM FOR DAMAGES. Being a contract of partnership, each partner must share in the profits and losses of the venture.
That is the essence of a partnership. And even with an assurance made by one of the partners
The first question raised in this petition refers to the award of P47,500.00 as the private that they would earn a huge amount of profits, in the absence of fraud, the other partner cannot
respondent's share in the unrealized profits of the partnership. The petitioner contends that the claim a right to recover the highly speculative profits. It is a rare business venture guaranteed to
award is highly speculative. The petitioner maintains that the respondent court did not take into give 100% profits. In this case, on an investment of P15,000.00, the respondent was supposed to
account the great risks involved in the business undertaking. earn a guaranteed P1,000.00 a month for eight months and around P142,500.00 on 95,000
posters costing P2.00 each but 2,000 of which were sold at P5.00 each. The fantastic nature of
We agree with the petitioner that the award of speculative damages has no basis in fact and law. expected profits is obvious. We have to take various factors into account. The failure of the
Commission on Elections to proclaim all the 320 candidates of the Constitutional Convention on
There is no dispute over the nature of the agreement between the petitioner and the private time was a major factor. The petitioner undesirable his best business judgment and felt that it
respondent. It is a contract of partnership. The latter in his complaint alleged that he was induced would be a losing venture to go on with the printing of the agreed 95,000 copies of the posters.
by the petitioner to enter into a partnership with him under the following terms and conditions: Hidden risks in any business venture have to be considered.

1. That the partnership will print colored posters of the delegates to the Constitutional Convention; It does not follow however that the private respondent is not entitled to recover any amount from
the petitioner. The records show that the private respondent gave P10,000.00 to the petitioner.
2. That they will invest the amount of Fifteen Thousand Pesos (P15,000.00) each; The latter used this amount for the printing of 2,000 posters at a cost of P2.00 per poster or a total
printing cost of P4,000.00. The records further show that the 2,000 copies were sold at P5.00
3. That they will print Ninety Five Thousand (95,000) copies of the said posters; each. The gross income therefore was P10,000.00. Deducting the printing costs of P4,000.00 from
the gross income of P10,000.00 and with no evidence on the cost of distribution, the net profits
4. That plaintiff will receive a commission of One Thousand Pesos (P1,000.00) a month starting amount to only P6,000.00. This net profit of P6,000.00 should be divided between the petitioner
April 15, 1971 up to December 15, 1971; and the private respondent. And since only P4,000.00 was undesirable by the petitioner in printing
the 2,000 copies, the remaining P6,000.00 should therefore be returned to the private respondent.
41
 promised a fixed profit of P8,000. This investment of P6,000.00 and the promised profit of P8,000
Relative to the second alleged error, the petitioner submits that the award of P8,000.00 as are covered by defendant's promissory note for P14,000 dated March 31, 1971 marked by
Pecson's supposed commission has no justifiable basis in law. defendant as Exhibit 2 (t.s.n., pp. 20-21, Nov. 29, 1972), and by plaintiff as Exhibit P. Later,
defendant returned P3,000.00 of the P6,000.00 investment thereby proportionately reducing the
Again, we agree with the petitioner. promised profit to P4,000. With the balance of P3,000 (capital) and P4,000 (promised profit),
defendant signed and executed the promissory note for P7,000 marked Exhibit 3 for the defendant
The partnership agreement stipulated that the petitioner would give the private respondent a and Exhibit M for plaintiff. Of this P7,000, defendant paid P4,000 representing full return of the
monthly commission of Pl,000.00 from April 15, 1971 to December 15, 1971 for a total of eight (8) capital investment and P1,000 partial payment of the promised profit. The P3,000 balance of the
monthly commissions. The agreement does not state the basis of the commission. The payment of promised profit was made part consideration of the P20,000 promissory note (t.s.n., pp. 22-24,
the commission could only have been predicated on relatively extravagant profits. The parties Nov. 29, 1972). It is, therefore, being presented to show the consideration for the P20,000
could not have intended the giving of a commission inspite of loss or failure of the venture. Since promissory note.
the venture was a failure, the private respondent is not entitled to the P8,000.00 commission.
F — Xerox copy of PNB Manager's check dated May 29, 1971 for P7,000 in favor of defendant.
Anent the third assigned error, the petitioner maintains that the respondent Court of Appeals erred The authenticity of the check and his receipt of the proceeds thereof were admitted by the
in holding him liable to the private respondent in the sum of P7,000.00 as a supposed return of defendant (t.s.n., pp. 3-4, Nov. 29, 1972). This P 7,000 is part consideration, and in cash, of the
investment in a magazine venture. P20,000 promissory note (t.s.n., p. 25, Nov. 29, 1972), and it is being presented to show the
consideration for the P20,000 note and the existence and validity of the obligation.
In awarding P7,000.00 to the private respondent as his supposed return of investment in the
"Voice of the Veterans" magazine venture, the respondent court ruled that: xxx xxx xxx

xxx xxx xxx L-Book entitled "Voice of the Veterans" which is being offered for the purpose of showing the
subject matter of the other partnership agreement and in which plaintiff invested the P6,000
... Moran admittedly signed the promissory note of P20,000 in favor of Pecson. Moran does not (Exhibit E) which, together with the promised profit of P8,000 made up for the consideration of the
question the due execution of said note. Must Moran therefore pay the amount of P20,000? The P14,000 promissory note (Exhibit 2; Exhibit P). As explained in connection with Exhibit E. the
evidence indicates that the P20,000 was assigned by Moran to cover the following: P3,000 balance of the promised profit was later made part consideration of the P20,000
promissory note.
(a) P 7,000 — the amount of the PNB check given by Pecson to Moran representing Pecson's
investment in Moran's other project (the publication and printing of the 'Voice of the Veterans'); M-Promissory note for P7,000 dated March 30, 1971. This is also defendant's Exhibit E. This
document is being offered for the purpose of further showing the transaction as explained in
(b) P10,000 — to cover the return of Pecson's contribution in the project of the Posters; connection with Exhibits E and L.

(c) P3,000 — representing Pecson's commission for three months (April, May, June, 1971). N-Receipt of plaintiff dated March 30, 1971 for the return of his P3,000 out of his capital
investment of P6,000 (Exh. E) in the P14,000 promissory note (Exh. 2; P). This is also defendant's
Of said P20,000 Moran has to pay P7,000 (as a return of Pecson's investment for the Veterans' Exhibit 4. This document is being offered in support of plaintiff's explanation in connection with
project, for this project never left the ground) ... Exhibits E, L, and M to show the transaction mentioned therein.

As a rule, the findings of facts of the Court of Appeals are final and conclusive and cannot be xxx xxx xxx
reviewed on appeal to this Court (Amigo v. Teves, 96 Phil. 252), provided they are borne out by
the record or are based on substantial evidence (Alsua-Betts v. Court of Appeals, 92 SCRA 332). P-Promissory note for P14,000.00. This is also defendant's Exhibit 2. It is being offered for the
However, this rule admits of certain exceptions. Thus, in Carolina Industries Inc. v. CMS Stock purpose of showing the transaction as explained in connection with Exhibits E, L, M, and N above.
Brokerage, Inc., et al., (97 SCRA 734), we held that this Court retains the power to review and
rectify the findings of fact of the Court of Appeals when (1) the conclusion is a finding grounded Explaining the above-quoted exhibits, respondent Pecson testified that:
entirely on speculation, surmises and conjectures; (2) when the inference made is manifestly
mistaken absurd and impossible; (3) where there is grave abuse of discretion; (4) when the Q During the pre-trial of this case, Mr. Pecson, the defendant presented a promissory note in the
judgment is based on a misapprehension of facts; and (5) when the court, in making its findings, amount of P14,000.00 which has been marked as Exhibit 2. Do you know this promissory note?
went beyond the issues of the case and the same are contrary to the admissions of both the
appellant and the appellee. A Yes, sir.

In this case, there is misapprehension of facts. The evidence of the private respondent himself Q What is this promissory note, in connection with your transaction with the defendant?
shows that his investment in the "Voice of Veterans" project amounted to only P3,000.00. The
remaining P4,000.00 was the amount of profit that the private respondent expected to receive. A This promissory note is for the printing of the "Voice of the Veterans".

The records show the following exhibits- Q What is this "Voice of the Veterans", Mr. Pecson?

E — Xerox copy of PNB Manager's Check No. 234265 dated March 22, 1971 in favor of A It is a book
defendant. Defendant admitted the authenticity of this check and of his receipt of the proceeds
thereof (t.s.n., pp. 3-4, Nov. 29, 1972). This exhibit is being offered for the purpose of showing (T.S.N., p. 19, Nov. 29, 1972)
plaintiff's capital investment in the printing of the "Voice of the Veterans" for which he was
42
Q And what does the amount of P14,000.00 indicated in the promissory note, Exhibit 2, represent? A The balance of P3,000.00 and the rest of the profit was applied as part of the consideration of
the promissory note of P20,000.00.
A It represents the P6,000.00 cash which I gave to Mr. Moran, as evidenced by the Philippine
National Bank Manager's check and the P8,000.00 profit assured me by Mr. Moran which I will (T.S.N., pp. 23-24, Nov. 29, 1972).
derive from the printing of this "Voice of the Veterans" book.
The respondent court erred when it concluded that the project never left the ground because the
Q You said that the P6,000.00 of this P14,000.00 is covered by, a Manager's check. I show you project did take place. Only it failed. It was the private respondent himself who presented a copy of
Exhibit E, is this the Manager's check that mentioned? the book entitled "Voice of the Veterans" in the lower court as Exhibit "L". Therefore, it would be
error to state that the project never took place and on this basis decree the return of the private
A Yes, sir. respondent's investment.

Q What happened to this promissory note of P14,000.00 which you said represented P6,000.00 of As already mentioned, there are risks in any business venture and the failure of the undertaking
your investment and P8,000.00 promised profits? cannot entirely be blamed on the managing partner alone, specially if the latter exercised his best
business judgment, which seems to be true in this case. In view of the foregoing, there is no
A Latter, Mr. Moran returned to me P3,000.00 which represented one-half (1/2) of the P6,000.00 reason to pass upon the fourth and fifth assignments of errors raised by the petitioner. We likewise
capital I gave to him. find no valid basis for the grant of the counterclaim.

Q As a consequence of the return by Mr. Moran of one-half (1/2) of the P6,000.00 capital you gave WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals (now
to him, what happened to the promised profit of P8,000.00? Intermediate Appellate Court) is hereby SET ASIDE and a new one is rendered ordering the
petitioner Isabelo Moran, Jr., to pay private respondent Mariano Pecson SIX THOUSAND
A It was reduced to one-half (1/2) which is P4,000.00. (P6,000.00) PESOS representing the amount of the private respondent's contribution to the
partnership but which remained unused; and THREE THOUSAND (P3,000.00) PESOS
Q Was there any document executed by Mr. Moran in connection with the Balance of P3,000.00 of representing one half (1/2) of the net profits gained by the partnership in the sale of the two
your capital investment and the P4,000.00 promised profits? thousand (2,000) copies of the posters, with interests at the legal rate on both amounts from the
date the complaint was filed until full payment is made.
A Yes, sir, he executed a promissory note.
SO ORDERED.
Q I show you a promissory note in the amount of P7,000.00 dated March 30, 1971 which for
purposes of Identification I request the same to be marked as Exhibit M. . .
2. Profits and Losses (Articles 1797-1799) – 2 cases
Court See cases 7 and 15
Mark it as Exhibit M.

Q (continuing) is this the promissory note which you said was executed by Mr. Moran in connection 3. Management (Articles 1800-1804)
with your transaction regarding the printing of the "Voice of the Veterans"?
16. G.R. No. L-24243 January 15, 1926
A Yes, sir. (T.S.N., pp. 20-22, Nov. 29, 1972).
ILDEFONSO DE LA ROSA, administrator of the intestate estate of the deceased Go-Lio,
Q What happened to this promissory note executed by Mr. Moran, Mr. Pecson? plaintiff-appellant,
vs.
A Mr. Moran paid me P4,000.00 out of the P7,000.00 as shown by the promissory note. ENRIQUE ORTEGA GO-COTAY, defendant-appellant.

Q Was there a receipt issued by you covering this payment of P4,000.00 in favor of Mr. Moran? VILLA-REAL, J.:

A Yes, sir. During the Spanish regime the Chinamen Go-Lio and Vicente Go-Sengco formed a society for the
purchase and sale of articles of commerce, and for this purpose they opened a store in the town of
(T.S.N., p. 23, Nov. 29, 1972). San Isidro, Nueva Ecija. Later Go-Lio went to China. Vicenyte Go-Sengco died and his son
Enrique Ortega Go-Cotay took charge of the businesses. Go-Lio died in China in October, 1916,
Q You stated that Mr. Moran paid the amount of P4,000.00 on account of the P7,000.00 covered leaving a widow and three children, one of whom came to the Philippines and filed a petition for
by the promissory note, Exhibit M. What does this P4,000.00 covered by Exhibit N represent? the appointment of Ildefonso de la Rosa as administrator of the intestate estate of his deceased
father, which petition was granted by the Court of First Instance of Nueva Ecija. Ildefonso de la
A This P4,000.00 represents the P3,000.00 which he has returned of my P6,000.00 capital Rosa, in his capacity as administrator of the intestate estate of the deceased Go-Lio, requested
investment and the P1,000.00 represents partial payment of the P4,000.00 profit that was Enrique Go-Cotay to wind up the business and to deliver to him the portion corresponding to the
promised to me by Mr. Moran. deceased Go-Lio. Enrique Ortega Go-Cotay denied the petition, alleging that the business was his
exclusively. In view of this denial, Ildefonso de la Rosa, as administratorm, on July 2, 1918, filed
Q And what happened to the balance of P3,000.00 under the promissory note, Exhibit M? with the Court of First Instance of Nueva Ecija a complaint against Enrique Ortega Co-Cotay in
which he prayed that the defendant be sentenced to deliver to the plaintiff one-half of all the

43
property of the partnership formed by Go-lIo and Vicente Go-Sengco, with costs against the thousand seven hundred fifty-five pesos and forty-seven centavos (P27,755.47). Philippine
defendant, and that the said plaintiff be appointed receiver for the property of the said partnership. currency, plus an annual quota of at least two thousand five hundred three pesos and eighty-seven
centavos (P2,503.87), Philippime currency, as his portion of the profits since the beginning of 1918
Defendant, in answering the complaint, denied each and every allegation thereof, and as a special until the delivery to the palintiff of his share in the partnership; (5) the court below erred in not
defense alleged that more than ten years had elapsed before the filing of the complaint, and ordering the prosecuting attorney to commence an investigation as to the falsified books of
prayed that he be absolved therefrom, with costs against the plaintiff. accounts that the defendant had exhibited for proper criminal proceeding.

On August 3, 1918, the Court of First Instance of Nueva Ecija appointed Justo Cabo-Chan, From the evidence it appears that the partnership capital was P4,779.39, and the net profits until
Francisco T. Tantengco and Go-Tiao, as commissioners to make an inventory, liquidate and the year 1915 amounted to P5,551.40. Because some books of account had been destroyed by
determine the one-half belonging to the plaintiff of all the property of the store in question. white ants (anay), the liquidation of the business of the partnership for the period from 1906 to
1912 could not be made. But knowing the net profit for the period between 1904 and 1905, which
On August 9, 1918, in order to prevent Justo Cabo-Chan from assuming the office of receiver, is P5,551.40, and findng the average of the profits for each of these years, which is P2,775.70;
pursuant to the order of the court dated August 3, 1918, the defendant filed a bond in the sum of and knowing the net profit for the year 1913, which is P2,979, we can find the average between
P10,000. the net profit for 1905, namely, P2,979. Said average is the sum of P2,877.35, which may be
considered as the average of the net annual profits for the period between 1906 an 1912, which in
Under the date of November 15, 1920, the said commissioners submitted to the court their report, seven years make a total of P20,141.45. The assets of the partnership, as well as the value of its
showing the net profits of the business between the period from 1913 to 1917, which amounted to property, could not be determined when making the liquidation because there was no inventory
the total sum of P25,038.70 and consisted of the following items: and for this reason it was not possible to determine the capital of the partnership. The plaintiff,
however, seems to be agreeable to considering the initial partnership capital as the capital at the
Profits for the year 1913........................ P2,979.00 time of the winding up of the business.
Profits for the year 1914........................ 3,046.94
Profits for the year 1915........................ 4,103.07 August 3, 1918, defendant assumed complete responsibility for the business by objecting to the
Profits for the year 1916........................ 4,735.00 appointment of a receiver as prayed for by plaintiff, and giving a bond therefor. Until that date his
Profits for the year 1917........................ 10,174.69 acts were those of a managing partner, binding against the partnership; but thereafter his acts
Total........................................................... 25.038.70 were those of a receiver whose authority is contained in section 175 of the Code of Civil
In view of the appeal taken by defendant the parties on December 7, 1921, entered into an Procedure.
agreement whereby they agreed to suspend the liquidation ordered by the court until the appeal to
the Supreme Court was decided, and whereby the defenadnt was authorized to continue in the A receiver has no right to carry on and conduct a business unless he is authorized or directed by
possession of the property in litigation, upon the giving of a bond in the amount of P25,000, and the court to do some, and such authority is not derived from an order of appointment to take and
cancelling the former bond for P10,000. preserve the property (34 Cyc., 283; 23 R. C. L., 73). It does not appear that the defendant as a
receiver was authorized by the court to continue the business of the partnership in liquidation. This
This court in deciding case R. G. No. 18919, on October 5, 1922, 1 held that the appeal was being so, he is personally liable for the losses that the business amy have sustained. (34 Cyc.,
premature and ordered that the record be remanded to the court of origin with instruction to enter a 296.) The partnership must not, therefore, be liable for the acts of the defendant in connection with
final order in accordance with the liquidation made by the commissioners. the management of the business until August 3, 1918, the date when he ceased to be a member
and manager in order to become receiver.
The record having been remanded and two of the commissioners having filed their resignations,
the copurt below appointed again Justo Cabo-Chan suggested by the defendant and Cua POco As to the first semester of 1918, during which time the defendant had seen managing the business
suggested by the plaintiff, as commissioners, who submitted two reports, one prepared by of the partnership as a member and manager, taking into account that the profits had been on the
commissioners Tantengco and Cua Poco, and the other by commissioners Justo Cabo-Chan. The increase, said profits having reached the amount of P10,174.69 in the year 1917, it would not be
former stated in their report that they had examined the books for the years 1919 to 1922, for the an exaggeration to estimate that the profits for 1918 would have been at least the same as the
reason, they said, that they appeared "to have been prepared by some person in a careful way at profits of 1917; so that for the first half of 1918, the profit would be P5,087.34.
a certain time." The later commissioner examined all books and stated in his report that the
business had suffered a net loss amounting to the sum of P89,099.22. In conclusion we have the following profits of the business of this partnership now in liquidation, to
wit:
After trial and the parties having introduced all their evidence, the lower court, by order of
December 13, 1924, disapproved the report of the commissioners Tantengco and Cua Poco, but Capital of partnership........................... P4,779.39
approved, with slight modifications, the report of commissioner Cabo-Chan, holding that the result Profits until 1905.................................. 5,551.40
of the liquidation showed liabilities to the amiount of P89,690.45 in view of which plaintiff had Profits 1906-1912................................ 20,141.45
nothing to recover from defendant, as there was no profit to divide. Profits 1913-1917................................ 25,038.70
Profits first semester 1918............... 5,087.34
From this decision the plaintiff has appealed in due time and form making the following assignment Total....................................................... 60,598.28
of errors: (1) The lower court erred in holding that the books were authentic, and in not holding that One-half of this total, that is, P30,299.14 pertains to the plaintiff as administrator of the intestate
they were false books exhibited by the defendant about alleged operations in the years 1918 et estate of Go-Lio.
seq. which show enormous debts and imaginary losses of the business; (2) the lower court erred
in giving full credit to the testimony of commissioner Justo Cabo-Chan; (3) the lower court erred in In view of the foregoing, we are of the opinion that the case must be, as is hereby, decided by the
holding that the partnership had incurred debts and suffered losses, as shown in the report of reversing the judgment appealed from, and sentencing the defendant to pay the plaintiff the sum of
Justo Cabo-Cahn from 1918 on; (4) the lower court erred in not holding that the share of the P30,299.14 with legal interest at the rate of 6 per cent per annum from July 1, 1918, until fully paid,
plaintiff, as his capital and profits until the end of 1917, is equivalent to the sum of twenty-seven with costs. So ordered.
44
 17. G.R. No. L-11840 July 26, 1960 partnership, to buy real or personal properties for cash or upon such terms as he may deem
advisable, to sell personal or real properties, such as lands and buildings of the co-partnership in
ANTONIO C. GOQUIOLAY and THE PARTNERSHIP "TAN SIN AN and ANTONIO C. any manner he may deem advisable for the best interest of said co-partnership, to borrow money
GOQUIOLAY, plaintiffs-appellants, on behalf of the co-partnership and to issue promissory notes for the repayment thereof, to deposit
vs. the funds of the co-partnership in any local bank or elsewhere and to draw checks against funds
WASHINGTON Z. SYCIP, ET AL., defendants-appellees. so deposited ... .

Jose C. Colayco, Manuel O. Chan and Padilla Law Offices for appellants. On May 29, 1940, the plaintiff partnership "Tan Sin An and Goquiolay" purchased the three (3)
Sycip, Quisumbing, Salazar and Associates for appellees. parcels of land, known as Lots Nos. 526, 441 and 521 of the Cadastral Survey of Davao, subject-
matter of the instant litigation, assuming the payment of a mortgage obligation of P25,000.00,
REYES, J. B. L., J.: payable to "La Urbana Sociedad Mutua de Construccion y Prestamos" for a period of ten (10)
years, with 10% interest per annum. Another 46 parcels were purchased by Tan Sin An in his
Direct appeal from the decision of the Court of First Instance of Davao (the amount involved being individual capacity, and he assumed payment of a mortgage debt thereon for P35,000.00 with
more than P200,00) dismissing the plaintiffs-appellants' complaint. interest. The downpayment and the amortization were advanced by Yutivo and Co., for the
account of the purchasers.
From the stipulation of facts of the parties and the evidence on record, it would appear that on May
29, 1940, Tan Sin An and Antonio C. Goquiolay", entered into a general commercial partnership On September 25, 1940, the two separate obligations were consolidated in an instrument
under the partnership name "Tan Sin An and Antonio C. Goquiolay", for the purpose in dealing in executed by the partnership and Tan Sin An, whereby the entire 49 lots were mortgaged in favor of
real state. The partnership had a capital of P30,000.00, P18,000.00 of which was contributed by the "Banco Hipotecario de Filipinas" (as successor to "La Urbana") and the covenantors bound
Goquiolay and P12,000.00 by Tan Sin An. The agreement lodge upon Tan Sin An the sole themselves to pay, jointly and severally, the remaining balance of their unpaid accounts amounting
management of the partnership affairs, stipulating that — to P52,282.80 within eight 8 years, with 8% annual interest, payable in 96 equal monthly
installments.
III. The co-partnership shall be composed of said Tan Sin An as sole managing and partner (sic),
and Antonio C. Goquiolay as co-partner. On June 26, 1942, Tan Sin An died, leaving as surviving heirs his widow, Kong Chai Pin, and four
minor children, namely: Tan L. Cheng, Tan L. Hua, Tan C. Chiu and Tan K. Chuan. Defendant
IV. Vhe affairs of co-partnership shall be managed exclusively by the managing and partner (sic) Kong Chai Pin was appointed administratrix of the intestate estate of her deceased husband.
or by his authorized agent, and it is expressly stipulated that the managing and partner (sic) may
delegate the entire management of the affairs of the co-partnership by irrevocable power of In the meantime, repeated demands for payment were made by the Banco Hipotecario on the
attorney to any person, firm or corporation he may select upon such terms as regards partnership and on Tan Sin An. In March, 1944, the defendant Sing Yee and Cuan, Co., Inc., upon
compensation as he may deem proper, and vest in such persons, firm or corporation full power request of defendant Yutivo Sans Hardware Co., paid the remaining balance of the mortgage debt,
and authority, as the agent of the co-partnership and in his name, place and stead to do anything and the mortgage was cancelled.
for it or on his behalf which he as such managing and partner (sic) might do or cause to be done.
Then in 1946, Yutivo Sons Hardware Co. and Sing Yee and Cuan Co., Inc. filed their claims in the
V. The co-partner shall have no voice or participation in the management of the affairs of the co- intestate proceedings of Tan Sin An for P62,415.91 and P54,310.13, respectively, as alleged
partnership; but he may examine its accounts once every six (6) months at any time during obligations of the partnership "Tan Sin An and Antonio C. Goquiolay" and Tan Sin An, for
ordinary business hours, and in accordance with the provisions of the Code of Commerce. (Article advances, interest and taxes paid in amortizing and discharging their obligations to "La Urbana"
of Co-Partnership). and the "Banco Hipotecario". Disclaiming knowledge of said claims at first, Kong Chai Pin later
admitted the claims in her amended answer and they were accordingly approved by the Court.
The lifetime of the partnership was fixed at ten (10) years and also that —
On March 29, 1949, Kong Chai Pin filed a petition with the probate court for authority to sell all the
In the event of the death of any of the partners at any time before the expiration of said term, the 49 parcels of land to Washington Z, Sycip and Betty Y. Lee, for the purpose preliminary of settling
co-partnership shall not be dissolved but will have to be continued and the deceased partner shall the aforesaid debts of Tan Sin An and the partnership. Pursuant to a court order of April 2, 1949,
be represented by his heirs or assigns in said co-partnership (Art. XII, Articles of Co-Partnership). the administratrix executed on April 4, 1949, a deed of sale1 of the 49 parcels of land to the
defendants Washington Sycip and Betty Lee in consideration of P37,000.00 and of vendees'
However, the partnership could be dissolved and its affairs liquidated at any time upon mutual assuming payments of the claims filed by Yutivo Sons Hardware Co. and Sing Yee and Cuan Co.,
agreement in writing of the partners (Art. XIII, articles of Co-Partnership). Inc. Later, in July, 1949, defendants Sycip and Betty Lee executed in favor of the Insular
Development Co., Inc. a deed of transfer covering the said 49 parcels of land.
On May 31, 1940, Antonio Goquiolay executed a general power of attorney to this effect:
Learning about the sale to Sycip and Lee, the surviving partner Antonio Goquiolay filed, on or
That besides the powers and duties granted the said Tan Sin An by the articles of co-partnership about July 25, 1949, a petition in the intestate proceedings seeking to set aside the order of the
of said co-partnership "Tan Sin An and Antonio Goquiolay", that said Tan Sin An should act as the probate court approving the sale in so far as his interest over the parcels of land sold was
Manager for said co-partnership for the full period of the term for which said co-partnership was concerned. In its order of December 29, 1949, the probate court annulled the sale executed by the
organized or until the whole period that the said capital of P30,000.00 of the co-partnership should administratrix with respect to the 60% interest of Antonio Goquiolay over the properties sold. Kong
last, to carry on to the best advantage and interest of the said co-partnership, to make and Chai Pin appealed to the Court of Appeals, which court later certified the case to us (93 Phil., 413;
execute, sign, seal and deliver for the co-partnership, and in its name, all bills, bonds, notes, 49 Off. Gaz. [7] 2307). On June 30, 1953, we rendered decision setting aside the orders of the
specialties, and trust receipts or other instruments or documents in writing whatsoever kind or probate court complained of and remanding the case for new trial, due to the non-inclusion of
nature which shall be necessary to the proper conduction of the said businesses, including the indispensable parties. Thereafter, new pleadings were filed.
power to mortgage and pledge real and personal properties, to secure the obligation of the co-
45
The second amended complaint in the case at bar prays, among other things, for the annulment of participation in the management of the partnership, being a limitation upon his right as a general
the sale in favor of Washington Sycip and Betty Lee, and their subsequent conveyance in favor of partner, must be held coextensive only with Tan's right to manage the affairs, the contrary not
Insular Development Co., Inc., in so far as the three (3) lots owned by the plaintiff partnership are being clearly apparent.
concerned. The answer averred the validity of the sale by Kong Chai Pin as successor partner, in
lieu of the late Tan Sin An. After hearing, the complaint was dismissed by the lower court in its Upon the other hand, consonant with the articles of co-partnership providing for the continuation of
decision dated October 30, 1956; hence, this appeal taken directly to us by the plaintiffs, as the the firm notwithstanding the death of one of the partners, the heirs of the deceased, by never
amount involved is more than P200,000.00. Plaintiffs-appellants assign as errors that — repudiating or refusing to be bound under the said provision in the articles, became individual
partners with Antonio Goquiolay upon Tan's demise. The validity of like clauses in partnership
I — The lower court erred in holding that Kong Chai Pin became the managing partner of the agreements is expressly sanctioned under Article 222 of the Code of Commerce.2
partnership upon the death of her husband, Tan Sin An, by virtue of the articles of Partnership
executed between Tan Sin An and Antonio Goquiolay, and the general power of attorney granted Minority of the heirs is not a bar to the application of that clause in the articles of co-partnership (2
by Antonio Goquiolay. Vivante, Tratado de Derecho Mercantil, 493; Planiol, Traite Elementaire de Droit Civil, English
translation by the Louisiana State Law Institute, Vol. 2, Pt. 2, p. 177).
II — The lower court erred in holding that Kong Chai Pin could act alone as sole managing partner
in view of the minority of the other heirs. Appellants argue, however, that since the "new" members' liability in the partnership was limited
merely to the value of the share or estate left by the deceased Tan Sin An, they became no more
III — The lower court erred in holding that Kong Chai Pin was the only heir qualified to act as than limited partners and, as such, were disqualified from the management of the business under
managing partner. Article 148 of the Code of Commerce. Although ordinarily, this effect follows from the continuance
of the heirs in the partnership,3 it was not so with respect to the widow Kong Chai Pin, who, by her
IV — The lower court erred in holding that Kong Chai Pin had authority to sell the partnership affirmative actions, manifested her intent to be bound by the partnership agreement not only as a
properties by virtue of the articles of partnership and the general power of attorney granted to Tan limited but as a general partner. Thus, she managed and retained possession of the partnership
Sin An in order to pay the partnership indebtedness. properties and was admittedly deriving income therefrom up to and until the same were sold to
Washington Sycip and Betty Lee. In fact, by executing the deed of sale of the parcels of land in
V — The lower court erred in finding that the partnership did not pay its obligation to the Banco dispute in the name of the partnership, she was acting no less than as a managing partner. Having
Hipotecario. thus preferred to act as such, she could be held liable for the partnership debts and liabilities as a
general partner, beyond what she might have derived only from the estate of her deceased
VI — The lower court erred in holding that the consent of Antonio Goquiolay was not necessary to husband. By allowing her to retain control of the firm's property from 1942 to 1949, plaintiff
consummate the sale of the partnership properties. estopped himself to deny her legal representation of the partnership, with the power to bind it by
the proper contracts.
VII — The lower court erred in finding that Kong Chai Pin managed the business of the partnership
after the death of her husband, and that Antonio Goquiolay knew it. The question now arises as to whether or not the consent of the other partners was necessary to
perfect the sale of the partnership properties to Washington Sycip and Betty Lee. The answer is,
VIII — The lower court erred in holding that the failure of Antonio Goquiolay to oppose the we believe, in the negative. Strangers dealing with a partnership have the right to assume, in the
management of the partnership by Kong Chai Pin estops him now from attacking the validity of the absence of restrictive clauses in the co-partnership agreement, that every general partner has
sale of the partnership properties. power to bind the partnership, specially those partners acting with ostensible authority. And so, we
held in one case:
IX — The lower court erred in holding that the buyers of the partnership properties acted in good
faith. . . . Third persons, like the plaintiff, are not bound in entering into a contract with any of the two
partners, to ascertain whether or not this partner with whom the transaction is made has the
X — The lower court erred in holding that the sale was not fraudulent against the partnership and consent of the other partner. The public need not make inquiries as to the agreements had
Antonio Goquiolay. between the partners. Its knowledge is enough that it is contracting with the partnership which is
represented by one of the managing partners.
XI — The lower court erred in holding that the sale was not only necessary but beneficial to the
partnership. "There is a general presumption that each individual partner is an agent for the firm and that he
has authority to bind the firm in carrying on the partnership transactions." [Mills vs. Riggle, 112
XII — The lower court erred in dismissing the complaint and in ordering Antonio Goquiolay to pay Pac., 617]
the costs of suit.
"The presumption is sufficient to permit third persons to hold the firm liable on transactions entered
There is a merit in the contention that the lower court erred in holding that the widow, Kong Chai into by one of the members of the firm acting apparently in its behalf and within the scope of his
Pin, succeeded her husband, Tan Sin An, in the sole management of the partnership, upon the authority." [Le Roy vs. Johnson, 7 U.S. Law, Ed., 391] (George Litton vs. Hill & Ceron, et al., 67
latter's death. While, as we previously stated in our narration of facts, the Articles of Co- Phil., 513-514).
Partnership and the power of attorney executed by Antonio Goquiolay, conferred upon Tan Sin An
the exclusive management of the business, such power, premised as it is upon trust and We are not unaware of the provision of Article 129 of the Code of Commerce to the effect that —
confidence, was a mere personal right that terminated upon Tan's demise. The provision in the
articles stating that "in the event of death of any one of the partners within the 10-year term of the If the management of the general partnership has not been limited by special agreement to any of
partnership, the deceased partner shall be represented by his heirs", could not have referred to the the members, all shall have the power to take part in the direction and management of the
managerial right given to Tan Sin An; more appropriately, it related to the succession in the common business, and the members present shall come to an agreement for all contracts or
proprietary interest of each partner. The covenant that Antonio Goquiolay shall have no voice or obligations which may concern the association. (Emphasis supplied)
46
but this obligation is one imposed by law on the partners among themselves, that does not En el caso que tales actos o contratos hayan sido tacitamente aprobados por la Compañia, o
necessarily affect the validity of the acts of a partner, while acting within the scope of the ordinary contabilizados en sus libros, si el acto o contrato ha sido convalidado sin protesta y se trata de
course of business of the partnership, as regards third persons without notice. The latter may acto o contrato que ha producido beneficio social, tendria plena validez, aun cuando le faltase
rightfully assume that the contracting partner was duly authorized to contract for and in behalf of algunos o ambos de aquellos requisitos antes señalados.
the firm and that, furthermore, he would not ordinarily act to the prejudice of his co-partners. The
regular course of business procedure does not require that each time a third person contracts with Cuando los Estatutos o la escritura social no contienen ninguna clausula relativa al nombramiento
one of the managing partners, he should inquire as to the latter's authority to do so, or that he o designacion de uno o mas de un socio para administrar la Compañia (art. 129 del Codigo) todos
should first ascertain whether or not the other partners had given their consent thereto. In fact, tienen por un igual el derecho de concurir a la decision y manejo de los negocios comunes. . . .
Article 130 of the same Code of Commerce provides that even if a new obligation was contracted
against the express will of one of the managing partners, "it shall not be annulled for such reason, Although the partnership under consideration is a commercial partnership and, therefore, to be
and it shall produce its effects without prejudice to the responsibility of the member or members governed by the Code of Commerce, the provisions of the old Civil Code may give us some light
who contracted it, for the damages they may have caused to the common fund." on the right of one partner to bind the partnership. States Art. 1695 thereof:

Cesar Vivante (2 Tratado de Derecho Mercantil, pp. 114-115) points out: Should no agreement have been made with respect to the form of management, the following
rules shall be observed:
367. Primera hipotesis. — A falta de pactos especiales, la facultad de administrar corresponde a
cada socio personalmente. No hay que esperar ciertamente concordia con tantas cabezas, y para 1. All the partners shall be considered agents, and whatever any one of the may do individually
cuando no vayan de acuerdo, la disciplina del Codigo no ofrece un sistema eficaz que evite los shall bind the partnership; but each one may oppose any act of the others before it has become
inconvenientes. Pero, ante el silencio del contrato, debia quiza el legislador privar de la legally binding.
administracion a uno de los socios en beneficio del otro? Seria una arbitrariedad. Debera quiza
declarar nula la Sociedad que no haya elegido Administrador? El remedio seria peor que el mal. The records fail to disclose that appellant Goquiolay made any opposition to the sale of the
Debera, tal vez, pretender que todos los socios concurran en todo acto de la Sociedad? Pero este partnership realty to Washington Z. Sycip and Betty Lee; on the contrary, it appears that he
concurso de todos habria reducido a la impotencia la administracion, que es asunto d todos los (Goquiolay) only interposed his objections after the deed of conveyance was executed and
dias y de todas horas. Hubieran sido disposiciones menos oportunas que lo adoptado por el approved by the probate court, and, consequently, his opposition came too late to be effective.
Codigo, el cual se confia al espiritu de reciproca confianza que deberia animar la colaboracion de
los socios, y en la ley inflexible de responsabilidad que implica comunidad en los intereses de los Appellants assails the correctness of the amounts paid for the account of the partnership as found
mismos. by the trial court. This question, however, need not be resolved here, as in the deed of conveyance
executed by Kong Chai Pin, the purchasers Washington Sycip and Betty Lee assumed, as part
En esta hipotesis, cada socio puede ejercer todos los negocios comprendidos en el contrato social consideration of the purchase, the full claims of the two creditors, Sing Yee and Cuan Co., Inc. and
sin dar de ello noticia a los otros, porque cada uno de ellos ejerce la administracion en la totalidad Yutivo Sons Hardware Co.
de sus relaciones, salvo su responsabilidad en el caso de una administracion culpable. Si debiera
dar noticia, el beneficio de su simultania actividad, frecuentemente distribuida en lugares y en Appellants also question the validity of the sale covering the entire firm realty, on the ground that it,
tiempos diferentes, se echaria a perder. Se objetara el que de esta forma, el derecho de oposicion in effect, threw the partnership into dissolution, which requires consent of all the partners. This
de cada uno de los socios puede quedar frustrado. Pero se puede contestar que este derecho de view is untenable. That the partnership was left without the real property it originally had will not
oposicion concedido por la ley como un remedio excepcional, debe subordinarse al derecho de work its dissolution, since the firm was not organized to exploit these precise lots but to engage in
ejercer el oficio de Administrador, que el Codigo concede sin limite: "se presume que los socios se buying and selling real estate, and "in general real estate agency and brokerage business".
han concedido reciprocamente la facultad de administrar uno para otro." Se haria precipitar esta Incidentally, it is to be noted that the payment of the solidary obligation of both the partnership and
hipotesis en la otra de una administracion colectiva (art. 1,721, Codigo Civil) y se acabaria con the late Tan Sin An, leaves open the question of accounting and contribution between the co-
pedir el consentimiento, a lo menos tacito, de todos los socios — lo que el Codigo excluye ........, si debtors, that should be ventilated separately.
se obligase al socio Administrador a dar noticia previa del negocio a los otros, a fin de que
pudieran oponerse si no consintieran. Lastly, appellants point out that the sale of the partnership properties was only a fraudulent device
by the appellees, with the connivance of Kong Chai Pin, to ease out Antonio Goquiolay from the
Commenting on the same subject, Gay de Montella (Codigo de Comercio, Tomo II, 147-148) partnership. The "devise", according to the appellants, started way back sometime in 1945, when
opines: one Yu Khe Thai sounded out Antonio Goquiolay on the possibility of selling his share in the
partnership; and upon his refusal to sell, was followed by the filing of the claims of Yutivo Sons
Para obligar a las Compañias enfrente de terceros (art. 128 del Codigo), no es bastante que los Hardware Co. and Sing Yee and Cuan Co., Inc. in the intestate estate proceedings of Tan Sin An.
actos y contratos hayan sido ejecutados por un socio o varios en nombre colectivo, sino que es As creditors of Tan Sin An and the plaintiff partnership (whose liability was alleged to be joint and
preciso el concurso de estos dos elementos, uno, que el socio o socios tengan reconocida la several), Yutivo Sons Hardware Co., and Sing Yee Cuan Co., Inc. had every right to file their
facultad de administrar la Compañia, y otro, que el acto o contrato haya sido ejecutado en nombre claims in the intestate proceedings. The denial of the claims at first by Kong Chai Pin ( for lack of
de la Sociedad y usando de su firma social. Asi se que toda obligacion contraida bajo la razon sufficient knowledge) negatives any conspiracy on her part in the alleged fraudulent scheme, even
social, se presume contraida por la Compañia. Esta presunion es impuesta por motivos de if she subsequently decided to admit their validity after studying the claims and finding it best to
necesidad practica. El tercero no puede cada vez que trata con la Compañia, inquirir si realmente admit the same. It may not be amiss to remark that the probate court approved the questioned
el negocio concierne a la Sociedad. La presuncion es juris tantum y no juris et de jure, de modo claims.
que si el gerente suscribe bajo la razon social una obligacion que no interesa a la Sociedad, este
podra rechazar la accion del tercero probando que el acreedor conocia que la obligacion no tenia There is complete failure of proof, moreover, that the price for which the properties were sold was
ninguna relacion con ella. Si tales actos y contratos no comportasen la concurrencia de ambos unreasonably low, or in any way unfair, since appellants presented no evidence of the market
elementos, seria nulos y podria decretarse la responsabilidad civil o penal contra sus autores. value of the lots as of the time of their sale to appellees Sycip and Lee. The alleged value of
47
P31,056.58 in May of 1955 is no proof of the market value in 1949, specially because in the
interval, the new owners appear to have converted the land into a subdivision, which they could (b) That the partnership was expressly organized "to engage in real estate business, either by
not do without opening roads and otherwise improving the property at their own expense. Upon the buying and selling real estate". The Article of co-partnership, in fact, expressly provided that:
other hand, Kong Chai Pin hardly had any choice but to execute the questioned sale, as it appears
that the partnership had neither cash nor other properties with which to pay its obligations. IV. The object and purpose of the co-partnership are as follows:
Anyway, we cannot consider seriously the inferences freely indulged in by the appellants as
allegedly indicating fraud in the questioned transactions, leading to the conveyance of the lots in 1. To engage in real estate business, either by buying and selling real estates; to subdivide real
dispute to the appellee Insular Development Co., Inc. estates into lots for the purpose of leasing and selling them.;

Wherefore, finding no reversible error in the appealed judgment, we affirm the same, with costs (c) That the properties sold were not part of the contributed capital (which was in cash) but land
against appellant Antonio Goquiolay. precisely acquired to be sold, although subject a mortgage in favor of the original owners, from
whom the partnership had acquired them.
Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion, Endencia, Barrera, and Gutierrez
David, JJ., concur. With these points firmly in mind, let us turn to the points insisted upon by appellant.

RESOLUTION It is first averred that there is "not one iota evidence" that Kong Chai Pin managed and retained
possession of the partnership properties. Suffice it to point out that appellant Goquiolay himself
December 10, 1963 admitted that —

REYES, J. B. L., J.: . . . Mr. Yu Eng Lai asked me if I can just let Mrs. Kong Chai Pin continue to manage the properties
(as) she had no other means of income. Then I said, because I wanted to help Mrs. Kong Chai
The matter now pending is the appellant's motion for reconsideration of our main decision, wherein Pin, she could just do it and besides I am not interested in agricultural lands. I allowed her to take
we have upheld the validity of the sale of the lands owned by the partnership Goquiolay & Tan Sin care of the properties in order to help her and because I believe in God and I wanted to help her.
An, made in 1949 by the widow of the managing partner, Tan Sin An (executed in her dual
capacity of Administratrix of her husband's estate and as partner, in lieu of the husband), in favor Q. — So the answer to my question is you did not take any steps?
of buyers Washington Sycip and Betty Lee for the following consideration:
A. — I did not.
Cash paid
Q. — And this conversation which you had with Mrs. Yu Eng Lai was few months after 1945?
P37,000.00
A. — In the year 1945. (Emphasis supplied)
Debts assumed by purchase:
The appellant subsequently ratified this testimony in his deposition of 30 June 1956, page 8-9,
To Yutivo wherein he sated:

62,415.91 that plantation was being occupied at that time by the widow, Mrs. Tan Sin An, and of course they
are receiving quite a lot of benefit from that plantation.
To Sing Yee Cuan & Co.
Discarding the self-serving expressions, these admissions of Goquiolay are certainly entitled to
54,310.13 greater weight than those of Hernando Young and Rufino Lim, having been made against the
party's own interest.
TOTAL
Moreover, the appellant's reference to the testimony of Hernando Young, that the witness found
P153,726.04 the properties "abandoned and undeveloped", omits to mention that said part of the testimony
started with the question:
Appellant Goquiolay, in his motion for reconsideration, insists that, contrary to our holding, Kong
Chai Pin, widow of the deceased partner Tan Sin An, never became more than a limited partner, Now, you said that about 1942 or 1943 you returned to Davao. Did you meet Mrs. Kong Chai Pin
incapacitated by law to manage the affairs of the partnership; that the testimony of her witnesses there in Davao at that time?
Young and Lim belies that she took over administration of the partnership property; and that, in
any event, the sale should be set aside because it was executed with the intent to defraud Similarly, the testimony of Rufino Lim, to the effect that the properties of the partnership were
appellant of his share in the properties sold. undeveloped, and the family of the widow (Kong Chai Pin) did not receive any income from the
partnership properties, was given in answer to the question:
Three things must be always held in mind in the discussion of this motion to reconsider, being
basic and beyond controversy: According to Mr. Goquiolay, during the Japanese occupation Tan Sin An and his family lived on
the plantation of the partnership and derived their subsistence from that plantation. What can you
(a) That we are dealing here with the transfer of partnership property by one partner, acting in say to that? (Dep. 19 July 1956, p. 8)
behalf of the firm, to a stranger. There is no question between partners inter se, and this aspects of
the case was expressly reserved in the main decision of 26 July 1960; And also —
48
 In that event of the death of any of the partners at any time before the expiration of said term, the
What can you say so to the development of these other properties of the partnership which you co-partnership shall not be dissolved but will have to be continued and the deceased partner shall
saw during the occupation?" (Dep., p. 13, Emphasis supplied) be represented by his heirs or assigns in said co-partnership" (Art. XII, Articles of Co-Partnership).

to which witness gave the following answer: The Articles did not provide that the heirs of the deceased would be merely limited partner; on the
contrary they expressly stipulated that in case of death of either partner "the co-partnership ... will
I saw the properties in Mamay still undeveloped. The third property which is in Tigatto is about have to be continued" with the heirs or assigns. It certainly could not be continued if it were to be
eleven (11) hectares and planted with abaca seedlings planted by Mr. Sin An. When I went there converted from a general partnership into a limited partnership, since the difference between the
with Hernando Young we saw all the abaca destroyed. The place was occupied by the Japanese two kinds of associations is fundamental; and specially because the conversion into a limited
Army. They planted camotes and vegetables to feed the Japanese Army. Of course they never association would leave the heirs of the deceased partner without a share in the management.
paid any money to Tan Sin An or his family. (Dep., Lim. pp. 13-14.) (Emphasis supplied) Hence, the contractual stipulation does actually contemplate that the heirs would become general
partners rather than limited ones.
Plainly, Both Young and Lim's testimonies do not belie, or contradict, Goquiolay's admission that
he told Mr. Yu Eng Lai that the widow "could just do it" (i e., continue to manage the properties. Of course, the stipulation would not bind the heirs of the deceased partner should they refuse to
Witnesses Lim and Young referred to the period of Japanese occupation; but Goquiolay's authority assume personal and unlimited responsibility for the obligations of the firm. The heirs, in other
was, in fact, given to the widow in 1945, after the occupation. words, can not be compelled to become general partners against their wishes. But because they
are not so compellable, it does not legitimately follow that they may not voluntarily choose to
Again, the disputed sale by the widow took place in 1949. That Kong Chai Pin carried out no acts become general partners, waiving the protective mantle of the general laws of succession. And in
of management during the Japanese occupation (1942-1944) does not mean that she did not do the latter event, it is pointless to discuss the legality of any conversion of a limited partner into a
so from 1945 to 1949. general one. The heir never was a limited partner, but chose to be, and became, a general partner
right at the start.
We thus fine that Goquiolay did not merely rely on reports from Lim and Young; he actually
manifested his willingness that the widow should manage the partnership properties. Whether or It is immaterial that the heirs name was not included in the firm name, since no conversion of
not she complied with this authority is a question between her and the appellant, and is not here status is involved, and the articles of co-partnership expressly contemplated the admission of the
involved. But the authority was given, and she did have it when she made the questioned sale, partner's heirs into the partnership.
because it has never revoked.
It must never be overlooked that this case involves the rights acquired by strangers, and does not
It is argued that the authority given by Goquiolay to the widow Kong Chai Pin was only to manage deal with the rights arising between partners Goquiolay and the widow of Tan Sin An. The issues
the property, and that it did not include the power to alienate, citing Article 1713 of the Civil Code between the partners inter se were expressly reversed in our main decision. Now, in determining
of 1889. What this argument overlooks is that the widow was not a mere agent, because she had what kind of partner the widow of partner Tan Sin An had elected to become, strangers had to be
become a partner upon her husband's death, as expressly provided by the articles of co- guided by her conduct and actuations and those of appellant Goquiolay. Knowing that by law a
partnership. Even more, granting that by succession to her husband, Tan Sin An, the widow only a limited partner is barred from managing the partnership business or property, third parties (like the
became the limited partner, Goquiolay's authorization to manage the partnership property was purchasers) who found the widow possessing and managing the firm property with the
proof that he considered and recognized her has general partner, at least since 1945. The reason acquiescense (or at least without apparent opposition) of the surviving partners were perfectly
is plain: Under the law (Article 148, last paragraph, Code of Commerce), appellant could not justified in assuming that she had become a general partner, and, therefore, in negotiating with her
empower the widow, if she were only a limited partner, to administer the properties of the firm, as such a partner, having authority to act for, and in behalf of, the firm. This belief, be it noted, was
even as a mere agent: shared even by the probate court that approved the sale by the widow of the real property standing
in the partnership name. That belief was fostered by the very inaction of appellant Goquiolay. Note
Limited partners may not perform any act of administration with respect to the interests of the co- that for seven long years, from partner Tan Sin An's death in 1942 to the sale in 1949, there was
partnership, not even in the capacity agents of the managing partners.(Emphasis supplied) more than ample time for Goquiolay to take up the management of these properties, or at least
ascertain how its affairs stood. For seven years Goquiolay could have asserted his alleged rights,
By seeking authority to manage partnership property, Tan Sin An's widow showed that she desired and by suitable notice in the commercial registry could have warned strangers that they must deal
to be considered a general partner. By authorizing the widow to manage partnership property with him alone, as sole general partner. But he did nothing of the sort, because he was not
(which a limited partner could not be authorized to do), Goquiolay recognized her as such partner, interested (supra), and he did not even take steps to pay, or settle, the firm debts that were
and is now in estoppel to deny her position as a general partner, with authority to administer and overdue since before the outbreak of the last war. He did not even take steps, after Tan Sin An
alienate partnership property. died, to cancel, or modify, the provisions of the partnership articles that he (Goquiolay) would have
no intervention in the management of the partnership. This laches certainly contributed to confirm
Besides, as we pointed out in our main decision, the heir ordinarily (and we did not say the view that the widow of Tan Sin An had, or was given, authority to manage and deal with the
"necessarily") becomes a limited partner for his own protection, because he would normally prefer firm's properties, apart from the presumption that a general partner dealing with partnership
to avoid any liability in excess of the value of the estate inherited so as not to jeopardize his property has the requisite authority from his co-partners (Litton vs. Hill and Ceron, et al., 67 Phil.,
personal assets. But this statutory limitation of responsibility being designed to protect the heir, the 513; quoted in our main decision, p. 11).
latter may disregard it and instead elect to become a collective or general partner, with all the
rights and privileges of one, and answering for the debts of the firm not only with the inheritance The stipulation in the articles of partnership that any of the two managing partners may contract
bud also with the heir's personal fortune. This choice pertains exclusively to the heir, and does not and sign in the name of the partnership with the consent of the other, undoubtedly creates an
require the assent of the surviving partner. obligation between the two partners, which consists in asking the other's consent before
contracting for the partnership. This obligation of course is not imposed upon a third person who
It must be remembered that the articles of co-partnership here involved expressly stipulated that: contracts with the partnership. Neither is it necessary for the third person to ascertain if the
managing partner with whom he contracts has previously obtained the consent of the other. A third
49
person may and has a right to presume that the partner with whom he contracts has, in the prosecution of its business. On that day, which was Saturday, the plaintiff caused to be prepared,
ordinary and natural course of business, the consent of his co-partner; for otherwise he would not ready for execution, the four chattel mortgages in question, which cover all the tangible property
enter into the contract. The third person would naturally not presume that the partner with whom then belonging to the firm, including the counters, shelving, and other furnishings and fixtures
he enters into the transaction is violating the articles of partnership, but on the contrary, is acting in necessary for, and used in carrying on, its business, and signed the same in this form: "In witness
accordance therewith. And this finds support in the legal presumption that the ordinary course of whereof, the said Cowen & McGrath, a firm, and Owen McGrath, surviving partner of said firm, and
business has been followed (No. 18, section 334, Code of Civil Procedure), and that the law has Owen McGrath, individually, have here-unto set their hands, this 20th day of May, A. D. 1893.
been obeyed (No. 31, section 334). This last presumption is equally applicable to contracts which Cowen & McGrath, by Owen McGrath. Owen McGrath, Surviving partner of Cowen & McGrath.
have the force of law between the parties. (Litton vs. Hill & Ceron, et al., 67 Phil., 509, 516) Owen McGrath" At the same time, the plaintiff had prepared, ready for filing, the petition for the
(Emphasis supplied) dissolution of the partnership and appointment of a receiver, which he subsequently filed, as
hereinafter stated. On the day the mortgages were signed, they were placed in the hands of the
It is next urged that the widow, even as a partner, had no authority to sell the real estate of the mortgagees, which was the first intimation to them that there was any intention to make then. At
firm. This argument is lamentably superficial because it fails to differentiate between real estate that time none of the claims secured by the mortgages were due, except, it may be, a small part of
acquired and held as stock-in-trade and real state held merely as business site (Vivante's "taller o one of them, and none of the creditors to whom the mortgages were made had requested security,
banco social") for the partnership. Where the partnership business is to deal in merchandise and or were pressing for the payment of their debts. ... The mortgages appear to be without a sufficient
goods, i.e., movable property, the sale of its real property (immovables) is not within the ordinary condition of defeasance, and contain a stipulation authorizing the mortgagees to take immediate
powers of a partner, because it is not in line with the normal business of the firm. But where the possession of the property, which they did as soon as the mortgages were filed, through the
express and avowed purpose of the partnership is to buy and sell real estate (as in the present attorney who then represented them, as well as the plaintiff; and the stores were at once closed,
case), the immovables thus acquired by the firm form part of its stock-in-trade, and the sale thereof and possession delivered by them to the receiver appointed upon the filing of the petition. The
is in pursuance of partnership purposes, hence within the ordinary powers of the partner. This avowed purpose of the plaintiff in the course pursued by him, was to terminate the partnership,
distinction is supported by the opinion of Gay de Montella1, in the very passage quoted in the place its property beyond the control of the firm, and insure the preference of the mortgages, all of
appellant's motion for reconsideration: which was known to them at the time: ... . (Cas cit., p. 343, Emphasis supplied)

La enajenacion puede entrar en las facultades del gerente: cuando es conforme a los fines It is natural that from these facts the Supreme Court of Ohio should draw the conclusion that
sociales. Pero esta facultad de enajenar limitada a las ventas conforme a los fines sociales, viene conveyances were made with intent to terminate the partnership, and that they were not within the
limitada a los objetos de comecio o a los productos de la fabrica para explotacion de los cuales se powers of McGrath as partner. But there is no similarly between those acts and the sale by the
ha constituido la Sociedad. Ocurrira una cosa parecida cuando el objeto de la Sociedad fuese la widow of Tan Sin An. In the McGrath case, the sale included even the fixtures used in the
compra y venta de inmuebles, en cuyo caso el gerente estaria facultado para otorgar las ventas business, in our case, the lands sold were those acquired to be sold. In the McGrath case, none of
que fuere necesario. (Montella) (Emphasis supplied) the creditors were pressing for payment; in our case, the creditors had been unpaid for more than
seven years, and their claims had been approved by the probate court for payment. In the
The same rule obtains in American law. McGrath case, the partnership received nothing beyond the discharge of its debts; in the present
case, not only were its debts assumed by the buyers, but the latter paid, in addition, P37,000.00 in
In Rosen vs. Rosen, 212 N. Y. Supp. 405, 406, it was held: cash to the widow, to the profit of the partnership. Clearly, the McGrath ruling is not applicable.

a partnership to deal in real estate may be created and either partner has the legal right to sell the We will now turn to the question to fraud. No direct evidence of it exists; but appellant points out,
firm real estate as indicia thereof, the allegedly low price paid for the property, and the relationship between the
buyers, the creditors of the partnership, and the widow of Tan Sin An.
In Chester vs. Dickerson, 54 N. Y. 1, 13 Am. Rep. 550:
First, as to the price: As already noted, this property was actually sold for a total of P153,726.04, of
And hence, when the partnership business is to deal in real estate, one partner has ample power, which P37,000.00 was in cash, and the rest in partnership debts assumed by the purchaser.
as a general agent of the firm, to enter into an executory contract for the sale of real estate. These debts (P62,415.91 to Yutivo, and P54,310.13 to Sing Yee Cuan & Co.) are not questioned;
they were approved by the Court, and its approval is now final. The claims were, in fact, for the
And in Rovelsky vs. Brown, 92 Ala. 522, 9 South 182, 25 Am. St., Rep. 83: balance on the original purchase price of the land sold (due first to La Urbana, later to the Banco
Hipotecario) plus accrued interests and taxes, redeemed by the two creditors-claimants. To show
If the several partners engaged in the business of buying and selling real estate can not bind the that the price was inadequate, appellant relies on the testimony of the realtor Mata, who in 1955,
firm by purchases or sales of such property made in the regular course of business, then they are six years after the sale in question, asserted that the land was worth P312,000.00. Taking into
incapable of exercising the essential rights and powers of general partners and their association is account the continued rise of real estate values since liberation, and the fact that the sale in
not really a partnership at all, but a several agency. question was practically a forced sale because the partnership had no other means to pay its
legitimate debts, this evidence certainly does not show such "gross inadequacy" as to justify
Since the sale by the widow was in conformity with the express objective of the partnership, "to rescission of the sale. If at the time of the sale (1949 the price of P153,726.04 was really low, how
engage * * * in buying and selling real estate" (Art IV, No. 1, Articles of Copartnership), it can not is it that appellant was not able to raise the amount, even if the creditor's representative, Yu Khe
be maintained that the sale was made in excess of her powers as general partner. Thai, had already warned him four years before (1946) that the creditors wanted their money back,
as they were justly entitled to?
Considerable stress is laid by appellant in the ruling of the Supreme Court of Ohio in McGrath, et
al., vs. Cowen, et al., 49 N. E., 338. But the facts of that case are vastly different from the one It is argued that the land could have been mortgaged to raise the sum needed to discharge the
before us. In the McGrath case, the Court expressly found that: debts. But the lands were already mortgaged, and had been mortgaged since 1940, first to La
Urbana, and then to the Banco Hipotecario. Was it reasonable to expect that other persons would
The firm was then, and for some time had been, insolvent, in the sense that its property was loan money to the partnership when it was unable even to pay the taxes on the property, and the
insufficient to pay its debts, though it still had good credit, and was actively engaged in the interest on the principal since 1940? If it had been possible to find lenders willing to take a chance
50
on such a bad financial record, would not Goquiolay have taken advantage of it? But the fact is 18. G.R. No. L-45624 April 25, 1939
clear on the record that since liberation until 1949 Goquiolay never lifted a finger to discharge the
debts of the partnership. Is he entitled now to cry fraud after the debts were discharged with no GEORGE LITTON, petitioner-appellant,
help from him? vs.
HILL & CERON, ET AL., respondents-appellees.
With regard to the relationship between the parties, suffice it to say that the Supreme Court has
ruled that relationship alone is not a badge of fraud (Oria Hnos. vs. McMicking, 21 Phil., 243; also
Hermandad de Smo. Nombre de Jesus vs. Sanchez, 40 Off. Gaz., 1685). There is no evidence CONCEPCION, J.:
that the original buyers, Washington Sycip and Betty Lee, were without independent means to
purchase the property. That the Yutivos should be willing to extend credit to them, and not to This is a petition to review on certiorari the decision of the Court of Appeals in a case originating
appellant, is neither illegal nor immoral; at the very least, these buyers did not have a record of from the Court of First Instance of Manila wherein the herein petitioner George Litton was the
inveterate defaults like the partnership "Tan Sin An & Goquiolay". plaintiff and the respondents Hill & Ceron, Robert Hill, Carlos Ceron and Visayan Surety &
Insurance Corporation were defendants.
Appellant seeks to create the impression that he was the victim of a conspiracy between the Yutivo
firm and their component members. But no proof is adduced. If he was such a victim, he could The facts are as follows: On February 14, 1934, the plaintiff sold and delivered to Carlos Ceron,
have easily defeated the conspirators by raising money and paying off the firm's debts between who is one of the managing partners of Hill & Ceron, a certain number of mining claims, and by
1945 and 1949; but he did; he did not even care to look for a purchaser of the partnership assets. virtue of said transaction, the defendant Carlos Ceron delivered to the plaintiff a document reading
Were it true that the conspiracy to defraud him arose (as he claims) because of his refusal to sell as follows:
the lands when in 1945 Yu Khe Thai asked him to do so, it is certainly strange that the
conspirators should wait 4 years, until 1949, to have the sale effected by the widow of Tan Sin An, Feb. 14, 1934
and that the sale should have been routed through the probate court taking cognizance of Tan Sin
An's estate, all of which increased the risk that the supposed fraud should be detected. Received from Mr. George Litton share certificates Nos. 4428, 4429 and 6699 for 5,000, 5,000 and
7,000 shares respectively — total 17,000 shares of Big Wedge Mining Company, which we have
Neither was there any anomaly in the filing of the claims of Yutivo and Sing Yee Cuan & Co., (as sold at P0.11 (eleven centavos) per share or P1,870.00 less 1/2 per cent brokerage.
subrogees of the Banco Hipotecario) in proceedings for the settlement of the estate of Tan Sin An.
This for two reasons: First, Tan Sin An and the partnership "Tan Sin An & Goquiolay" were solidary HILL & CERON
(joint and several) debtors (Exhibit "N" mortgage to the Banco Hipotecario), and Rule 87, section 6,
is to the effect that:
By: (Sgd.) CARLOS CERON
Where the obligation of the decedent is joint and several with another debtor, the claim shall be
filed against the decedent as if he were the only debtor, without prejudice to the right of the estate Ceron paid to the plaintiff the sum or P1,150 leaving an unpaid balance of P720, and unable to
to recover contribution from the other debtor. (Emphasis supplied) collect this sum either from Hill & Ceron or from its surety Visayan Surety & Insurance Corporation,
Litton filed a complaint in the Court of First Instance of Manila against the said defendants for the
Secondly, the solidary obligation was guaranteed by a mortgage on the properties of the recovery of the said balance. The court, after trial, ordered Carlos Ceron personally to pay the
partnership and those of Tan Sin An personally, and a mortgage in indivisible, in the sense that amount claimed and absolved the partnership Hill & Ceron, Robert Hill and the Visayan Surety &
each and every parcel under mortgage answers for the totality of the debt (Civ. Code of 1889, Insurance Corporation. On appeal to the Court of Appeals, the latter affirmed the decision of the
Article 1860; New Civil Code, Art. 2089). court on May 29, 1937, having reached the conclusion that Ceron did not intend to represent and
did not act for the firm Hill & Ceron in the transaction involved in this litigation.
A final and conclusive consideration. The fraud charged not being one used to obtain a party's
consent to a contract (i.e., not being deceit or dolus in contrahendo), if there is fraud at all, it can Accepting, as we cannot but accept, the conclusion arrived at by the Court of Appeals as to the
only be a fraud of creditors that gives rise to a rescission of the offending contract. But by express question of fact just mentioned, namely, that Ceron individually entered into the transaction with
provision of law (Article 1294, Civil Code of 1889; Article 1383, New Civil Code), "the action for the plaintiff, but in view, however, of certain undisputed facts and of certain regulations and
rescission is subsidiary; it can not be instituted except when the party suffering damage has no provisions of the Code of Commerce, we reach the conclusion that the transaction made by Ceron
other legal means to obtain reparation for the same". Since there is no allegation, or evidence, that with the plaintiff should be understood in law as effected by Hill & Ceron and binding upon it.
Goquiolay can not obtain reparation from the widow and heirs of Tan Sin An, the present suit to
rescind the sale in question is not maintenable, even if the fraud charged actually did exist. In the first place, it is an admitted fact by Robert Hill when he testified at the trial that he and
Ceron, during the partnership, had the same power to buy and sell; that in said partnership Hill as
Premises considered, the motion for reconsideration is denied. well as Ceron made the transaction as partners in equal parts; that on the date of the transaction,
February 14, 1934, the partnership between Hill and Ceron was in existence. After this date, or on
February 19th, Hill & Ceron sold shares of the Big Wedge; and when the transaction was entered
into with Litton, it was neither published in the newspapers nor stated in the commercial registry
that the partnership Hill & Ceron had been dissolved.

Hill testified that a few days before February 14th he had a conversation with the plaintiff in the
course of which he advised the latter not to deliver shares for sale or on commission to Ceron
because the partnership was about to be dissolved; but what importance can be attached to said
advice if the partnership was not in fact dissolved on February 14th, the date when the transaction
with Ceron took place?
51
 The kind of business in which the partnership Hill & Ceron is to engage being thus determined,
Under article 226 of the Code of Commerce, the dissolution of a commercial association shall not none of the two partners, under article 130 of the Code of Commerce, may legally engage in the
cause any prejudice to third parties until it has been recorded in the commercial registry. (See also business of brokerage in general as stock brokers, security brokers and other activities pertaining
Cardell vs. Mañeru, 14 Phil., 368.) The Supreme Court of Spain held that the dissolution of a to the business of the partnership. Ceron, therefore, could not have entered into the contract of
partnership by the will of the partners which is not registered in the commercial registry, does not sale of shares with Litton as a private individual, but as a managing partner of Hill & Ceron.
prejudice third persons. (Opinion of March 23, 1885.)
The respondent argues in its brief that even admitting that one of the partners could not, in his
Aside from the aforecited legal provisions, the order of the Bureau of Commerce of December 7, individual capacity, engage in a transaction similar to that in which the partnership is engaged
1933, prohibits brokers from buying and selling shares on their own account. Said order reads: without binding the latter, nevertheless there is no law which prohibits a partner in the stock
brokerage business for engaging in other transactions different from those of the partnership, as it
The stock and/or bond broker is, therefore, merely an agent or an intermediary, and as such, shall happens in the present case, because the transaction made by Ceron is a mere personal loan,
not be allowed. . . . and this argument, so it is said, is corroborated by the Court of Appeals. We do not find this
alleged corroboration because the only finding of fact made by the Court of Appeals is to the effect
(c) To buy or to sell shares of stock or bonds on his own account for purposes of speculation that the transaction made by Ceron with the plaintiff was in his individual capacity.
and/or for manipulating the market, irrespective of whether the purchase or sale is made from or to
a private individual, broker or brokerage firm. The appealed decision is reversed and the defendants are ordered to pay to the plaintiff, jointly
and severally, the sum of P720, with legal interest, from the date of the filing of the complaint,
In its decision the Court of Appeals states: minus the commission of one-half per cent (½%) from the original price of P1,870, with the costs to
the respondents. So ordered.
But there is a stronger objection to the plaintiff's attempt to make the firm responsible to him. Since Kong Chai Pin sold the partnership properties not in line with the business of the partnership
According to the articles of copartnership of 'Hill & Ceron,' filed in the Bureau of Commerce. but to pay its obligation without first obtaining the consent of the other partners, the sale is invalid
being in excess of her authority.
Sixth. That the management of the business affairs of the copartnership shall be entrusted to both
copartners who shall jointly administer the business affairs, transactions and activities of the 4. Finally, the same under consideration was effected in a suspicious manner as may be gleaned
copartnership, shall jointly open a current account or any other kind of account in any bank or from the following circumstances:
banks, shall jointly sign all checks for the withdrawal of funds and shall jointly or singly sign, in the
latter case, with the consent of the other partner. . . . (a) The properties subject of the instant sale which consist of three parcels of land situated in the
City of Davao have an area of 200 hectares more or less, or 2,000,000 square meters. These
Under this stipulation, a written contract of the firm can only be signed by one of the partners if the properties were purchased by the partnership for purposes of subdivision. According to realtor
other partner consented. Without the consent of one partner, the other cannot bind the firm by a Mata, who testified in court, these properties could command at the time he testified a value of not
written contract. Now, assuming for the moment that Ceron attempted to represent the firm in this less than P312,000.00, and according to Dalton Chen, manager of the firm which took over the
contract with the plaintiff (the plaintiff conceded that the firm name was not mentioned at that time), administration, since the date of sale no improvement was ever made thereon precisely because
the latter has failed to prove that Hill had consented to such contract. of this litigation. And yet, for said properties, aside from the sum of P37,000.00 which was paid for
the properties of the deceased and the partnership, only the paltry sum of P66,529.91 was paid as
It follows from the sixth paragraph of the articles of partnership of Hill &n Ceron above quoted that a consideration therefor, of which the sum of P46,116.75 was even paid in Japanese currency.
the management of the business of the partnership has been entrusted to both partners thereof,
but we dissent from the view of the Court of Appeals that for one of the partners to bind the (b) Considering the area of the properties Kong Chai Pin had no valid reason to sell them if her
partnership the consent of the other is necessary. Third persons, like the plaintiff, are not bound in purpose was only to pay the partnership's obligation. She could have negotiated a loan if she
entering into a contract with any of the two partners, to ascertain whether or not this partner with wanted to pay it by placing the properties as security, but preferred to sell them even at such low
whom the transaction is made has the consent of the other partner. The public need not make prices because of her close relationship with the purchasers and creditors who conveniently
inquires as to the agreements had between the partners. Its knowledge, is enough that it is organized a partnership to exploit them, as may be seen from the following relationship of their
contracting with the partnership which is represented by one of the managing partners. pedigree:

There is a general presumption that each individual partner is an authorized agent for the firm and KONG CHAI PIN, the administratrix, was a granddaughter of Jose P. Yutivo, founder of the
that he has authority to bind the firm in carrying on the partnership transactions. (Mills vs. Riggle, defendant Yutivo Sons Hardware Co. YUTIVO SONS HARDWARE CO, and SIN YEE CUAN CO,
112 Pac., 617.) INC., alleged creditors, are owned by the heirs of Jose P. Yutivo (Sing, Yee & Cuan are the three
children of Jose). YU KHE THAI is a grandson of the same Jose P. Yutivo, and president of the
The presumption is sufficient to permit third persons to hold the firm liable on transactions entered two alleged creditors. He is the acknowledged head of the Yu families. WASHINGTON Z. SYCIP,
into by one of members of the firm acting apparently in its behalf and within the scope of his one of the original buyers, is married to Ana Yu, a daughter of Yu Khe Thai, BETTY Y. LEE, the
authority. (Le Roy vs. Johnson, 7 U. S. [Law. ed.], 391.) other original buyer is also a daughter of Yu Khe Thai. The INSULAR DEVELOPMENT CO., the
ultimate buyer, was organized for the specific purpose of buying the partnership properties. Its
The second paragraph of the articles of partnership of Hill & Ceron reads in part: incorporators were: Ana Yu and Betty V. Lee, Atty. Quisumbing and Salazar the lawyers who
studied the papers of sale and have been counsel for the Yutivo interests; Dalton Chen a brother-
Second: That the purpose or object for which this copartnership is organized is to engage in the in-law of Yu Khe Thai and an executive of Sing Yee & Cuan Co; Lillian Yu, daughter of Yu Eng
business of brokerage in general, such as stock and bond brokers, real brokers, investment Poh, an executive of Yutivo Sons Hardware, and Simeon Daguiwag, a trusted employee of the
security brokers, shipping brokers, and other activities pertaining to the business of brokers in Yutivos.
general.

52
(c) Lastly, even since Tan Sin An died in 1942 the creditors, who were close relatives of Kong Chai share of 30% was to be based on the profits which might be realized by the partnership only until
Pin, have already conceived the idea of possessing the lands for purposes of subdivision, full payment of the loan which it had obtained in December, 1955 from the Rehabilitation Finance
excluding Goquiolay from their plan, and this is evident from the following sequence of events: Corporation in the sum of P30,000, for which the plaintiff had signed a promisory note as co-maker
and mortgaged her property as security.
Tan Sin An died in 1942 and intestate proceedings were opened in 1944. In 1946, the creditors of
the partnership filed their claim against the partnership in the intestate proceedings. The creditors The parties are in agreement that the main issue in this case is "whether the plaintiff-appellee
studied ways and means of liquidating the obligation of the partnership, leading to the formation of (respondent here) is an industrial partner as claimed by her or merely a profit sharer entitled to
the defendant Insular Development Co., composed of members of the Yutivo family and the 30% of the net profits that may be realized by the partnership from June 7, 1955 until the mortgage
counsel of record of the defendants, which subsequently bought the properties of the partnership loan from the Rehabilitation Finance Corporation shall be fully paid, as claimed by appellants
and assumed the obligation of the latter in favor of the creditors of the partnership, Yutivo Sons (herein petitioners)." On that issue the Court of First Instance found for the plaintiff and rendered
Hardware and Sing, Yee & Cuan, also of the Yutivo family. The buyers took time to study the judgement "declaring her an industrial partner of Evangelista & Co.; ordering the defendants to
commercial potentialities of the partnership properties and their lawyers carefully studied the render an accounting of the business operations of the (said) partnership ... from June 7, 1955; to
document and other papers involved in the transaction. All these steps led finally to the sale of the pay the plaintiff such amounts as may be due as her share in the partnership profits and/or
three partnership properties. dividends after such an accounting has been properly made; to pay plaintiff attorney's fees in the
sum of P2,000.00 and the costs of this suit."
Upon the strength of the foregoing considerations, I vote to grant motion for reconsideration.
The defendants appealed to the Court of Appeals, which thereafter affirmed judgments of the court
a quo.

4. Accounting of Partnership Affairs (Articles 1805-1809) In the petition before Us the petitioners have assigned the following errors:

B. Property Rights of a Partner (Articles 1810-1814) – 1 case I. The Court of Appeals erred in the finding that the respondent is an industrial partner of
Evangelista & Co., notwithstanding the admitted fact that since 1954 and until after promulgation of
19. G.R. No. L-31684 June 28, 1973 the decision of the appellate court the said respondent was one of the judges of the City Court of
Manila, and despite its findings that respondent had been paid for services allegedly contributed by
EVANGELISTA & CO., DOMINGO C. EVANGELISTA, JR., CONCHITA B. NAVARRO and her to the partnership. In this connection the Court of Appeals erred:
LEONARDA ATIENZA ABAD SABTOS, petitioners,
vs. (A) In finding that the "amended Articles of Co-partnership," Exhibit "A" is conclusive evidence that
ESTRELLA ABAD SANTOS, respondent. respondent was in fact made an industrial partner of Evangelista & Co.

(B) In not finding that a portion of respondent's testimony quoted in the decision proves that said
MAKALINTAL, J.: respondent did not bind herself to contribute her industry, and she could not, and in fact did not,
because she was one of the judges of the City Court of Manila since 1954.
On October 9, 1954 a co-partnership was formed under the name of "Evangelista & Co." On June
7, 1955 the Articles of Co-partnership was amended as to include herein respondent, Estrella (C) In finding that respondent did not in fact contribute her industry, despite the appellate court's
Abad Santos, as industrial partner, with herein petitioners Domingo C. Evangelista, Jr., Leonardo own finding that she has been paid for the services allegedly rendered by her, as well as for the
Atienza Abad Santos and Conchita P. Navarro, the original capitalist partners, remaining in that loans of money made by her to the partnership.
capacity, with a contribution of P17,500 each. The amended Articles provided, inter alia, that "the
contribution of Estrella Abad Santos consists of her industry being an industrial partner", and that II. The lower court erred in not finding that in any event the respondent was lawfully excluded from,
the profits and losses "shall be divided and distributed among the partners ... in the proportion of and deprived of, her alleged share, interests and participation, as an alleged industrial partner, in
70% for the first three partners, Domingo C. Evangelista, Jr., Conchita P. Navarro and Leonardo the partnership Evangelista & Co., and its profits or net income.
Atienza Abad Santos to be divided among them equally; and 30% for the fourth partner Estrella
Abad Santos." III. The Court of Appeals erred in affirming in toto the decision of the trial court whereby
respondent was declared an industrial partner of the petitioner, and petitioners were ordered to
On December 17, 1963 herein respondent filed suit against the three other partners in the Court of render an accounting of the business operation of the partnership from June 7, 1955, and to pay
First Instance of Manila, alleging that the partnership, which was also made a party-defendant, had the respondent her alleged share in the net profits of the partnership plus the sum of P2,000.00 as
been paying dividends to the partners except to her; and that notwithstanding her demands the attorney's fees and the costs of the suit, instead of dismissing respondent's complaint, with costs,
defendants had refused and continued to refuse and let her examine the partnership books or to against the respondent.
give her information regarding the partnership affairs to pay her any share in the dividends
declared by the partnership. She therefore prayed that the defendants be ordered to render It is quite obvious that the questions raised in the first assigned errors refer to the facts as found by
accounting to her of the partnership business and to pay her corresponding share in the the Court of Appeals. The evidence presented by the parties as the trial in support of their
partnership profits after such accounting, plus attorney's fees and costs. respective positions on the issue of whether or not the respondent was an industrial partner was
thoroughly analyzed by the Court of Appeals on its decision, to the extent of reproducing verbatim
The defendants, in their answer, denied ever having declared dividends or distributed profits of the therein the lengthy testimony of the witnesses.
partnership; denied likewise that the plaintiff ever demanded that she be allowed to examine the
partnership books; and byway of affirmative defense alleged that the amended Articles of Co- It is not the function of the Supreme Court to analyze or weigh such evidence all over again, its
partnership did not express the true agreement of the parties, which was that the plaintiff was not jurisdiction being limited to reviewing errors of law that might have been commited by the lower
an industrial partner; that she did not in fact contribute industry to the partnership; and that her court. It should be observed, in this regard, that the Court of Appeals did not hold that the Articles
53
of Co-partnership, identified in the record as Exhibit "A", was conclusive evidence that the industry to a common fund, with the intention of dividing the profits among themselves, 'does not
respondent was an industrial partner of the said company, but considered it together with other specify the kind of industry that a partner may thus contribute, hence the said services may
factors, consisting of both testimonial and documentary evidences, in arriving at the factual legitimately be considered as appellee's contribution to the common fund. Another article of the
conclusion expressed in the decision. same Code relied upon appellants reads:

The findings of the Court of Appeals on the various points raised in the first assignment of error are 'ART. 1789. An industrial partner cannot engage in business for himself, unless the partnership
hereunder reproduced if only to demonstrate that the same were made after a through analysis of expressly permits him to do so; and if he should do so, the capitalist partners may either exclude
then evidence, and hence are beyond this Court's power of review. him from the firm or avail themselves of the benefits which he may have obtained in violation of
this provision, with a right to damages in either case.'
The aforequoted findings of the lower Court are assailed under Appellants' first assigned error,
wherein it is pointed out that "Appellee's documentary evidence does not conclusively prove that It is not disputed that the provision against the industrial partner engaging in business for himself
appellee was in fact admitted by appellants as industrial partner of Evangelista & Co." and that seeks to prevent any conflict of interest between the industrial partner and the partnership, and to
"The grounds relied upon by the lower Court are untenable" (Pages 21 and 26, Appellant's Brief). insure faithful compliance by said partner with this prestation. There is no pretense, however, even
on the part of the appellee is engaged in any business antagonistic to that of appellant company,
The first point refers to Exhibit A, B, C, K, K-1, J, N and S, appellants' complaint being that "In since being a Judge of one of the branches of the City Court of Manila can hardly be characterized
finding that the appellee is an industrial partner of appellant Evangelista & Co., herein referred to as a business. That appellee has faithfully complied with her prestation with respect to appellants
as the partnership — the lower court relied mainly on the appellee's documentary evidence, is clearly shown by the fact that it was only after filing of the complaint in this case and the answer
entirely disregarding facts and circumstances established by appellants" evidence which contradict thereto appellants exercised their right of exclusion under the codal art just mentioned by alleging
the said finding' (Page 21, Appellants' Brief). The lower court could not have done otherwise but in their Supplemental Answer dated June 29, 1964 — or after around nine (9) years from June 7,
rely on the exhibits just mentioned, first, because appellants have admitted their genuineness and 1955 — subsequent to the filing of defendants' answer to the complaint, defendants reached an
due execution, hence they were admitted without objection by the lower court when appellee agreement whereby the herein plaintiff been excluded from, and deprived of, her alleged share,
rested her case and, secondly the said exhibits indubitably show the appellee is an industrial interests or participation, as an alleged industrial partner, in the defendant partnership and/or in its
partner of appellant company. Appellants are virtually estopped from attempting to detract from the net profits or income, on the ground plaintiff has never contributed her industry to the partnership,
probative force of the said exhibits because they all bear the imprint of their knowledge and instead she has been and still is a judge of the City Court (formerly Municipal Court) of the City of
consent, and there is no credible showing that they ever protested against or opposed their Manila, devoting her time to performance of her duties as such judge and enjoying the privilege
contents prior of the filing of their answer to appellee's complaint. As a matter of fact, all the and emoluments appertaining to the said office, aside from teaching in law school in Manila,
appellant Evangelista, Jr., would have us believe — as against the cumulative force of appellee's without the express consent of the herein defendants' (Record On Appeal, pp. 24-25). Having
aforesaid documentary evidence — is the appellee's Exhibit "A", as confirmed and corroborated by always knows as a appellee as a City judge even before she joined appellant company on June 7,
the other exhibits already mentioned, does not express the true intent and agreement of the 1955 as an industrial partner, why did it take appellants many yearn before excluding her from said
parties thereto, the real understanding between them being the appellee would be merely a profit company as aforequoted allegations? And how can they reconcile such exclusive with their main
sharer entitled to 30% of the net profits that may be realized between the partners from June 7, theory that appellee has never been such a partner because "The real agreement evidenced by
1955, until the mortgage loan of P30,000.00 to be obtained from the RFC shall have been fully Exhibit "A" was to grant the appellee a share of 30% of the net profits which the appellant
paid. This version, however, is discredited not only by the aforesaid documentary evidence partnership may realize from June 7, 1955, until the mortgage of P30,000.00 obtained from the
brought forward by the appellee, but also by the fact that from June 7, 1955 up to the filing of their Rehabilitation Finance Corporal shall have been fully paid." (Appellants Brief, p. 38).
answer to the complaint on February 8, 1964 — or a period of over eight (8) years — appellants
did nothing to correct the alleged false agreement of the parties contained in Exhibit "A". It is thus What has gone before persuades us to hold with the lower Court that appellee is an industrial
reasonable to suppose that, had appellee not filed the present action, appellants would not have partner of appellant company, with the right to demand for a formal accounting and to receive her
advanced this obvious afterthought that Exhibit "A" does not express the true intent and agreement share in the net profit that may result from such an accounting, which right appellants take
of the parties thereto. exception under their second assigned error. Our said holding is based on the following article of
the New Civil Code:
At pages 32-33 of appellants' brief, they also make much of the argument that 'there is an
overriding fact which proves that the parties to the Amended Articles of Partnership, Exhibit "A", 'ART. 1899. Any partner shall have the right to a formal account as to partnership affairs:
did not contemplate to make the appellee Estrella Abad Santos, an industrial partner of
Evangelista & Co. It is an admitted fact that since before the execution of the amended articles of (1) If he is wrongfully excluded from the partnership business or possession of its property by his
partnership, Exhibit "A", the appellee Estrella Abad Santos has been, and up to the present time co-partners;
still is, one of the judges of the City Court of Manila, devoting all her time to the performance of the
duties of her public office. This fact proves beyond peradventure that it was never contemplated (2) If the right exists under the terms of any agreement;
between the parties, for she could not lawfully contribute her full time and industry which is the
obligation of an industrial partner pursuant to Art. 1789 of the Civil Code. (3) As provided by article 1807;

The Court of Appeals then proceeded to consider appellee's testimony on this point, quoting it in (4) Whenever other circumstance render it just and reasonable.
the decision, and then concluded as follows:
We find no reason in this case to depart from the rule which limits this Court's appellate jurisdiction
One cannot read appellee's testimony just quoted without gaining the very definite impression that, to reviewing only errors of law, accepting as conclusive the factual findings of the lower court upon
even as she was and still is a Judge of the City Court of Manila, she has rendered services for its own assessment of the evidence.
appellants without which they would not have had the wherewithal to operate the business for
which appellant company was organized. Article 1767 of the New Civil Code which provides that The judgment appealed from is affirmed, with costs.
"By contract of partnership two or more persons bind themselves, to contribute money, property, or
54
 C. Obligations of the Partners with Regard to Third Persons (Articles 4. There is no possibility of imposition or deception because the deaths of their respective
1815-1827) deceased partners were well-publicized in all newspapers of general circulation for several days;
the stationeries now being used by them carry new letterheads indicating the years when their
See case 17 respective deceased partners were connected with the firm; petitioners will notify all leading
national and international law directories of the fact of their respective deceased partners' deaths.
5
20. July 30, 1979
5. No local custom prohibits the continued use of a deceased partner's name in a professional
PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME "SYCIP, SALAZAR, firm's name; 6 there is no custom or usage in the Philippines, or at least in the Greater Manila
FELICIANO, HERNANDEZ & CASTILLO." LUCIANO E. SALAZAR, FLORENTINO P. Area, which recognizes that the name of a law firm necessarily Identifies the individual members of
FELICIANO, BENILDO G. HERNANDEZ. GREGORIO R. CASTILLO. ALBERTO P. SAN JUAN, the firm. 7
JUAN C. REYES. JR., ANDRES G. GATMAITAN, JUSTINO H. CACANINDIN, NOEL A. LAMAN,
ETHELWOLDO E. FERNANDEZ, ANGELITO C. IMPERIO, EDUARDO R. CENIZA, TRISTAN A. 6. The continued use of a deceased partner's name in the firm name of law partnerships has been
CATINDIG, ANCHETA K. TAN, and ALICE V. PESIGAN, petitioners. consistently allowed by U.S. Courts and is an accepted practice in the legal profession of most
countries in the world.8
IN THE MATTER OF THE PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM
NAME "OZAETA, ROMULO, DE LEON, MABANTA & REYES." RICARDO J. ROMULO, The question involved in these Petitions first came under consideration by this Court in 1953 when
BENJAMIN M. DE LEON, ROMAN MABANTA, JR., JOSE MA, REYES, JESUS S. J. SAYOC, a law firm in Cebu (the Deen case) continued its practice of including in its firm name that of a
EDUARDO DE LOS ANGELES, and JOSE F. BUENAVENTURA, petitioners. deceased partner, C.D. Johnston. The matter was resolved with this Court advising the firm to
desist from including in their firm designation the name of C. D. Johnston, who has long been
RESOLUTION dead."

MELENCIO-HERRERA The same issue was raised before this Court in 1958 as an incident in G. R. No. L-11964, entitled
Register of Deeds of Manila vs. China Banking Corporation. The law firm of Perkins & Ponce
Two separate Petitions were filed before this Court 1) by the surviving partners of Atty. Alexander Enrile moved to intervene as amicus curiae. Before acting thereon, the Court, in a Resolution of
Sycip, who died on May 5, 1975, and 2) by the surviving partners of Atty. Herminio Ozaeta, who April 15, 1957, stated that it "would like to be informed why the name of Perkins is still being used
died on February 14, 1976, praying that they be allowed to continue using, in the names of their although Atty. E. A. Perkins is already dead." In a Manifestation dated May 21, 1957, the law firm
firms, the names of partners who had passed away. In the Court's Resolution of September 2, of Perkins and Ponce Enrile, raising substantially the same arguments as those now being raised
1976, both Petitions were ordered consolidated. by petitioners, prayed that the continued use of the firm name "Perkins & Ponce Enrile" be held
proper.
Petitioners base their petitions on the following arguments:
On June 16, 1958, this Court resolved:
1. Under the law, a partnership is not prohibited from continuing its business under a firm name
which includes the name of a deceased partner; in fact, Article 1840 of the Civil Code explicitly After carefully considering the reasons given by Attorneys Alfonso Ponce Enrile and Associates for
sanctions the practice when it provides in the last paragraph that: their continued use of the name of the deceased E. G. Perkins, the Court found no reason to
depart from the policy it adopted in June 1953 when it required Attorneys Alfred P. Deen and Eddy
The use by the person or partnership continuing the business of the partnership name, or the A. Deen of Cebu City to desist from including in their firm designation, the name of C. D. Johnston,
name of a deceased partner as part thereof, shall not of itself make the individual property of the deceased. The Court believes that, in view of the personal and confidential nature of the relations
deceased partner liable for any debts contracted by such person or partnership. 1 between attorney and client, and the high standards demanded in the canons of professional
ethics, no practice should be allowed which even in a remote degree could give rise to the
2. In regulating other professions, such as accountancy and engineering, the legislature has possibility of deception. Said attorneys are accordingly advised to drop the name "PERKINS" from
authorized the adoption of firm names without any restriction as to the use, in such firm name, of their firm name.
the name of a deceased partner; 2 the legislative authorization given to those engaged in the
practice of accountancy — a profession requiring the same degree of trust and confidence in Petitioners herein now seek a re-examination of the policy thus far enunciated by the Court.
respect of clients as that implicit in the relationship of attorney and client — to acquire and use a
trade name, strongly indicates that there is no fundamental policy that is offended by the continued The Court finds no sufficient reason to depart from the rulings thus laid down.
use by a firm of professionals of a firm name which includes the name of a deceased partner, at
least where such firm name has acquired the characteristics of a "trade name." 3 A. Inasmuch as "Sycip, Salazar, Feliciano, Hernandez and Castillo" and "Ozaeta, Romulo, De
Leon, Mabanta and Reyes" are partnerships, the use in their partnership names of the names of
3. The Canons of Professional Ethics are not transgressed by the continued use of the name of a deceased partners will run counter to Article 1815 of the Civil Code which provides: têñ.£îhqwâ£
deceased partner in the firm name of a law partnership because Canon 33 of the Canons of
Professional Ethics adopted by the American Bar Association declares that: Art. 1815. Every partnership shall operate under a firm name, which may or may not include the
name of one or more of the partners.
... The continued use of the name of a deceased or former partner when permissible by local
custom, is not unethical but care should be taken that no imposition or deception is practiced Those who, not being members of the partnership, include their names in the firm name, shall be
through this use. ... 4 subject to the liability, of a partner.

55
It is clearly tacit in the above provision that names in a firm name of a partnership must either be
those of living partners and. in the case of non-partners, should be living persons who can be Dean Pound, in his recently published contribution to the Survey of the Legal Profession, (The
subjected to liability. In fact, Article 1825 of the Civil Code prohibits a third person from including Lawyer from Antiquity to Modern Times, p. 5) defines a profession as "a group of men pursuing a
his name in the firm name under pain of assuming the liability of a partner. The heirs of a learned art as a common calling in the spirit of public service, — no less a public service because it
deceased partner in a law firm cannot be held liable as the old members to the creditors of a firm may incidentally be a means of livelihood."
particularly where they are non-lawyers. Thus, Canon 34 of the Canons of Professional Ethics
"prohibits an agreement for the payment to the widow and heirs of a deceased lawyer of a xxx xxx xxx
percentage, either gross or net, of the fees received from the future business of the deceased
lawyer's clients, both because the recipients of such division are not lawyers and because such Primary characteristics which distinguish the legal profession from business are:
payments will not represent service or responsibility on the part of the recipient. " Accordingly,
neither the widow nor the heirs can be held liable for transactions entered into after the death of 1. A duty of public service, of which the emolument is a byproduct, and in which one may attain the
their lawyer-predecessor. There being no benefits accruing, there ran be no corresponding liability. highest eminence without making much money.

Prescinding the law, there could be practical objections to allowing the use by law firms of the 2. A relation as an "officer of court" to the administration of justice involving thorough sincerity,
names of deceased partners. The public relations value of the use of an old firm name can tend to integrity, and reliability.
create undue advantages and disadvantages in the practice of the profession. An able lawyer
without connections will have to make a name for himself starting from scratch. Another able 3. A relation to clients in the highest degree fiduciary.
lawyer, who can join an old firm, can initially ride on that old firm's reputation established by
deceased partners. 4. A relation to colleagues at the bar characterized by candor, fairness, and unwillingness to resort
to current business methods of advertising and encroachment on their practice, or dealing directly
B. In regards to the last paragraph of Article 1840 of the Civil Code cited by petitioners, supra, the with their clients. 13
first factor to consider is that it is within Chapter 3 of Title IX of the Code entitled "Dissolution and
Winding Up." The Article primarily deals with the exemption from liability in cases of a dissolved "The right to practice law is not a natural or constitutional right but is in the nature of a privilege or
partnership, of the individual property of the deceased partner for debts contracted by the person franchise. 14 It is limited to persons of good moral character with special qualifications duly
or partnership which continues the business using the partnership name or the name of the ascertained and certified. 15 The right does not only presuppose in its possessor integrity, legal
deceased partner as part thereof. What the law contemplates therein is a hold-over situation standing and attainment, but also the exercise of a special privilege, highly personal and partaking
preparatory to formal reorganization. of the nature of a public trust." 16

Secondly, Article 1840 treats more of a commercial partnership with a good will to protect rather D. Petitioners cited Canon 33 of the Canons of Professional Ethics of the American Bar
than of a professional partnership, with no saleable good will but whose reputation depends on the Association" in support of their petitions.
personal qualifications of its individual members. Thus, it has been held that a saleable goodwill
can exist only in a commercial partnership and cannot arise in a professional partnership It is true that Canon 33 does not consider as unethical the continued use of the name of a
consisting of lawyers. deceased or former partner in the firm name of a law partnership when such a practice is
permissible by local custom but the Canon warns that care should be taken that no imposition or
As a general rule, upon the dissolution of a commercial partnership the succeeding partners or deception is practiced through this use.
parties have the right to carry on the business under the old name, in the absence of a stipulation
forbidding it, (s)ince the name of a commercial partnership is a partnership asset inseparable from It must be conceded that in the Philippines, no local custom permits or allows the continued use of
the good will of the firm. ... (60 Am Jur 2d, s 204, p. 115) (Emphasis supplied) a deceased or former partner's name in the firm names of law partnerships. Firm names, under our
custom, Identify the more active and/or more senior members or partners of the law firm. A
On the other hand, glimpse at the history of the firms of petitioners and of other law firms in this country would show
how their firm names have evolved and changed from time to time as the composition of the
... a professional partnership the reputation of which depends or; the individual skill of the partnership changed.
members, such as partnerships of attorneys or physicians, has no good win to be distributed as a
firm asset on its dissolution, however intrinsically valuable such skill and reputation may be, The continued use of a firm name after the death of one or more of the partners designated by it is
especially where there is no provision in the partnership agreement relating to good will as an proper only where sustained by local custom and not where by custom this purports to Identify the
asset. ... (ibid, s 203, p. 115) (Emphasis supplied) active members. ...

C. A partnership for the practice of law cannot be likened to partnerships formed by other There would seem to be a question, under the working of the Canon, as to the propriety of adding
professionals or for business. For one thing, the law on accountancy specifically allows the use of the name of a new partner and at the same time retaining that of a deceased partner who was
a trade name in connection with the practice of accountancy. never a partner with the new one. (H.S. Drinker, op. cit., supra, at pp. 207208) (Emphasis
supplied).
A partnership for the practice of law is not a legal entity. It is a mere relationship or association for
a particular purpose. ... It is not a partnership formed for the purpose of carrying on trade or The possibility of deception upon the public, real or consequential, where the name of a deceased
business or of holding property." 11 Thus, it has been stated that "the use of a nom de plume, partner continues to be used cannot be ruled out. A person in search of legal counsel might be
assumed or trade name in law practice is improper. 12 guided by the familiar ring of a distinguished name appearing in a firm title.

The usual reason given for different standards of conduct being applicable to the practice of law
from those pertaining to business is that the law is a profession.
56
E. Petitioners argue that U.S. Courts have consistently allowed the continued use of a deceased for a trifling equivalent and it is his pride to do what he does in a way worthy of his profession even
partner's name in the firm name of law partnerships. But that is so because it is sanctioned by if done with no expectation of reward, This spirit of public service in which the profession of law is
custom. and ought to be exercised is a prerequisite of sound administration of justice according to law. The
other two elements of a profession, namely, organization and pursuit of a learned art have their
In the case of Mendelsohn v. Equitable Life Assurance Society (33 N.Y.S. 2d 733) which justification in that they secure and maintain that spirit. 25
petitioners Salazar, et al. quoted in their memorandum, the New York Supreme Court sustained
the use of the firm name Alexander & Green even if none of the present ten partners of the firm In fine, petitioners' desire to preserve the Identity of their firms in the eyes of the public must bow
bears either name because the practice was sanctioned by custom and did not offend any to legal and ethical impediment.
statutory provision or legislative policy and was adopted by agreement of the parties. The Court
stated therein: ACCORDINGLY, the petitions filed herein are denied and petitioners advised to drop the names
"SYCIP" and "OZAETA" from their respective firm names. Those names may, however, be
The practice sought to be proscribed has the sanction of custom and offends no statutory provision included in the listing of individuals who have been partners in their firms indicating the years
or legislative policy. Canon 33 of the Canons of Professional Ethics of both the American Bar during which they served as such.
Association and the New York State Bar Association provides in part as follows: "The continued
use of the name of a deceased or former partner, when permissible by local custom is not SO ORDERED.
unethical, but care should be taken that no imposition or deception is practiced through this use."
There is no question as to local custom. Many firms in the city use the names of deceased
members with the approval of other attorneys, bar associations and the courts. The Appellate
Division of the First Department has considered the matter and reached The conclusion that such 21. [G.R. No. L-7991. May 21, 1956.]
practice should not be prohibited. (Emphasis supplied)
PAUL MACDONALD, ET AL., Petitioners, vs. THE NATIONAL CITY BANK OF NEW YORK,
xxx xxx xxx Respondent.

Neither the Partnership Law nor the Penal Law prohibits the practice in question. The use of the
firm name herein is also sustainable by reason of agreement between the partners. 18 DECISION

Not so in this jurisdiction where there is no local custom that sanctions the practice. Custom has PARAS, J.:
been defined as a rule of conduct formed by repetition of acts, uniformly observed (practiced) as a
social rule, legally binding and obligatory. 19 Courts take no judicial notice of custom. A custom This is an appeal by certiorari from the decision of the Court of Appeals from which we are
must be proved as a fact, according to the rules of evidence. 20 A local custom as a source of right reproducing the following basic findings of fact:
cannot be considered by a court of justice unless such custom is properly established by
competent evidence like any other fact. 21 We find such proof of the existence of a local custom, “STASIKINOCEY is a partnership doing business at No. 58, Aurora Boulevard, San Juan, Rizal,
and of the elements requisite to constitute the same, wanting herein. Merely because something is and formed by Alan W. Gorcey, Louis F. da Costa, Jr., William Kusik and Emma Badong Gavino.
done as a matter of practice does not mean that Courts can rely on the same for purposes of This partnership was denied registration in the Securities and Exchange Commission, and while it
adjudication as a juridical custom. Juridical custom must be differentiated from social custom. The is confusing to see in this case that the CARDINAL RATTAN, sometimes called the CARDINAL
former can supplement statutory law or be applied in the absence of such statute. Not so with the RATTAN FACTORY, is treated as a copartnership, of which Defendants Gorcey and da Costa are
latter. considered general partners, we are satisfied that, as alleged in various instruments appearing of
record, said Cardinal Rattan is merely the business name or style used by the partnership
Moreover, judicial decisions applying or interpreting the laws form part of the legal system. 22 Stasikinocey.
When the Supreme Court in the Deen and Perkins cases issued its Resolutions directing lawyers
to desist from including the names of deceased partners in their firm designation, it laid down a “Prior to June 3, 1949, Defendant Stasikinocey had an overdraft account with The National City
legal rule against which no custom or practice to the contrary, even if proven, can prevail. This is Bank of New York, a foreign banking association duly licensed to do business in the Philippines.
not to speak of our civil law which clearly ordains that a partnership is dissolved by the death of On June 3, 1949, the overdraft showed a balance of P6,134.92 against the Defendant
any partner. 23 Custom which are contrary to law, public order or public policy shall not be Stasikinocey or the Cardinal Rattan (Exhibit D), which account, due to the failure of the partnership
countenanced. 24 to make the required payment, was converted into an ordinary loan for which the corresponding
promissory ‘joint note non-negotiable’ was executed on June 3, 1949, by Louis F. da Costa for and
The practice of law is intimately and peculiarly related to the administration of justice and should in the name of the Cardinal Rattan, Louis F. da Costa and Alan Gorcey (Exhibit D). This
not be considered like an ordinary "money-making trade." promissory note was secured on June 7, 1949, by a chattel mortgage executed by Louis F. da
Costa, Jr., General Partner for and in the name of Stasikinocey, alleged to be a duly registered
... It is of the essence of a profession that it is practiced in a spirit of public service. A trade ... aims Philippine partnership, doing business under the name and style of Cardinal Rattan, with principal
primarily at personal gain; a profession at the exercise of powers beneficial to mankind. If, as in the office at 69 Riverside, San Juan, Rizal (Exhibit A). The chattels mortgaged were the following
era of wide free opportunity, we think of free competitive self assertion as the highest good, lawyer motor vehicles:
and grocer and farmer may seem to be freely competing with their fellows in their calling in order
each to acquire as much of the world's good as he may within the allowed him by law. But the “(a) Fargo truck with motor No. T-118-202839, Serial No. 81410206 and with plate No. T-7333
member of a profession does not regard himself as in competition with his professional brethren. (1949);
He is not bartering his services as is the artisan nor exchanging the products of his skill and
learning as the farmer sells wheat or corn. There should be no such thing as a lawyers' or “(b) Plymouth Sedan automobile motor No. T-5638876, Serial No. 11872718 and with plate No.
physicians' strike. The best service of the professional man is often rendered for no equivalent or 10372; and
57
“(c) Fargo Pick-Up FKI-16, with motor No. T-112800032, This appeal by certiorari was taken by Paul McDonald and Benjamin Gonzales, Petitioners herein,
who have assigned the following errors:
Serial No. 8869225 and with plate No. T-7222 (1949).
“I
The mortgage deed was fully registered by the mortgagee on June 11, 1949, in the Office of the
Register of Deeds for the province of Rizal, at Pasig, (Exhibit A), and among other provisions it “IN RULING THAT AN UNREGISTERED COMMERCIAL CO-PARTNERSHIP WHICH HAS NO
contained the following: INDEPENDENT JURIDICAL PERSONALITY CAN HAVE A ‘DOMICILE SO THAT A CHATTEL
MORTGAGE REGISTERED IN THAT ‘DOMICILE’ WOULD BIND THIRD PERSONS WHO ARE
“‘(a) That the mortgagor shall not sell or otherwise dispose of the said chattels without the INNOCENT PURCHASERS FOR VALUE.
mortgagee’s written consent;
“II
“‘(b) That the mortgagee may foreclose the mortgage at any time, after breach of any condition
thereof, the mortgagor waiving the 30- day notice of foreclosure.’ “IN RULING THAT WHEN A CHATTEL MORTGAGE IS EXECUTED BY ONE OF THE
MEMBERS OF AN UNREGISTERED COMMERCIAL CO-PARTNERSHIP WITHOUT JURIDICAL
“On June 7, 1949, the same day of the execution of the chattel mortgage aforementioned, Gorcey PERSONALITY INDEPENDENT OF ITS MEMBERS, IT NEED NOT BE REGISTERED IN THE
and Da Costa executed an agreement purporting to convey and transfer all their rights, title and ACTUAL RESIDENCE OF THE MEMBERS WHO EXECUTED SAME;, AS A CONSEQUENCE
participation in Defendant partnership to Shaeffer, allegedly in consideration of the cancellation of THEREOF, IN NOT MAKING ANY FINDING OF FACT AS TO THE ACTUAL RESIDENCE OF
an indebtedness of P25,000 owed by them and Defendant partnership to the latter (Exhibit J), SAID CHATTEL MORTGAGOR, DESPITE APPELLANTS’ RAISING THAT QUESTION
which transaction is said to be in violation of the Bulk Sales Law (Act No. 3952 of the Philippine PROPERLY BEFORE IT AND REQUESTING A RULING THEREON.
Legislature).
“III
“While the said loan was still unpaid and the chattel mortgage subsisting, Defendant partnership,
through Defendants Gorcey and Da Costa transferred to Defendant McDonald the Fargo truck and IN NOT RULING THAT, WHEN A CHATTEL MORTGAGOR EXECUTES AN AFFIDAVIT OF
Plymouth sedan on June 24, 1949 (Exhibit L). The Fargo pickup was also sold on June 28, 1949, GOOD FAITH BEFORE A NOTARY PUBLIC OUTSIDE OF THE TERRITORIAL JURISDICTION
by William Shaeffer to Paul McDonald. OF THE LATTER, THE AFFIDAVIT IS VOID AND THE CHATTEL MORTGAGE IS NOT BINDING
ON THIRD PERSONS WHO ARE INNOCENT PURCHASERS FOR VALUE;, AS A
“On or about July 19, 1944, Paul Mcdonald, notwithstanding Plaintiff’s existing mortgage lien, in CONSEQUENCE THEREOF, IN NOT MAKING ANY FINDING OF FACT AS TO WHERE THE
turn transferred the Fargo truck and the Plymouth sedan to Benjamin Gonzales.” DEED WAS IN FACT EXECUTED, DESPITE APPELLANTS’ RAISING THAT QUESTION
PROPERLY BEFORE IT AND EXPRESSLY REQUESTING A RULING THEREON.
The National City Bank of New York, Respondent herein, upon learning of the transfers made by
the partnership Stasikinocey to William Shaeffer, from the latter to Paul McDonald, and from Paul “IV
McDonald to Benjamin Gonzales, of the vehicles previously pledged by Stasikinocey to the
Respondent, filed an action against Stasikinocey and its alleged partners Gorcey and Da Costa, as “IN RULING THAT A LETTER AUTHORIZING ONE MEMBER OF AN UNREGISTERED
well as Paul McDonald and Benjamin Gonzales, to recover its credit and to foreclose the COMMERCIAL CO-PARTNERSHIP ‘TO MAKE ALL OFFICIAL AND BUSINESS
corresponding chattel mortgage. McDonald and Gonzales were made Defendants because they ARRANGEMENTS .. WITH THE NATIONAL CITY BANK OF NEW YORK IN ORDER TO
claimed to have a better right over the pledged vehicle. SIMPLIFY ALL MATTERS RELATIVE TO LCS CABLE TRANSFERS, DRAFTS, OR OTHER
BANKING MEDIUMS,’ WAS SUFFICIENT AUTHORITY FOR THE SAID MEMBER TO EXECUTE
After trial the Court of First Instance of Manila rendered judgment in favor of the Respondent, A CHATTEL MORTGAGE IN ORDER TO GIVE THE BANK SECURITY FOR A PRE-EXISTING
annulling the sale of the vehicles in question to Benjamin Gonzales; Da Costa and Gorcey to pay OVERDRAFT, GRANTED WITHOUT SECURITY. WHICH THE BANK HAD CONVERTED INTO A
to the Respondent jointly and severally the sum of P6,134.92, with legal interest from the debt of DEMAND LOAN UPON FAILURE TO PAY SAME AND BEFORE THE CHATTEL MORTGAGE
the promissory note involved; sentencing the Petitioner Gonzales to deliver the vehicles in WAS EXECUTED.’
question to the Respondent for sale at public auction if Da Costa and Gorcey should fail to pay the
money judgment; and sentencing Da Costa, Gorcey and Shaeffers to pay to the Respondent This is the first question propounded by the Petitioners: “Since an unregistered commercial
jointly and severally any deficiency that may remain unpaid should the proceeds of the sale not be partnership unquestionably has no juridical personality, can it have a domicile so that the
sufficient; and sentencing Gorcey, Da Costa, McDonald and Shaeffer to pay the costs. Only Paul registration of a chattel mortgage therein is notice to the world?”.
McDonald and Benjamin Gonzales appealed to the Court of Appeals which rendered a decision
the dispositive part of which reads as follows: While an unregistered commercial partnership has no juridical personality, nevertheless, where
two or more persons attempt to create a partnership failing to comply with all the legal formalities,
“WHEREFORE, the decision appealed from is hereby modified, relieving Appellant William the law considers them as partners and the association is a partnership in so far as it is a favorable
Shaeffer of the obligation of paying, jointly and severally, together with Alan W. Gorcey and Louis to third persons, by reason of the equitable principle of estoppel. In Jo Chung Chang vs. Pacific
F. da Costa, Jr., any deficiency that may remain unpaid after applying the proceeds of the sale of Commercial Co., 45 Phil., 145, it was held “that although the partnership with the firm name of
the said motor vehicles which shall be undertaken upon the lapse of 90 days from the date this ‘Teck Seing and Co. Ltd.,’ could not be regarded as a partnership de jure, yet with respect to third
decision becomes final, if by then Defendants Louis F. da Costa, Jr., and Alan W. Gorcey had not persons it will be considered a partnership with all the consequent obligations for the purpose of
paid the amount of the judgment debt. With this modification the decision appealed from is in all enforcing the rights of such third persons.” Da Costa and Gorcey cannot deny that they are
other respects affirmed, with costs against Appellants. This decision is without prejudice to partners of the partnership Stasikinocey, because in all their transactions with the Respondent
whatever action Louis F. da Costa, Jr., and Alan W. Gorcey may take against their co-partners in they represented themselves as such. Petitioner McDonald cannot disclaim knowledge of the
the Stasikinocey unregistered partnership.” partnership Stasikinocey because he dealt with said entity in purchasing two of the vehicles in
58
question through Gorcey and Da Costa. As was held in Behn Meyer & Co. vs. Rosatzin, 5 Phil., the affidavit may be made and subscribed by one member thereof. In this case the affidavit was
660, where a partnership not duly organized has been recognized as such in its dealings with executed and subscribed by Da Costa, not only as a partner but as a managing partner.
certain persons, it shall be considered as “partnership by estoppel” and the persons dealing with it
are estopped from denying its partnership existence. The sale of the vehicles in question being There is no merit in Petitioners’ pretense that the motor vehicles in question are the common
void as to Petitioner McDonald, the transfer from the latter to Petitioner Benjamin Gonzales is also property of Da Costa and Gorcey. Petitioners invoke article 24 of the Code of Commerce in
void, as the buyer cannot have a better right than the seller. arguing that an unregistered commercial partnership has no juridical personality and cannot
execute any act that would adversely affect innocent third persons. Petitioners forget that the
It results that if the law recognizes a defectively organized partnership as de facto as far as third Respondent is a third person with respect to the partnership, and the chattel mortgage executed
persons are concerned, for purposes of its de facto existence it should have such attribute of a by Da Costa cannot therefore be impugned by Gorcey on the ground that there is no partnership
partnership as domicile. In Hung-Man Yoc vs. Kieng-Chiong-Seng, 6 Phil., 498, it was held that between them and that the vehicles in question belonged to them in common. As a matter of fact,
although “it has no legal standing, it is a partnership de facto and the general provisions of the the Respondent and the Petitioners are all third persons as regards the partnership Stasikinocey;
Code applicable to all partnerships apply to it.” The registration of the chattel mortgage in question even assuming that the Petitioners are purchasers in good faith and for value, the Respondent
with the Office of the Register of Deeds of Rizal, the residence or place of business of the having transacted with Stasikinocey earlier than the Petitioners, it should enjoy and be given
partnership Stasikinocey being San Juan, Rizal, was therefore in accordance with section 4 of the priority.
Chattel Mortgage Law.
Wherefore, the appealed decision of the Court of Appeals is affirmed with costs against the
The second question propounded by the Petitioners is: “If not, is a chattel mortgage executed by Petitioners.
only one of the ‘partners’ of an unregistered commercial partnership validly registered so as to
constitute notice to the world if it is not registered at the place where the aforesaid ‘partner’ actually
resides but only in the place where the deed states that he resides, which is not his real II. Dissolution and Winding Up (Articles 1828-1842)
residence?” And the third question is as follows: “If the actual residence of the chattel mortgagor — A. Causes of Dissolutions (Articles 1828-1831)
not the residence stated in the deed of chattel mortgage — is controlling, may the Court of Appeals
refuse to make a finding of fact as to where the mortgagor resided despite your Petitioners’ having 22. G.R. No. 109248 July 3, 1995
properly raised that question before it and expressly requested a ruling thereon?”
GREGORIO F. ORTEGA, TOMAS O. DEL CASTILLO, JR., and BENJAMIN T. BACORRO,
These two questions have become academic by reason of the answer to the first question, petitioners,
namely, that as a de facto partnership, Stasikinocey had its domicile in San Juan, Rizal. vs.
HON. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and JOAQUIN L.
The fourth question asked by the Petitioners is as follows: “Is a chattel mortgage executed by only MISA, respondents.
one of the ‘partners’ of an unregistered commercial partnership valid as to third persons when that
‘partner’ executed the affidavit of good faith in Quezon City before a notary public whose
appointment is only for the City of Manila? If not, may the Court of Appeals refuse to make a VITUG, J.:
finding of fact as to where the deed was executed, despite your Petitioners’ having properly raised
that issue before it and expressly requested a ruling thereon?” The instant petition seeks a review of the decision rendered by the Court of Appeals, dated 26
February 1993, in CA-G.R. SP No. 24638 and No. 24648 affirming in toto that of the Securities and
It is noteworthy that the chattel mortgage in question is in the form required by law, and there is Exchange Commission ("SEC") in SEC AC 254.
therefore the presumption of its due execution which cannot be easily destroyed by the biased
testimony of the one who executed it. The interested version of Da Costa that the affidavit of good The antecedents of the controversy, summarized by respondent Commission and quoted at length
faith appearing in the chattel mortgage was executed in Quezon City before a notary public for and by the appellate court in its decision, are hereunder restated.
in the City of Manila was correctly rejected by the trial court and the Court of Appeals. Indeed,
cumbersome legal formalities are imposed to prevent fraud. As aptly pointed out in El Hogar The law firm of ROSS, LAWRENCE, SELPH and CARRASCOSO was duly registered in the
Filipino vs. Olviga, 60 Phil., 17, “If the biased and interested testimony of a grantor and the vague Mercantile Registry on 4 January 1937 and reconstituted with the Securities and Exchange
and uncertain testimony of his son are deemed sufficient to overcome a public instrument drawn Commission on 4 August 1948. The SEC records show that there were several subsequent
up with all the formalities prescribed by the law then there will have been established a very amendments to the articles of partnership on 18 September 1958, to change the firm [name] to
dangerous doctrine which would throw wide open the doors to fraud.” ROSS, SELPH and CARRASCOSO; on 6 July 1965 . . . to ROSS, SELPH, SALCEDO, DEL
ROSARIO, BITO & MISA; on 18 April 1972 to SALCEDO, DEL ROSARIO, BITO, MISA &
The last question raised by the Petitioners is as follows: “Does only one of several ‘partners’ of an LOZADA; on 4 December 1972 to SALCEDO, DEL ROSARIO, BITO, MISA & LOZADA; on 11
unregistered commercial partnership have authority, by himself alone, to execute a valid chattel March 1977 to DEL ROSARIO, BITO, MISA & LOZADA; on 7 June 1977 to BITO, MISA &
mortgage over property owned by the unregistered commercial partnership in order to guarantee a LOZADA; on 19 December 1980, [Joaquin L. Misa] appellees Jesus B. Bito and Mariano M.
pre-existing overdraft previously granted, without guaranty, by the bank?” Lozada associated themselves together, as senior partners with respondents-appellees Gregorio
F. Ortega, Tomas O. del Castillo, Jr., and Benjamin Bacorro, as junior partners.
In view of the conclusion that Stasikinocey is a de facto partnership, and Da Costa appears as a
co-manager in the letter of Gorcey to the Respondent and in the promissory note executed by Da On February 17, 1988, petitioner-appellant wrote the respondents-appellees a letter stating:
Costa, and that even the partners considered him as such, as stated in the affidavit of April 21,
1948, to the effect that “That we as the majority partners hereby agree to appoint Louis da Costa I am withdrawing and retiring from the firm of Bito, Misa and Lozada, effective at the end of this
co-managing partner of Alan W. Gorcey, duly approved managing partner of the said firm,” the month.
“partner” who executed the chattel mortgage in question must be deemed to be so fully authorized.
Section 6 of the Chattel Mortgage Law provides that when a partnership is a party to the mortgage,
59
"I trust that the accountants will be instructed to make the proper liquidation of my participation in partner can be forced to continue in the partnership against his will. In its decision, dated 17
the firm." January 1990, the SEC held:

On the same day, petitioner-appellant wrote respondents-appellees another letter stating: WHEREFORE, premises considered the appealed order of 31 March 1989 is hereby REVERSED
insofar as it concludes that the partnership of Bito, Misa & Lozada has not been dissolved. The
"Further to my letter to you today, I would like to have a meeting with all of you with regard to the case is hereby REMANDED to the Hearing Officer for determination of the respective rights and
mechanics of liquidation, and more particularly, my interest in the two floors of this building. I would obligations of the parties.2
like to have this resolved soon because it has to do with my own plans."
The parties sought a reconsideration of the above decision. Attorney Misa, in addition, asked for
On 19 February 1988, petitioner-appellant wrote respondents-appellees another letter stating: an appointment of a receiver to take over the assets of the dissolved partnership and to take
charge of the winding up of its affairs. On 4 April 1991, respondent SEC issued an order denying
"The partnership has ceased to be mutually satisfactory because of the working conditions of our reconsideration, as well as rejecting the petition for receivership, and reiterating the remand of the
employees including the assistant attorneys. All my efforts to ameliorate the below subsistence case to the Hearing Officer.
level of the pay scale of our employees have been thwarted by the other partners. Not only have
they refused to give meaningful increases to the employees, even attorneys, are dressed down The parties filed with the appellate court separate appeals (docketed CA-G.R. SP No. 24638 and
publicly in a loud voice in a manner that deprived them of their self-respect. The result of such CA-G.R. SP No. 24648).
policies is the formation of the union, including the assistant attorneys."
During the pendency of the case with the Court of Appeals, Attorney Jesus Bito and Attorney
On 30 June 1988, petitioner filed with this Commission's Securities Investigation and Clearing Mariano Lozada both died on, respectively, 05 September 1991 and 21 December 1991. The
Department (SICD) a petition for dissolution and liquidation of partnership, docketed as SEC Case death of the two partners, as well as the admission of new partners, in the law firm prompted
No. 3384 praying that the Commission: Attorney Misa to renew his application for receivership (in CA G.R. SP No. 24648). He expressed
concern over the need to preserve and care for the partnership assets. The other partners
"1. Decree the formal dissolution and order the immediate liquidation of (the partnership of) Bito, opposed the prayer.
Misa & Lozada;
The Court of Appeals, finding no reversible error on the part of respondent Commission,
"2. Order the respondents to deliver or pay for petitioner's share in the partnership assets plus the AFFIRMED in toto the SEC decision and order appealed from. In fine, the appellate court held, per
profits, rent or interest attributable to the use of his right in the assets of the dissolved partnership; its decision of 26 February 1993, (a) that Atty. Misa's withdrawal from the partnership had changed
the relation of the parties and inevitably caused the dissolution of the partnership; (b) that such
"3. Enjoin respondents from using the firm name of Bito, Misa & Lozada in any of their withdrawal was not in bad faith; (c) that the liquidation should be to the extent of Attorney Misa's
correspondence, checks and pleadings and to pay petitioners damages for the use thereof despite interest or participation in the partnership which could be computed and paid in the manner
the dissolution of the partnership in the amount of at least P50,000.00; stipulated in the partnership agreement; (d) that the case should be remanded to the SEC Hearing
Officer for the corresponding determination of the value of Attorney Misa's share in the partnership
"4. Order respondents jointly and severally to pay petitioner attorney's fees and expense of assets; and (e) that the appointment of a receiver was unnecessary as no sufficient proof had
litigation in such amounts as maybe proven during the trial and which the Commission may deem been shown to indicate that the partnership assets were in any such danger of being lost, removed
just and equitable under the premises but in no case less than ten (10%) per cent of the value of or materially impaired.
the shares of petitioner or P100,000.00;
In this petition for review under Rule 45 of the Rules of Court, petitioners confine themselves to the
"5. Order the respondents to pay petitioner moral damages with the amount of P500,000.00 and following issues:
exemplary damages in the amount of P200,000.00.
1. Whether or not the Court of Appeals has erred in holding that the partnership of Bito, Misa &
"Petitioner likewise prayed for such other and further reliefs that the Commission may deem just Lozada (now Bito, Lozada, Ortega & Castillo) is a partnership at will;
and equitable under the premises."
2. Whether or not the Court of Appeals has erred in holding that the withdrawal of private
On 13 July 1988, respondents-appellees filed their opposition to the petition. respondent dissolved the partnership regardless of his good or bad faith; and

On 13 July 1988, petitioner filed his Reply to the Opposition. 3. Whether or not the Court of Appeals has erred in holding that private respondent's demand for
the dissolution of the partnership so that he can get a physical partition of partnership was not
On 31 March 1989, the hearing officer rendered a decision ruling that: made in bad faith;

"[P]etitioner's withdrawal from the law firm Bito, Misa & Lozada did not dissolve the said law to which matters we shall, accordingly, likewise limit ourselves.
partnership. Accordingly, the petitioner and respondents are hereby enjoined to abide by the
provisions of the Agreement relative to the matter governing the liquidation of the shares of any A partnership that does not fix its term is a partnership at will. That the law firm "Bito, Misa &
retiring or withdrawing partner in the partnership interest."1 Lozada," and now "Bito, Lozada, Ortega and Castillo," is indeed such a partnership need not be
unduly belabored. We quote, with approval, like did the appellate court, the findings and
On appeal, the SEC en banc reversed the decision of the Hearing Officer and held that the disquisition of respondent SEC on this matter; viz:
withdrawal of Attorney Joaquin L. Misa had dissolved the partnership of "Bito, Misa & Lozada." The
Commission ruled that, being a partnership at will, the law firm could be dissolved by any partner The partnership agreement (amended articles of 19 August 1948) does not provide for a specified
at anytime, such as by his withdrawal therefrom, regardless of good faith or bad faith, since no period or undertaking. The "DURATION" clause simply states:
60
 mentioned which shall be paid monthly within the first ten (10) days of every month in installments
"5. DURATION. The partnership shall continue so long as mutually satisfactory and upon the death of not less than P20,000.00 for the Senior Partners, P10,000.00 in the case of two (2) existing
or legal incapacity of one of the partners, shall be continued by the surviving partners." Junior Partners and P5,000.00 in the case of the new Junior Partner. 11

The hearing officer however opined that the partnership is one for a specific undertaking and The term "retirement" must have been used in the articles, as we so hold, in a generic sense to
hence not a partnership at will, citing paragraph 2 of the Amended Articles of Partnership (19 mean the dissociation by a partner, inclusive of resignation or withdrawal, from the partnership that
August 1948): thereby dissolves it.

"2. Purpose. The purpose for which the partnership is formed, is to act as legal adviser and On the third and final issue, we accord due respect to the appellate court and respondent
representative of any individual, firm and corporation engaged in commercial, industrial or other Commission on their common factual finding, i.e., that Attorney Misa did not act in bad faith. Public
lawful businesses and occupations; to counsel and advise such persons and entities with respect respondents viewed his withdrawal to have been spurred by "interpersonal conflict" among the
to their legal and other affairs; and to appear for and represent their principals and client in all partners. It would not be right, we agree, to let any of the partners remain in the partnership under
courts of justice and government departments and offices in the Philippines, and elsewhere when such an atmosphere of animosity; certainly, not against their will. 12 Indeed, for as long as the
legally authorized to do so." reason for withdrawal of a partner is not contrary to the dictates of justice and fairness, nor for the
purpose of unduly visiting harm and damage upon the partnership, bad faith cannot be said to
The "purpose" of the partnership is not the specific undertaking referred to in the law. Otherwise, characterize the act. Bad faith, in the context here used, is no different from its normal concept of a
all partnerships, which necessarily must have a purpose, would all be considered as partnerships conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity.
for a definite undertaking. There would therefore be no need to provide for articles on partnership
at will as none would so exist. Apparently what the law contemplates, is a specific undertaking or WHEREFORE, the decision appealed from is AFFIRMED. No pronouncement on costs.
"project" which has a definite or definable period of completion.3
SO ORDERED.
The birth and life of a partnership at will is predicated on the mutual desire and consent of the
partners. The right to choose with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued existence is, in turn, dependent on the 23. G.R. No. 110782 September 25, 1998
constancy of that mutual resolve, along with each partner's capability to give it, and the absence of
a cause for dissolution provided by the law itself. Verily, any one of the partners may, at his sole IRMA IDOS, petitioner,
pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not vs.
that the attendance of bad faith can prevent the dissolution of the partnership4 but that it can result COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.
in a liability for damages.5

In passing, neither would the presence of a period for its specific duration or the statement of a QUISUMBING, J.:
particular purpose for its creation prevent the dissolution of any partnership by an act or will of a
partner.6 Among partners,7 mutual agency arises and the doctrine of delectus personae allows Before this Court is the petition for review of the Decision of respondent Court of Appeals 1
them to have the power, although not necessarily the right, to dissolve the partnership. An dismissing petitioner's appeal in CA-G.R. CR No. 11960; and affirming her conviction as well as
unjustified dissolution by the partner can subject him to a possible action for damages. the sentence imposed on her by the Regional Trial Court of Malolos, Bulacan, in Criminal Case
No. 1395-M-88 2 as follows:
The dissolution of a partnership is the change in the relation of the parties caused by any partner
ceasing to be associated in the carrying on, as might be distinguished from the winding up of, the WHEREFORE . . . the (c)ourt finds the accused Irma Idos guilty beyond reasonable doubt and is
business.8 Upon its dissolution, the partnership continues and its legal personality is retained until hereby sentenced to suffer the penalty of imprisonment of six (6) months and to pay a fine of
the complete winding up of its business culminating in its termination.9 P135,000.00 and to pay private complainant Eddie Alarilla the amount of the check in question of
P135,000.00 at 12% interest from the time of the filing of the (i)nformation (August 10, 1988) until
The liquidation of the assets of the partnership following its dissolution is governed by various said amount has been fully paid.
provisions of the Civil Code; 10 however, an agreement of the partners, like any other contract, is
binding among them and normally takes precedence to the extent applicable over the Code's Elevated from the Third Division3 of this Court, the case was accepted for resolution en banc on
general provisions. We here take note of paragraph 8 of the "Amendment to Articles of the initial impression that here, a constitutional question might be involved. 4 It was opined that
Partnership" reading thusly: petitioner's sentence, particularly six months' imprisonment, might be in violation of the
constitutional guarantee against imprisonment for non-payment of a debt.5
. . . In the event of the death or retirement of any partner, his interest in the partnership shall be
liquidated and paid in accordance with the existing agreements and his partnership participation A careful consideration of the issues presented in the petition as well as the comments thereon
shall revert to the Senior Partners for allocation as the Senior Partners may determine; provided, and the findings of fact by the courts below in the light of applicable laws and precedents
however, that with respect to the two (2) floors of office condominium which the partnership is now convinces us, however, that the constitutional dimension need not be reached in order to resolve
acquiring, consisting of the 5th and the 6th floors of the Alpap Building, 140 Alfaro Street, Salcedo those issues adequately. For, as herein discussed, the merits of the petition could be determined
Village, Makati, Metro Manila, their true value at the time of such death or retirement shall be without delving into aspects of the cited constitutional guarantee vis-a-vis provisions of the
determined by two (2) independent appraisers, one to be appointed (by the partnership and the Bouncing Checks Law (Batas Pambansa Blg. 22). There being no necessity therefor, we lay aside
other by the) retiring partner or the heirs of a deceased partner, as the case may be. In the event discussions of the constitutional challenge to said law in deciding this petition.
of any disagreement between the said appraisers a third appraiser will be appointed by them
whose decision shall be final. The share of the retiring or deceased partner in the aforementioned
two (2) floor office condominium shall be determined upon the basis of the valuation above
61
The petitioner herein, Irma L. Idos, is a businesswoman engaged in leather tanning. Her accuser as manifested by petitioner in a Motion to Render Judgment based on Compromise Agreement9
for violation of B.P. 22 is her erstwhile supplier and business partner, the complainant below, filed on August 5, 1993. After submission of the Comment10 by the Solicitor General, and the
Eddie Alarilla. Reply11 by petitioner, this case was deemed submitted for decision.

As narrated by the Court of Appeals, the background of this case is as follows: Contending that the Court of Appeals erred in its affirmance of the trial court's decision, petitioner
cites the following reasons to justify the review of her case:
The complainant Eddie Alarilla supplied chemicals and rawhide to the accused-appellant Irma L.
Idos for use in the latter's business of manufacturing leather. In 1985, he joined the accused- 1. The Honorable Court of Appeals has decided against the innocence of the accused based on
appellant's business and formed with her a partnership under the style "Tagumpay Manufacturing," mere probabilities which, on the contrary, should have warranted her acquittal on reasonable
with offices in Bulacan and Cebu City. doubt. Even then, the conclusion of the trial court is contrary to the evidence on record, including
private complainant's judicial admission that there was no consideration for the check.
However, the partnership was short lived. In January, 1986 the parties agreed to terminate their
partnership. Upon liquidation of the business the partnership had as of May 1986 receivables and 2 The Honorable Court of Appeals has confused and merged into one the legal concepts of
stocks worth P1,800,000.00. The complainant's share of the assets was P900,000.00 to pay for dissolution, liquidation and termination of a partnership and on the basis of such misconception of
which the accused-appellant issued the following postdated checks, all drawn against Metrobank the law, disregarded the fact of absence of consideration of the check and convicted the accused.
Branch in Mandaue, Cebu:
3 While this appeal was pending, the parties submitted for the approval of the Honorable Court a
CHECK NO. DATE AMOUNT compromise agreement on the civil liability. The accused humbly submits that this supervening
event, which by its terms puts to rest any doubt the Court of Appeals had entertained against the
1) 103110295 8-15-86 P135,828.87 defense of lack of consideration, should have a legal effect favorable to the accused, considering
that the dishonored check constitutes a private transaction between partners which does not
2) 103110294 P135,828.87 involve the public interest, and considering further that the offense is not one involving moral
turpitude.
3) 103115490 9-30-86 P135,828.87
4 The Honorable Court of Appeals failed to appreciate the fact that the accused had warned
4) 103115491 10-30-86 P126,656.01 private complainant that the check was not sufficiently funded, which should have exonerated the
accused pursuant to the ruling in the recent case of Magno vs. Court of Appeals, 210 SCRA 471,
The complainant was able to encash the first, second, and fourth checks, but the third check (Exh. which calls for a more flexible and less rigid application of the Bouncing Checks law.12
A) which is the subject of this case, was dishonored on October 14, 1986 for insufficiency of funds.
The complainant demanded payment from the accused-appellant but the latter failed to pay. For a thorough consideration of the merits of petitioner's appeal, we find pertinent and decisive the
Accordingly, on December 18, 1986, through counsel, he made a formal demand for payment. following issues:
(Exh. B) In a letter dated January 2, 1987, the accused-appellant denied liability. She claimed that
the check had been given upon demand of complainant in May 1986 only as "assurance" of his 1. Whether respondent court erred in holding that the subject check was issued by petitioner to
share in the assets of the partnership and that it was not supposed to be deposited until the stocks apply on account or for value, that is, as part of the consideration of a "buy-out" of said
had been sold. complainant's interest in the partnership, and not merely as a commitment on petitioner's part to
return the investment share of complainant, along with any profit pertaining to said share, in the
Complainant then filed his complaint in the Office of the Provincial Fiscal of Bulacan which on partnership.
August 22, 1988 filed an information for violation of BP Blg. 22 against accused-appellant.
2. Whether the respondent court erred in concluding that petitioner issued the subject check
Complainant danied that the checks issued to him by accused-appellant were subject to the knowing at the time of issue that she did not have sufficient funds in or credit with the drawee bank
disposition of the stocks and the collection of receivables of the business. But the accused- and without communicating this fact of insufficiency of funds to the complainant.
appellant insisted that the complainant had known that the checks were to be funded from the
proceeds of the sale of the stocks and the collection of receivables. She claimed that the Both inquiries boil down into one ultimate issue: Did the respondent court err in affirming the trial
complainant himself asked for the checks because he did not want to continue in the tannery court's judgment that she violated Batas Pambansa Blg. 22?
business and had no use for a share of the stocks. (TSN, p. 7, April 14, 1991; id., pp. 8-9, Nov. 13,
1989; id., pp. 12, 16, 20, Feb. 14, 1990; id, p. 14, June 4, 1990). Considering that penal statutes are strictly construed against the state and liberally in favor of the
accused, it bears stressing that for an act to be punishable under the B.P. 22, it "must come clearly
On February 15, 1992, the trial court rendered judgment finding the accused-appellant guilty of the within both the spirit and the letter of the statue. 13 Otherwise, the act has to be declared outside
crime charged. The accused-appellant's motion for annulment of the decision and for the law's ambit and a plea of innocence by the accused must be sustained.
reconsideration was denied by the trial court in its order dated April 12, 1991.6
The relevant provisions of B.P. 22 state that:
Herein respondent court thereafter affirmed on appeal the decision of the trial court. Petitioner
timely moved for a reconsideration, but this was subsequently denied by respondent court in its Sec. 1. Checks without sufficient funds. — Any person who makes or draws and issues any check
Resolution7 dated June 11, 1993. Petitioner has now appealed to us by way of a petition for to apply on account or for value, knowing at the time of issue that he does not have sufficient funds
certiorari under Rule 45 of the Rules of Court. in or credit with the drawee bank for the payment of such check in full upon its presentment, which
check is subsequently dishonored by the drawee bank for insufficiency of funds or credit or would
During the pendency of this petition, this Court by a resolutions8 dated August 30, 1993, took note have been dishonored for the same reason had not the drawer, without any valid reason, ordered
of the compromise agreement executed between the parties, regarding the civil aspect of the case, the bank to stop payment, shall be punished by imprisonment of not less than thirty days but not
62
more than one (1) year or by a fine of not less than but not more than double the amount of the
check which fine shall in no case exceed Two hundred thousand pesos, or both such fine and (2) Winding Up Defined
imprisonment at the discretion of the court.
Winding up is the process of settling business affairs of dissolution.
The same penalty shall be imposed upon any person who having sufficient funds in or credit with
the drawee bank when he makes or draws and issues a check, shall fail to keep sufficient funds or (NOTE: Examples of winding up: the paying of previous obligations; the collecting of assets
to maintain a credit or to cover the full amount of the check if presented within a period of ninety previously demandable; even new business if needed to wind up, as the contracting with a
(90) days from the date appearing thereon, for which reason it is dishonored by the drawee bank. demolition company for the demolition of the garage used in a "used car" partnership.)

Where the check is drawn by a corporation, company or entity, the person or persons who actually (3) Termination Defined
signed the check in behalf of such drawer shall be liable under this Act.
Termination is the point in time after all the partnership affairs have been wound up. 16 [Citation
Sec. 2. Evidence of knowledge of insufficient funds. — The making, drawing and issuance of a omitted] (Emphasis supplied).
check payment of which is refused by the drawee because of insufficient funds in or credit with
such bank, when presented within ninety (90) days from the date of the check, shall be prima facie These final stages in the life of a partnership are recognized under the Civil Code that explicitly
evidence of knowledge of such insufficiency of funds or credit unless such maker or drawer pays declares that upon dissolution, the partnership is not terminated, to wit:
the holder thereof the amount due thereon or makes arrangements for payment in full by the
drawee of such check within five (5) banking days after receiving notice that such check has not Art 1828. The dissolution of a partnership is the change in the relation of the partners caused by
been paid by the drawee. (Emphasis supplied) any partner ceasing to be associated in the carrying on as distinguished from the winding up of the
business.
As decided by this Court, the elements of the offense penalized under B.P. 22, are as follows: "(1)
the making, drawing and issuance of any check to apply to account or for value; (2) the knowledge Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of
of the maker, drawer or issuer that at the time of issue he does not have sufficient funds in or partnership affairs is completed. (Emphasis supplied.)
credit with the drawee bank for the payment of such check in full upon its presentment; and (3)
subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or The best evidence of the existence of the partnership, which was not yet terminated (though in the
dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to winding up stage), were the unsold goods and uncollected receivables, which were presented to
stop payment. 14 the trial court. Since the partnership has not been terminated, the petitioner and private
complainant remained as co-partners. The check was thus issued by the petitioner to complainant,
In the present case, with regard to the first issue, evidence on record would show that the subject as would a partner to another, and not as payment from a debtor to a creditor.
check was to be funded from receivables to be collected and goods to be sold by the partnership,
and only when such collection and sale were realized. 15 Thus, there is sufficient basis for the The more tenable view, one in favor of the accused, is that the check was issued merely to
assertion that the petitioner issued the subject check (Metrobank Check No. 103115490 dated evidence the complainant's share in the partnership property, or to assure the latter that he would
October 30, 1986, in the amount of P135,828.87) to evidence only complainant's share or interest receive in time his due share therein. The alternative view that the check was in consideration of a
in the partnership, or at best, to show her commitment that when receivables are collected and "buy out" is but a theory, favorable to the complainant, but lacking support in the record; and must
goods are sold, she would give to private complainant the net amount due him representing his necessarily be discarded.
interest in the partnership. It did not involve a debt of or any account due and payable by the
petitioner. For there is nothing on record which even slightly suggest that petitioner ever became interested in
acquiring, much less keeping, the shares of the complainant. What is very clear therefrom is that
Two facts stand out. Firstly, three of four checks were properly encashed by complainant; only one the petitioner exerted her best efforts to sell the remaining goods and to collect the receivables of
(the third) was not. But eventually even this one was redeemed by petitioner. Secondly, even the partnership, in order to come up with the amount necessary to satisfy the value of
private complainant admitted that there was no consideration whatsoever for the issuance of the complainant's interest in the partnership at the dissolution thereof. To go by accepted custom of
check, whose funding was dependent on future sales of goods and receipts of payment of account the trade, we are more inclined to the view that the subject check was issued merely to evidence
receivables. complainant's interest in the partnership. Thus, we are persuaded that the check was not intended
to apply on account or for value; rather it should be deemed as having been drawn without
Now, it could not be denied that though the parties — petitioner and complainant — had agreed to consideration at the time of issue.
dissolve the partnership, such ageement did not automatically put an end to the partnership, since
they still had to sell the goods on hand and collect the receivables from debtors. In short, they Absent the first element of the offense penalized under B.P. 22, which is "the making, drawing and
were still in the process of "winding up" the affairs of the partnership, when the check in question issuance of any check to apply on account or for value", petitioner's issuance of the subject check
was issued. was not an act contemplated in nor made punishable by said statute.

Under the Civil Code, the three final stages of a partnership are (1) dissolution; (2) winding-up; and As to the second issue, the Solicitor General contends that under the Bouncing Checks Law, the
(3) termination. These stages are distinguished, to wit: elements of deceit and damage are not essential or required to constitute a violation thereof. In his
view, the only essential element is the knowledge on the part of the maker or drawer of the check
(1) Dissolution Defined of the insufficiency of his/her funds at the time of the issuance of said check.

Dissolution is the change in the relation of the partners caused by any partner ceasing to be The Bouncing Checks Law makes the mere act of issuing a bad or worthless check a special
associated in the carrying on of the business (Art. 1828). It is that point of time the time the offense punishable by law. "Malice or intent in issuing the worthless check is immaterial, the
partners cease to carry on the business tonether. (Citation omitted). offense being malum
63
prohibitum," 17 so goes the argument for the public respondents. the checks would be encashed. As it turned out, three were fully funded when presented to the
bank; the remaining one was settled only later on.
But of course this could not be an absolute proposition without descending to absurdity. For if a
check were issued by a kidnap victim to a kidnapper for ransom, it would be absurd to hold the Since petitioner issued these four checks without actual knowledge of the insufficiency of funds,
drawer liable under B.P. 22, if the check is dishonored and unpaid. That would go against public she could not be held liable under B.P. 22 when one was not honored right away. For it is basic
policy and common sense. doctrine that penal statutes such as B.P. 22 "must be construed with such strictness as to carefully
safeguard the rights of the defendant . . ."24 The element of knowledge of insufficiency of funds
Public respondents further contend that "since petitioner issued the check in favor of complainant. has to be proved by the prosecution; absent said proof, petitioner could not be held criminally
Alarilla and when notified that it was returned for insufficiency of funds, failed to make good the liable under that law. Moreover, the presumption of prima facie knowledge of such insufficiency in
check, then petitioner is liable for violation of B.P. 22.18 Again, this matter could not be all that this case was actually rebutted by petitioner's evidence.
simple. For while "the maker's knowledge of the insufficiency of funds is legally presumed from the
dishonor of his checks for insufficiency of funds,19 this presumption is rebuttable. Further, we find that the prosecution also failed to prove adequate notice of dishonor of the subject
check on petitioner's part, thus precluding any finding of prima facie evidence of knowledge of
In the instant case, there is only a prima facie presumption which did not preclude the presentation insufficiency of funds. There is no proof that notice of dishonor was actually sent by the
of contrary evidence.20 In fact, such contrary evidence on two points could be gleaned from the complainant or by the drawee bank to the petitioner. On this point, the record is bereft of evidence
record concerning (1) lack of actual knowledge of insufficiency of funds; and (2) lack of adequate to the contrary.
notice of dishonor.
But in fact, while the subject check initially bounced, it was later made good by petitioner. In
Noteworthy for the defense, knowledge of insufficiency of funds or credit in the drawee bank for addition, the terms of the parties' compromise agreement, entered into during the pendency of this
the payment of a check upon its presentment is an essential element of the offense.21 It must be case, effectively invalidates the allegation of failure to pay or to make arrangement for the payment
proved, particularly where the prima facie presumption of the existence of this element has been of the check in full. Verily, said compromise agreement constitutes an arrangement for the
rebutted. The prima facie presumption arising from the fact of drawing, issuing or making a check, payment in full of the subject check.
the payment of which was subsequently refused for insufficiency of funds is, moreover, not
sufficient proof of guilt by the issuer. The absence of notice of dishonor is crucial in the present case. As held by this Court in prior
cases:
In the case of Nieva v. Court of Appeals,22 it was held that the subsequent dishonor of the subject
check issued by accused merely engendered the prima facie presumption that she knew of the Because no notice of dishonor was actually sent to and received by the petitioner, the prima facie
insufficiency of funds, but did not render the accused automatically guilty under B.P. 22.23 presumption that she knew about the insufficiency of funds cannot apply. Section 2 of B.P. 22
clearly provides that this presumption arises not from the mere fact of drawing, making and issuing
The prosecution has a duty to prove all the elements of the crime, including the acts that give rise a bum check; there must also be a showing that, within five banking days from receipt of the notice
to the prima facie presumption; petitioner, on the other hand, has a right to rebut the prima facie of dishonor, such maker or drawer failed to pay the holder of the check the amount due thereon or
presumption. Therefore, if such knowledge of insufficiency of funds is proven to be actually absent to make arrangement for its payment in full by the drawee of such check. 25 [Emphasis supplied.]
or non-existent, the accused should not be held liable for the offense defined under the first
paragraph of Section 1 of B.P. 22. Although the offense charged is a malum prohibitum, the The absence of a notice of dishonor necessarily deprives an accused an opportunity to preclude a
prosecution is not thereby excused from its responsibility of proving beyond reasonable doubt all criminal prosecution. Accordingly, procedural due process clearly enjoins that a notice of dishonor
the elements of the offense, one of which is knowledge of the insufficiency of funds. be actually served on petitioner. Petitioner has a right to demand — and the basic postulates of
fairness require — that the notice of dishonor be actually sent to and received by her to afford her
Sec. 1 of B.P. 22 specifically requires that the person in making, drawing or issuing the check, be the opportunity to avert prosecution under
shown that he knows at the time of issue, that he does not have sufficient funds in or credit with B.P. 26
the drawee bank for the payment of such check in full upon its presentment.
Further, what militates strongly against public respondents' stand is the fact that petitioner
In the case at bar, as earlier discussed, petitioner issued the check merely to evidence the repeatedly notified the complainant of the insufficiency of funds. Instructive is the following
proportionate share of complainant in the partnership assets upon its dissolution. Payment of that pronouncement of this Court in Magno v. Court of Appeals:
share in the partnership was conditioned on the subsequent realization of profits from the unsold
goods and collection of the receivables of the firm. This condition must be satisfied or complied Furthermore, the element of "knowing at the time of issue that he does not have sufficient funds in
with before the complainant can actually "encash" the check. The reason for the condition is that or credit with the drawee bank for the payment of such check in full upon its presentment, which
petitioner has no independent means to satisfy or discharge the complainant's share, other than by check is subsequently dishonored by the drawee bank for insufficiency of funds or credit or would
the future sale and collection of the partnership assets. Thus, prior to the selling of the goods and have been dishonored for the same reason . . ." is inversely applied in this case. From the very
collecting of the receivables, the complainant could not, as of yet, demand his proportionate share beginning. petitioner never hid the fact that he did not have the funds with which to put up the
in the business. This situation would hold true until after the winding up, and subsequent warranty deposit and as a matter of fact, he openly intimated this to the vital conduit of the
termination of the partnership. For only then, when the goods were already sold and receivables transaction, Joey Gomez, to whom petitioner was introduced by Mrs. Teng. It would have been
paid that cash money could be availed of by the erstwhile partners. different if this predicament was not communicated to all the parties he dealt with regarding the
lease agreement the financing or which was covered by L.S. Finance Management. " 27
Complainant did not present any evidence that petitioner signed and issued four checks actually
knowing that funds therefor would be insufficient at the time complainant would present them to In the instant case, petitioner intimated to private complainant the possibility that funds might be
the drawee bank. For it was uncertain at the time of issuance of the checks whether the unsold insufficient to cover the subject check, due to the fact that the partnership's goods were yet to be
goods would have been sold, or whether the receivables would have been collected by the time sold and receivables yet to be collected.

64
As Magno had well observed:
Petitioner Emilio Emnace, Vicente Tabanao and Jacinto Divinagracia were partners in a business
For all intents and purposes, the law was devised to safeguard the interest of the banking system concern known as Ma. Nelma Fishing Industry. Sometime in January of 1986, they decided to
and the legitimate public checking account user. It did not intend to shelter or favor nor encourage dissolve their partnership and executed an agreement of partition and distribution of the
users of the system to enrich themselves through manipulations and circumvention of the noble partnership properties among them, consequent to Jacinto Divinagracia's withdrawal from the
purpose and objective of the law. Least should it be used also as a means of jeopardizing honest- partnership.1 Among the assets to be distributed were five (5) fishing boats, six (6) vehicles, two
to-goodness transactions with some color of "get-rich" scheme to the prejudice of well-meaning (2) parcels of land located at Sto. Niño and Talisay, Negros Occidental, and cash deposits in the
businessmen who are the pillars of society. local branches of the Bank of the Philippine Islands and Prudential Bank.

xxx xxx xxx Throughout the existence of the partnership, and even after Vicente Tabanao's untimely demise in
1994, petitioner failed to submit to Tabanao's heirs any statement of assets and liabilities of the
Thus, it behooves upon a court of law that in applying the punishment imposed upon the accused, partnership, and to render an accounting of the partnership's finances. Petitioner also reneged on
the objective of retribution of a wronged society, should be directed against the "actual and his promise to turn over to Tabanao's heirs the deceased's 1/3 share in the total assets of the
potential wrongdoers". In the instant case, there is no doubt that petitioner's four (4) checks were partnership, amounting to P30,000,000.00, or the sum of P10,000,000.00, despite formal demand
used to collateralize an accommodation, and not to cover the receipt of an actual "account or credit for payment thereof.2
for value" as this was absent, and therefore petitioner should not be punished for mere issuance of
the checks in question. Following the aforecited theory, in petitioner's stead the "potential Consequently, Tabanao' s heirs, respondents herein, filed against petitioner an action for
wrongdoer," whose operation could be a menace to society, should not be glorified by convicting accounting, payment of shares, division of assets and damages.3 In their complaint, respondents
the petitioner. 28 prayed as follows:

Under the circumstances obtaining in this case, we find the petitioner to have issued the check in 1. Defendant be ordered to render the proper accounting of all the assets and liabilities of the
good faith, with every intention of abiding by her commitment to return, as soon as able, the partnership at bar; and
investments of complainant in the partnership. Evidently, petitioner issued the check with benign
considerations in mind, and not for the purpose of committing fraud, deceit, or violating public 2. After due notice and hearing defendant be ordered to pay/remit/deliver/surrender/yield to the
policy. plaintiffs the following:

To recapitulate, we find the petition impressed with merit. Petitioner may not be held liable for A. No less than One Third (1/3) of the assets, properties, dividends, cash, land(s), fishing vessels,
violation of B.P. 22 for the following reasons: (1) the subject check was not made, drawn and trucks, motor vehicles, and other forms and substance of treasures which belong and/or should
issued by petitioner in exchange for value received as to qualify it as a check on account or for belong, had accrued and/or must accrue to the partnership;
value; (2) there is no sufficient basis to conclude that petitioner, at the time of issue of the check,
had actual knowledge of the insufficiency of funds; and (3) there was no notice of dishonor of said B. No less than Two Hundred Thousand Pesos (P200,000.00) as moral damages;
check actually served on petitioner, thereby depriving her of the opportunity to pay or make
arrangements for the payment of the check, to avoid criminal prosecution. C. Attorney's fees equivalent to Thirty Percent (30%) of the entire share/amount/award which the
Honorable Court may resolve the plaintiffs as entitled to plus P1,000.00 for every appearance in
Having resolved the foregoing principal issues, and finding the petition meritorious, we no longer court.4
need to pass upon the validity and legality or necessity of the purported compromise agreement on
civil liability between the petitioner and the complainant. Petitioner filed a motion to dismiss the complaint on the grounds of improper venue, lack of
jurisdiction over the nature of the action or suit, and lack of capacity of the estate of Tabanao to
WHEREFORE, the instant petition is hereby GRANTED AND THE PETITIONER ACQUITTED. sue.5 On August 30, 1994, the trial court denied the motion to dismiss. It held that venue was
The Decision of the respondent Court of Appeals in CA-G.R. CR No. 11960 is hereby REVERSED properly laid because, while realties were involved, the action was directed against a particular
and the Decision of Regional Trial Court in Criminal Case No. 1395-M-88 is hereby SET ASIDE. person on the basis of his personal liability; hence, the action is not only a personal action but also
an action in personam. As regards petitioner's argument of lack of jurisdiction over the action
NO COSTS. because the prescribed docket fee was not paid considering the huge amount involved in the
claim, the trial court noted that a request for accounting was made in order that the exact value of
SO ORDERED. the partnership may be ascertained and, thus, the correct docket fee may be paid. Finally, the trial
court held that the heirs of Tabanao had aright to sue in their own names, in view of the provision
of Article 777 of the Civil Code, which states that the rights to the succession are transmitted from
B. Effects of Dissolution (Articles 1832-1842) the moment of the death of the decedent.6

24. G.R. No. 126334 November 23, 2001 The following day, respondents filed an amended complaint,7 incorporating the additional prayer
that petitioner be ordered to "sell all (the partnership's) assets and thereafter
EMILIO EMNACE, petitioner, pay/remit/deliver/surrender/yield to the plaintiffs" their corresponding share in the proceeds thereof.
vs. In due time, petitioner filed a manifestation and motion to dismiss,8 arguing that the trial court did
COURT OF APPEALS, ESTATE OF VICENTE TABANAO, SHERWIN TABANAO, VICENTE not acquire jurisdiction over the case due to the plaintiffs' failure to pay the proper docket fees.
WILLIAM TABANAO, JANETTE TABANAO DEPOSOY, VICENTA MAY TABANAO VARELA, Further, in a supplement to his motion to dismiss,9 petitioner also raised prescription as an
ROSELA TABANAO and VINCENT TABANAO, respondents. additional ground warranting the outright dismissal of the complaint.

YNARES-SANTIAGO, J.:
65
On June 15, 1995, the trial court issued an Order,10 denying the motion to dismiss inasmuch as amount of docket and other fees.14 It is thus imperative for respondents to pay the corresponding
the grounds raised therein were basically the same as the earlier motion to dismiss which has docket fees in order that the trial court may acquire jurisdiction over the action.15
been denied. Anent the issue of prescription, the trial court ruled that prescription begins to run
only upon the dissolution of the partnership when the final accounting is done. Hence, prescription Nevertheless, unlike in the case of Manchester Development Corp. v. Court of Appeals,16 where
has not set in the absence of a final accounting. Moreover, an action based on a written contract there was clearly an effort to defraud the government in avoiding to pay the correct docket fees,
prescribes in ten years from the time the right of action accrues. we see no attempt to cheat the courts on the part of respondents. In fact, the lower courts have
noted their expressed desire to remit to the court "any payable balance or lien on whatever award
Petitioner filed a petition for certiorari before the Court of Appeals,11 raising the following issues: which the Honorable Court may grant them in this case should there be any deficiency in the
payment of the docket fees to be computed by the Clerk of Court."17 There is evident willingness
I. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion to pay, and the fact that the docket fee paid so far is inadequate is not an indication that they are
in taking cognizance of a case despite the failure to pay the required docket fee; trying to avoid paying the required amount, but may simply be due to an inability to pay at the time
of filing. This consideration may have moved the trial court and the Court of Appeals to declare
II. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion that the unpaid docket fees shall be considered a lien on the judgment award.
in insisting to try the case which involve (sic) a parcel of land situated outside of its territorial
jurisdiction; Petitioner, however, argues that the trial court and the Court of Appeals erred in condoning the
non-payment of the proper legal fees and in allowing the same to become a lien on the monetary
III. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion or property judgment that may be rendered in favor of respondents. There is merit in petitioner's
in allowing the estate of the deceased to appear as party plaintiff, when there is no intestate case assertion. The third paragraph of Section 16, Rule 141 of the Rules of Court states that:
and filed by one who was never appointed by the court as administratrix of the estates; and
The legal fees shall be a lien on the monetary or property judgment in favor of the pauper-litigant.
IV. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion
in not dismissing the case on the ground of prescription. Respondents cannot invoke the above provision in their favor because it specifically applies to
pauper-litigants. Nowhere in the records does it appear that respondents are litigating as paupers,
On August 8, 1996, the Court of Appeals rendered the assailed decision,12 dismissing the petition and as such are exempted from the payment of court fees.18
for certiorari, upon a finding that no grave abuse of discretion amounting to lack or excess of
jurisdiction was committed by the trial court in issuing the questioned orders denying petitioner's The rule applicable to the case at bar is Section 5(a) of Rule 141 of the Rules of Court, which
motions to dismiss. defines the two kinds of claims as: (1) those which are immediately ascertainable; and (2) those
which cannot be immediately ascertained as to the exact amount. This second class of claims,
Not satisfied, petitioner filed the instant petition for review, raising the same issues resolved by the where the exact amount still has to be finally determined by the courts based on evidence
Court of Appeals, namely: presented, falls squarely under the third paragraph of said Section 5(a), which provides:

I. Failure to pay the proper docket fee; In case the value of the property or estate or the sum claimed is less or more in accordance with
the appraisal of the court, the difference of fee shall be refunded or paid as the case may be.
II. Parcel of land subject of the case pending before the trial court is outside the said court's (Underscoring ours)
territorial jurisdiction;
In Pilipinas Shell Petroleum Corporation v. Court of Appeals,19 this Court pronounced that the
III. Lack of capacity to sue on the part of plaintiff heirs of Vicente Tabanao; and above-quoted provision "clearly contemplates an Initial payment of the filing fees corresponding to
the estimated amount of the claim subject to adjustment as to what later may be proved."20
IV. Prescription of the plaintiff heirs' cause of action. Moreover, we reiterated therein the principle that the payment of filing fees cannot be made
contingent or dependent on the result of the case. Thus, an initial payment of the docket fees
It can be readily seen that respondents' primary and ultimate objective in instituting the action based on an estimated amount must be paid simultaneous with the filing of the complaint.
below was to recover the decedent's 1/3 share in the partnership' s assets. While they ask for an Otherwise, the court would stand to lose the filing fees should the judgment later turn out to be
accounting of the partnership' s assets and finances, what they are actually asking is for the trial adverse to any claim of the respondent heirs.
court to compel petitioner to pay and turn over their share, or the equivalent value thereof, from the
proceeds of the sale of the partnership assets. They also assert that until and unless a proper The matter of payment of docket fees is not a mere triviality. These fees are necessary to defray
accounting is done, the exact value of the partnership' s assets, as well as their corresponding court expenses in the handling of cases. Consequently, in order to avoid tremendous losses to the
share therein, cannot be ascertained. Consequently, they feel justified in not having paid the judiciary, and to the government as well, the payment of docket fees cannot be made dependent
commensurate docket fee as required by the Rules of Court.1âwphi1.nêt on the outcome of the case, except when the claimant is a pauper-litigant.

We do not agree. The trial court does not have to employ guesswork in ascertaining the estimated Applied to the instant case, respondents have a specific claim - 1/3 of the value of all the
value of the partnership's assets, for respondents themselves voluntarily pegged the worth thereof partnership assets - but they did not allege a specific amount. They did, however, estimate the
at Thirty Million Pesos (P30,000,000.00). Hence, this case is one which is really not beyond partnership's total assets to be worth Thirty Million Pesos (P30,000,000.00), in a letter21
pecuniary estimation, but rather partakes of the nature of a simple collection case where the value addressed to petitioner. Respondents cannot now say that they are unable to make an estimate,
of the subject assets or amount demanded is pecuniarily determinable.13 While it is true that the for the said letter and the admissions therein form part of the records of this case. They cannot
exact value of the partnership's total assets cannot be shown with certainty at the time of filing, avoid paying the initial docket fees by conveniently omitting the said amount in their amended
respondents can and must ascertain, through informed and practical estimation, the amount they complaint. This estimate can be made the basis for the initial docket fees that respondents should
expect to collect from the partnership, particularly from petitioner, in order to determine the proper pay. Even if it were later established that the amount proved was less or more than the amount
alleged or estimated, Rule 141, Section 5(a) of the Rules of Court specifically provides that the
66
court may refund the 'excess or exact additional fees should the initial payment be insufficient. It is that the parcels of land involved in this case are being disputed. In fact, it is only incidental that
clear that it is only the difference between the amount finally awarded and the fees paid upon filing part of the assets of the partnership under liquidation happen to be parcels of land.
of this complaint that is subject to adjustment and which may be subjected to alien.
The time-tested case of Claridades v. Mercader, et al.,28 settled this issue thus:
In the oft-quoted case of Sun Insurance Office, Ltd. v. Hon. Maximiano Asuncion,22 this Court held
that when the specific claim "has been left for the determination by the court, the additional filing The fact that plaintiff prays for the sale of the assets of the partnership, including the fishpond in
fee therefor shall constitute a lien on the judgment and it shall be the responsibility of the Clerk of question, did not change the nature or character of the action, such sale being merely a necessary
Court or his duly authorized deputy to enforce said lien and assess and collect the additional fee." incident of the liquidation of the partnership, which should precede and/or is part of its process of
Clearly, the rules and jurisprudence contemplate the initial payment of filing and docket fees based dissolution.
on the estimated claims of the plaintiff, and it is only when there is a deficiency that a lien may be
constituted on the judgment award until such additional fee is collected. The action filed by respondents not only seeks redress against petitioner. It also seeks the
enforcement of, and petitioner's compliance with, the contract that the partners executed to
Based on the foregoing, the trial court erred in not dismissing the complaint outright despite their formalize the partnership's dissolution, as well as to implement the liquidation and partition of the
failure to pay the proper docket fees. Nevertheless, as in other procedural rules, it may be liberally partnership's assets. Clearly, it is a personal action that, in effect, claims a debt from petitioner and
construed in certain cases if only to secure a just and speedy disposition of an action. While the seeks the performance of a personal duty on his part.29 In fine, respondents' complaint seeking
rule is that the payment of the docket fee in the proper amount should be adhered to, there are the liquidation and partition of the assets of the partnership with damages is a personal action
certain exceptions which must be strictly construed.23 which may be filed in the proper court where any of the parties reside.30 Besides, venue has
nothing to do with jurisdiction for venue touches more upon the substance or merits of the case.31
In recent rulings, this Court has relaxed the strict adherence to the Manchester doctrine, allowing As it is, venue in this case was properly laid and the trial court correctly ruled so.
the plaintiff to pay the proper docket fees within a reasonable time before the expiration of the
applicable prescriptive or reglementary period.24 On the third issue, petitioner asserts that the surviving spouse of Vicente Tabanao has no legal
capacity to sue since she was never appointed as administratrix or executrix of his estate.
In the recent case of National Steel Corp. v. Court of Appeals,25 this Court held that: Petitioner's objection in this regard is misplaced. The surviving spouse does not need to be
appointed as executrix or administratrix of the estate before she can file the action. She and her
The court acquires jurisdiction over the action if the filing of the initiatory pleading is accompanied children are complainants in their own right as successors of Vicente Tabanao. From the very
by the payment of the requisite fees, or, if the fees are not paid at the time of the filing of the moment of Vicente Tabanao' s death, his rights insofar as the partnership was concerned were
pleading, as of the time of full payment of the fees within such reasonable time as the court may transmitted to his heirs, for rights to the succession are transmitted from the moment of death of
grant, unless, of course, prescription has set in the meantime. the decedent.32

It does not follow, however, that the trial court should have dismissed the complaint for failure of Whatever claims and rights Vicente Tabanao had against the partnership and petitioner were
private respondent to pay the correct amount of docket fees. Although the payment of the proper transmitted to respondents by operation of law, more particularly by succession, which is a mode
docket fees is a jurisdictional requirement, the trial court may allow the plaintiff in an action to pay of acquisition by virtue of which the property, rights and obligations to the extent of the value of the
the same within a reasonable time before the expiration of the applicable prescriptive or inheritance of a person are transmitted.33 Moreover, respondents became owners of their
reglementary period. If the plaintiff fails to comply within this requirement, the defendant should respective hereditary shares from the moment Vicente Tabanao died.34
timely raise the issue of jurisdiction or else he would be considered in estoppel. In the latter case,
the balance between the appropriate docket fees and the amount actually paid by the plaintiff will A prior settlement of the estate, or even the appointment of Salvacion Tabanao as executrix or
be considered a lien or any award he may obtain in his favor. (Underscoring ours) administratrix, is not necessary for any of the heirs to acquire legal capacity to sue. As successors
who stepped into the shoes of their decedent upon his death, they can commence any action
Accordingly, the trial court in the case at bar should determine the proper docket fee based on the originally pertaining to the decedent.35 From the moment of his death, his rights as a partner and
estimated amount that respondents seek to collect from petitioner, and direct them to pay the to demand fulfillment of petitioner's obligations as outlined in their dissolution agreement were
same within a reasonable time, provided the applicable prescriptive or reglementary period has not transmitted to respondents. They, therefore, had the capacity to sue and seek the court's
yet expired, Failure to comply therewith, and upon motion by petitioner, the immediate dismissal of intervention to compel petitioner to fulfill his obligations.
the complaint shall issue on jurisdictional grounds.
Finally, petitioner contends that the trial court should have dismissed the complaint on the ground
On the matter of improper venue, we find no error on the part of the trial court and the Court of of prescription, arguing that respondents' action prescribed four (4) years after it accrued in 1986.
Appeals in holding that the case below is a personal action which, under the Rules, may be The trial court and the Court of Appeals gave scant consideration to petitioner's hollow arguments,
commenced and tried where the defendant resides or may be found, or where the plaintiffs reside, and rightly so.
at the election of the latter.26
The three (3) final stages of a partnership are: (1) dissolution; (2) winding-up; and (3)
Petitioner, however, insists that venue was improperly laid since the action is a real action termination.36 The partnership, although dissolved, continues to exist and its legal personality is
involving a parcel of land that is located outside the territorial jurisdiction of the court a quo. This retained, at which time it completes the winding up of its affairs, including the partitioning and
contention is not well-taken. The records indubitably show that respondents are asking that the distribution of the net partnership assets to the partners.37 For as long as the partnership exists,
assets of the partnership be accounted for, sold and distributed according to the agreement of the any of the partners may demand an accounting of the partnership's business. Prescription of the
partners. The fact that two of the assets of the partnership are parcels of land does not materially said right starts to run only upon the dissolution of the partnership when the final accounting is
change the nature of the action. It is an action in personam because it is an action against a done.38
person, namely, petitioner, on the basis of his personal liability. It is not an action in rem where the
action is against the thing itself instead of against the person.27 Furthermore, there is no showing

67
Contrary to petitioner's protestations that respondents' right to inquire into the business affairs of the partners that the balance would be paid when the firm shall have secured additional operating
the partnership accrued in 1986, prescribing four (4) years thereafter, prescription had not even funds from abroad. Benjamin Yu actually managed the operations and finances of the business; he
begun to run in the absence of a final accounting. Article 1842 of the Civil Code provides: had overall supervision of the workers at the marble quarry in Bulacan and took charge of the
preparation of papers relating to the exportation of the firm's products.
The right to an account of his interest shall accrue to any partner, or his legal representative as
against the winding up partners or the surviving partners or the person or partnership continuing Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and
the business, at the date of dissolution, in the absence of any agreement to the contrary. Rhodora Bendal sold and transferred their interests in the partnership to private respondent Willy
Co and to one Emmanuel Zapanta. Mr. Yu Chang, a limited partner, also sold and transferred his
Applied in relation to Articles 1807 and 1809, which also deal with the duty to account, the above- interest in the partnership to Willy Co. Between Mr. Emmanuel Zapanta and himself, private
cited provision states that the right to demand an accounting accrues at the date of dissolution in respondent Willy Co acquired the great bulk of the partnership interest. The partnership now
the absence of any agreement to the contrary. When a final accounting is made, it is only then that constituted solely by Willy Co and Emmanuel Zapanta continued to use the old firm name of Jade
prescription begins to run. In the case at bar, no final accounting has been made, and that is Mountain, though they moved the firm's main office from Makati to Mandaluyong, Metropolitan
precisely what respondents are seeking in their action before the trial court, since petitioner has Manila. A Supplement to the Memorandum Agreement relating to the operation of the marble
failed or refused to render an accounting of the partnership's business and assets. Hence, the said quarry was entered into with the Cruz spouses in February of 1988.2 The actual operations of the
action is not barred by prescription. business enterprise continued as before. All the employees of the partnership continued working in
the business, all, save petitioner Benjamin Yu as it turned out.
In fine, the trial court neither erred nor abused its discretion when it denied petitioner's motions to
dismiss. Likewise, the Court of Appeals did not commit reversible error in upholding the trial court's On 16 November 1987, having learned of the transfer of the firm's main office from Makati to
orders. Precious time has been lost just to settle this preliminary issue, with petitioner resurrecting Mandaluyong, petitioner Benjamin Yu reported to the Mandaluyong office for work and there met
the very same arguments from the trial court all the way up to the Supreme Court. The litigation of private respondent Willy Co for the first time. Petitioner was informed by Willy Co that the latter had
the merits and substantial issues of this controversy is now long overdue and must proceed bought the business from the original partners and that it was for him to decide whether or not he
without further delay. was responsible for the obligations of the old partnership, including petitioner's unpaid salaries.
Petitioner was in fact not allowed to work anymore in the Jade Mountain business enterprise. His
WHEREFORE, in view of all the foregoing, the instant petition is DENIED for lack of merit, and the unpaid salaries remained unpaid.3
case is REMANDED to the Regional Trial Court of Cadiz City, Branch 60, which is ORDERED to
determine the proper docket fee based on the estimated amount that plaintiffs therein seek to On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid
collect, and direct said plaintiffs to pay the same within a reasonable time, provided the applicable salaries accruing from November 1984 to October 1988, moral and exemplary damages and
prescriptive or reglementary period has not yet expired. Thereafter, the trial court is ORDERED to attorney's fees, against Jade Mountain, Mr. Willy Co and the other private respondents. The
conduct the appropriate proceedings in Civil Case No. 416-C. partnership and Willy Co denied petitioner's charges, contending in the main that Benjamin Yu was
never hired as an employee by the present or new partnership.4
Costs against petitioner.
In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner had
SO ORDERED. been illegally dismissed. The Labor Arbiter decreed his reinstatement and awarded him his claim
for unpaid salaries, backwages and attorney's fees.5
25. G.R. No. 97212 June 30, 1993
On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the Labor
BENJAMIN YU, petitioner, Arbiter and dismissed petitioner's complaint in a Resolution dated 29 November 1990. The NLRC
vs. held that a new partnership consisting of Mr. Willy Co and Mr. Emmanuel Zapanta had bought the
NATIONAL LABOR RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS Jade Mountain business, that the new partnership had not retained petitioner Yu in his original
COMPANY LIMITED, WILLY CO, RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN JENG position as Assistant General Manager, and that there was no law requiring the new partnership to
and CHEN HO-FU, respondents. absorb the employees of the old partnership. Benjamin Yu, therefore, had not been illegally
dismissed by the new partnership which had simply declined to retain him in his former managerial
position or any other position. Finally, the NLRC held that Benjamin Yu's claim for unpaid wages
FELICIANO, J.: should be asserted against the original members of the preceding partnership, but these though
impleaded had, apparently, not been served with summons in the proceedings before the Labor
Petitioner Benjamin Yu was formerly the Assistant General Manager of the marble quarrying and Arbiter.6
export business operated by a registered partnership with the firm name of "Jade Mountain
Products Company Limited" ("Jade Mountain"). The partnership was originally organized on 28 Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set aside
June 1984 with Lea Bendal and Rhodora Bendal as general partners and Chin Shian Jeng, Chen and annul the Resolution of the NLRC as a product of grave abuse of discretion amounting to lack
Ho-Fu and Yu Chang, all citizens of the Republic of China (Taiwan), as limited partners. The or excess of jurisdiction.
partnership business consisted of exploiting a marble deposit found on land owned by the Sps.
Ricardo and Guillerma Cruz, situated in Bulacan Province, under a Memorandum Agreement The basic contention of petitioner is that the NLRC has overlooked the principle that a partnership
dated 26 June 1984 with the Cruz spouses. 1 The partnership had its main office in Makati, has a juridical personality separate and distinct from that of each of its members. Such
Metropolitan Manila. independent legal personality subsists, petitioner claims, notwithstanding changes in the identities
of the partners. Consequently, the employment contract between Benjamin Yu and the partnership
Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant Jade Mountain could not have been affected by changes in the latter's membership.7
General Manager with a monthly salary of P4,000.00. According to petitioner Yu, however, he
actually received only half of his stipulated monthly salary, since he had accepted the promise of
68
Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the business enterprise owned by the preceeding partnership, and continued using the old name of
partnership which had hired petitioner Yu as Assistant General Manager had been extinguished Jade Mountain Products Company Limited, without winding up the business affairs of the old
and replaced by a new partnerships composed of Willy Co and Emmanuel Zapanta; and (2) if partnership, paying off its debts, liquidating and distributing its net assets, and then re-assembling
indeed a new partnership had come into existence, whether petitioner Yu could nonetheless assert the said assets or most of them and opening a new business enterprise. There were, no doubt,
his rights under his employment contract as against the new partnership. powerful tax considerations which underlay such an informal approach to business on the part of
the retiring and the incoming partners. It is not, however, necessary to inquire into such matters.
In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal
effect of the changes in the membership of the partnership was the dissolution of the old What is important for present purposes is that, under the above described situation, not only the
partnership which had hired petitioner in 1984 and the emergence of a new firm composed of Willy retiring partners (Rhodora Bendal, et al.) but also the new partnership itself which continued the
Co and Emmanuel Zapanta in 1987. business of the old, dissolved, one, are liable for the debts of the preceding partnership. In
Singson, et al. v. Isabela Saw Mill, et al,8 the Court held that under facts very similar to those in
The applicable law in this connection — of which the NLRC seemed quite unaware — is found in the case at bar, a withdrawing partner remains liable to a third party creditor of the old
the Civil Code provisions relating to partnerships. Article 1828 of the Civil Code provides as partnership.9 The liability of the new partnership, upon the other hand, in the set of circumstances
follows: obtaining in the case at bar, is established in Article 1840 of the Civil Code which reads as follows:

Art. 1828. The dissolution of a partnership is the change in the relation of the partners caused by Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of the
any partner ceasing to be associated in the carrying on as distinguished from the winding up of the person or partnership continuing the business:
business. (Emphasis supplied)
(1) When any new partner is admitted into an existing partnership, or when any partner retires and
Article 1830 of the same Code must also be noted: assigns (or the representative of the deceased partner assigns) his rights in partnership property to
two or more of the partners, or to one or more of the partners and one or more third persons, if the
Art. 1830. Dissolution is caused: business is continued without liquidation of the partnership affairs;

(1) without violation of the agreement between the partners; (2) When all but one partner retire and assign (or the representative of a deceased partner
assigns) their rights in partnership property to the remaining partner, who continues the business
xxx xxx xxx without liquidation of partnership affairs, either alone or with others;

(b) by the express will of any partner, who must act in good faith, when no definite term or (3) When any Partner retires or dies and the business of the dissolved partnership is continued as
particular undertaking is specified; set forth in Nos. 1 and 2 of this Article, with the consent of the retired partners or the representative
of the deceased partner, but without any assignment of his right in partnership property;
xxx xxx xxx
(4) When all the partners or their representatives assign their rights in partnership property to one
(2) in contravention of the agreement between the partners, where the circumstances do not or more third persons who promise to pay the debts and who continue the business of the
permit a dissolution under any other provision of this article, by the express will of any partner at dissolved partnership;
any time;
(5) When any partner wrongfully causes a dissolution and remaining partners continue the
xxx xxx xxx business under the provisions of article 1837, second paragraph, No. 2, either alone or with others,
and without liquidation of the partnership affairs;
(Emphasis supplied)
(6) When a partner is expelled and the remaining partners continue the business either alone or
In the case at bar, just about all of the partners had sold their partnership interests (amounting to with others without liquidation of the partnership affairs;
82% of the total partnership interest) to Mr. Willy Co and Emmanuel Zapanta. The record does not
show what happened to the remaining 18% of the original partnership interest. The acquisition of The liability of a third person becoming a partner in the partnership continuing the business, under
82% of the partnership interest by new partners, coupled with the retirement or withdrawal of the this article, to the creditors of the dissolved partnership shall be satisfied out of the partnership
partners who had originally owned such 82% interest, was enough to constitute a new partnership. property only, unless there is a stipulation to the contrary.

The occurrence of events which precipitate the legal consequence of dissolution of a partnership When the business of a partnership after dissolution is continued under any conditions set forth in
do not, however, automatically result in the termination of the legal personality of the old this article the creditors of the retiring or deceased partner or the representative of the deceased
partnership. Article 1829 of the Civil Code states that: partner, have a prior right to any claim of the retired partner or the representative of the deceased
partner against the person or partnership continuing the business on account of the retired or
[o]n dissolution the partnership is not terminated, but continues until the winding up of partnership deceased partner's interest in the dissolved partnership or on account of any consideration
affairs is completed. promised for such interest or for his right in partnership property.

In the ordinary course of events, the legal personality of the expiring partnership persists for the Nothing in this article shall be held to modify any right of creditors to set assignment on the ground
limited purpose of winding up and closing of the affairs of the partnership. In the case at bar, it is of fraud.
important to underscore the fact that the business of the old partnership was simply continued by
the new partners, without the old partnership undergoing the procedures relating to dissolution and xxx xxx xxx
winding up of its business affairs. In other words, the new partnership simply took over the
69
(Emphasis supplied)
(b) separation pay computed at the rate of P4,000.00 monthly pay multiplied by three (3) years of
Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade service or a total of P12,000.00;
Mountain which continued the business of the old one without liquidation of the partnership affairs.
Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin Yu in respect of his claim for (c) indemnity for moral damages in the amount of P20,000.00;
unpaid wages, is entitled to priority vis-a-vis any claim of any retired or previous partner insofar as
such retired partner's interest in the dissolved partnership is concerned. It is not necessary for the (d) six percent (6%) per annum legal interest computed on items (a) and (b) above, commencing
Court to determine under which one or mare of the above six (6) paragraphs, the case at bar on 26 December 1989 and until fully paid; and
would fall, if only because the facts on record are not detailed with sufficient precision to permit
such determination. It is, however, clear to the Court that under Article 1840 above, Benjamin Yu is (e) ten percent (10%) attorney's fees on the total amount due from private respondent Jade
entitled to enforce his claim for unpaid salaries, as well as other claims relating to his employment Mountain.
with the previous partnership, against the new Jade Mountain.
Costs against private respondents.
It is at the same time also evident to the Court that the new partnership was entitled to appoint and
hire a new general or assistant general manager to run the affairs of the business enterprise take SO ORDERED.
over. An assistant general manager belongs to the most senior ranks of management and a new
partnership is entitled to appoint a top manager of its own choice and confidence. The non-
retention of Benjamin Yu as Assistant General Manager did not therefore constitute unlawful 26. G.R. No. 94285 August 31, 1999
termination, or termination without just or authorized cause. We think that the precise authorized
cause for termination in the case at bar was redundancy. 10 The new partnership had its own new JESUS SY, JAIME SY, ESTATE OF JOSE SY, ESTATE OF VICENTE SY,
General Manager, apparently Mr. Willy Co, the principal new owner himself, who personally ran HEIR OF MARCIANO SY represented by JUSTINA VDA. DE SY and WILLIE SY, petitioners,
the business of Jade Mountain. Benjamin Yu's old position as Assistant General Manager thus vs.
became superfluous or redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation THE COURT OF APPEALS, INTESTATE ESTATE OF SY YONG HU,
pay at the rate of one month's pay for each year of service that he had rendered to the old SEC. HEARING OFFICER FELIPE TONGCO, SECURITIES AND EXCHANGE COMMISSION,
partnership, a fraction of at least six (6) months being considered as a whole year. respondents.

While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its employ, -----------------------------
we consider that Benjamin Yu was very shabbily treated by the new partnership. The old
partnership certainly benefitted from the services of Benjamin Yu who, as noted, previously ran the G.R. No. 100313 August 31, 1999
whole marble quarrying, processing and exporting enterprise. His work constituted value-added to
the business itself and therefore, the new partnership similarly benefitted from the labors of SY YONG HU & SONS, JOHN TAN, BACOLOD CANVAS AND UPHOLSTERY SUPPLY CO.,
Benjamin Yu. It is worthy of note that the new partnership did not try to suggest that there was any AND NEGROS ISUZU SALES, petitioners,
cause consisting of some blameworthy act or omission on the part of Mr. Yu which compelled the vs.
new partnership to terminate his services. Nonetheless, the new Jade Mountain did not notify him HONORABLE COURT OF APPEALS (11th Division),
of the change in ownership of the business, the relocation of the main office of Jade Mountain from INTESTATE ESTATE OF THE LATE SY YONG HU, JOSE FALSIS, JR., AND HON. BETHEL
Makati to Mandaluyong and the assumption by Mr. Willy Co of control of operations. The treatment KATALBAS-MOSCARDON, RTC OF NEGROS OCCIDENTAL, Branch 51, respondents.
(including the refusal to honor his claim for unpaid wages) accorded to Assistant General Manager
Benjamin Yu was so summary and cavalier as to amount to arbitrary, bad faith treatment, for which PURISIMA, J.:
the new Jade Mountain may legitimately be required to respond by paying moral damages. This
Court, exercising its discretion and in view of all the circumstances of this case, believes that an At bar are two consolidated petitions for review on certiorari under Rule 45 of the Revised Rules of
indemnity for moral damages in the amount of P20,000.00 is proper and reasonable. Court, docketed as G.R. Nos. 94285 and G.R. No. 100313, respectively, seeking to reinstate the
Resolution of the Court of Appeals in CA-G.R. SP No. 17070 and its Decision in CA-G.R. SP No.
In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of six 24189.
percent (6%) per annum on the amount of unpaid wages, and of his separation pay, computed
from the date of promulgation of the award of the Labor Arbiter. Finally, because the new Jade In G.R. No. 94285, the petitioners assail the Resolution1 dated June 27, 1990 of the Court of
Mountain compelled Benjamin Yu to resort to litigation to protect his rights in the premises, he is Appeals granting the Motion for Reconsideration interposed by the petitioners (now the private
entitled to attorney's fees in the amount of ten percent (10%) of the total amount due from private respondents) of its Decision2, promulgated on January 15, 1990, which affirmed the Order3 issued
respondent Jade Mountain. on January 16, 1989 by the Securities and Exchange Commission (SEC) en banc and the Order4
of SEC Hearing Officer Felipe Tongco, dated October 5, 1988.
WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the
Comment filed by private respondents is treated as their Answer to the Petition for Certiorari, and The facts that matter are as follows:
the Decision of the NLRC dated 29 November 1990 is hereby NULLIFIED and SET ASIDE. A new
Decision is hereby ENTERED requiring private respondent Jade Mountain Products Company Sy Yong Hu & Sons is a partnership of Sy Yong Hu and his sons, Jose Sy, Jayme Sy, Marciano
Limited to pay to petitioner Benjamin Yu the following amounts: Sy, Willie Sy, Vicente Sy, and Jesus Sy, registered with the SEC on March 29, 1962, with Jose Sy
as managing partner. The partners and their respective shares are reflected in the Amended
(a) for unpaid wages which, as found by the Labor Arbiter, shall be computed at the rate of Articles of Partnership5 as follows:
P2,000.00 per month multiplied by thirty-six (36) months (November 1984 to December 1987) in
the total amount of P72,000.00; NAMES AMOUNT
70
CONTRIBUTED certificate of registration of Sy Yong Hu & Sons, and to have its assets reverted to the estate of the
SY YONG HU P 31,000.00 late Sy Yong Hu. After hearings, the petition was dismissed by Hearing Officer Bernardo T. Espejo
JOSE S. SY 205,000.00 in an Order, dated January 11, 1984, which Order became final since no appeal was taken
JAYME S. SY 112,000.00 therefrom.14
MARCIANO S. SY 143,000.00
WILLIE S. SY 85,000.00 After the dismissal of SEC Case No. 2338, the children of Keng Sian sought to intervene in SEC
VICENTE SY 85,000.00 Case No. 1648 but their motion to so intervene was denied in an Order dated May 9, 1985. There
JESUS SY 88,000.00 was no appeal from said order.15
Partners Sy Yong Hu, Jose Sy, Vicente Sy, and Marciano Sy died on May 18, 1978, August 12,
1978, December 30, 1979 and August 7, 1987, respectively.6 At present, the partnership has In the meantime, Branch 43 of the Regional Trial Court of Negros Occidental appointed one Felix
valuable assets such as tracts of lands planted to sugar cane and commercial lots in the business Ferrer as a Special Administrator for the Intestate Estate of Sy Yong Hu in Civil Case No. 13388.
district of Bacolod City. Then, on August 30, 1985, Alex Ferrer moved to intervene in the proceedings in SEC Case No.
1648, for the partition and distribution of the partnership assets, on behalf of the respondent
Sometime in September, 1977, during the lifetime of all the partners, Keng Sian brought an Intestate Estate.16
action,7 docketed as Civil Case No. 13388 before the then Court of First Instance of Negros
Occidental, against the partnership as well as against the individual partners for accounting of all It appears that sometime in December, 1985, Special Administrator Ferrer filed an Amended
the properties allegedly owned in common by Sy Yong Hu and the plaintiff (Keng Sian), and for the Complaint on behalf of respondent Intestate Estate in Civil Case No. 13388, wherein he joined
delivery or reconveyance of her one-half (1/2) share in said properties and in the fruits thereof. Keng Sian as plaintiff and thereby withdrew as defendant in the case. Special Administrator Ferrer
Keng Sian averred that she was the common law wife of partner Sy Yong Hu, that Sy Yong Hu, adopted the theory of Keng Sian that the assets of the partnership belong to Keng Sian and Sy
together with his children,8 who were partners in the partnership, connived to deprive her of her Yong Hu (now represented by the Estate of Sy Yong Hu) in co-ownership, which assets were
share in the properties acquired during her cohabitation with Sy Yong Hu, by diverting such wrongfully diverted in favor of the defendants.17
properties to the partnership.9
The motion to intervene in SEC Case No. 1648, filed by Special Administrator Alex Ferrer on
In their answer dated November 3, 1977, the defendants, including Sy Yong Hu himself, countered behalf of the respondent Estate, was denied in the order issued on May 9, 1986 by Hearing Officer
that Keng Sian is only a house helper of Sy Yong Hu and his wife, subject properties "are Sison. With the denial of the motion for reconsideration, private respondent Intestate Estate of Sy
exclusively owned by defendant partnership, and plaintiff has absolutely no right to or interest Yong Hu appealed to the Commission en banc.
therein."10
In its decision (Sulit decision) on the aforesaid appeal from the Order dated May 9, 1986, and the
On September 20, 1978, during the pendency of said civil case, Marciano Sy filed a petition for Order dated December 2, 1986, the SEC en banc18 ruled:
declaratory relief against partners Vicente Sy, Jesus Sy and Jayme Sy, docketed as SEC Case
No. 1648, praying that he be appointed managing partner of the partnership, to replace Jose Sy WHEREFORE, in the interest of Justice and equity, substantive rights of due process being
who died on August 12, 1978. Answering the petition, Vicente Sy, Jesus Sy and Jaime Sy, who paramount over the rules of procedure, and in order to avoid multiplicity of suits; the order of the
claim to represent the majority interest in the partnership, sought the dissolution of the partnership hearing officer below dated May 9, 1986 denying the motion to intervene in SEC Case No. 1648 of
and the appointment of Vicente Sy as managing partner. In due time, Hearing Officer Emmanuel appellant herein as well as the order dated December 2, 198619 denying the motion for
Sison came out with a decision11 (Sison Decision) dismissing the petition, dissolving the reconsideration are hereby reversed and the motion to intervene given due course. The instant
partnership and naming Jesus Sy, in lieu of Vicente Sy who had died earlier, as the managing case is hereby remanded to the hearing officer below for further proceeding on the aspect of
partner in charge of winding the affairs of the partnership. partition and/or distribution of partnership assets. The urgent motion for the issuance of a
restraining order is likewise hereby remanded to the hearing officer below for appropriate action.20
The Sison decision was affirmed in toto by the SEC en banc in a decision12 (Abello decision)
dated June 8, 1982, disposing thus: The said decision of the SEC en banc reiterated that the Abello decision of June 8, 1982, which
upheld the order of dissolution of the partnership, had long become final and executory. No further
WHEREFORE, the Commission en banc affirms the dispositive portion of the decision of the appeal was taken from the Sulit Decision.
Hearing Officer, but clarifies that: (1) the partnership was dissolved by express will of the majority
and not ipso facto because of the death of any partner in view of the stipulation of Articles of During the continuation of the proceedings in SEC Case No. 1648, now presided over by Hearing
Partnership and the provisions of the New Civil Code particularly Art. 1837 [2] and Art. 1841. (2) Officer Felipe S. Tongco who had substituted Hearing Officer Sison, the propriety of placing the
The Managing Partner designated by the majority, namely Jesus Sy, vice Vicente Sy (deceased) Partnership under receivership was taken up. The parties brought to the attention of the Hearing
shall only act as a manager in liquidation and he shall submit to the Hearing Officer an accounting Officer the fact of existence of Civil Case No. 903 (formerly Civil Case No. 13388) pending before
and a project of partition, within 90 days from receipt of this decision. (3) The petitioner is also the Regional Trial Court of Negros Occidental. They also agreed that during the pendency of the
required within the same period to submit his counter-project of partition, from date of receipt of the aforesaid court case, there will be no disposition of the partnership assets.21 On October 5, 1988,
Managing Partner's project of partition. (4) The case is remanded to the Hearing Officer for Hearing Officer Tongco came out with an Order22 (Tongco Order) incorporating the above
evaluation and approval of the accounting and project of partition. submissions of the parties and placing23 the partnership under a receivership committee,
explaining that "it is the most equitable fair and just manner to preserve the assets of the
On the basis of the above decision of the SEC en banc, Hearing Officer Sison approved a partial partnership during the pendency of the civil case in the Regional Trial Court of Bacolod City."
partition of certain partnership assets in an order13 dated December 2, 1986. Therefrom,
respondents seasonably appealed. On October 22, 1988, a joint Notice of Appeal to the SEC en banc was filed by herein petitioners
Jayme Sy, Jesus Sy, Estate of Jose Sy, Estate of Vicente Sy, Heirs of Marciano Sy (represented
In 1982, the children of Keng Sian with Sy Yong Hu, namely, John Keng Seng, Carlos Keng Seng, by Justina Vda. de Sy), and Willie Sy, against the Intervenor (now private respondent). In an order
Tita Sy, Yolanda Sy and Lolita Sy, filed a petition, docketed as SEC Case No. 2338, to revoke the (Lopez Order) dated January 16, 1989, the SEC en banc24 affirmed the Tongco Order.
71
With the denial of their Motion for Reconsideration,25 petitioners filed a special civil action for WHEREFORE PREMISES CONSIDERED, it is respectfully prayed of the Honorable Court that:
certiorari with the Court of Appeals.
1. A writ of Preliminary Injunction be issued to the respondent, after preliminary hearing is had,
On January 15, 1990, the Court of Appeals granted the petition and set aside the Tongco and compelling his office to padlock the premises occupied, without the requisite Certificate of
Lopez Orders, and remanded the case for further execution of the 1982 Abello and 1988 Sulit Occupancy; to stop all construction activities, and barricade the same premises so that the unwary
Decisions, ordering the partition and distribution of the partnership properties.26 public will not be subject to undue hazards due to lack of requisite safety precaution;

Private respondent seasonably interposed a motion for reconsideration of such decision of the 2. The Respondent be ordered to enforce without exemption every requisite provision of the
Court of Appeals. Building Code as so mandated by it."35

Acting thereupon on June 27, 1990, the Court of Appeals issued its assailed Resolution, reversing Petitioners Sy Yong Hu & Sons, the owners of the building sought to be padlocked were not
its Decision of January 15, 1990, and remanding the case to the SEC for the formation of a impleaded as party to the petition dated February 22, 1989. Neither were the lessees-occupants
receivership committee, as envisioned in the Tongco Order.1âwphi1.nêt thereon so impleaded. Thus, they were not notified of the hearing scheduled for April 5, 1989, on
which date the Petition was heard. Subsequently, however, the Regional Trial Court issued an
G.R. No. 100313 came about in view of the dismissal by the Court of Appeals27 of the Petition for order dated April 19, 1989 for the issuance of a Writ of Preliminary Mandatory Injunction ordering
Certiorari with a Prayer for Preliminary Injunction, docketed as CA-G.R. SP No. 24189, seeking to the City Engineer to padlock the building.36
annul and set aside the orders, dated January 24, 1991 and April 19, 1989, respectively, in Civil
Case No. 5326 before the Regional Trial Court of Bacolod City. On May 9, 1989, upon learning of the issuance of the Writ of Preliminary Injunction, dated May 4,
1989, 0petitioners immediately filed the: (1) Motion for Intervention; (2) Answer in Intervention; and
The antecedent facts are as follows: (3) Motion to set aside order of mandatory injunction. In its order dated June 22, 1989, the Motion
for Intervention was granted by the lower court through Acting Presiding Judge Porfirio A. Parian.
Sometime in June of 1988, petitioner Sy Yong Hu & Sons through its Managing Partner, Jesus Sy,
applied for a building permit to reconstruct its building called Sy Yong Hu & Sons Building, located On August 3, 1989, respondent Intestate Estate presented a Motion to cite Engineer Jose Falsis,
in the central business district of Bacolod City, which had been destroyed by fire in the late 70's. Jr. in contempt of court for failure to implement the injunctive relief.
On July 5, 1988, respondent City Engineer issued Building Permit No. 4936 for the reconstruction
of the first two floors of the building. Soon thereafter, reconstruction work began. In January, 1989, On August 15, 1989, petitioners submitted an "Amended Answer in Intervention". Reacting thereto,
upon completion of its reconstruction, the building was occupied by the herein petitioners, Bacolod respondent Intestate Estate filed a "Motion to Strike or Expunge from the Record" the Amended
and Upholstery Supply Company and Negros Isuzu Sales, which businesses are owned by Answer in Intervention.37
successors-in-interest of the deceased partners Jose Sy and Vicente Sy. Petitioner John Tan, who
is also an occupant of the reconstructed building, is the brother-in-law of deceased partner On January 25, 1990, petitioner Sy Yong Hu & Sons again wrote the respondent City Engineer to
Marciano Sy.28 reiterate its request for the immediate issuance of a certificate of occupancy, alleging that the
Court of Appeals in its Decision of January 15, 1990 in CA-G.R. No. 17070 had reversed the SEC
From the records on hand, it can be gleaned that the Tongco Order29, dated October 5, 1988, in decision which approved the appointment of a receivership committee. However, the City Engineer
SEC Case No. 1648, had, among others, denied a similar petition of the intervenors therein (now refused to issue the Occupancy Permit without the conformity of the respondent Intestate Estate
private respondents) for a restraining order and/or injunction to enjoin the reconstruction of the and one John Keng Seng who claims to be an Illegitimate son of the Late Sy Yong Hu.38
same building. However, on October 10, 1988, respondent Intestate Estate sent a letter to the City
Engineer claiming that Jesus Sy is not authorized to act for petitioners Sy Yong Hu & Sons with In an order issued on January 24, 1991 upon an "Ex Parte Motion to Have All Pending Incidents
respect to the reconstruction or renovation of the property of the partnership. This was followed by Resolved" filed by respondent Intestate Estate, Judge Bethel Katalbas-Moscardon issued an order
a letter dated November 11, 1988, requesting the revocation of Building Permit No. 4936. modifying the Writ of Preliminary Mandatory Injunction, and directing the respondent City Engineer
to:
Respondent City Engineer inquired30 later from Jesus Sy for an "authority to sign for and on
behalf of Sy Yong Hu & Sons" to justify the latter's signature in the application for the building . . . immediately order stoppage of any work affecting the construction of the said building under
permit, informing him that absent any proof of his authority, he would not be issued an occupancy Lot 259-A-2 located at Gonzaga Street adjacent to the present Banco de Oro Building, BACOLOD
permit.31 On December 27, 1988, respondent Intestate Estate reiterated its objection to the City, to cancel or cause to be cancelled the Building Permit it had issued; to order the
authority of Jesus Sy to apply for a building permit and pointing out that in view of the creation of a discontinuance of the occupancy or use of said building or structure or portion thereof found to be
receivership committee, Jesus Sy no longer had any authority to act for the partnership.32 occupied or used, the same being contrary and violative of the provisions of the Code; and to
desist from issuing any certificate of Occupancy until the merits of this case can finally be resolved
In reply, Jesus Sy informed the City Engineer that the Tongco Order had been elevated to the SEC by this Court. . . .
en banc, making him still the authorized manager of the partnership. He then requested that an
occupancy permit be issued as Sy Yong Hu & Sons had complied with the requirements of the City Again, it is emphasized that the issue involved is solely question of law and the Court cannot see
Engineer's Office and the National Building Code.33 any logical reason that the intervenors should be allowed to intervene as earlier granted in the
Order of the then Presiding Judge Porfirio A. Parian, of June 22, 1989. Much less the said
Unable to convince the respondent City Engineer to revoke subject building permit, respondent intervenors to move for presentation of additional parties, only on the argument of Intervenors that
Intestate Estate brought a "Petition for Mandamus with prayer for a Writ of Preliminary Injunction," any restraining order to be issued by this Court upon the respondent would prejudice their present
docketed as Civil Case No. 5326 before the Regional Trial Court of Bacolod City and entitled occupancy which is self serving, whimsical and in fact immoral. It is axiomatic that the means
"Intestate Estate of the Late Sy Yong Hu vs. Engineer Jose P. Falsis, Jr."34 The Complaint would not justify the end nor the end justify the means. Assuming damage to the present
concluded with the following prayer: occupants will occur and assuming further that they are entitled, the same should be ventilated in a
72
different action against the lessor or landlord, and the present petition cannot be the proper forum, I
otherwise, while it maybe argued that there is a multiplicity of suit which actually is groundless, on
the other hand, there will be only confusion of the issues to be resolved by the Court. Well valid THE HONORABLE COURT OF APPEALS (ELEVENTH DIVISION) ERRED IN HOLDING THAT
enough is to reiterate that the present petition is not the proper forum for the intervenors to shop RESPONDENT JUDGE DID NOT ACT WITHOUT JURISDICTION AND WITH GRAVE ABUSE
for whatever relief. OF JURISDICTION IN ISSUING THE WRIT OF PRELIMINARY MANDATORY INJUNCTION.

In view of the above, the Order allowing the intervenors in this case is likewise hereby withdrawn II
for the purposes above discussed. Consequently, the Motion to present additional parties is
deemed denied, and the Motion to Strike Or Expunge From The Records the Amended Answer In THE HONORABLE COURT OF APPEALS (ELEVENTH DIVISION) ERRED IN HOLDING THAT
Intervention is deemed granted as in fact the same become moot and academic with the THE RESPONDENT JUDGE DID NOT ACT WITHOUT JURISDICTION AND WITH GRAVE
elimination of the Intervenors in this case.39 ABUSE OF DISCRETION IN DISALLOWING THE INTERVENTION OF PETITIONERS IN CIVIL
CASE NO. 5326.
Pursuant to the above Order of January 24, 1991, respondent City Engineer served a notice upon
petitioners revoking Building Permit No. 4936, ordering the stoppage of all construction work on III
the building, and commanding discontinuance of the occupancy thereof.
THE LOWER COURT ACTED WITH GRAVE ABUSE OF DISCRETION IN ISSUING AND
On February 15, 1991, the aggrieved petitioners filed a Petition for Certiorari with Prayer for ORDERING THE IMPLEMENTATION OF THE WRIT OF PRELIMINARY MANDATORY
Preliminary Injunction with the Court of Appeals, docketed as CA-G.R. SP No. 24189. INJUNCTION DESPITE THE ABSENCE OR LACK OF AN INJUNCTION BOND.45

On February 27, 1991, the Court of Appeals issued a Temporary Restraining Order enjoining the On the two (2) issues raised in G.R. No. 94285, the Court rules for respondents.
respondent Judge from implementing the questioned orders dated January 24, 1991 and April 19,
1989.40 Petitioners fault the Court of Appeals for affirming the 1989 Decision of the SEC which approved
the appointment of a receivership committee as ordered by Hearing Officer Felipe Tongco. They
After the respondents had sent in their answer, petitioners filed a Reply with a prayer for the theorize that the 1988 Tongco Decision varied the 1982 Abello Decision affirming the dissolution of
issuance of a writ of mandamus directing the respondent City Engineer to reissue the building the partnership, contrary to the final and executory tenor of the said judgment. To buttress their
permit previously issued in favor of petitioner Sy Yong Hu & Sons, and to issue a certificate of theory, petitioners offer the 1988 Sulit Decision which, among others, expressly confirmed the
occupancy on the basis of the admission by respondent City Engineer that petitioner had complied finality of the Abello Decision.
with the provisions of the National Building Code.41
On the same premise, petitioners aver that when Hearing Officer Tongco took over from Hearing
On May 31, 1991, the Court of Appeals rendered its questioned decision denying the petition.42 Officer Sison, he was left with no course of action as far as the proceedings in the SEC Case were
concerned other than to continue with the partition and distribution of the partnership assets. Thus,
From the Resolution of the Court of Appeals granting the motion for reconsideration in CA-G.R. SP the Order placing the partnership under a receivership committee was erroneous and tainted with
No. 17070 and the Decision in CA-G.R. SP No. 24189, petitioners have come to this Court for excess of jurisdiction.
relief.
The contentions are untenable. Petitioners fail to recognize the basic distinctions underlying the
In G.R. No. 94285, petitioners contend by way of assignment of errors,43 that: principles of dissolution, winding up and partition or distribution. The dissolution of a partnership is
the change in the relation of the parties caused by any partner ceasing to be associated in the
I carrying on, as might be distinguished from the winding up, of its business. Upon its dissolution,
the partnership continues and its legal personality is retained until the complete winding up of its
RESPONDENT COURT OF APPEALS ERRED IN REVERSING ITS MAIN DECISION IN CA-G.R. business culminating in its termination.46
No. 17070, WHICH DECISION HAD REMANDED TO THE SEC THE CASE FOR THE PROPER
IMPLEMENTATION OF THE 1982 ABELLO AND 1988 SULIT DECISIONS WHICH IN TURN The dissolution of the partnership did not mean that the juridical entity was immediately terminated
ORDERED THE DISTRIBUTION AND PARTITION OF THE PARTNERSHIP PROPERTIES. and that the distribution of the assets to its partners should perfunctorily follow. On the contrary,
the dissolution simply effected a change in the relationship among the partners. The partnership,
II although dissolved, continues to exist until its termination, at which time the winding up of its affairs
should have been completed and the net partnership assets are partitioned and distributed to the
RESPONDENT COURT OF APPEALS ERRED IN REINSTATING THE TONGCO ORDER, partners.47
WHICH HAD SUSPENDED THE DISSOLUTION OF THE PARTNERSHIP AND THE
DISTRIBUTION OF ITS ASSETS, AND IN PLACING THE PARTNERSHIP PROPERTIES UNDER The error, therefore, ascribed to the Court of Appeals is devoid of any sustainable basis. The
RECEIVERSHIP PENDING THE RESOLUTION OF CIVIL CASE NO. 903 (13388), ON A Abello Decision though, indeed, final and executory, did not pose any obstacle to the Hearing
GROUND NOT MADE THE BASIS OF THE SEC RESOLUTION UNDER REVIEW, I.E., THE Officer to issue orders not inconsistent therewith. From the time a dissolution is ordered until the
DISPOSITION BY A PARTNER OF SMALL PROPERTIES ALREADY ADJUDICATED TO HIM BY actual termination of the partnership, the SEC retained jurisdiction to adjudicate all incidents
A FINAL SEC ORDER DATED DECEMBER 2, 1986 AND MADE LONG BEFORE THE relative thereto. Thus, the disputed order placing the partnership under a receivership committee
AGREEMENT OF JUNE 28, 1988 OF THE PETITIONERS NOT TO DISPOSE OF THE cannot be said to have varied the final order of dissolution. Neither did it suspend the dissolution of
PARTNERSHIP ASSETS. the partnership. If at all, it only suspended the partition and distribution of the partnership assets
pending disposition of Civil Case No. 903 on the basis of the agreement by the parties and under
In G.R. No. 100313, Petitioners assign as errors, that:44 the circumstances of the case. It bears stressing that, like the appointment of a manager in charge

73
of the winding up of the affairs of the partnership, said appointment of a receiver during the as of June 28, 1988, that during the pendency of the Negros Occidental case just mentioned, there
pendency of the dissolution is interlocutory in nature, well within the jurisdiction of the SEC. should be no disposition of partnership assets or property, and further, that the proceedings in
SEC Case No. 1648 should be suspended in the meantime (p. 2, Order; p. 12, Rollo).
Furthermore, having agreed with the respondents not to dispose of the partnership assets,
petitioners effectively consented to the suspension of the winding up or, more specifically, the As alleged by the respondents and as shown by the records there is now pending civil case
partition and distribution of subject assets. Petitioners are now estopped from questioning the entitled "Keng Sian and Intestate of Sy Yong Hu vs. Jayme Sy, Jesus Sy, Marciano Sy, Willy Sy,
order of the Hearing Officer issued in accordance with the said agreement.48 Intestate of Jose Sy, Intestate of Vicente Sy, Sy Yong Hu & co and Sy Yong Hu & Sons"
denominated as Civil Case No. 903 before Branch 50 of the Regional Trial Court of Bacolod City.
Petitioners also assail the propriety of the receivership theorizing that there was no necessity
therefor, and that such remedy should be granted only in extreme cases, with respondent being Moreover, a review of the records reveal that certain properties in question have already been sold
duty-bound to adduce evidence of the grave and irremediable loss or damage which it would suffer as of 1987, as evidenced by deeds of absolute sale executed by Jesus in favor of Reynaldo
if the same was not granted. It is further theorized that, at any rate, the rights of respondent Navarro (p. 331, Rollo), among others.
Intestate Estate are adequately protected since notices of lis pendens of the aforesaid civil case
have been annotated on the real properties of the partnership.49 To ensure that no further disposition shall be made of the questioned assets and in view of the
pending civil case in the lower court, there is a compelling necessity to place all these properties
To bolster petitioners' contention, they maintain that they are the majority partners of the and assets under the management of a receivership committee. The receivership committee,
partnership Sy Yong Hu & Sons controlling Ninety Six per cent (96%) of its equity. As such, they which will provide active participation, through a designated representative, on the part of all
have the greatest interest in preserving the partnership properties for themselves,50 and therefore, interested parties, can best protect the properties involved and assure fairness and equity for all.
keeping the said properties in their possession will not bring about any feared damage or
dissipation of such properties, petitioner's stressed. Receivership, which is admittedly a harsh remedy, should be granted with extreme caution.52
Sound bases therefor must appear on record, and there should be a clear showing of its
Sec. (6) of Presidential Decree No. 902-A, as amended, reads: necessity.53 The need for a receivership in the case under consideration can be gleaned from the
aforecited disquisition by the Court of Appeals finding that the properties of the partnership were in
Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the danger of being damaged or lost on account of certain acts of the appointed manager in
following powers: liquidation.

xxx xxx xxx The dispositions of certain properties by the said manager, on the basis of an order of partial
partition, dated December 2, 1986, by Hearing Officer Sison, which was not yet final and
(c) To appoint one or more receivers of the property, real or personal, which is the subject of the executory, indicated that the feared irreparable injury to the properties of the partnership might
action pending before the commission in accordance with the pertinent provisions of the Rules of happen again. So also, the failure of the manager in liquidation to submit to the SEC an accounting
Court, and in such other cases, whenever necessary in order to preserve the rights of parties- of all the partnership assets as required in its order of April 29, 1988, justified the SEC in placing
litigants and/or protect the interest of the investing public and creditors; . . . . the subject assets under receivership.

The findings of the Court of Appeals accord with existing rules and jurisprudence on receivership. Moreover, it has been held by this Court that an order placing the partnership under receivership
Conformably, it stated that:51 so as to wind up its affairs in an orderly manner and to protect the interest of the plaintiff (herein
private respondent) was not tainted with grave abuse of discretion.54 The allegation that
. . . From a reexamination of the issues and the evidences involved, We find merit in respondent's respondents' rights are adequately protected by the notices of lis pendens in Civil Case 903 is
motion for reconsideration. inaccurate. As pointed out in their Comment to the Petition, the private respondents claim that the
partnership assets include the income and fruits thereof. Therefore, protection of such rights and
This Court notes with special attention the order dated June 28, 1988 issued by Hearing Officer preservation of the properties involved are best left to a receivership committee in which the
Felipe S. Tongco in SEC Case No. 1648 (Annex to Manifestation, June 16, 1990) wherein all the opposing parties are represented.
parties agreed on the following:
What is more, as held in Go Tecson vs. Macaraig:55
1. That there is a pending case in court wherein the plaintiffs are claiming in their complaint that all
the assets of the partnership belong to Sy Yong Hu; The power to appoint a receiver pendente lite is discretionary with the judge of the court of first
instance; and once the discretion is exercised, the appellate court will not interfere, except in a
2. That the parties likewise agreed that during the pendency of the court case, there will be no clear case of abuse thereof, or an extra limitation of jurisdiction.
disposition of the partnership assets and further hearing is suspended. . . .
Here, no clear abuse of discretion in the appointment of a receiver in the case under consideration
As observed by the SEC Commission (sic) in its Order dated January 16, 1989: can be discerned.

Ordinarily, appellants' contention would be correct, except that the en banc order of April 29th With respect to G.R. No. 100313.56
appears to have been overtaken, and accordingly, rendered inappropriate, by subsequent
developments in SEC Case No. 1648, particularly the entry in that proceedings, as of April 29, Petitioners argue in this case that the failure of the private respondents to implead them in Civil
1988, of an intervenor who claims a superior and exclusive ownership right to all the partnership Case No. 5326 constituted a violation of due process. It is their submission that the ex parte grant
assets and property. This claim of superior ownership right is presently pending adjudication of said petition by the trial court worked to their prejudice as they were deprived of an opportunity
before the Regional Trial Court of Negros Occidental, And precisely because if this supervening to be heard on the allegations of the petition concerning subject property and assets. The recall of
development, it would appear that the parties in SEC Case No. 1648 agreed among themselves,
74
the order granting their Motion to Intervene was done without the observance of due process and For failure to observe due process, the herein respondent court acted without jurisdiction. As a
consequently without jurisdiction on the part of the lower court. result, petitioners cannot be bound by its orders. Generally accepted is the principle that no man
shall be affected by any proceeding to which he is a stranger, and strangers to a case are not
Commenting on the Petition, private respondents maintain that the only issue in the present case bound by judgment rendered by the court.62
is whether or not there was a violation of the Building Code. They contend that after due and
proper hearing before the lower court, it was fully established that the provisions of the said Code In similar fashion, the respondent court acted with grave abuse of discretion when it disallowed the
had been violated, warranting issuance of the Writ of Preliminary Injunction dated April 19, 1989. intervention of petitioners in Civil Case No. 5326. As it was, the issuance of the Writ of Preliminary
They further asseverate that the petitioners, who are the owner and lessees in the building under Injunction directing the padlocking of the building was improper for non-conformity with the
controversy, have nothing to do with the case for mandamus since it is directed against the rudiments of due process.
respondent building official to perform a specific duty mandated by the provisions of the Building
Code. Parenthetically, the trial court, in issuing the questioned order, ignored established principles
relative to the issuance of a Writ of Preliminary Injunction. For the issuance of the writ of
In his Comment, the respondent City Engineer, relying on the validity of the order of the trial court preliminary injunction to be proper, it must be shown that the invasion of the right sought to be
to padlock the building, denied any impropriety in his compliance with the said order. protected is material and substantial, that the right of complainant is clear and unmistakable and
that there is an urgent and paramount necessity for the writ to prevent serious damage.63
After a careful examination of the records on hand, the Court finds merit in the petition.
In light of the allegations supporting the prayer for the issuance of a writ of preliminary injunction,
In opposing the petition, respondent intestate estate anchors its stance on the existence of the Court is at a loss as to the basis of the respondent judge in issuing the same. What is clear is
violations of pertinent provisions of the aforesaid Code. As regards due process, however, a that complainant (now private respondent) therein, which happens to be a juridical person (Estate
distinction must be made between matters of substance.57 In essence, procedural due process of Sy Yong Hu), made general allegations of hazard and serious damage to the public due to
"refers to the method or manner by which the law is enforced," while substantive due process violations of various provisions of the Building Code, but without any showing of any grave
"requires that the law itself, not merely the procedure by which the law would be enforced, is fair, damage or injury it was bound to suffer should the writ not issue.
reasonable, and just".58 Although private respondent upholds the substantive aspect of due
process, it, in the same breath, brushes aside its procedural aspect, which is just as important, if Finally, the Court notes, with disapproval, what the respondent court did in ordering the ejectment
the constitutional injunction against deprivation of property without due process is to be observed. of the lawful owner and the occupants of the building, and disposed of the case before him even
before it was heard on the merits by the simple expedient of issuing the said writ of preliminary
Settled is the rule that the essence of due process is the opportunity to be heard. Thus, in Legarda injunction. In Ortigas & Company Limited Partnership vs. Court of Appeals et al. this Court held
vs. Court of Appeals et al.,59 the Court held that as long as a party was given the opportunity to that courts should avoid issuing a writ of preliminary injunction which in effect disposes of the main
defend her interest in due course, he cannot be said to have been denied due process of law. case without trial.64

Contrary to these basic tenets, the trial court gave due course to the petition for mandamus, and Resolution of the third issue has become moot and academic in view of the Court's finding of grave
granted the prayer for the issuance of a writ of preliminary injunction on May 4, 1989, abuse of discretion tainting the issuance of the Writ of Preliminary Injunction in question.
notwithstanding the fact that the owner (herein petitioner Sy Yong Hu) of the building and its
occupants60 were not impleaded as parties in the case. Affirming the same, the Court of Appeals WHEREFORE, the Resolution of the Court of Appeals in CA-G.R. No. 17070 is AFFIRMED and its
acknowledged that the lower court came out with the said order upon the testimony of the lone Decision in CA-G.R. No. 24189 REVERSED. No pronouncement as to costs.
witness for the respondent, in the person of the City Engineer, whose testimony was not effectively
traversed by the petitioners. This conclusion arrived at by the Court of Appeals is erroneous in the SO ORDERED.
face of the irrefutable fact that the herein petitioners were not made parties in the said case and,
consequently, had absolutely no opportunity to cross examine the witness of private respondent 27. G.R. No. L-5837 May 31, 1954
and to present contradicting evidence.
CRISTOBAL BONNEVIE, ET AL., plaintiffs-appellants,
To be sure, the petitioners are indispensable parties in Civil Case No. 5326, which sought to close vs.
subject building. Such being the case, no final determination of the claims thereover could be JAIME HERNANDEZ, defendant-appellee.
had.61 That the petition for mandamus with a prayer for the issuance of a writ of preliminary
mandatory injunction was only directed against the City Engineer is of no moment. No matter how
private respondent justifies its failure to implead the petitioners, the alleged violation of the REYES, J.:
provisions of the Building Code relative to the reconstruction of the building in question, by
petitioners, did not warrant an ex parte and summary resolution of the petition. The violation of a This is an action for the recovery of the sum of P115,312.50, with interests, as plaintiffs' alleged
substantive law should not be confused with punishment of the violator for such violation. The share in the profits of a partnership.
former merely gives rise to a cause of action while the latter is its effect, after compliance with the
requirements of due process. It appears that prior to January, 1947, plaintiffs with other associates formed a syndicate or secret
partnership for the purpose of acquiring the plants, franchises and other properties of the Manila
The trial court failed to give petitioners their day in court to be heard before they were condemned Electric Co. — hereinafter called the Meralco — in the provinces of Camarines Sur, Albay, and
for the alleged violation of certain provisions of the Building Code. Being the owner of the building Sorsogon, with the idea of continuing that company's business in that region. No formal articles
in question and lessees thereon, petitioners possess property rights entitled to be protected by were drawn for it was the purpose of the members to incorporate once the deal had been
law. Their property rights cannot be arbitrarily interfered with without running afoul with the due consummated. But in the meantime they elected Pedro Serranzana and David Serrano general
process rule enshrined in the Bill of Rights. manager and secretary-treasurer, respectively, of the partnership.

75
Negotiation for the purchase was commenced, but as it made no headway, defendant was taken in Defendant's answer denies that he has made any profit out of the assignment in question and
as a member of the partnership so that he could push the deal through, and to that end he was alleges that in any event plaintiffs, after their withdrawal from the partnership, ceased to have any
given the necessary power of attorney. Using partnership funds, defendant was able to buy the further interest in the subsequent transactions of the remaining members.
Meralco properties for P122,000, paying P40,000 upon the signing of the deed of sale and
agreeing to pay the balance in two equal installments, that is, P41,000 on or before July 31, 1947, After trial the lower court found that the partnership had not realized any profit out of the
and another P41,000 on or before January 31, 1948, with interest at 6 per cent per annum and assignment of the Meralco properties to the corporation and that, even supposing that profit had
with a penalty clause which reads: really been made, defendant would not be the one to answer to plaintiffs for their share thereof,
because he did not receive the consideration for the assignment, which according to the court,
(6) That in case the VENDEE fails to make the payment or payments of the balance due or any consisted of the subscriptions of various persons to the capital stock of the corporation. The court
part thereof as herein provided, this contract shall, at the option of the VENDOR, be annuled and, therefore dismissed the complaint with costs against the plaintiffs. From this decision plaintiffs
in such an event, all payments made by the VENDEE to the VENDOR by virtue of this contract appealed. The case comes within our jurisdiction because of the amount involved.
shall be forfeited and retained by the VENDOR in full satisfaction as the liquidated damages
sustained by said VENDOR; and the said VENDOR shall have the right to forthwith reenter and We find no merit in the appeal.
take possession of the premises, properties and rights which are the subject-matter of this
contract. In the first place, the profit alleged to have been realized from the assignment of the Meralco
properties to the new corporation, the Bicol Electric Company, is more apparent than real. It is true
Although defendant was the one named vendee in the deed of sale, there is no question that the that the value set for those properties in the deed of assignment was P365,000 when the
transaction was in penalty made for the partnership so that the latter assumed control of the acquisition price was only P122,000. But one should not jump to the conclusion that a profit,
business the day following the sale. consisting of the difference between the two sums was really made out of the transaction, for the
assignment was not made for cash but in payment for subscriptions to shares of stock in the
About the latter half of the following month the members of the partnership proceeded with the assignee, and while those shares had a total face value of P225,000, this is not necessarily their
formation of the proposed corporation, apportioning among themselves its shares of stock in real worth. Needless to say, the real value of the shares of stock of a corporation depends upon
proportion to their respective contributions to the capital of the partnership and their individual the value of its assets over and above its liabilities. It does not appear that the Bicol Electric
efforts in bringing about the acquisition of the Meralco properties. But before the incorporation Company had any assets other than those acquired from the Meralco, and according to the
papers could be perfected, several partners, not satisfied with the way matters were being run and evidence the company, aside from owing the Meralco, P82,000 was, in the language of the court
fearful that the venture might prove a failure because the business was not going well and there below, actually "in the red."
was a possibility of their being assessed more than their original investments when the time came
to meet the two installments of the unpaid purchase price due the Meralco, expressed their desire In the second place, assuming that the assignment actually brought profit to the partnership, it is
to withdraw from the partnership and get back the money they had invested therein. In accordance hard to see how defendant could be made to answer for plaintiffs' alleged share thereof. As stated
with this wish, one of them, Judge Jaime Reyes, in a meeting held on April 10, 1947, to consider in the decision below, defendant did not receive the consideration for the assignment for, as
various matters connected with the business, presented a resolution to the effect that those already stated, the assignment was made in payment for subscriptions of various persons to the
partners who did not want to remain in the association should be allowed to withdraw and get back capital stock of the new corporation. Plaintiffs, in order to give color of legality to their claim against
their contributions. The resolution was approved, with the herein plaintiffs voting affirmatively, and defendant, maintain that the latter should be held liable for damages caused to them, consisting of
on that same day plaintiffs and Judge Reyes withdrew from the partnership, and, as admitted by the loss of their share of the profits, due to defendant's failure properly to perform his duty as a
both parties, the partnership was then dissolved. In accordance with the terms of the resolution, liquidator of the dissolved partnership, this on the theory that as managing partner of the
the withdrawing partners were, on the following day, reimbursed their respective contributions to partnership, it was defendant's duty to liquidate its affairs upon its dissolutions. But it does not
the partnership fund. appear that plaintiffs have ever asked for a liquidation, and as will presently be explained no
liquidation was called for because when plaintiffs withdrew from the partnership the understanding
Following the dissolution of the partnership, the members who preferred to remain in the business was that after they had been reimbursed their investment, they were no longer to have any further
went ahead with the formation of the corporation, taking in new associates as stockholders. And interest in the partnership or its assets and liabilities. Moreover, the stipulation of facts made at the
defendant, on his part, in fulfillment of his trust, made a formal assignment of the Meralco hearing does not bear out the claim that defendant was the managing partner of the partnership,
properties to the treasurer of the corporation, giving them a book value of P365,000, in return for for if there appears that the partnership had its general manager in the person of Pedro
which the corporation issued, to the various subscribers to its capital stock, shares of stock of the Serranzana, who upon the formation of the new corporation also became its vice-president and
total face value of P225,000 and assumed the obligation of paying what was still due the Meralco general manager.
on the purchase price. The new corporation was named "Bicol Electric Company."
As a general rule, when a partner retires from the firm, he is entitled to the payment of what may
Though business was losing during the first year, that is, in 1947, the corporation, thanks to a loan be due him after a liquidation. But certainly no liquidation is necessary where there is already a
obtained from the RFC later prospered and made money. Then trouble began for one of its big settlement or an agreement as to what the retiring partner shall receive. In the instant case, it
stockholders, the defendant herein. appears that a settlement was agreed upon on the very day the partnership was dissolved. For
when plaintiffs and Judge Jaime Reyes withdrew from the partnership on that day they did so as
Two years from their withdrawal from the partnership, when the corporate business was already in agreed to by all the partners, subject to the only condition that they were to be repaid their
a prosperous condition, plaintiffs brought the present suit against Jaime Hernandez, claiming a contributions or investments within three days from said date. And this condition was fulfilled when
share in the profit the latter is supposed to have made from the assignment of the Meralco on the following day they were reimbursed the respective amounts due them pursuant to the
properties to the corporation, estimated by plaintiffs to be P225,000 and their share of it to be agreement.
P115,312.50.
There is evidence that the partnership was at that time operating its business at a loss and that the
partnership did not have necessary funds to meet its obligation to Meralco for the balance of the
purchase price. And in that connection it should be recalled that nonpayment of that obligation
76
would result in the partnership losing its entire investment because of the penalty clause in the Alfonso Leonardo Ng Sua, Lim Teck Chuan, and Eng Chong Leonardo, through fraud and
deed of sale. Because of these circumstances there is every reason to believe that plaintiffs machination, took actual and active management of the partnership and although Tee Hoon Lim
together with Judge Jaime Reyes, withdrew from the partnership for fear that they might lose their Po Chuan was the manager of Glory Commercial Company, defendants managed to use the funds
entire investment should they choose to remain in the partnership which then faced the danger of of the partnership to purchase lands and building's in the cities of Cebu, Lapulapu, Mandaue, and
losing its entire assets. As testified to by Judge Reyes, one of the withdrawing partners, it was the municipalities of Talisay and Minglanilla, some of which were hidden, but the description of
clearly understood that upon their withdrawal and return to them of their investment they would those already discovered were as follows: (list of properties) ...;" and that:
have nothing more to do with the association. It must, therefore, have been the intention or
understanding of the parties that the withdrawing partners were relinquishing all their rights and 13. (A)fter the death of Tee Hoon Lim Po Chuan, the defendants, without liquidation continued the
interest in the partnership upon the return to them of their investment. That Judge Reyes did not business of Glory Commercial Company by purportedly organizing a corporation known as the
join the plaintiffs in this action is a clear indication that such was really the understanding. Judge Glory Commercial Company, Incorporated, with paid up capital in the sum of P125,000.00, which
Reyes has testified that when he was invited to join in the present claim he refused because he did money and other assets of the said Glory Commercial Company, Incorporated are actually the
not want to be a "sin verguenza." And, indeed, if the agreement was that the withdrawing partners assets of the defunct Glory Commercial Company partnership, of which the plaintiff has a share
were still to have participation in the subsequent transactions of the partnership so that they would equivalent to one third (¹/3 ) thereof;
have a share not only in the profits but also in the losses, it is not likely that their investment would
have been returned to them. 14. (P)laintiff, on several occasions after the death of her husband, has asked defendants of the
above-mentioned properties and for the liquidation of the business of the defunct partnership,
It is, therefore, our conclusion that the acceptance by the withdrawing partners, including the including investments on real estate in Hong Kong, but defendants kept on promising to liquidate
plaintiffs, of their investment in the instant case was understood and intended by all the parties as said properties and just told plaintiff to
a final settlement of whatever rights or claim the withdrawing partners might have in the dissolved
partnership. Such being the case they are now precluded from claiming any share in the alleged 15. (S)ometime in the month of November, 1967, defendants, Antonio Lim Tanhu, by means of
profits, should there be any, at the time of the dissolution. fraud deceit and misrepresentations did then and there, induce and convince the plaintiff to
execute a quitclaim of all her rights and interests, in the assets of the partnership of Glory
In view of the foregoing, we find plaintiffs' claim against defendant to be without legal basis so that Commercial Company, which is null and void, executed through fraud and without any legal effect.
the judgment of dismissal rendered by the court below should be, as it is hereby, affirmed, with The original of said quitclaim is in the possession of the adverse party defendant Antonio Lim
costs against the appellants. Tanhu.

16. (A)s a matter of fact, after the execution of said quitclaim, defendant Antonio Lim Tanhu
28. G.R. No. L-40098 August 29, 1975 offered to pay the plaintiff the amount P65,000.00 within a period of one (1) month, for which
plaintiff was made to sign a receipt for the amount of P65,000.00 although no such amount was
ANTONIO LIM TANHU, DY OCHAY, ALFONSO LEONARDO NG SUA and CO OYO, given and plaintiff was not even given a copy of said document;
petitioners,
vs. 17. (T)hereafter, in the year 1968-69, the defendants who had earlier promised to liquidate the
HON. JOSE R. RAMOLETE as Presiding Judge, Branch III, CFI, Cebu and TAN PUT, aforesaid properties and assets in favor among others of plaintiff and until the middle of the year
respondents. 1970 when the plaintiff formally demanded from the defendants the accounting of real and
personal properties of the Glory Commercial Company, defendants refused and stated that they
would not give the share of the plaintiff. (Pp. 36-37, Record.)
BARREDO, J.:
She prayed as follows:
Petition for (1) certiorari to annul and set aside certain actuations of respondent Court of First
Instance of Cebu Branch III in its Civil Case No. 12328, an action for accounting of properties and WHEREFORE, it is most respectfully prayed that judgment be rendered:
money totalling allegedly about P15 million pesos filed with a common cause of action against six
defendants, in which after declaring four of the said defendants herein petitioners, in default and a) Ordering the defendants to render an accounting of the real and personal properties of the Glory
while the trial as against the two defendants not declared in default was in progress, said court Commercial Company including those registered in the names of the defendants and other
granted plaintiff's motion to dismiss the case in so far as the non-defaulted defendants were persons, which properties are located in the Philippines and in Hong Kong;
concerned and thereafter proceeded to hear ex-parte the rest of the plaintiffs evidence and
subsequently rendered judgment by default against the defaulted defendants, with the b) Ordering the defendants to deliver to the plaintiff after accounting, one third (¹/3 ) of the total
particularities that notice of the motion to dismiss was not duly served on any of the defendants, value of all the properties which is approximately P5,000,000.00 representing the just share of the
who had alleged a compulsory counterclaim against plaintiff in their joint answer, and the judgment plaintiff;
so rendered granted reliefs not prayed for in the complaint, and (2) prohibition to enjoin further
proceedings relative to the motion for immediate execution of the said judgment. c) Ordering the defendants to pay the attorney of the plaintiff the sum of Two Hundred Fifty
Thousand Pesos (P250,000.00) by way of attorney's fees and damages in the sum of One Million
Originally, this litigation was a complaint filed on February 9, 1971 by respondent Tan Put only Pesos (P1,000,000.00).
against the spouses-petitioners Antonio Lim Tanhu and Dy Ochay. Subsequently, in an amended
complaint dated September 26, 1972, their son Lim Teck Chuan and the other spouses-petitioners This Honorable Court is prayed for other remedies and reliefs consistent with law and equity and
Alfonso Leonardo Ng Sua and Co Oyo and their son Eng Chong Leonardo were included as order the defendants to pay the costs. (Page 38, Record.)
defendants. In said amended complaint, respondent Tan alleged that she "is the widow of Tee
Hoon Lim Po Chuan, who was a partner in the commercial partnership, Glory Commercial
Company ... with Antonio Lim Tanhu and Alfonso Ng Sua that "defendant Antonio Lim Tanhu,
77
The admission of said amended complaint was opposed by defendants upon the ground that there 5. That the defendants have acquired properties out of their own personal fund and certainly not
were material modifications of the causes of action previously alleged, but respondent judge from the funds belonging to the partnership, just as Tee Hoon Lim Po Chuan had acquired
nevertheless allowed the amendment reasoning that: properties out of his personal fund and which are now in the possession of the widow and neither
the defendants nor the partnership have anything to do about said properties;
The present action is for accounting of real and personal properties as well as for the recovery of
the same with damages. 6. That it would have been impossible to buy properties from funds belonging to the partnership
without the other partners knowing about it considering that the amount taken allegedly is quite big
An objective consideration of pars. 13 and 15 of the amended complaint pointed out by the and with such big amount withdrawn the partnership would have been insolvent;
defendants to sustain their opposition will show that the allegations of facts therein are merely to
amplify material averments constituting the cause of action in the original complaint. It likewise 7. That plaintiff and Tee Hoon Lim Po Chuan were not blessed with children who would have been
include necessary and indispensable defendants without whom no final determination can be had lawfully entitled to succeed to the properties left by the latter together with the widow and
in the action and in order that complete relief is to be accorded as between those already parties. legitimate children;

Considering that the amendments sought to be introduced do not change the main causes of 8. That despite the fact that plaintiff knew that she was no longer entitled to anything of the shares
action in the original complaint and the reliefs demanded and to allow amendments is the rule, and of the late Tee Hoon Lim Po Chuan, yet, this suit was filed against the defendant who have to
to refuse them the exception and in order that the real question between the parties may be interpose the following —
properly and justly threshed out in a single proceeding to avoid multiplicity of actions. (Page 40,
Record.) COUNTERCLAIM

In a single answer with counterclaim, over the signature of their common counsel, defendants A. That the defendants hereby reproduced, by way of reference, all the allegations and foregoing
denied specifically not only the allegation that respondent Tan is the widow of Tee Hoon because, averments as part of this counterclaim; .
according to them, his legitimate wife was Ang Siok Tin still living and with whom he had four (4)
legitimate children, a twin born in 1942, and two others born in 1949 and 1965, all presently B. That plaintiff knew and was aware she was merely the common-law wife of Tee Hoon Lim Po
residing in Hongkong, but also all the allegations of fraud and conversion quoted above, the truth Chuan and that the lawful and legal is still living, together with the legitimate children, and yet she
being, according to them, that proper liquidation had been regularly made of the business of the deliberately suppressed this fact, thus showing her bad faith and is therefore liable for exemplary
partnership and Tee Hoon used to receive his just share until his death, as a result of which the damages in an amount which the Honorable Court may determine in the exercise of its sound
partnership was dissolved and what corresponded to him were all given to his wife and children. judicial discretion. In the event that plaintiff is married to Tee Hoon Lim Po Chuan, then, her
To quote the pertinent portions of said answer: marriage is bigamous and should suffer the consequences thereof;

AND BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES, C. That plaintiff was aware and had knowledge about the 'quitclaim', even though she was not
entitled to it, and yet she falsely claimed that defendants refused even to see her and for filing this
defendants hereby incorporate all facts averred and alleged in the answer, and further most unfounded, baseless, futile and puerile complaint, defendants suffered mental anguish and torture
respectfully declare: conservatively estimated to be not less than P3,000.00;

1. That in the event that plaintiff is filing the present complaint as an heir of Tee Hoon Lim Po D. That in order to defend their rights in court, defendants were constrained to engage the services
Chuan, then, she has no legal capacity to sue as such, considering that the legitimate wife, of the undersigned counsel, obligating themselves to pay P500,000.00 as attorney's fees;
namely: Ang Siok Tin, together with their children are still alive. Under Sec. 1, (d), Rule 16 of the
Revised Rules of Court, lack of legal capacity to sue is one of the grounds for a motion to dismiss E. That by way of litigation expenses during the time that this case will be before this Honorable
and so defendants prays that a preliminary hearing be conducted as provided for in Sec. 5, of the Court and until the same will be finally terminated and adjudicated, defendants will have to spend
same rule; at least P5,000.00. (Pp. 44-47. Record.)

2. That in the alternative case or event that plaintiff is filing the present case under Art. 144 of the After unsuccessfully trying to show that this counterclaim is merely permissive and should be
Civil Code, then, her claim or demand has been paid, waived abandoned or otherwise dismissed for non-payment of the corresponding filing fee, and after being overruled by the court,
extinguished as evidenced by the 'quitclaim' Annex 'A' hereof, the ground cited is another ground in due time, plaintiff answered the same, denying its material allegations.
for a motion to dismiss (Sec. 1, (h), Rule 16) and hence defendants pray that a preliminary hearing
be made in connection therewith pursuant to Section 5 of the aforementioned rule; On February 3, 1973, however, the date set for the pre-trial, both of the two defendants-spouses
the Lim Tanhus and Ng Suas, did not appear, for which reason, upon motion of plaintiff dated
3. That Tee Hoon Lim Po Chuan was legally married to Ang Siok Tin and were blessed with the February 16, 1973, in an order of March 12, 1973, they were all "declared in DEFAULT as of
following children, to wit: Ching Siong Lim and Ching Hing Lim (twins) born on February 16, 1942; February 3, 1973 when they failed to appear at the pre-trial." They sought to hive this order lifted
Lim Shing Ping born on March 3, 1949 and Lim Eng Lu born on June 25, 1965 and presently thru a motion for reconsideration, but the effort failed when the court denied it. Thereafter, the trial
residing in Hongkong; started, but at the stage thereof where the first witness of the plaintiff by the name of Antonio
Nuñez who testified that he is her adopted son, was up for re-cross-examination, said plaintiff
4. That even before the death of Tee Hoon Lim Po Chuan, the plaintiff was no longer his common unexpectedly filed on October 19, 1974 the following simple and unreasoned
law wife and even though she was not entitled to anything left by Tee Hoon Lim Po Chuan, yet, out
of the kindness and generosity on the part of the defendants, particularly Antonio Lain Tanhu, who, MOTION TO DROP DEFENDANTS LIM TECK
was inspiring to be monk and in fact he is now a monk, plaintiff was given a substantial amount CHUAN AND ENG CHONG LEONARDO
evidenced by the 'quitclaim' (Annex 'A');

78
COMES now plaintiff, through her undersigned counsel, unto the Honorable Court most
respectfully moves to drop from the complaint the defendants Lim Teck Chuan and Eng Chong Cebu City, Philippines, October 28, 1974. (Page 53. Record.)
Leonardo and to consider the case dismissed insofar as said defendants Lim Teck Chuan and Eng
Chong Leonardo are concerned. Upon learning of these orders on October 23, 1973, the defendant Lim Teck Cheng, thru counsel,
Atty. Sitoy, filed a motion for reconsideration thereof, and on November 1, 1974, defendant Eng
WHEREFORE, it is most respectfully prayed of the Honorable Court to drop from the complaint the Chong Leonardo, thru counsel Atty. Alcudia, filed also his own motion for reconsideration and
defendants Lim Teck Chuan and Eng Chong Leonardo and to dismiss the case against them clarification of the same orders. These motions were denied in an order dated December 6, 1974
without pronouncement as to costs. (Page 50, Record.) but received by the movants only on December 23, 1974. Meanwhile, respondent court rendered
the impugned decision on December 20, 1974. It does not appear when the parties were served
which she set for hearing on December 21, 1974. According to petitioners, none of the defendants copies of this decision.
declared in default were notified of said motion, in violation of Section 9 of Rule 13, since they had
asked for the lifting of the order of default, albeit unsuccessfully, and as regards the defendants not Subsequently, on January 6, 1975, all the defendants, thru counsel, filed a motion to quash the
declared in default, the setting of the hearing of said motion on October 21, 1974 infringed the order of October 28, 1974. Without waiting however for the resolution thereof, on January 13,
three-day requirement of Section 4 of Rule 15, inasmuch as Atty. Adelino Sitoy of Lim Teck Chuan 1974, Lim Teck Chuan and Eng Chong Leonardo went to the Court of Appeals with a petition for
was served with a copy of the motion personally only on October 19, 1974, while Atty. Benjamin certiorari seeking the annulment of the above-mentioned orders of October 21, 1974 and October
Alcudia of Eng Chong Leonardo was served by registered mail sent only on the same date. 28, 1974 and decision of December 20, 1974. By resolution of January 24, 1975, the Court of
Appeals dismissed said petition, holding that its filing was premature, considering that the motion
Evidently without even verifying the notices of service, just as simply as plaintiff had couched her to quash the order of October 28, 1974 was still unresolved by the trial court. This holding was
motion, and also without any legal grounds stated, respondent court granted the prayer of the reiterated in the subsequent resolution of February 5, 1975 denying the motion for reconsideration
above motion thus: of the previous dismissal.

ORDER On the other hand, on January 20, 1975, the other defendants, petitioners herein, filed their notice
of appeal, appeal bond and motion for extension to file their record on appeal, which was granted,
Acting on the motion of the plaintiff praying for the dismissal of the complaint as against the extension to expire after fifteen (15) days from January 26 and 27, 1975, for defendants Lim
defendants Lim Teck Chuan and Eng Chong Leonardo. — Tanhu and Ng Suas, respectively. But on February 7, 1975, before the perfection of their appeal,
petitioners filed the present petition with this Court. And with the evident intent to make their
The same is hereby GRANTED. The complaint as against defendant Lim Teck Chuan and Eng procedural position clear, counsel for defendants, Atty. Manuel Zosa, filed with respondent court a
Chong Leonardo is hereby ordered DISMISSED without pronouncement as to costs. manifestation dated February 14, 1975 stating that "when the non-defaulted defendants Eng
Chong Leonardo and Lim Teck Chuan filed their petition in the Court of Appeals, they in effect
Simultaneously, the following order was also issued: abandoned their motion to quash the order of October 28, 1974," and that similarly "when Antonio
Lim Tanhu, Dy Ochay, Alfonso Leonardo Ng Sua and Co Oyo, filed their petition for certiorari and
Considering that defendants Antonio Lim Tanhu and his spouse Dy Ochay as well as defendants prohibition ... in the Supreme Court, they likewise abandoned their motion to quash." This
Alfonso Ng Sua and his spouse Co Oyo have been declared in default for failure to appear during manifestation was acted upon by respondent court together with plaintiffs motion for execution
the pre-trial and as to the other defendants the complaint had already been ordered dismissed as pending appeal in its order of the same date February 14, 1975 this wise:
against them.
ORDER
Let the hearing of the plaintiff's evidence ex-parte be set on November 20, 1974, at 8:30 A.M.
before the Branch Clerk of Court who is deputized for the purpose, to swear in witnesses and to When these incidents, the motion to quash the order of October 28, 1974 and the motion for
submit her report within ten (10) days thereafter. Notify the plaintiff. execution pending appeal were called for hearing today, counsel for the defendants-movants
submitted their manifestation inviting the attention of this Court that by their filing for certiorari and
SO ORDERED. prohibition with preliminary injunction in the Court of Appeals which was dismissed and later the
defaulted defendants filed with the Supreme Court certiorari with prohibition they in effect
Cebu City, Philippines, October 21, 1974. (Page 52, Record.) abandoned their motion to quash.

But, in connection with this last order, the scheduled ex-parte reception of evidence did not take IN VIEW HEREOF, the motion to quash is ordered ABANDONED. The resolution of the motion for
place on November 20, 1974, for on October 28, 1974, upon verbal motion of plaintiff, the court execution pending appeal shall be resolved after the petition for certiorari and prohibition shall
issued the following self-explanatory order: . have been resolved by the Supreme Court.

Acting favorably on the motion of the plaintiff dated October 18, 1974, the Court deputized the SO ORDERED.
Branch Clerk of Court to receive the evidence of the plaintiff ex-parte to be made on November 20,
1974. However, on October 28, 1974, the plaintiff, together with her witnesses, appeared in court Cebu City, Philippines, February 14, 1975. (Page 216, Record.)
and asked, thru counsel, that she be allowed to present her evidence.
Upon these premises, it is the position of petitioners that respondent court acted illegally, in
Considering the time and expenses incurred by the plaintiff in bringing her witnesses to the court, violation of the rules or with grave abuse of discretion in acting on respondent's motion to dismiss
the Branch Clerk of Court is hereby authorized to receive immediately the evidence of the plaintiff of October 18, 1974 without previously ascertaining whether or not due notice thereof had been
ex-parte. served on the adverse parties, as, in fact, no such notice was timely served on the non-defaulted
defendants Lim Teck Chuan and Eng Chong Leonardo and no notice at all was ever sent to the
SO ORDERED. other defendants, herein petitioners, and more so, in actually ordering the dismissal of the case by
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its order of October 21, 1974 and at the same time setting the case for further hearing as against Indeed, a seeming disposition on the part of respondent court to lean more on the contentions of
the defaulted defendants, herein petitioners, actually hearing the same ex-parte and thereafter private respondent may be discerned from the manner it resolved the attempts of defendants Dy
rendering the decision of December 20, 1974 granting respondent Tan even reliefs not prayed for Ochay and Antonio Lim Tanhu to have the earlier order of default against them lifted.
in the complaint. According to the petitioners, to begin with, there was compulsory counterclaim in Notwithstanding that Dy Ochay's motion of October 8, 1971, co-signed by her with their counsel,
the common answer of the defendants the nature of which is such that it cannot be decided in an Atty. Jovencio Enjambre (Annex 2 of respondent answer herein) was over the jurat of the notary
independent action and as to which the attention of respondent court was duly called in the public before whom she took her oath, in the order of November 2, 1971, (Annex 3 id.) it was held
motions for reconsideration. Besides, and more importantly, under Section 4 of Rule 18, that "the oath appearing at the bottom of the motion is not the one contemplated by the
respondent court had no authority to divide the case before it by dismissing the same as against abovequoted pertinent provision (See. 3, Rule 18) of the rules. It is not even a verification. (See. 6,
the non-defaulted defendants and thereafter proceeding to hear it ex-parte and subsequently Rule 7.) What the rule requires as interpreted by the Supreme Court is that the motion must have
rendering judgment against the defaulted defendants, considering that in their view, under the said to be accompanied by an affidavit of merits that the defendant has a meritorious defense, thereby
provision of the rules, when a common cause of action is alleged against several defendants, the ignoring the very simple legal point that the ruling of the Supreme Court in Ong Peng vs. Custodio,
default of any of them is a mere formality by which those defaulted are not allowed to take part in 1 SCRA 781, relied upon by His Honor, under which a separate affidavit of merit is required refers
the proceedings, but otherwise, all the defendants, defaulted and not defaulted, are supposed to obviously to instances where the motion is not over oath of the party concerned, considering that
have but a common fate, win or lose. In other words, petitioners posit that in such a situation, there what the cited provision literally requires is no more than a "motion under oath." Stated otherwise,
can only be one common judgment for or against all the defendant, the non-defaulted and the when a motion to lift an order of default contains the reasons for the failure to answer as well as
defaulted. Thus, petitioners contend that the order of dismissal of October 21, 1974 should be the facts constituting the prospective defense of the defendant and it is sworn to by said
considered also as the final judgment insofar as they are concerned, or, in the alternative, it should defendant, neither a formal verification nor a separate affidavit of merit is necessary.
be set aside together with all the proceedings and decision held and rendered subsequent thereto,
and that the trial be resumed as of said date, with the defendants Lim Teck Chuan and Eng Chong What is worse, the same order further held that the motion to lift the order of default "is an
Leonardo being allowed to defend the case for all the defendants. admission that there was a valid service of summons" and that said motion could not amount to a
challenge against the jurisdiction of the court over the person of the defendant. Such a
On the other hand, private respondent maintains the contrary view that inasmuch as petitioners rationalization is patently specious and reveals an evident failure to grasp the import of the legal
had been properly declared in default, they have no personality nor interest to question the concepts involved. A motion to lift an order of default on the ground that service of summons has
dismissal of the case as against their non-defaulted co-defendants and should suffer the not been made in accordance with the rules is in order and is in essence verily an attack against
consequences of their own default. Respondent further contends, and this is the only position the jurisdiction of the court over the person of the defendant, no less than if it were worded in a
discussed in the memorandum submitted by her counsel, that since petitioners have already made manner specifically embodying such a direct challenge.
or at least started to make their appeal, as they are in fact entitled to appeal, this special civil
action has no reason for being. Additionally, she invokes the point of prematurity upheld by the And then, in the order of February 14, 1972 (Annex 6, id.) lifting at last the order of default as
Court of Appeals in regard to the above-mentioned petition therein of the non-defaulted defendants against defendant Lim Tanhu, His Honor posited that said defendant "has a defense (quitclaim)
Lim Teck Chuan and Eng Chong Leonardo. Finally, she argues that in any event, the errors which renders the claim of the plaintiff contentious." We have read defendants' motion for
attributed to respondent court are errors of judgment and may be reviewed only in an appeal. reconsideration of November 25, 1971 (Annex 5, id.), but We cannot find in it any reference to a
"quitclaim". Rather, the allegation of a quitclaim is in the amended complaint (Pars. 15-16, Annex B
After careful scrutiny of all the above-related proceedings, in the court below and mature of the petition herein) in which plaintiff maintains that her signature thereto was secured through
deliberation, the Court has arrived at the conclusion that petitioners should be granted relief, if only fraud and deceit. In truth, the motion for reconsideration just mentioned, Annex 5, merely reiterated
to stress emphatically once more that the rules of procedure may not be misused and abused as the allegation in Dy Ochay's earlier motion of October 8, 1971, Annex 2, to set aside the order of
instruments for the denial of substantial justice. A review of the record of this case immediately default, that plaintiff Tan could be but the common law wife only of Tee Hoon, since his legitimate
discloses that here is another demonstrative instance of how some members of the bar, availing of wife was still alive, which allegation, His Honor held in the order of November 2, 1971, Annex 3, to
their proficiency in invoking the letter of the rules without regard to their real spirit and intent, be "not good and meritorious defense". To top it all, whereas, as already stated, the order of
succeed in inducing courts to act contrary to the dictates of justice and equity, and, in some February 19, 1972, Annex 6, lifted the default against Lim Tanhu because of the additional
instances, to wittingly or unwittingly abet unfair advantage by ironically camouflaging their consideration that "he has a defense (quitclaim) which renders the claim of the plaintiff
actuations as earnest efforts to satisfy the public clamor for speedy disposition of litigations, contentious," the default of Dy Ochay was maintained notwithstanding that exactly the same
forgetting all the while that the plain injunction of Section 2 of Rule 1 is that the "rules shall be "contentions" defense as that of her husband was invoked by her.
liberally construed in order to promote their object and to assist the parties in obtaining not only
'speedy' but more imperatively, "just ... and inexpensive determination of every action and Such tenuous, if not altogether erroneous reasonings and manifest inconsistency in the legal
proceeding." We cannot simply pass over the impression that the procedural maneuvers and postures in the orders in question can hardly convince Us that the matters here in issue were
tactics revealed in the records of the case at bar were deliberately planned with the calculated end accorded due and proper consideration by respondent court. In fact, under the circumstances
in view of depriving petitioners and their co-defendants below of every opportunity to properly herein obtaining, it seems appropriate to stress that, having in view the rather substantial value of
defend themselves against a claim of more than substantial character, considering the millions of the subject matter involved together with the obviously contentious character of plaintiff's claim,
pesos worth of properties involved as found by respondent judge himself in the impugned decision, which is discernible even on the face of the complaint itself, utmost care should have been taken
a claim that appears, in the light of the allegations of the answer and the documents already to avoid the slightest suspicion of improper motivations on the part of anyone concerned. Upon the
brought to the attention of the court at the pre-trial, to be rather dubious. What is most regrettable considerations hereunder to follow, the Court expresses its grave concern that much has to be
is that apparently, all of these alarming circumstances have escaped respondent judge who did not done to dispel the impression that herein petitioners and their co-defendants are being railroaded
seem to have hesitated in acting favorably on the motions of the plaintiff conducive to the out of their rights and properties without due process of law, on the strength of procedural
deplorable objective just mentioned, and which motions, at the very least, appeared to be 'of highly technicalities adroitly planned by counsel and seemingly unnoticed and undetected by respondent
controversial' merit, considering that their obvious tendency and immediate result would be to court, whose orders, gauged by their tenor and the citations of supposedly pertinent provisions and
convert the proceedings into a one-sided affair, a situation that should be readily condemnable and jurisprudence made therein, cannot be said to have proceeded from utter lack of juridical
intolerable to any court of justice. knowledgeability and competence.

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–1– defendants Lim and Leonardo. While it is true that said defendants are not petitioners herein, the
Court deems it necessary for a full view of the outrageous procedural strategy conceived by
The first thing that has struck the Court upon reviewing the record is the seeming alacrity with respondent's counsel and sanctioned by respondent court to also make reference to the very
which the motion to dismiss the case against non-defaulted defendants Lim Teck Chuan and Eng evident fact that in ordering said dismissal respondent court disregarded completely the existence
Chong Leonardo was disposed of, which definitely ought not to have been the case. The trial was of defendant's counterclaim which it had itself earlier held if indirectly, to be compulsory in nature
proceeding with the testimony of the first witness of plaintiff and he was still under re-cross- when it refused to dismiss the same on the ground alleged by respondent Tan that he docketing
examination. Undoubtedly, the motion to dismiss at that stage and in the light of the declaration of fees for the filing thereof had not been paid by defendants.
default against the rest of the defendants was a well calculated surprise move, obviously designed
to secure utmost advantage of the situation, regardless of its apparent unfairness. To say that it Indeed, that said counterclaim is compulsory needs no extended elaboration. As may be noted in
must have been entirely unexpected by all the defendants, defaulted and non-defaulted , is merely the allegations hereof aforequoted, it arose out of or is necessarily connected with the occurrence
to rightly assume that the parties in a judicial proceeding can never be the victims of any that is the subject matter of the plaintiff's claim, (Section 4, Rule 9) namely, plaintiff's allegedly
procedural waylaying as long as lawyers and judges are imbued with the requisite sense of equity being the widow of the deceased Tee Hoon entitled, as such, to demand accounting of and to
and justice. receive the share of her alleged late husband as partner of defendants Antonio Lim Tanhu and
Alfonso Leonardo Ng Sua in Glory Commercial Company, the truth of which allegations all the
But the situation here was aggravated by the indisputable fact that the adverse parties who were defendants have denied. Defendants maintain in their counterclaim that plaintiff knew of the falsity
entitled to be notified of such unanticipated dismissal motion did not get due notice thereof. of said allegations even before she filed her complaint, for she had in fact admitted her common-
Certainly, the non-defaulted defendants had the right to the three-day prior notice required by law relationship with said deceased in a document she had jointly executed with him by way of
Section 4 of Rule 15. How could they have had such indispensable notice when the motion was agreement to terminate their illegitimate relationship, for which she received P40,000 from the
set for hearing on Monday, October 21, 1974, whereas the counsel for Lim Teck Chuan, Atty. Sitoy deceased, and with respect to her pretended share in the capital and profits in the partnership, it is
was personally served with the notice only on Saturday, October 19, 1974 and the counsel for Eng also defendants' posture that she had already quitclaimed, with the assistance of able counsel,
Chong Leonardo, Atty. Alcudia, was notified by registered mail which was posted only that same whatever rights if any she had thereto in November, 1967, for the sum of P25,000 duly receipted
Saturday, October 19, 1974? According to Chief Justice Moran, "three days at least must intervene by her, which quitclaim was, however, executed, according to respondent herself in her amended
between the date of service of notice and the date set for the hearing, otherwise the court may not complaint, through fraud. And having filed her complaint knowing, according to defendants, as she
validly act on the motion." (Comments on the Rules of Court by Moran, Vol. 1, 1970 ed. p. 474.) ought to have known, that the material allegations thereof are false and baseless, she has caused
Such is the correct construction of Section 4 of Rule 15. And in the instant case, there can be no them to suffer damages. Undoubtedly, with such allegations, defendants' counterclaim is
question that the notices to the non-defaulted defendants were short of the requirement of said compulsory, not only because the same evidence to sustain it will also refute the cause or causes
provision. of action alleged in plaintiff's complaint, (Moran, supra p. 352) but also because from its very
nature, it is obvious that the same cannot "remain pending for independent adjudication by the
We can understand the over-anxiety of counsel for plaintiff, but what is incomprehensible is the court." (Section 2, Rule 17.)
seeming inattention of respondent judge to the explicit mandate of the pertinent rule, not to speak
of the imperatives of fairness, considering he should have realized the far-reaching implications, The provision of the rules just cited specifically enjoins that "(i)f a counterclaim has been pleaded
specially from the point of view he subsequently adopted, albeit erroneously, of his favorably by a defendant prior to the service upon him of the plaintiff's motion to dismiss, the action shall not
acting on it. Actually, he was aware of said consequences, for simultaneously with his order of be dismissed against the defendant's objection unless the counterclaim can remain pending for
dismissal, he immediately set the case for the ex-parte hearing of the evidence against the independent adjudication by the court." Defendants Lim and Leonardo had no opportunity to object
defaulted defendants, which, incidentally, from the tenor of his order which We have quoted above, to the motion to dismiss before the order granting the same was issued, for the simple reason that
appears to have been done by him motu propio As a matter of fact, plaintiff's motion also quoted they were not opportunity notified of the motion therefor, but the record shows clearly that at least
above did not pray for it. defendant Lim immediately brought the matter of their compulsory counterclaim to the attention of
the trial court in his motion for reconsideration of October 23, 1974, even as the counsel for the
Withal, respondent court's twin actions of October 21, 1974 further ignores or is inconsistent with a other defendant, Leonardo, predicated his motion on other grounds. In its order of December 6,
number of known juridical principles concerning defaults, which We will here take occasion to 1974, however, respondent court not only upheld the plaintiffs supposed absolute right to choose
reiterate and further elucidate on, if only to avoid a repetition of the unfortunate errors committed in her adversaries but also held that the counterclaim is not compulsory, thereby virtually making
this case. Perhaps some of these principles have not been amply projected and elaborated before, unexplained and inexplicable 180-degree turnabout in that respect.
and such paucity of elucidation could be the reason why respondent judge must have acted as he
did. Still, the Court cannot but express its vehement condemnation of any judicial actuation that There is another equally fundamental consideration why the motion to dismiss should not have
unduly deprives any party of the right to be heard without clear and specific warrant under the been granted. As the plaintiff's complaint has been framed, all the six defendants are charged with
terms of existing rules or binding jurisprudence. Extreme care must be the instant reaction of every having actually taken part in a conspiracy to misappropriate, conceal and convert to their own
judge when confronted with a situation involving risks that the proceedings may not be fair and benefit the profits, properties and all other assets of the partnership Glory Commercial Company,
square to all the parties concerned. Indeed, a keen sense of fairness, equity and justice that to the extent that they have allegedly organized a corporation, Glory Commercial Company, Inc.
constantly looks for consistency between the letter of the adjective rules and these basic principles with what they had illegally gotten from the partnership. Upon such allegations, no judgment
must be possessed by every judge, If substance is to prevail, as it must, over form in our courts. finding the existence of the alleged conspiracy or holding the capital of the corporation to be the
Literal observance of the rules, when it is conducive to unfair and undue advantage on the part of money of the partnership is legally possible without the presence of all the defendants. The non-
any litigant before it, is unworthy of any court of justice and equity. Withal, only those rules and defaulted defendants are alleged to be stockholders of the corporation and any decision depriving
procedure informed, with and founded on public policy deserve obedience in accord with their the same of all its assets cannot but prejudice the interests of said defendants. Accordingly, upon
unequivocal language or words.. these premises, and even prescinding from the other reasons to be discussed anon it is clear that
all the six defendants below, defaulted and non-defaulted, are indispensable parties. Respondents
Before proceeding to the discussion of the default aspects of this case, however, it should not be could do no less than grant that they are so on page 23 of their answer. Such being the case, the
amiss to advert first to the patent incorrectness, apparent on the face of the record, of the questioned order of dismissal is exactly the opposite of what ought to have been done. Whenever
aforementioned order of dismissal of October 21, 1974 of the case below as regards non-defaulted it appears to the court in the course of a proceeding that an indispensable party has not been
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joined, it is the duty of the court to stop the trial and to order the inclusion of such party. (The against their parents. Respondent court paid no heed at all to the mandate that such dropping
Revised Rules of Court, Annotated & Commented by Senator Vicente J. Francisco, Vol. 1, p. 271, must be on such terms as are just" — meaning to all concerned with its legal and factual effects.
1973 ed. See also Cortez vs. Avila, 101 Phil. 705.) Such an order is unavoidable, for the "general
rule with reference to the making of parties in a civil action requires the joinder of all necessary Thus, it is quite plain that respondent court erred in issuing its order of dismissal of October 21,
parties wherever possible, and the joinder of all indispensable parties under any and all conditions, 1974 as well as its order of December 6, 1974 denying reconsideration of such dismissal. As We
the presence of those latter being a sine qua non of the exercise of judicial power." (Borlasa vs. make this ruling, We are not oblivious of the circumstance that defendants Lim and Leonardo are
Polistico, 47 Phil. 345, at p. 347.) It is precisely " when an indispensable party is not before the not parties herein. But such consideration is inconsequential. The fate of the case of petitioners is
court (that) the action should be dismissed." (People v. Rodriguez, 106 Phil. 325, at p. 327.) The inseparably tied up with said order of dismissal, if only because the order of ex-parte hearing of
absence of an indispensable party renders all subsequent actuations of the court null and void, for October 21, 1974 which directly affects and prejudices said petitioners is predicated thereon.
want of authority to act, not only as to the absent parties but even as to those present. In short, Necessarily, therefore, We have to pass on the legality of said order, if We are to decide the case
what respondent court did here was exactly the reverse of what the law ordains — it eliminated of herein petitioners properly and fairly.
those who by law should precisely be joined.
The attitude of the non-defaulted defendants of no longer pursuing further their questioning of the
As may he noted from the order of respondent court quoted earlier, which resolved the motions for dismissal is from another point of view understandable. On the one hand, why should they insist
reconsideration of the dismissal order filed by the non-defaulted defendants, His Honor on being defendants when plaintiff herself has already release from her claims? On the other
rationalized his position thus: hand, as far as their respective parents-co-defendants are concerned, they must have realized that
they (their parents) could even be benefited by such dismissal because they could question
It is the rule that it is the absolute prerogative of the plaintiff to choose, the theory upon which he whether or not plaintiff can still prosecute her case against them after she had secured the order of
predicates his right of action, or the parties he desires to sue, without dictation or imposition by the dismissal in question. And it is in connection with this last point that the true and correct concept of
court or the adverse party. If he makes a mistake in the choice of his right of action, or in that of default becomes relevant.
the parties against whom he seeks to enforce it, that is his own concern as he alone suffers
therefrom. The plaintiff cannot be compelled to choose his defendants, He may not, at his own At this juncture, it may also be stated that the decision of the Court of Appeals of January 24, 1975
expense, be forced to implead anyone who, under the adverse party's theory, is to answer for in G. R. No. SP-03066 dismissing the petition for certiorari of non-defaulted defendants Lim and
defendant's liability. Neither may the Court compel him to furnish the means by which defendant Leonardo impugning the order of dismissal of October 21, 1974, has no bearing at all in this case,
may avoid or mitigate their liability. (Vaño vs. Alo, 95 Phil. 495-496.) not only because that dismissal was premised by the appellate court on its holding that the said
petition was premature inasmuch as the trial court had not yet resolved the motion of the
This being the rule this court cannot compel the plaintiff to continue prosecuting her cause of defendants of October 28, 1974 praying that said disputed order be quashed, but principally
action against the defendants-movants if in the course of the trial she believes she can enforce it because herein petitioners were not parties in that proceeding and cannot, therefore, be bound by
against the remaining defendants subject only to the limitation provided in Section 2, Rule 17 of its result. In particular, We deem it warranted to draw the attention of private respondent's counsel
the Rules of Court. ... (Pages 6263, Record.) to his allegations in paragraphs XI to XIV of his answer, which relate to said decision of the Court
of Appeals and which have the clear tendency to make it appear to the Court that the appeals
Noticeably, His Honor has employed the same equivocal terminology as in plaintiff's motion of court had upheld the legality and validity of the actuations of the trial court being questioned, when
October 18, 1974 by referring to the action he had taken as being "dismissal of the complaint as a matter of indisputable fact, the dismissal of the petition was based solely and exclusively on
against them or their being dropped therefrom", without perceiving that the reason for the evidently its being premature without in any manner delving into its merits. The Court must and does
intentional ambiguity is transparent. The apparent idea is to rely on the theory that under Section admonish counsel that such manner of pleading, being deceptive and lacking in candor, has no
11 of Rule 3, parties may be dropped by the court upon motion of any party at any stage of the place in any court, much less in the Supreme Court, and if We are adopting a passive attitude in
action, hence "it is the absolute right prerogative of the plaintiff to choose—the parties he desires the premises, it is due only to the fact that this is counsel's first offense. But similar conduct on his
to sue, without dictation or imposition by the court or the adverse party." In other words, the part in the future will definitely be dealt with more severely. Parties and counsel would be well
ambivalent pose is suggested that plaintiff's motion of October 18, 1974 was not predicated on advised to avoid such attempts to befuddle the issues as invariably then will be exposed for what
Section 2 of Rule 17 but more on Section 11 of Rule 3. But the truth is that nothing can be more they are, certainly unethical and degrading to the dignity of the law profession. Moreover, almost
incorrect. To start with, the latter rule does not comprehend whimsical and irrational dropping or always they only betray the inherent weakness of the cause of the party resorting to them.
adding of parties in a complaint. What it really contemplates is erroneous or mistaken non-joinder
and misjoinder of parties. No one is free to join anybody in a complaint in court only to drop him –2–
unceremoniously later at the pleasure of the plaintiff. The rule presupposes that the original
inclusion had been made in the honest conviction that it was proper and the subsequent dropping Coming now to the matter itself of default, it is quite apparent that the impugned orders must have
is requested because it has turned out that such inclusion was a mistake. And this is the reason proceeded from inadequate apprehension of the fundamental precepts governing such procedure
why the rule ordains that the dropping be "on such terms as are just" — just to all the other parties. under the Rules of Court. It is time indeed that the concept of this procedural device were fully
In the case at bar, there is nothing in the record to legally justify the dropping of the non-defaulted understood by the bench and bar, instead of being merely taken for granted as being that of a
defendants, Lim and Leonardo. The motion of October 18, 1974 cites none. From all appearances, simple expedient of not allowing the offending party to take part in the proceedings, so that after
plaintiff just decided to ask for it, without any relevant explanation at all. Usually, the court in his adversary shall have presented his evidence, judgment may be rendered in favor of such
granting such a motion inquires for the reasons and in the appropriate instances directs the opponent, with hardly any chance of said judgment being reversed or modified.
granting of some form of compensation for the trouble undergone by the defendant in answering
the complaint, preparing for or proceeding partially to trial, hiring counsel and making The Rules of Court contain a separate rule on the subject of default, Rule 18. But said rule is
corresponding expenses in the premises. Nothing of these, appears in the order in question. Most concerned solely with default resulting from failure of the defendant or defendants to answer within
importantly, His Honor ought to have considered that the outright dropping of the non-defaulted the reglementary period. Referring to the simplest form of default, that is, where there is only one
defendants Lim and Leonardo, over their objection at that, would certainly be unjust not only to the defendant in the action and he fails to answer on time, Section 1 of the rule provides that upon
petitioners, their own parents, who would in consequence be entirely defenseless, but also to Lim "proof of such failure, (the court shall) declare the defendant in default. Thereupon the court shall
and Leonardo themselves who would naturally correspondingly suffer from the eventual judgment proceed to receive the plaintiff's evidence and render judgment granting him such relief as the
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complaint and the facts proven may warrant." This last clause is clarified by Section 5 which says consequences necessitates a careful and liberal examination of the grounds upon which the
that "a judgment entered against a party in default shall not exceed the amount or be different in defendant may seek to set it aside." (Moran, supra p. 534, citing Coombs vs. Santos, 24 Phil. 446;
kind from that prayed for." 449-450.) The expression, therefore, in Section 1 of Rule 18 aforequoted which says that
"thereupon the court shall proceed to receive the plaintiff's evidence etc." is not to be taken
Unequivocal, in the literal sense, as these provisions are, they do not readily convey the full import literally. The gain in time and dispatch should the court immediately try the case on the very day of
of what they contemplate. To begin with, contrary to the immediate notion that can be drawn from or shortly after the declaration of default is far outweighed by the inconvenience and complications
their language, these provisions are not to be understood as meaning that default or the failure of involved in having to undo everything already done in the event the defendant should justify his
the defendant to answer should be "interpreted as an admission by the said defendant that the omission to answer on time.
plaintiff's cause of action find support in the law or that plaintiff is entitled to the relief prayed for."
(Moran, supra, p. 535 citing Macondary & Co. v. Eustaquio, 64 Phil. 466, citing with approval The foregoing observations, as may be noted, refer to instances where the only defendant or all
Chaffin v. McFadden, 41 Ark. 42; Johnson v. Pierce, 12 Ark. 599; Mayden v. Johnson, 59 Ga. 105; the defendants, there being several, are declared in default. There are additional rules embodying
People v. Rust, 292 111. 328; Ken v. Leopold 21 111. A. 163; Chicago, etc. Electric R. Co. v. more considerations of justice and equity in cases where there are several defendants against
Krempel 116 111. A. 253.) whom a common cause of action is averred and not all of them answer opportunely or are in
default, particularly in reference to the power of the court to render judgment in such situations.
Being declared in default does not constitute a waiver of rights except that of being heard and of Thus, in addition to the limitation of Section 5 that the judgment by default should not be more in
presenting evidence in the trial court. According to Section 2, "except as provided in Section 9 of amount nor different in kind from the reliefs specifically sought by plaintiff in his complaint, Section
Rule 13, a party declared in default shall not be entitled to notice of subsequent proceedings, nor 4 restricts the authority of the court in rendering judgment in the situations just mentioned as
to take part in the trial." That provision referred to reads: "No service of papers other than follows:
substantially amended pleadings and final orders or judgments shall be necessary on a party in
default unless he files a motion to set aside the order of default, in which event he shall be entitled Sec. 4. Judgment when some defendants answer, and other make difficult. — When a complaint
to notice of all further proceedings regardless of whether the order of default is set aside or not." states a common cause of action against several defendant some of whom answer, and the others
And pursuant to Section 2 of Rule 41, "a party who has been declared in default may likewise fail to do so, the court shall try the case against all upon the answer thus filed and render judgment
appeal from the judgment rendered against him as contrary to the evidence or to the law, even if upon the evidence presented. The same proceeding applies when a common cause of action is
no petition for relief to set aside the order of default has been presented by him in accordance with pleaded in a counterclaim, cross-claim and third-party claim.
Rule 38.".
Very aptly does Chief Justice Moran elucidate on this provision and the controlling jurisprudence
In other words, a defaulted defendant is not actually thrown out of court. While in a sense it may be explanatory thereof this wise:
said that by defaulting he leaves himself at the mercy of the court, the rules see to it that any
judgment against him must be in accordance with law. The evidence to support the plaintiff's cause Where a complaint states a common cause of action against several defendants and some appear
is, of course, presented in his absence, but the court is not supposed to admit that which is to defend the case on the merits while others make default, the defense interposed by those who
basically incompetent. Although the defendant would not be in a position to object, elementary appear to litigate the case inures to the benefit of those who fail to appear, and if the court finds
justice requires that, only legal evidence should be considered against him. If the evidence that a good defense has been made, all of the defendants must be absolved. In other words, the
presented should not be sufficient to justify a judgment for the plaintiff, the complaint must be answer filed by one or some of the defendants inures to the benefit of all the others, even those
dismissed. And if an unfavorable judgment should be justifiable, it cannot exceed in amount or be who have not seasonably filed their answer. (Bueno v. Ortiz, L-22978, June 27, 1968, 23 SCRA
different in kind from what is prayed for in the complaint. 1151.) The proper mode of proceeding where a complaint states a common cause of action
against several defendants, and one of them makes default, is simply to enter a formal default
Incidentally, these considerations argue against the present widespread practice of trial judges, as order against him, and proceed with the cause upon the answers of the others. The defaulting
was done by His Honor in this case, of delegating to their clerks of court the reception of the defendant merely loses his standing in court, he not being entitled to the service of notice in the
plaintiff's evidence when the defendant is in default. Such a Practice is wrong in principle and cause, nor to appear in the suit in any way. He cannot adduce evidence; nor can he be heard at
orientation. It has no basis in any rule. When a defendant allows himself to be declared in default, the final hearing, (Lim Toco v. Go Fay, 80 Phil. 166.) although he may appeal the judgment
he relies on the faith that the court would take care that his rights are not unduly prejudiced. He rendered against him on the merits. (Rule 41, sec. 2.) If the case is finally decided in the plaintiff's
has a right to presume that the law and the rules will still be observed. The proceedings are held in favor, a final decree is then entered against all the defendants; but if the suit should be decided
his forced absence, and it is but fair that the plaintiff should not be allowed to take advantage of against the plaintiff, the action will be dismissed as to all the defendants alike. (Velez v. Ramas, 40
the situation to win by foul or illegal means or with inherently incompetent evidence. Thus, in such Phil. 787-792; Frow v. de la Vega, 15 Wal. 552,21 L. Ed. 60.) In other words the judgment will
instances, there is need for more attention from the court, which only the judge himself can affect the defaulting defendants either favorably or adversely. (Castro v. Peña, 80 Phil. 488.)
provide. The clerk of court would not be in a position much less have the authority to act in the
premises in the manner demanded by the rules of fair play and as contemplated in the law, Defaulting defendant may ask execution if judgment is in his favor. (Castro v. Peña, supra.)
considering his comparably limited area of discretion and his presumably inferior preparation for (Moran, Rules of Court, Vol. 1, pp. 538-539.)
the functions of a judge. Besides, the default of the defendant is no excuse for the court to
renounce the opportunity to closely observe the demeanor and conduct of the witnesses of the In Castro vs. Peña, 80 Phil. 488, one of the numerous cases cited by Moran, this Court elaborated
plaintiff, the better to appreciate their truthfulness and credibility. We therefore declare as a matter on the construction of the same rule when it sanctioned the execution, upon motion and for the
of judicial policy that there being no imperative reason for judges to do otherwise, the practice benefit of the defendant in default, of a judgment which was adverse to the plaintiff. The Court
should be discontinued. held:

Another matter of practice worthy of mention at this point is that it is preferable to leave enough As above stated, Emilia Matanguihan, by her counsel, also was a movant in the petition for
opportunity open for possible lifting of the order of default before proceeding with the reception of execution Annex 1. Did she have a right to be such, having been declared in default? In Frow vs.
the plaintiff's evidence and the rendition of the decision. "A judgment by default may amount to a De la Vega, supra, cited as authority in Velez vs. Ramas, supra, the Supreme Court of the United
positive and considerable injustice to the defendant; and the possibility of such serious
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States adopted as ground for its own decision the following ruling of the New York Court of Errors acting as his agent. Patanao's cause of action against the other respondents in Case No. 190,
in Clason vs. Morris, 10 Jons., 524: namely, the Director of Forestry, the District Forester of Agusan, the Forest Officer of Bayugan,
Agusan, and the Secretary of Agriculture and Natural Resources. Pursuant to Rule 18, Section 4,
It would be unreasonable to hold that because one defendant had made default, the plaintiff of the Rules of Court, 'when a complaint states a common cause of action against several
should have a decree even against him, where the court is satisfied from the proofs offered by the defendants some of whom answer and the others fail to do so, the court shall try the case against
other, that in fact the plaintiff is not entitled to a decree. (21 Law, ed., 61.) all upon the answer thus filed (by some) and render judgment upon the evidence presented.' In
other words, the answer filed by one or some of the defendants inures to the benefit of all the
The reason is simple: justice has to be consistent. The complaint stating a common cause of others, even those who have not seasonably filed their answer.
action against several defendants, the complainant's rights — or lack of them — in the controversy
have to be the same, and not different, as against all the defendant's although one or some make Indeed, since the petition in Case No. 190 sets forth a common cause of action against all of the
default and the other or others appear, join issue, and enter into trial. For instance, in the case of respondents therein, a decision in favor of one of them would necessarily favor the others. In fact,
Clason vs. Morris above cited, the New York Court of Errors in effect held that in such a case if the the main issue, in said case, is whether Patanao has a timber license to undertake logging
plaintiff is not entitled to a decree, he will not be entitled to it, not only as against the defendant operations in the disputed area. It is not possible to decide such issue in the negative, insofar as
appearing and resisting his action but also as against the one who made default. In the case at the Director of Forestry, and to settle it otherwise, as regards the PC, which is merely acting as
bar, the cause of action in the plaintiff's complaint was common against the Mayor of Manila, agent of the Director of Forestry, and is, therefore, his alter ego, with respect to the disputed forest
Emilia Matanguihan, and the other defendants in Civil Case No. 1318 of the lower court. The Court area.
of First Instance in its judgment found and held upon the evidence adduced by the plaintiff and the
defendant mayor that as between said plaintiff and defendant Matanguihan the latter was the one Stated differently, in all instances where a common cause of action is alleged against several
legally entitled to occupy the stalls; and it decreed, among other things, that said plaintiff defendants, some of whom answer and the others do not, the latter or those in default acquire a
immediately vacate them. Paraphrasing the New York Court of Errors, it would be unreasonable to vested right not only to own the defense interposed in the answer of their co- defendant or co-
hold now that because Matanguihan had made default, the said plaintiff should be declared, as defendants not in default but also to expect a result of the litigation totally common with them in
against her, legally entitled to the occupancy of the stalls, or to remain therein, although the Court kind and in amount whether favorable or unfavorable. The substantive unity of the plaintiff's cause
of First Instance was so firmly satisfied, from the proofs offered by the other defendant, that the against all the defendants is carried through to its adjective phase as ineluctably demanded by the
same plaintiff was not entitled to such occupancy that it peremptorily ordered her to vacate the homogeneity and indivisibility of justice itself. Indeed, since the singleness of the cause of action
stalls. If in the cases of Clason vs. Morris, supra, Frow vs. De la Vega, supra, and Velez vs. also inevitably implies that all the defendants are indispensable parties, the court's power to act is
Ramas, supra the decrees entered inured to the benefit of the defaulting defendants, there is no integral and cannot be split such that it cannot relieve any of them and at the same time render
reason why that entered in said case No. 1318 should not be held also to have inured to the judgment against the rest. Considering the tenor of the section in question, it is to be assumed that
benefit of the defaulting defendant Matanguihan and the doctrine in said three cases plainly when any defendant allows himself to be declared in default knowing that his defendant has
implies that there is nothing in the law governing default which would prohibit the court from already answered, he does so trusting in the assurance implicit in the rule that his default is in
rendering judgment favorable to the defaulting defendant in such cases. If it inured to her benefit, it essence a mere formality that deprives him of no more than the right to take part in the trial and
stands to reason that she had a right to claim that benefit, for it would not be a benefit if the that the court would deem anything done by or for the answering defendant as done by or for him.
supposed beneficiary were barred from claiming it; and if the benefit necessitated the execution of The presumption is that otherwise he would not -have seen to that he would not be in default. Of
the decree, she must be possessed of the right to ask for the execution thereof as she did when course, he has to suffer the consequences of whatever the answering defendant may do or fail to
she, by counsel, participated in the petition for execution Annex 1. do, regardless of possible adverse consequences, but if the complaint has to be dismissed in so
far as the answering defendant is concerned it becomes his inalienable right that the same be
Section 7 of Rule 35 would seem to afford a solid support to the above considerations. It provides dismissed also as to him. It does not matter that the dismissal is upon the evidence presented by
that when a complaint states a common cause of action against several defendants, some of the plaintiff or upon the latter's mere desistance, for in both contingencies, the lack of sufficient
whom answer, and the others make default, 'the court shall try the case against all upon the legal basis must be the cause. The integrity of the common cause of action against all the
answer thus filed and render judgment upon the evidence presented by the parties in court'. It is defendants and the indispensability of all of them in the proceedings do not permit any possibility
obvious that under this provision the case is tried jointly not only against the defendants answering of waiver of the plaintiff's right only as to one or some of them, without including all of them, and
but also against those defaulting, and the trial is held upon the answer filed by the former; and the so, as a rule, withdrawal must be deemed to be a confession of weakness as to all. This is not only
judgment, if adverse, will prejudice the defaulting defendants no less than those who answer. In elementary justice; it also precludes the concomitant hazard that plaintiff might resort to the kind of
other words, the defaulting defendants are held bound by the answer filed by their co-defendants procedural strategem practiced by private respondent herein that resulted in totally depriving
and by the judgment which the court may render against all of them. By the same token, and by all petitioners of every opportunity to defend themselves against her claims which, after all, as will be
rules of equity and fair play, if the judgment should happen to be favorable, totally or partially, to seen later in this opinion, the record does not show to be invulnerable, both in their factual and
the answering defendants, it must correspondingly benefit the defaulting ones, for it would not be legal aspects, taking into consideration the tenor of the pleadings and the probative value of the
just to let the judgment produce effects as to the defaulting defendants only when adverse to them competent evidence which were before the trial court when it rendered its assailed decision where
and not when favorable. all the defendants are indispensable parties, for which reason the absence of any of them in the
case would result in the court losing its competency to act validly, any compromise that the plaintiff
In Bueno vs. Ortiz, 23 SCRA 1151, the Court applied the provision under discussion in the might wish to make with any of them must, as a matter of correct procedure, have to await until
following words: after the rendition of the judgment, at which stage the plaintiff may then treat the matter of its
execution and the satisfaction of his claim as variably as he might please. Accordingly, in the case
In answer to the charge that respondent Judge had committed a grave abuse of discretion in now before Us together with the dismissal of the complaint against the non-defaulted defendants,
rendering a default judgment against the PC, respondents allege that, not having filed its answer the court should have ordered also the dismissal thereof as to petitioners.
within the reglementary period, the PC was in default, so that it was proper for Patanao to forthwith
present his evidence and for respondent Judge to render said judgment. It should be noted, Indeed, there is more reason to apply here the principle of unity and indivisibility of the action just
however, that in entering the area in question and seeking to prevent Patanao from continuing his discussed because all the defendants here have already joined genuine issues with plaintiff. Their
logging operations therein, the PC was merely executing an order of the Director of Forestry and default was only at the pre-trial. And as to such absence of petitioners at the pre-trial, the same
84
could be attributed to the fact that they might not have considered it necessary anymore to be act on the motion, to dismiss, pursuant to Section 6 of Rule 15, for according to Senator Francisco,
present, since their respective children Lim and Leonardo, with whom they have common "(t) he Rules of Court clearly provide that no motion shall be acted upon by the Court without the
defenses, could take care of their defenses as well. Anything that might have had to be done by proof of service of notice thereof, together with a copy of the motion and other papers
them at such pre-trial could have been done for them by their children, at least initially, specially accompanying it, to all parties concerned at least three days before the hearing thereof, stating the
because in the light of the pleadings before the court, the prospects of a compromise must have time and place for the hearing of the motion. (Rule 26, section 4, 5 and 6, Rules of Court (now
appeared to be rather remote. Such attitude of petitioners is neither uncommon nor totally Sec. 15, new Rules). When the motion does not comply with this requirement, it is not a motion. It
unjustified. Under the circumstances, to declare them immediately and irrevocably in default was presents no question which the court could decide. And the Court acquires no jurisdiction to
not an absolute necessity. Practical considerations and reasons of equity should have moved consider it. (Roman Catholic Bishop of Lipa vs. Municipality of Unisan 44 Phil., 866; Manakil vs.
respondent court to be more understanding in dealing with the situation. After all, declaring them in Revilla, 42 Phil., 81.) (Laserna vs. Javier, et al., CA-G.R. No. 7885, April 22, 1955; 21 L.J. 36,
default as respondent court did not impair their right to a common fate with their children. citing Roman Catholic Bishop of Lipa vs. Municipality of Unisan 44 Phil., 866; Manakil vs. Revilla,
42 Phil., 81.) (Francisco. The Revised Rules of Court in the Philippines, pp. 861-862.) Thus, We
–3– see again, from a different angle, why respondent court's order of dismissal of October 21, 1974 is
fatally ineffective.
Another issue to be resolved in this case is the question of whether or not herein petitioners were
entitled to notice of plaintiff's motion to drop their co-defendants Lim and Leonardo, considering –4–
that petitioners had been previously declared in default. In this connection, the decisive
consideration is that according to the applicable rule, Section 9, Rule 13, already quoted above, (1) The foregoing considerations notwithstanding, it is respondents' position that certiorari is not the
even after a defendant has been declared in default, provided he "files a motion to set aside the proper remedy of petitioners. It is contended that inasmuch as said petitioners have in fact made
order of default, — he shall be entitled to notice of all further proceedings regardless of whether their appeal already by filing the required notice of appeal and appeal bond and a motion for
the order of default is set aside or not" and (2) a party in default who has not filed such a motion to extension to file their record on appeal, which motion was granted by respondent court, their only
set aside must still be served with all "substantially amended or supplemented pleadings." In the recourse is to prosecute that appeal. Additionally, it is also maintained that since petitioners have
instant case, it cannot be denied that petitioners had all filed their motion for reconsideration of the expressly withdrawn their motion to quash of January 4, 1975 impugning the order of October 28,
order declaring them in default. Respondents' own answer to the petition therein makes reference 1974, they have lost their right to assail by certiorari the actuations of respondent court now being
to the order of April 3, 1973, Annex 8 of said answer, which denied said motion for reconsideration. questioned, respondent court not having been given the opportunity to correct any possible error it
On page 3 of petitioners' memorandum herein this motion is referred to as "a motion to set aside might have committed.
the order of default." But as We have not been favored by the parties with a copy of the said
motion, We do not even know the excuse given for petitioners' failure to appear at the pre-trial, and We do not agree. As already shown in the foregoing discussion, the proceedings in the court
We cannot, therefore, determine whether or not the motion complied with the requirements of below have gone so far out of hand that prompt action is needed to restore order in the entangled
Section 3 of Rule 18 which We have held to be controlling in cases of default for failure to answer situation created by the series of plainly illegal orders it had issued. The essential purpose of
on time. (The Philippine-British Co. Inc. etc. et al. vs. The Hon. Walfrido de los Angeles etc. et al., certiorari is to keep the proceedings in lower judicial courts and tribunals within legal bounds, so
63 SCRA 50.) that due process and the rule of law may prevail at all times and arbitrariness, whimsicality and
unfairness which justice abhors may immediately be stamped out before graver injury, juridical and
We do not, however, have here, as earlier noted, a case of default for failure to answer but one for otherwise, ensues. While generally these objectives may well be attained in an ordinary appeal, it
failure to appear at the pre-trial. We reiterate, in the situation now before Us, issues have already is undoubtedly the better rule to allow the special remedy of certiorari at the option of the party
been joined. In fact, evidence had been partially offered already at the pre-trial and more of it at adversely affected, when the irregularity committed by the trial court is so grave and so far
the actual trial which had already begun with the first witness of the plaintiff undergoing re-cross- reaching in its consequences that the long and cumbersome procedure of appeal will only further
examination. With these facts in mind and considering that issues had already been joined even as aggravate the situation of the aggrieved party because other untoward actuations are likely to
regards the defaulted defendants, it would be requiring the obvious to pretend that there was still materialize as natural consequences of those already perpetrated. If the law were otherwise,
need for an oath or a verification as to the merits of the defense of the defaulted defendants in certiorari would have no reason at all for being.
their motion to reconsider their default. Inasmuch as none of the parties had asked for a summary
judgment there can be no question that the issues joined were genuine, and consequently, the No elaborate discussion is needed to show the urgent need for corrective measures in the case at
reason for requiring such oath or verification no longer holds. Besides, it may also be reiterated bar. Verily, this is one case that calls for the exercise of the Supreme Court's inherent power of
that being the parents of the non-defaulted defendants, petitioners must have assumed that their supervision over all kinds of judicial actions of lower courts. Private respondent's procedural
presence was superfluous, particularly because the cause of action against them as well as their technique designed to disable petitioners to defend themselves against her claim which appears
own defenses are common. Under these circumstances, the form of the motion by which the on the face of the record itself to be at least highly controversial seems to have so fascinated
default was sought to be lifted is secondary and the requirements of Section 3 of Rule 18 need not respondent court that none would be surprised should her pending motion for immediate execution
be strictly complied with, unlike in cases of default for failure to answer. We can thus hold as We of the impugned judgment receive similar ready sanction as her previous motions which turned the
do hold for the purposes of the revival of their right to notice under Section 9 of Rule 13, that proceedings into a one-sided affair. The stakes here are high. Not only is the subject matter
petitioner's motion for reconsideration was in substance legally adequate regardless of whether or considerably substantial; there is the more important aspect that not only the spirit and intent of the
not it was under oath. rules but even the basic rudiments of fair play have been disregarded. For the Court to leave
unrestrained the obvious tendency of the proceedings below would be nothing short of wittingly
In any event, the dropping of the defendants Lim and Leonardo from plaintiff's amended complaint condoning inequity and injustice resulting from erroneous construction and unwarranted
was virtually a second amendment of plaintiffs complaint. And there can be no doubt that such application of procedural rules.
amendment was substantial, for with the elimination thereby of two defendants allegedly solidarily
liable with their co-defendants, herein petitioners, it had the effect of increasing proportionally what –5–
each of the remaining defendants, the said petitioners, would have to answer for jointly and
severally. Accordingly, notice to petitioners of the plaintiff's motion of October 18, 1974 was legally The sum and total of all the foregoing disquisitions is that the decision here in question is legally
indispensable under the rule above-quoted. Consequently, respondent court had no authority to anomalous. It is predicated on two fatal malactuations of respondent court namely (1) the
85
dismissal of the complaint against the non-defaulted defendants Lim and Leonardo and (2) the ex- defense, without considering that all of them are indispensable parties to a common cause of
parte reception of the evidence of the plaintiff by the clerk of court, the subsequent using of the action to which they have countered with a common defense readily connotes an intent to secure a
same as basis for its judgment and the rendition of such judgment. one-sided decision, even improperly. And when, in this connection, the obvious weakness of
plaintiff's evidence is taken into account, one easily understands why such tactics had to be
For at least three reasons which We have already fully discussed above, the order of dismissal of availed of. We cannot directly or indirectly give Our assent to the commission of unfairness and
October 21, 1974 is unworthy of Our sanction: (1) there was no timely notice of the motion therefor inequity in the application of the rules of procedure, particularly when the propriety of reliance
to the non-defaulted defendants, aside from there being no notice at all to herein petitioners; (2) thereon is not beyond controversy.
the common answer of the defendants, including the non-defaulted, contained a compulsory
counterclaim incapable of being determined in an independent action; and (3) the immediate effect 2. The theories of remedial law pursued by private respondents, although approved by His Honor,
of such dismissal was the removal of the two non-defaulted defendants as parties, and inasmuch run counter to such basic principles in the rules on default and such elementary rules on dismissal
as they are both indispensable parties in the case, the court consequently lost the" sine qua non of of actions and notice of motions that no trial court should be unaware of or should be mistaken in
the exercise of judicial power", per Borlasa vs. Polistico, supra. This is not to mention anymore the applying. We are at a loss as to why His Honor failed to see through counsel's inequitous strategy,
irregular delegation to the clerk of court of the function of receiving plaintiff's evidence. And as when the provisions (1) on the three-day rule on notice of motions, Section 4 of Rule 15, (2)
regards the ex-parte reception of plaintiff's evidence and subsequent rendition of the judgment by against dismissal of actions on motion of plaintiff when there is a compulsory counterclaim, Section
default based thereon, We have seen that it was violative of the right of the petitioners, under the 2, Rule 17, (3) against permitting the absence of indispensable parties, Section 7, Rule 3, (4) on
applicable rules and principles on default, to a common and single fate with their non-defaulted co- service of papers upon defendants in default when there are substantial amendments to pleadings,
defendants. And We are not yet referring, as We shall do this anon to the numerous reversible Section 9, Rule 13, and (5) on the unity and integrity of the fate of defendants in default with those
errors in the decision itself. not in default where the cause of action against them and their own defenses are common,
Section 4, Rule 18, are so plain and the jurisprudence declaratory of their intent and proper
It is to be noted, however, that the above-indicated two fundamental flaws in respondent court's construction are so readily comprehensible that any error as to their application would be unusual
actuations do not call for a common corrective remedy. We cannot simply rule that all the in any competent trial court.
impugned proceedings are null and void and should be set aside, without being faced with the
insurmountable obstacle that by so doing We would be reviewing the case as against the two non- 3. After all, all the malactuations of respondent court are traceable to the initiative of private
defaulted defendants who are not before Us not being parties hereto. Upon the other hand, for Us respondent and/or her counsel. She cannot, therefore, complain that she is being made to
to hold that the order of dismissal should be allowed to stand, as contended by respondents unjustifiably suffer the consequences of what We have found to be erroneous orders of respondent
themselves who insist that the same is already final, not only because the period for its finality has court. It is only fair that she should not be allowed to benefit from her own frustrated objective of
long passed but also because allegedly, albeit not very accurately, said 'non-defaulted defendants securing a one-sided decision.
unsuccessfully tried to have it set aside by the Court of Appeals whose decision on their petition is
also already final, We would have to disregard whatever evidence had been presented by the 4. More importantly, We do not hesitate to hold that on the basis of its own recitals, the decision in
plaintiff against them and, of course, the findings of respondent court based thereon which, as the question cannot stand close scrutiny. What is more, the very considerations contained therein
assailed decision shows, are adverse to them. In other words, whichever of the two apparent reveal convincingly the inherent weakness of the cause of the plaintiff. To be sure, We have been
remedies the Court chooses, it would necessarily entail some kind of possible juridical giving serious thought to the idea of merely returning this case for a resumption of trial by setting
imperfection. Speaking of their respective practical or pragmatic effects, to annul the dismissal aside the order of dismissal of October 21, 1974, with all its attendant difficulties on account of its
would inevitably prejudice the rights of the non-defaulted defendants whom We have not heard adverse effects on parties who have not been heard, but upon closer study of the pleadings and
and who even respondents would not wish to have anything anymore to do with the case. On the the decision and other circumstances extant in the record before Us, We are now persuaded that
other hand, to include petitioners in the dismissal would naturally set at naught every effort private such a course of action would only lead to more legal complications incident to attempts on the
respondent has made to establish or prove her case thru means sanctioned by respondent court. part of the parties concerned to desperately squeeze themselves out of a bad situation. Anyway,
In short, We are confronted with a legal para-dilemma. But one thing is certain — this difficult We feel confident that by and large, there is enough basis here and now for Us to rule out the
situations has been brought about by none other than private respondent who has quite cynically claim of the plaintiff.
resorted to procedural maneuvers without realizing that the technicalities of the adjective law, even
when apparently accurate from the literal point of view, cannot prevail over the imperatives of the Even a mere superficial reading of the decision would immediately reveal that it is littered on its
substantive law and of equity that always underlie them and which have to be inevitably face with deficiencies and imperfections which would have had no reason for being were there less
considered in the construction of the pertinent procedural rules. haste and more circumspection in rendering the same. Recklessness in jumping to unwarranted
conclusions, both factual and legal, is at once evident in its findings relative precisely to the main
All things considered, after careful and mature deliberation, the Court has arrived at the conclusion bases themselves of the reliefs granted. It is apparent therein that no effort has been made to
that as between the two possible alternatives just stated, it would only be fair, equitable and proper avoid glaring inconsistencies. Where references are made to codal provisions and jurisprudence,
to uphold the position of petitioners. In other words, We rule that the order of dismissal of October inaccuracy and inapplicability are at once manifest. It hardly commends itself as a deliberate and
21, 1974 is in law a dismissal of the whole case of the plaintiff, including as to petitioners herein. consciencious adjudication of a litigation which, considering the substantial value of the subject
Consequently, all proceedings held by respondent court subsequent thereto including and matter it involves and the unprecedented procedure that was followed by respondent's counsel,
principally its decision of December 20, 1974 are illegal and should be set aside. calls for greater attention and skill than the general run of cases would.

This conclusion is fully justified by the following considerations of equity: Inter alia, the following features of the decision make it highly improbable that if We took another
course of action, private respondent would still be able to make out any case against petitioners,
1. It is very clear to Us that the procedural maneuver resorted to by private respondent in securing not to speak of their co-defendants who have already been exonerated by respondent herself thru
the decision in her favor was ill-conceived. It was characterized by that which every principle of law her motion to dismiss:
and equity disdains — taking unfair advantage of the rules of procedure in order to unduly deprive
the other party of full opportunity to defend his cause. The idea of "dropping" the non-defaulted 1. According to His Honor's own statement of plaintiff's case, "she is the widow of the late Tee
defendants with the end in view of completely incapacitating their co-defendants from making any Hoon Po Chuan (Po Chuan, for short) who was then one of the partners in the commercial
86
partnership, Glory Commercial Co. with defendants Antonio Lim Tanhu (Lim Tanhu, for short) and Now, applying these postulates to the findings of respondent court just quoted, it will be observed
Alfonso Leonardo Ng Sua (Ng Sua, for short) as co-partners; that after the death of her husband that the court's conclusion about the supposed marriage of plaintiff to the deceased Tee Hoon Lim
on March 11, 1966 she is entitled to share not only in the capital and profits of the partnership but Po Chuan is contrary to the weight of the evidence brought before it during the trial and the pre-
also in the other assets, both real and personal, acquired by the partnership with funds of the latter trial.
during its lifetime."
Under Article 55 of the Civil Code, the declaration of the contracting parties that they take each
Relatedly, in the latter part of the decision, the findings are to the following effect: . other as husband and wife "shall be set forth in an instrument" signed by the parties as well as by
their witnesses and the person solemnizing the marriage. Accordingly, the primary evidence of a
That the herein plaintiff Tan Put and her late husband Po Chuan married at the Philippine marriage must be an authentic copy of the marriage contract. While a marriage may also be
Independent Church of Cebu City on December, 20, 1949; that Po Chuan died on March 11, 1966; proved by other competent evidence, the absence of the contract must first be satisfactorily
that the plaintiff and the late Po Chuan were childless but the former has a foster son Antonio explained. Surely, the certification of the person who allegedly solemnized a marriage is not
Nuñez whom she has reared since his birth with whom she lives up to the present; that prior to the admissible evidence of such marriage unless proof of loss of the contract or of any other
marriage of the plaintiff to Po Chuan the latter was already managing the partnership Glory satisfactory reason for its non-production is first presented to the court. In the case at bar, the
Commercial Co. then engaged in a little business in hardware at Manalili St., Cebu City; that prior purported certification issued by a Mons. Jose M. Recoleto, Bishop, Philippine Independent
to and just after the marriage of the plaintiff to Po Chuan she was engaged in the drugstore Church, Cebu City, is not, therefore, competent evidence, there being absolutely no showing as to
business; that not long after her marriage, upon the suggestion of Po Chuan the plaintiff sold her unavailability of the marriage contract and, indeed, as to the authenticity of the signature of said
drugstore for P125,000.00 which amount she gave to her husband in the presence of defendant certifier, the jurat allegedly signed by a second assistant provincial fiscal not being authorized by
Lim Tanhu and was invested in the partnership Glory Commercial Co. sometime in 1950; that after law, since it is not part of the functions of his office. Besides, inasmuch as the bishop did not
the investment of the above-stated amount in the partnership its business flourished and it testify, the same is hearsay.
embarked in the import business and also engaged in the wholesale and retail trade of cement and
GI sheets and under huge profits; As regards the testimony of plaintiff herself on the same point and that of her witness Antonio
Nuñez, there can be no question that they are both self-serving and of very little evidentiary value,
xxx xxx xxx it having been disclosed at the trial that plaintiff has already assigned all her rights in this case to
said Nuñez, thereby making him the real party in interest here and, therefore, naturally as biased
That the late Po Chuan was the one who actively managed the business of the partnership Glory as herself. Besides, in the portion of the testimony of Nuñez copied in Annex C of petitioner's
Commercial Co. he was the one who made the final decisions and approved the appointments of memorandum, it appears admitted that he was born only on March 25, 1942, which means that he
new personnel who were taken in by the partnership; that the late Po Chuan and defendants Lim was less than eight years old at the supposed time of the alleged marriage. If for this reason alone,
Tanhu and Ng Sua are brothers, the latter two (2) being the elder brothers of the former; that it is extremely doubtful if he could have been sufficiently aware of such event as to be competent
defendants Lim Tanhu and Ng Sua are both naturalized Filipino citizens whereas the late Po to testify about it.
Chuan until the time of his death was a Chinese citizen; that the three (3) brothers were partners in
the Glory Commercial Co. but Po Chuan was practically the owner of the partnership having the Incidentally, another Annex C of the same memorandum purports to be the certificate of birth of
controlling interest; that defendants Lim Tanhu and Ng Sua were partners in name but they were one Antonio T. Uy supposed to have been born on March 23, 1937 at Centro Misamis, Misamis
mere employees of Po Chuan .... (Pp. 89-91, Record.) Occidental, the son of one Uy Bien, father, and Tan Put, mother. Significantly, respondents have
not made any adverse comment on this document. It is more likely, therefore, that the witness is
How did His Honor arrive at these conclusions? To start with, it is not clear in the decision whether really the son of plaintiff by her husband Uy Kim Beng. But she testified she was childless. So
or not in making its findings of fact the court took into account the allegations in the pleadings of which is which? In any event, if on the strength of this document, Nuñez is actually the legitimate
the parties and whatever might have transpired at the pre-trial. All that We can gather in this son of Tan Put and not her adopted son, he would have been but 13 years old in 1949, the year of
respect is that references are made therein to pre-trial exhibits and to Annex A of the answer of the her alleged marriage to Po Chuan, and even then, considering such age, his testimony in regard
defendants to plaintiff's amended complaint. Indeed, it was incumbent upon the court to consider thereto would still be suspect.
not only the evidence formally offered at the trial but also the admissions, expressed or implied, in
the pleadings, as well as whatever might have been placed before it or brought to its attention Now, as against such flimsy evidence of plaintiff, the court had before it, two documents of great
during the pre-trial. In this connection, it is to be regretted that none of the parties has thought it weight belying the pretended marriage. We refer to (1) Exhibit LL, the income tax return of the
proper to give Us an idea of what took place at the pre-trial of the present case and what are deceased Tee Hoon Lim Po Chuan indicating that the name of his wife was Ang Sick Tin and (2)
contained in the pre-trial order, if any was issued pursuant to Section 4 of Rule 20. the quitclaim, Annex A of the answer, wherein plaintiff Tan Put stated that she had been living with
the deceased without benefit of marriage and that she was his "common-law wife". Surely, these
The fundamental purpose of pre-trial, aside from affording the parties every opportunity to two documents are far more reliable than all the evidence of the plaintiff put together.
compromise or settle their differences, is for the court to be apprised of the unsettled issues
between the parties and of their respective evidence relative thereto, to the end that it may take Of course, Exhibit LL is what might be termed as pre-trial evidence. But it is evidence offered to
corresponding measures that would abbreviate the trial as much as possible and the judge may be the judge himself, not to the clerk of court, and should have at least moved him to ask plaintiff to
able to ascertain the facts with the least observance of technical rules. In other words whatever is explain if not rebut it before jumping to the conclusion regarding her alleged marriage to the
said or done by the parties or their counsel at the pre- trial serves to put the judge on notice of their deceased, Po Chuan. And in regard to the quitclaim containing the admission of a common-law
respective basic positions, in order that in appropriate cases he may, if necessary in the interest of relationship only, it is to be observed that His Honor found that "defendants Lim Tanhu and Ng Sua
justice and a more accurate determination of the facts, make inquiries about or require had the plaintiff execute a quitclaim on November 29, 1967 (Annex "A", Answer) where they gave
clarifications of matters taken up at the pre-trial, before finally resolving any issue of fact or of law. plaintiff the amount of P25,000 as her share in the capital and profits of the business of Glory
In brief, the pre-trial constitutes part and parcel of the proceedings, and hence, matters dealt with Commercial Co. which was engaged in the hardware business", without making mention of any
therein may not be disregarded in the process of decision making. Otherwise, the real essence of evidence of fraud and misrepresentation in its execution, thereby indicating either that no evidence
compulsory pre-trial would be insignificant and worthless. to prove that allegation of the plaintiff had been presented by her or that whatever evidence was
actually offered did not produce persuasion upon the court. Stated differently, since the existence
87
of the quitclaim has been duly established without any circumstance to detract from its legal evidence in favor of the defendants, her attempt to substantiate her main cause of action that
import, the court should have held that plaintiff was bound by her admission therein that she was defendants Lim Tanhu and Ng Sua have defrauded the partnership Glory Commercial Co. and
the common-law wife only of Po Chuan and what is more, that she had already renounced for converted its properties to themselves is even more dismal. From the very evidence summarized
valuable consideration whatever claim she might have relative to the partnership Glory by His Honor in the decision in question, it is clear that not an iota of reliable proof exists of such
Commercial Co. alleged misdeeds.

And when it is borne in mind that in addition to all these considerations, there are mentioned and Of course, the existence of the partnership has not been denied, it is actually admitted impliedly in
discussed in the memorandum of petitioners (1) the certification of the Local Civil Registrar of defendants' affirmative defense that Po Chuan's share had already been duly settled with and paid
Cebu City and (2) a similar certification of the Apostolic Prefect of the Philippine Independent to both the plaintiff and his legitimate family. But the evidence as to the actual participation of the
Church, Parish of Sto. Niño, Cebu City, that their respective official records corresponding to defendants Lim Tanhu and Ng Sua in the operation of the business that could have enabled them
December 1949 to December 1950 do not show any marriage between Tee Hoon Lim Po Chuan to make the extractions of funds alleged by plaintiff is at best confusing and at certain points
and Tan Put, neither of which certifications have been impugned by respondent until now, it stands manifestly inconsistent.
to reason that plaintiff's claim of marriage is really unfounded. Withal, there is still another
document, also mentioned and discussed in the same memorandum and unimpugned by In her amended complaint, plaintiff repeatedly alleged that as widow of Po Chuan she is entitled to
respondents, a written agreement executed in Chinese, but purportedly translated into English by ¹/3 share of the assets and properties of the partnership. In fact, her prayer in said complaint is,
the Chinese Consul of Cebu, between Tan Put and Tee Hoon Lim Po Chuan to the following among others, for the delivery to her of such ¹/3 share. His Honor's statement of the case as well
effect: as his findings and judgment are all to that same effect. But what did she actually try to prove at
the ex- parte hearing?
CONSULATE OF THE REPUBLIC OF CHINA Cebu City, Philippines
According to the decision, plaintiff had shown that she had money of her own when she "married"
TRANSLATION Po Chuan and "that prior to and just after the marriage of the plaintiff to Po Chuan, she was
engaged in the drugstore business; that not long after her marriage, upon the suggestion of Po
This is to certify that 1, Miss Tan Ki Eng Alias Tan Put, have lived with Mr. Lim Po Chuan alias Chuan, the plaintiff sold her drugstore for P125,000 which amount she gave to her husband in the
TeeHoon since 1949 but it recently occurs that we are incompatible with each other and are not in presence of Tanhu and was invested in the partnership Glory Commercial Co. sometime in 1950;
the position to keep living together permanently. With the mutual concurrence, we decided to that after the investment of the above-stated amount in the partnership, its business flourished and
terminate the existing relationship of common law-marriage and promised not to interfere each it embarked in the import business and also engaged in the wholesale and retail trade of cement
other's affairs from now on. The Forty Thousand Pesos (P40,000.00) has been given to me by Mr. and GI sheets and under (sic) huge profits." (pp. 25-26, Annex L, petition.)
Lim Po Chuan for my subsistence.
To begin with, this theory of her having contributed of P125,000 to the capital of the partnership by
Witnesses: reason of which the business flourished and amassed all the millions referred to in the decision
has not been alleged in the complaint, and inasmuch as what was being rendered was a judgment
Mr. Lim Beng Guan Mr. Huang Sing Se by default, such theory should not have been allowed to be the subject of any evidence. But
inasmuch as it was the clerk of court who received the evidence, it is understandable that he failed
Signed on the 10 day of the 7th month of the 54th year of the Republic of China (corresponding to to observe the rule. Then, on the other hand, if it was her capital that made the partnership
the year 1965). flourish, why would she claim to be entitled to only to ¹/3 of its assets and profits? Under her theory
found proven by respondent court, she was actually the owner of everything, particularly because
(SGD) TAN KI ENG His Honor also found "that defendants Lim Tanhu and Ng Sua were partners in the name but they
were employees of Po Chuan that defendants Lim Tanhu and Ng Sua had no means of livelihood
Verified from the records. JORGE TABAR (Pp. 283-284, Record.) at the time of their employment with the Glory Commercial Co. under the management of the late
Po Chuan except their salaries therefrom; ..." (p. 27, id.) Why then does she claim only ¹/3 share?
Indeed, not only does this document prove that plaintiff's relation to the deceased was that of a Is this an indication of her generosity towards defendants or of a concocted cause of action
common-law wife but that they had settled their property interests with the payment to her of existing only in her confused imagination engendered by the death of her common-law husband
P40,000. with whom she had settled her common-law claim for recompense of her services as common law
wife for less than what she must have known would go to his legitimate wife and children?
In the light of all these circumstances, We find no alternative but to hold that plaintiff Tan Put's
allegation that she is the widow of Tee Hoon Lim Po Chuan has not been satisfactorily established Actually, as may be noted from the decision itself, the trial court was confused as to the
and that, on the contrary, the evidence on record convincingly shows that her relation with said participation of defendants Lim Tanhu and Ng Sua in Glory Commercial Co. At one point, they
deceased was that of a common-law wife and furthermore, that all her claims against the company were deemed partners, at another point mere employees and then elsewhere as partners-
and its surviving partners as well as those against the estate of the deceased have already been employees, a newly found concept, to be sure, in the law on partnership. And the confusion is
settled and paid. We take judicial notice of the fact that the respective counsel who assisted the worse comfounded in the judgment which allows these "partners in name" and "partners-
parties in the quitclaim, Attys. H. Hermosisima and Natalio Castillo, are members in good standing employees" or employees who had no means of livelihood and who must not have contributed any
of the Philippine Bar, with the particularity that the latter has been a member of the Cabinet and of capital in the business, "as Po Chuan was practically the owner of the partnership having the
the House of Representatives of the Philippines, hence, absent any credible proof that they had controlling interest", ¹/3 each of the huge assets and profits of the partnership. Incidentally, it may
allowed themselves to be parties to a fraudulent document His Honor did right in recognizing its be observed at this juncture that the decision has made Po Chuan play the inconsistent role of
existence, albeit erring in not giving due legal significance to its contents. being "practically the owner" but at the same time getting his capital from the P125,000 given to
him by plaintiff and from which capital the business allegedly "flourished."
2. If, as We have seen, plaintiff's evidence of her alleged status as legitimate wife of Po Chuan is
not only unconvincing but has been actually overcome by the more competent and weighty
88
Anent the allegation of plaintiff that the properties shown by her exhibits to be in the names of sometimes attended to the imported items of the business of Glory Commercial Co." Counting 18
defendants Lim Tanhu and Ng Sua were bought by them with partnership funds, His Honor years back from 1965 or 1966 would take Us to 1947 or 1948. Since according to Exhibit LL, the
confirmed the same by finding and holding that "it is likewise clear that real properties together with baptismal certificate produced by the same witness as his birth certificate, shows he was born in
the improvements in the names of defendants Lim Tanhu and Ng Sua were acquired with March, 1942, how could he have started managing Glory Commercial Co. in 1949 when he must
partnership funds as these defendants were only partners-employees of deceased Po Chuan in have been barely six or seven years old? It should not have escaped His Honor's attention that the
the Glory Commercial Co. until the time of his death on March 11, 1966." (p. 30, id.) It Is Our photographs showing the premises of Philippine Metal Industries after its organization "a year or
considered view, however, that this conclusion of His Honor is based on nothing but pure two after the establishment of Cebu Can Factory in 1957 or 1958" must have been taken after
unwarranted conjecture. Nowhere is it shown in the decision how said defendants could have 1959. How could Nuñez have been only 13 years old then as claimed by him to have been his age
extracted money from the partnership in the fraudulent and illegal manner pretended by plaintiff. in those photographs when according to his "birth certificate", he was born in 1942? His Honor
Neither in the testimony of Nuñez nor in that of plaintiff, as these are summarized in the decision, should not have overlooked that according to the same witness, defendant Ng Sua was living in
can there be found any single act of extraction of partnership funds committed by any of said Bantayan until he was directed to return to Cebu after the fishing business thereat floundered,
defendants. That the partnership might have grown into a multi-million enterprise and that the whereas all that the witness knew about defendant Lim Teck Chuan's arrival from Hongkong and
properties described in the exhibits enumerated in the decision are not in the names of Po Chuan, the expenditure of partnership money for him were only told to him allegedly by Po Chuan, which
who was Chinese, but of the defendants who are Filipinos, do not necessarily prove that Po Chuan testimonies are veritably exculpatory as to Ng Sua and hearsay as to Lim Teck Chuan. Neither
had not gotten his share of the profits of the business or that the properties in the names of the should His Honor have failed to note that according to plaintiff herself, "Lim Tanhu was employed
defendants were bought with money of the partnership. In this connection, it is decisively important by her husband although he did not go there always being a mere employee of Glory Commercial
to consider that on the basis of the concordant and mutually cumulative testimonies of plaintiff and Co." (p. 22, Annex the decision.)
Nuñez, respondent court found very explicitly that, and We reiterate:
The decision is rather emphatic in that Lim Tanhu and Ng Sua had no known income except their
xxx xxx xxx salaries. Actually, it is not stated, however, from what evidence such conclusion was derived in so
far as Ng Sua is concerned. On the other hand, with respect to Lim Tanhu, the decision itself
That the late Po Chuan was the one who actively managed the business of the partnership Glory states that according to Exhibit NN-Pre trial, in the supposed income tax return of Lim Tanhu for
Commercial Co. he was the one who made the final decisions and approved the appointments of 1964, he had an income of P4,800 as salary from Philippine Metal Industries alone and had a total
new Personnel who were taken in by the partnership; that the late Po Chuan and defendants Lim assess sable net income of P23,920.77 that year for which he paid a tax of P4,656.00. (p. 14.
Tanhu and Ng Sua are brothers, the latter to (2) being the elder brothers of the former; that Annex L, id.) And per Exhibit GG-Pretrial in the year, he had a net income of P32,000 for which be
defendants Lim Tanhu and Ng Sua are both naturalized Filipino citizens whereas the late Po paid a tax of P3,512.40. (id.) As early as 1962, "his fishing business in Madridejos Cebu was
Chuan until the time of his death was a Chinese citizen; that the three (3) brothers were partners in making money, and he reported "a net gain from operation (in) the amount of P865.64" (id., per
the Glory Commercial Co. but Po Chuan was practically the owner of the partnership having the Exhibit VV-Pre-trial.) From what then did his Honor gather the conclusion that all the properties
controlling interest; that defendants Lim Tanhu and Ng Sua were partners in name but they were registered in his name have come from funds malversed from the partnership?
mere employees of Po Chuan; .... (Pp. 90-91, Record.)
It is rather unusual that His Honor delved into financial statements and books of Glory Commercial
If Po Chuan was in control of the affairs and the running of the partnership, how could the Co. without the aid of any accountant or without the same being explained by any witness who had
defendants have defrauded him of such huge amounts as plaintiff had made his Honor believe? prepared them or who has knowledge of the entries therein. This must be the reason why there
Upon the other hand, since Po Chuan was in control of the affairs of the partnership, the more are apparent inconsistencies and inaccuracies in the conclusions His Honor made out of them. In
logical inference is that if defendants had obtained any portion of the funds of the partnership for Exhibit SS-Pre-trial, the reported total assets of the company amounted to P2,328,460.27 as of
themselves, it must have been with the knowledge and consent of Po Chuan, for which reason no December, 1965, and yet, Exhibit TT-Pre-trial, according to His Honor, showed that the total value
accounting could be demanded from them therefor, considering that Article 1807 of the Civil Code of goods available as of the same date was P11,166,327.62. On the other hand, per Exhibit XX-
refers only to what is taken by a partner without the consent of the other partner or partners. Pre-trial, the supposed balance sheet of the company for 1966, "the value of inventoried
Incidentally again, this theory about Po Chuan having been actively managing the partnership up merchandise, both local and imported", as found by His Honor, was P584,034.38. Again, as of
to his death is a substantial deviation from the allegation in the amended complaint to the effect December 31, 1966, the value of the company's goods available for sale was P5,524,050.87, per
that "defendants Antonio Lim Tanhu, Alfonso Leonardo Ng Sua, Lim Teck Chuan and Eng Chong Exhibit YY and YY-Pre-trial. Then, per Exhibit II-3-Pre-trial, the supposed Book of Account,
Leonardo, through fraud and machination, took actual and active management of the partnership whatever that is, of the company showed its "cash analysis" was P12,223,182.55. We do not
and although Tee Hoon Lim Po Chuan was the manager of Glory Commercial Co., defendants hesitate to make the observation that His Honor, unless he is a certified public accountant, was
managed to use the funds of the partnership to purchase lands and buildings etc. (Par. 4, p. 2 of hardly qualified to read such exhibits and draw any definite conclusions therefrom, without risk of
amended complaint, Annex B of petition) and should not have been permitted to be proven by the erring and committing an injustice. In any event, there is no comprehensible explanation in the
hearing officer, who naturally did not know any better. decision of the conclusion of His Honor that there were P12,223,182.55 cash money defendants
have to account for, particularly when it can be very clearly seen in Exhibits 11-4, 11-4- A, 11-5
Moreover, it is very significant that according to the very tax declarations and land titles listed in and 11-6-Pre-trial, Glory Commercial Co. had accounts payable as of December 31, 1965 in the
the decision, most if not all of the properties supposed to have been acquired by the defendants amount of P4,801,321.17. (p. 15, id.) Under the circumstances, We are not prepared to permit
Lim Tanhu and Ng Sua with funds of the partnership appear to have been transferred to their anyone to predicate any claim or right from respondent court's unaided exercise of accounting
names only in 1969 or later, that is, long after the partnership had been automatically dissolved as knowledge.
a result of the death of Po Chuan. Accordingly, defendants have no obligation to account to
anyone for such acquisitions in the absence of clear proof that they had violated the trust of Po Additionally, We note that the decision has not made any finding regarding the allegation in the
Chuan during the existence of the partnership. (See Hanlon vs. Hansserman and. Beam, 40 Phil. amended complaint that a corporation denominated Glory Commercial Co., Inc. was organized
796.) after the death of Po Chuan with capital from the funds of the partnership. We note also that there
is absolutely no finding made as to how the defendants Dy Ochay and Co Oyo could in any way be
There are other particulars which should have caused His Honor to readily disbelieve plaintiffs' accountable to plaintiff, just because they happen to be the wives of Lim Tanhu and Ng Sua,
pretensions. Nuñez testified that "for about 18 years he was in charge of the GI sheets and respectively. We further note that while His Honor has ordered defendants to deliver or pay jointly
89
and severally to the plaintiff P4,074,394.18 or ¹/3 of the P12,223,182.55, the supposed cash payment, but appellant having refused, they filed the initial complaint in the court below. Appellant
belonging to the partnership as of December 31, 1965, in the same breath, they have also been defended by denying any partnership with appellees, whom he claimed to be mere employees of
sentenced to partition and give ¹/3 share of the properties enumerated in the dispositive portion of his.
the decision, which seemingly are the very properties allegedly purchased from the funds of the
partnership which would naturally include the P12,223,182.55 defendants have to account for. The Court of First Instance of Bohol refused to give credence to Exhibit "C", and dismissed the
Besides, assuming there has not yet been any liquidation of the partnership, contrary to the complaint on the ground that the other were indispensable parties but hid not been impleaded.
allegation of the defendants, then Glory Commercial Co. would have the status of a partnership in Upon appeal, the Court of Appeals reversed, with the result noted at the start of this opinion.
liquidation and the only right plaintiff could have would be to what might result after such liquidation
to belong to the deceased partner, and before this is finished, it is impossible to determine, what Gregorio Magdusa then petitioned for a review of the decision, and we gave it due
rights or interests, if any, the deceased had (Bearneza vs. Dequilla 43 Phil. 237). In other words, course.1äwphï1.ñët
no specific amounts or properties may be adjudicated to the heir or legal representative of the
deceased partner without the liquidation being first terminated. The main argument of appellant is that the appellees' action can not be entertained, because in the
distribution of all or part of a partnership's assets, all the partners have no interest and are
Indeed, only time and the fear that this decision would be much more extended than it is already indispensable parties without whose intervention no decree of distribution can be validly entered.
prevent us from further pointing out the inexplicable deficiencies and imperfections of the decision This argument was considered and answered by the Court of Appeals in the following words:
in question. After all, what have been discussed should be more than sufficient to support Our
conclusion that not only must said decision be set aside but also that the action of the plaintiff must We now come to the last issue involved. While finding that some amounts are due the plaintiffs,
be totally dismissed, and, were it not seemingly futile and productive of other legal complications, the lower court withheld an award in their favor, reasoning that a judgment ordering the defendant
that plaintiff is liable on defendants' counterclaims. Resolution of the other issues raised by the to pay might affect the rights of other partners who were not made parties in this case. The reason
parties albeit important and perhaps pivotal has likewise become superfluous. cited by the lower court does not constitute a legal impediment to a judgment for the plaintiffs in
this case. This is not an action for a dissolution of a partnership and winding up of its affairs or
IN VIEW OF ALL THE FOREGOING, the petition is granted. All proceedings held in respondent liquidation of its assets in which the interest of other partners who are not brought into the case
court in its Civil Case No. 12328 subsequent to the order of dismissal of October 21, 1974 are may be affected. The action of the plaintiffs is one for the recovery of a sum of money with
hereby annulled and set aside, particularly the ex-parte proceedings against petitioners and the Gregorio Magdusa as the principal defendant. The partnership, with Gregorio Magdusa as
decision on December 20, 1974. Respondent court is hereby ordered to enter an order extending managing partner, was brought into the case as an alternative defendant only. Plaintiffs' action
the effects of its order of dismissal of the action dated October 21, 1974 to herein petitioners was based on the allegation, substantiated in evidence, that Gregorio Magdusa, having taken
Antonio Lim Tanhu, Dy Ochay, Alfonso Leonardo Ng Sua and Co Oyo. And respondent court is delivery of their shares, failed and refused and still fails and refuses to pay them their claims. The
hereby permanently enjoined from taking any further action in said civil case gave and except as liability, therefore, is personal to Gregorio Magdusa, and the judgment should be against his sole
herein indicated. Costs against private respondent. interest, not against the partnership's although the judgment creditors may satisfy the judgment
against the interest of Gregorio Magdusa in the partnership subject to the condition imposed by
Article 1814 of the Civil Code.
29. G.R. No. L-17526 June 30, 1962
We do not find the preceding reasoning tenable. A partner's share can not be returned without first
GREGORIO MAGDUSA, ET AL., petitioners, dissolving and liquidating the partnership (Po Yeng Cheo vs. Lim Ka Yam, 44 Phil. 177), for the
vs. return is dependent on the discharge of the creditors, whose claims enjoy preference over those of
GERUNDIO ALBARAN, ET AL., respondents. the partners; and it is self-evident that all members of the partnership are interested in his assets
and business, and are entitled to be heard in the matter of the firm's liquidation and the distribution
Montenegro, Madayag, Viola and Hernandez, Olimpio R. Epis, David C. Ocangas and Bonifacio of its property. The liquidation Exhibit "C" is not signed by the other members of the partnership
M. Belderol for petitioners. besides appellees and appellant; it does not appear that they have approved, authorized, or
Lozano, Soria, Muana, Ruiz and Morales for respondents. ratified the same, and, therefore, it is not binding upon them. At the very least, they are entitled to
be heard upon its correctness.
REYES, J.B.L., J.:
In addition, unless a proper accounting and liquidation of the partnership affairs is first had, the
Appeal from a decision of the Court of Appeals (G.R. No. 24248-R) reversing a judgment of the capital shares of the appellees, as retiring partners, can not be repaid, for the firm's outside
Court of First Instance of Bohol and ordering appellant Gregorio Magdusa to pay to appellees, by creditors have preference over the assets of the enterprise (Civ. Code, Art. 1839), and the firm's
way of refund of their shares as partners, the following amounts: Gerundio Albaran, P8,979.10; property can not be diminished to their prejudice. Finally, the appellant can not be held liable in his
Pascual Albaran, P5,394.78; Zosimo Albaran, P1,979.28; and Telesforo Bebero, P3,020.27; plus personal capacity for the payment of partners' shares for he does not hold them except as
legal interests from the filing of the complaint, and costs. manager of, or trustee for, the partnership. It is the latter that must refund their shares to the
retiring partners. Since not all the members of the partnership have been impleaded, no judgment
The Court of Appeals found that appellant and appellees, together with various other persons, had for refund can be rendered, and the action should have been dismissed.
verbally formed a partnership de facto, for the sale of general merchandise in Surigao, Surigao, to
which appellant contributed P2,000 as capital, and the others contributed their labor, under the IN VIEW OF THE FOREGOING, the decision of the Court of Appeals is reversed and the action
condition that out of the net profits of the business 25% would be added to the original capital, and ordered dismissed, without prejudice to a proper proceeding for the dissolution and liquidation of
the remaining 75% would be divided among the members in proportion to the length of service of the common enterprise. Costs against appellees.
each. Sometime in 1953 and 1954, the appellees expressed their desire to withdraw from the
partnership, and appellant thereupon made a computation to determine the value of the partners'
shares to that date. The results of the computation were embodied in the document Exhibit "C",
drawn in the handwriting of appellant. Appellees thereafter made demands upon appellant for
90
III. Limited Partnership (Articles 1843-1867) After the parties had filed their respective memoranda, the of Tax Appeals which took the case
A. Nature (Articles 1843-1869;1867) rendered a decision ordering defendant to refund the sum of P26,873.66, without costs, and
making the following pronouncements:
30. G.R. No. L-9186 April 29, 1957
In view of the foregoing, we are, therefore, of the opinion and so hold that the partnership
COLLECTOR OF INTERNAL REVENUE, petitioner, "Aldecoa, Zuloaga e Isasi" was a duly registered general co-partnership (compania colectiva) with
vs. the meaning and contemplation of sections 24 and 26 of the National Internal Revenue Code and
JUAN ISASI, M. SALUSTIANA ALDECOA, CLAUDIO ZULOAGA, MIREN ZULOAGA, HUGO P. as such it is not liable for income tax as a juridical person although the partners composing it are
RODRIGUEZ, and THE COURT OF TAX APPEALS, respondents. liable in their individual capacity. Since it is admitted that during the calendar years 1948, 1949,
1950 and 1951, the plaintiff partners Juan Isasi, M. Salustiana Aldecoa, Claudio Zuloaga and
Office of the Solicitor General Ambrosio Padilla, Solicitor Jose Alejandro, Solicitor Conrado T. Zuloaga of the said partnership had filed their respective individual income tax returns, and in
Limcaoco, Pedro P. Magaliman and Zoilo R. Sandoval for petitioner. these returns, the said plaintiff partners indicated the amounts they had received as income from
Emilio Abello and Hugo P. Rodriguez for respondents. the partnership and paid the income tax assessed against them by the defendant Collector of
Internal Revenue on account thereof, the total amount of P26,873.66 paid by the partnership
FELIX, J.: "Aldecoa, Zuloaga e Isasi" as income tax for the fiscal years from July 1, 1948, to June 30, 1950, is
therefore refundable.
Juan Isasi, M. Salustiana Aldecoa assisted by her husband Jesus Isasi, Claudio Zuloaga, Jr.,
Miren Zuloaga and Hugo P. Rodriguez in his capacity as Liquidator of the Partnership Aldecoa, From this decision, defendant filed with this Court a petition to review the said decision making the
Zuloaga and Isasi, instituted originally this case against the Collector of Internal Revenue of the following assignment of errors:
Republic of the Philippines in the Court of First Instance of Negros Occidental (Civil Case No.
2028), but by virtue of the enactment of Republic Act No. 1125, creating the Court of Tax Appeals, 1. That the respondent Court of Tax Appeals erred in holding that the term "duly registered general
same was remanded to the latter Court in accordance with section 22 of said Act. co-partnership (sociedad colectiva)" found in sections 24 and 26 of the National Internal Revenue
Code includes civil partnerships which have adopted the form of compañias colectivas and (were)
From the agreed stipulation of facts and other pleadings filed by the parties, it appears that duly registered;
plaintiffs Juan Isasi, M. Salustiana Aldecoa, Claudio Zuloaga, Jr., and Miren Zuloaga formed a
partnership known as "Aldecoa, Zuloaga e Isasi" organized principally for the exploitation, 2. That the respondent Court of Tax Appeals erred in finding that the partnership "Aldecoa,
development and utilization of Haciendas Manucao and Conchita, located in the municipalities of Zuloaga e Isasi" has adopted the form of general partnership (sociedad colectiva) under the Code
Binalbagan and Hinigaran, Negros, Occidental. The partnership agreement "Escritura de of Commerce; and
Constitucion de la Sociedad Agricola Aldecoa, Zuloaga e Isasi" was duly registered on October 27,
1947. 3. That the respondent Court of Tax Appeals Erred in holding that the partnership "Aldecoa,
Zuloaga e Isasi" was a duly registered general co-partnership (sociedad colectiva) within the
The records show that for the tax years 1948 and 1949, the firm Aldecoa, Zuloaga e Isasi filed its meaning and contemplation of the aforesaid sections of the Tax Code and was not therefore liable
income tax returns and the Collector of Internal Revenue assessed the sum of P26,873.66 against to pay income tax.
said partnership which the latter paid and that the members of the partnership filed their individual
income tax returns for the years 1948, 1949, 1950 and 1951, in which returns they indicated the The dispute arose from a divergence of opinion as to the proper interpretation and application of
shares of the profit or dividends that they allege to have received from the partnership. On June sections 24 and 26 of the National Revenue Code, which reads as follows:
30, 1951, the partners agreed to dissolve the partnership and the agreement of dissolution was
duly recorded in the Securities and Exchange Commission on October 25, 1951, wherein plaintiff SEC. 24. RATE OF TAX ON CORPORATIONS. — There shall be levied, assessed, collective and
Hugo P. Rodriguez was appointed as liquidator. paid annually upon the total net income received in the proceeding taxable year from all sources
by every corporation organized in, or existing under the laws of the Philippines no matter how
Believing that the partnership "Aldecoa, Zuloaga e Isasi" was a duly registered general co- created or organized but not including duly registered general co-partnership (compañias
partnership (sociedad colectiva) and therefore not subject to income tax under Section 24 of the colectivas), a tax upon such income equal to the sum of the following: . . .
National Internal Revenue Code, plaintiffs filed with defendant on July 16, 1951, a claim for the
refund of P26,873.66 which the partnership had paid as income tax. The claim for refund not Sec. 26. TAX LIABILITY OF MEMBERS OF DULY REGISTERED GENERAL CO.-
having been acted upon by defendant, a complaint was filed with the Court of First Instance of PARTNERSHIPS. — Persons carrying on business in general co-partnership (compañia colectiva)
Negros Occidental on August 4, 1951, praying the defendant be ordered to return to plaintiffs the duly registered in the mercantile registry shall be liable for income tax only in their individual
aforementioned sum with costs, and for such other remedies as may be just and equitable in the capacity, and the share of the profits of the registered general co-partnership (compañia colectiva)
premises. to which any taxable partner would be entitled, whether divided or otherwise, shall be returned for
taxation and the tax paid in accordance with the provisions of this Title.
On September 14, 1951, the Provincial Fiscal of Negros Occidental answered the complaint
admitting some of the averments thereof and at the same time denying plaintiff's allegations that It shall be noted in the case at bar that the cause of action accrued before the effectivity of the new
Aldecoa, Zuloaga e Isasi is a general or regular collective partnership, the truth being said Civil Code and, therefore, it is to be governed by the pertinent provisions of the old Civil Code (Art.
partnership was a limited partner ship and as such cannot be exempt from income tax. The Fiscal 2253, new Civil Code) and the Code of Commerce, although the provisions of the latter Code on
further set up the affirmative defense that it being a civil partnership, whether registered or not, partnership have been repealed by Article 2270, No. 2, of the new Civil Code.
Aldecoa, Zuloaga e Isasi could be taxed as a corporation under Section 24 of the National Internal
Revenue Code. He therefore prayed that the complaint be dismissed with costs against plaintiffs. Under the old codes, there was a distinction between civil and commercial partnership and since
sections 24 and 26 of the Tax Code, under which respondent partners claim their right to be
refunded, expressly exempts from corporation tax "duly registered general co-partnerships"
91
(sociedades colectivas), respondent partners maintain that their defunct partnership (which by its
purposes and scope seemed to partake of the nature of a civil partnership), was dully registered Article 122 of the Code of Commerce prescribes the following:
and had the form and style of a general co-partnership and is, therefore, entitled to the exemption.
They also advanced the theory that a partnership, whether civil or commercial, would be entitled to ART. 122. As a general rule commercial associations shall be established by the adoption of any
the exemption as long as it is a general partnership, because the Tax Code makes qualification to of the following forms:
this effect.
1. The regular general co-partnership in which all the partners, under a collective commercial
The issues left for Us to determine in this appeal are: whether the term duly registered general co- name, bind themselves participate, in the proportion they establish in the same rights and
partnership (sociedades colectivas) used in sections 24 and 26 of the Tax Code includes both the obligations.
commercial civil ones, and whether the partnership Aldecoa, Zuloaga e Isasi falls within said
classification and hence entitled to the benefit granted therein. 2. The limited co-partnership to which one or more persons contribute a specific amount of capital
to a common fund, to become liable for the business transactions of the firm executed exclusively
There is no dispute that the partnership agreement entered into by the respondent partners was by others under a collective name.
styled "Escritura de Constitucion de la Sociedad Agricola Limitada Aldecoa, Zuloaga e Isasi",
thereby giving said partnership is a limited one. On the other hand, said agreement specifies that 3. (The provisions of this paragraph have been repealed by the Corporation Law).
the primary purpose for which the partnership was organized was the exploitation of the two
haciendas "Manucao" and "Conchita", as stated in paragraph 3 thereof which declares that: Even a casual scrutiny of the partnership agreement executed by the respondent partners would
reveal that they followed the pattern set for the pattern set for the regular co-partnership (Arts. 122,
3.o Que el objeto de la sociedad es la rehabilitation de las haciendas citadas y de sus No. 2, 125, 126, 131, 133 and 136 of the Code of Commerce). They have a firm name — Aldecoa,
pertenencias, y la explotacion agricola de las mismas, en la forma que crea oportuno el gerente de Zuloaga e Isasi; that firm name was composed of all the surnames of the partners — to which the
la misma, y para llevar a cabo dicho objeto y los fines generales de la sociedad, la misma podra: words "and company" (to indicate the limited partnership — Art. 146 of the Code of Commerce) is
not added; the management of the firm was entrusted to a partner, Don Juan Isasi; the contribution
and petitioner contends, that this clause clearly indicates that respondents' partnership was a civil of all the partners was expressly provided therein — there being no person Contributing a specific
partnership which justifies petitioner's stand in collecting the taxes in question. In passing upon this amount of capital to a common fund to become liable for the business transactions of the firm
point, We must take into consideration the provision of the old Civil Code which states that: executed exclusively by others under a collective name, as is the case in limited partnerships (Art.
122, No. 2, Code of Commerce); the duration of the partnership was made to last until June 30,
Art. 1670. Partnerships which on account of the purpose to which they devoted are civil may adopt 1952; and it allowed its manager, Don Juan Isasi to engage in the same kind of undertaking. It is
any of the forms recognized by the Code of Commerce. In such cases its provisions shall be unmistakable, notwithstanding the title of the partnership agreement (Escritura de Constitucion de
applicable to them in so far they do no conflict with those of this Code, la Sociedad Agricola Limitada Aldecoa, Zuloaga e Isasi), that the partners intended to organize a
general partnership under the Code of Commerce. For this reason, We agree with the Court of Tax
and Chief Justice Arellano saw fit to apply this particular provision in his concurring opinion in the Appeals when it states:
case of Compañia Agricola de Ultramar vs. Reyes, 4 Phil., 2, by enunciating that:
To establish a limited partnership there must be at least one general partner and the name of at
The civil partnership without ceasing to be, civil by reason of its object maybe created in all forms least one of the general partners must appear in the firm name. (Articles 122(2), 146, 148, Code of
recognized in the code of Commerce. It may be a collective or general partnership, a partnership Commerce). If these requisites are not complied with, the partnership, notwithstanding the fact that
on comandita or an anonymous partnership. In this case if it will adopt the form of a general the articles of association are entitled "limited partnership" (Jo Chung Cang vs. Pacific Commercial
partnership then the provisions of Article 125 to 144 inclusive would be applicable to it. If it would Co., 45 Phil. 142). An examination of the firm name of the partnership "Aldecoa, Zuloaga e Isasi"
adopt the form a partnership on comandita then Articles 145 to 150 would be applicable and if the will readily show that neither of this requirements have been fulfilled; instead it operated under the
form is that of an anonymous partnership then the provisions of Articles 157 to 174 of the Code of name of all its members of some of them, or of only one (without necessarily adding to the name of
Commerce would be applicable in so far as they are in no conflict with the articles of the present names stated in last two cases, the words "and company" (par. 1, Art. 126, Code of Commerce). A
code. limited partnership that has not complied with the law of its creation is not considered a limited
partnership at all, but a general partnership in which all the members are liable (Hechen, Elements
From the above-quoted opinion, a civil partnership adopting a form recognized by the Code of of Partnership, p. 412; Gilmore, Partnership, p. 499; 20 R.C.L. 1064). Moreover, a limited
Commerce (sociedad colectiva) does not necessarily cease to be a civil partnership. Members of a partnership cannot perform any act in the management of the partner interests and cannot even
partnership organized for civil purposes may form themselves into a general or collective examine the condition and state of partnership administration except at stated times. (Articles 122
partnership (sociedad colectiva) which is sanctioned by Sections 125 to 144 of the Code of (2), 148 and 150, Code of Commerce), unlike the partnership Aldecoa, Zuloaga e Isasi, wherein all
Commerce and register as such in the registry in which case their obligations and liabilities will be the partners exercised powers of management and administration.
governed by the provisions of said Code as long as they are not in conflict with the Civil Code. This
organization in mercantile form does not transform the civil partnership into a commercial one, but We, therefore, declare that the Partnership "Aldecoa, Zuloaga e Isasi" was a duly registered
just the same it is a sociedad colectiva, and since Sections 24 and 26 of the Tax Code duly general co-partnership (sociedad colectiva) within the meaning and contemplation of sections 24
registered general co-partnership (Compañia colectiva)", there is no reason why a civil organized and 26 of the National Internal Revenue Code.
in accordance with the provisions of the Code of Commerce and duly registered as such should
not fall within the exemption provided for in said Sections of the Tax Code. Wherefore, the decision appealed from is hereby affirmed, without pronouncement as to costs. It is
so ordered.
IN VIEW OF THIS CONCLUSION, we now have to find out whether the partnership Aldecoa,
Zuloaga e Isasi has adopted the form of a general partnership (compañia colectiva) or of a B. Rights/Duties/Liabilities of General Partners (Arts. 1850 and 1853)
"Sociedad Agricola Limitada Aldecoa, Zuloaga e Isasi", as the partners thereof named their own SEE case 17
association.
92
VI- AGENCY (MRS.) FLORENCIA C. BALUYOT
-Nature, Form and Kinds of Agency (Articles 1868-1883) Agency Manager
A. Agency as a Contact (Art. 1868) Holy Cross Memorial Park

31. G.R. No. 151319 November 22, 2004 4/18/85

MANILA MEMORIAL PARK CEMETERY, INC., petitioner, Dear Atty. Linsangan:

vs.
PEDRO L. LINSANGAN, respondent. This will confirm our agreement that while the offer to purchase under Contract No. 28660 states
that the total price of P132,250.00 your undertaking is to pay only the total sum of P95,000.00
under the old price. Further the total sum of P19,838.00 already paid by you under O.R. # 118912
DECISION dated April 6, 1985 has been credited in the total purchase price thereby leaving a balance of
P75,162.00 on a monthly installment of P1,800.00 including interests (sic) charges for a period of
five (5) years.
TINGA, J.:
(Signed)
For resolution in this case is a classic and interesting texbook question in the law on agency.
FLORENCIA C. BALUYOT
This is a petition for review assailing the Decision1 of the Court of Appeals dated 22 June 2001,
and its Resolution2 dated 12 December 2001 in CA G.R. CV No. 49802 entitled "Pedro L. By virtue of this letter, Atty. Linsangan signed Contract No. 28660 and accepted Official Receipt
Linsangan v. Manila Memorial Cemetery, Inc. et al.," finding Manila Memorial Park Cemetery, Inc. No. 118912. As requested by Baluyot, Atty. Linsangan issued twelve (12) postdated checks of
(MMPCI) jointly and severally liable with Florencia C. Baluyot to respondent Atty. Pedro L. P1,800.00 each in favor of MMPCI. The next year, or on 29 April 1986, Atty. Linsangan again
Linsangan. issued twelve (12) postdated checks in favor of MMPCI.

The facts of the case are as follows: On 25 May 1987, Baluyot verbally advised Atty. Linsangan that Contract No. 28660 was cancelled
for reasons the latter could not explain, and presented to him another proposal for the purchase of
Sometime in 1984, Florencia Baluyot offered Atty. Pedro L. Linsangan a lot called Garden State at an equivalent property. He refused the new proposal and insisted that Baluyot and MMPCI honor
the Holy Cross Memorial Park owned by petitioner (MMPCI). According to Baluyot, a former owner their undertaking.
of a memorial lot under Contract No. 25012 was no longer interested in acquiring the lot and had
opted to sell his rights subject to reimbursement of the amounts he already paid. The contract was For the alleged failure of MMPCI and Baluyot to conform to their agreement, Atty. Linsangan filed
for P95,000.00. Baluyot reassured Atty. Linsangan that once reimbursement is made to the former a Complaint7 for Breach of Contract and Damages against the former.
buyer, the contract would be transferred to him. Atty. Linsangan agreed and gave Baluyot
P35,295.00 representing the amount to be reimbursed to the original buyer and to complete the Baluyot did not present any evidence. For its part, MMPCI alleged that Contract No. 28660 was
down payment to MMPCI.3 Baluyot issued handwritten and typewritten receipts for these cancelled conformably with the terms of the contract8 because of non-payment of arrearages.9
payments.4 MMPCI stated that Baluyot was not an agent but an independent contractor, and as such was not
authorized to represent MMPCI or to use its name except as to the extent expressly stated in the
Sometime in March 1985, Baluyot informed Atty. Linsangan that he would be issued Contract No. Agency Manager Agreement.10 Moreover, MMPCI was not aware of the arrangements entered
28660, a new contract covering the subject lot in the name of the latter instead of old Contract No. into by Atty. Linsangan and Baluyot, as it in fact received a down payment and monthly
25012. Atty. Linsangan protested, but Baluyot assured him that he would still be paying the old installments as indicated in the contract.11 Official receipts showing the application of payment
price of P95,000.00 with P19,838.00 credited as full down payment leaving a balance of about were turned over to Baluyot whom Atty. Linsangan had from the beginning allowed to receive the
P75,000.00.5 same in his behalf. Furthermore, whatever misimpression that Atty. Linsangan may have had must
have been rectified by the Account Updating Arrangement signed by Atty. Linsangan which states
Subsequently, on 8 April 1985, Baluyot brought an Offer to Purchase Lot No. A11 (15), Block 83, that he "expressly admits that Contract No. 28660 'on account of serious delinquency…is now due
Garden Estate I denominated as Contract No. 28660 and the Official Receipt No. 118912 dated 6 for cancellation under its terms and conditions.'''12
April 1985 for the amount of P19,838.00. Contract No. 28660 has a listed price of P132,250.00.
Atty. Linsangan objected to the new contract price, as the same was not the amount previously The trial court held MMPCI and Baluyot jointly and severally liable.13 It found that Baluyot was an
agreed upon. To convince Atty. Linsangan, Baluyot executed a document6 confirming that while agent of MMPCI and that the latter was estopped from denying this agency, having received and
the contract price is P132,250.00, Atty. Linsangan would pay only the original price of P95,000.00. enchased the checks issued by Atty. Linsangan and given to it by Baluyot. While MMPCI insisted
that Baluyot was authorized to receive only the down payment, it allowed her to continue to receive
The document reads in part: postdated checks from Atty. Linsangan, which it in turn consistently encashed.14

The monthly installment will start April 6, 1985; the amount of P1,800.00 and the difference will be The dispositive portion of the decision reads:
issued as discounted to conform to the previous price as previously agreed upon. --- P95,000.00
WHEREFORE, judgment by preponderance of evidence is hereby rendered in favor of plaintiff
Prepared by: declaring Contract No. 28660 as valid and subsisting and ordering defendants to perform their
undertakings thereof which covers burial lot No. A11 (15), Block 83, Section Garden I, Holy Cross
(Signed) Memorial Park located at Novaliches, Quezon City. All payments made by plaintiff to defendants

93
should be credited for his accounts. NO DAMAGES, NO ATTORNEY'S FEES but with costs In the instant Petition for Review, MMPCI claims that the Court of Appeals seriously erred in
against the defendants. disregarding the plain terms of the written contract and Atty. Linsangan's failure to abide by the
terms thereof, which justified its cancellation. In addition, even assuming that Baluyot was an
The cross claim of defendant Manila Memorial Cemetery Incorporated as against defendant agent of MMPCI, she clearly exceeded her authority and Atty. Linsangan knew or should have
Baluyot is GRANTED up to the extent of the costs. known about this considering his status as a long-practicing lawyer. MMPCI likewise claims that
the Court of Appeals erred in failing to consider that the facts and the applicable law do not support
SO ORDERED.15 a judgment against Baluyot only "up to the extent of costs."26

MMPCI appealed the trial court's decision to the Court of Appeals.16 It claimed that Atty. Atty. Linsangan argues that he did not violate the terms and conditions of the contract, and in fact
Linsangan is bound by the written contract with MMPCI, the terms of which were clearly set forth faithfully performed his contractual obligations and complied with them in good faith for at least two
therein and read, understood, and signed by the former.17 It also alleged that Atty. Linsangan, a years.27 He claims that contrary to MMPCI's position, his profession as a lawyer is immaterial to
practicing lawyer for over thirteen (13) years at the time he entered into the contract, is presumed the validity of the subject contract and the case at bar.28 According to him, MMPCI had practically
to know his contractual obligations and is fully aware that he cannot belatedly and unilaterally admitted in its Petition that Baluyot was its agent, and thus, the only issue left to be resolved is
change the terms of the contract without the consent, much less the knowledge of the other whether MMPCI allowed Baluyot to act as though she had full powers to be held solidarily liable
contracting party, which was MMPCI. And in this case, MMPCI did not agree to a change in the with the latter.29
contract and in fact implemented the same pursuant to its clear terms. In view thereof, because of
Atty. Linsangan's delinquency, MMPCI validly cancelled the contract. We find for the petitioner MMPCI.

MMPCI further alleged that it cannot be held jointly and solidarily liable with Baluyot as the latter The jurisdiction of the Supreme Court in a petition for review under Rule 45 of the Rules of Court is
exceeded the terms of her agency, neither did MMPCI ratify Baluyot's acts. It added that it cannot limited to reviewing only errors of law, not fact, unless the factual findings complained of are
be charged with making any misrepresentation, nor of having allowed Baluyot to act as though she devoid of support by the evidence on record or the assailed judgment is based on
had full powers as the written contract expressly stated the terms and conditions which Atty. misapprehension of facts.30 In BPI Investment Corporation v. D.G. Carreon Commercial
Linsangan accepted and understood. In canceling the contract, MMPCI merely enforced the terms Corporation,31 this Court ruled:
and conditions imposed therein.18
There are instances when the findings of fact of the trial court and/or Court of Appeals may be
Imputing negligence on the part of Atty. Linsangan, MMPCI claimed that it was the former's reviewed by the Supreme Court, such as (1) when the conclusion is a finding grounded entirely on
obligation, as a party knowingly dealing with an alleged agent, to determine the limitations of such speculation, surmises and conjectures; (2) when the inference made is manifestly mistaken,
agent's authority, particularly when such alleged agent's actions were patently questionable. absurd or impossible; (3) where there is a grave abuse of discretion; (4) when the judgment is
According to MMPCI, Atty. Linsangan did not even bother to verify Baluyot's authority or ask based on a misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the
copies of official receipts for his payments.19 Court of Appeals, in making its findings, went beyond the issues of the case and the same is
contrary to the admissions of both appellant and appellee; (7) when the findings are contrary to
The Court of Appeals affirmed the decision of the trial court. It upheld the trial court's finding that those of the trial court; (8) when the findings of fact are conclusions without citation of specific
Baluyot was an agent of MMPCI at the time the disputed contract was entered into, having evidence on which they are based; (9) when the facts set forth in the petition as well as in the
represented MMPCI's interest and acting on its behalf in the dealings with clients and customers. petitioners' main and reply briefs are not disputed by the respondents; and (10) the findings of fact
Hence, MMPCI is considered estopped when it allowed Baluyot to act and represent MMPCI even of the Court of Appeals are premised on the supposed absence of evidence and contradicted by
beyond her authority.20 The appellate court likewise found that the acts of Baluyot bound MMPCI the evidence on record.32
when the latter allowed the former to act for and in its behalf and stead. While Baluyot's authority
"may not have been expressly conferred upon her, the same may have been derived impliedly by In the case at bar, the Court of Appeals committed several errors in the apprehension of the facts
habit or custom, which may have been an accepted practice in the company for a long period of of the case, as well as made conclusions devoid of evidentiary support, hence we review its
time."21 Thus, the Court of Appeals noted, innocent third persons such as Atty. Linsangan should findings of fact.
not be prejudiced where the principal failed to adopt the needed measures to prevent
misrepresentation. Furthermore, if an agent misrepresents to a purchaser and the principal By the contract of agency, a person binds himself to render some service or to do something in
accepts the benefits of such misrepresentation, he cannot at the same time deny responsibility for representation or on behalf of another, with the consent or authority of the latter.33 Thus, the
such misrepresentation.22 Finally, the Court of Appeals declared: elements of agency are (i) consent, express or implied, of the parties to establish the relationship;
(ii) the object is the execution of a juridical act in relation to a third person; (iii) the agent acts as a
There being absolutely nothing on the record that would show that the court a quo overlooked, representative and not for himself; and (iv) the agent acts within the scope of his authority.34
disregarded, or misinterpreted facts of weight and significance, its factual findings and conclusions
must be given great weight and should not be disturbed by this Court on appeal. In an attempt to prove that Baluyot was not its agent, MMPCI pointed out that under its Agency
Manager Agreement; an agency manager such as Baluyot is considered an independent
WHEREFORE, in view of the foregoing, the appeal is hereby DENIED and the appealed decision contractor and not an agent.35 However, in the same contract, Baluyot as agency manager was
in Civil Case No. 88-1253 of the Regional Trial Court, National Capital Judicial Region, Branch 57 authorized to solicit and remit to MMPCI offers to purchase interment spaces belonging to and sold
of Makati, is hereby AFFIRMED in toto. by the latter.36 Notwithstanding the claim of MMPCI that Baluyot was an independent contractor,
the fact remains that she was authorized to solicit solely for and in behalf of MMPCI. As properly
SO ORDERED.23 found both by the trial court and the Court of Appeals, Baluyot was an agent of MMPCI, having
represented the interest of the latter, and having been allowed by MMPCI to represent it in her
MMPCI filed its Motion for Reconsideration,24 but the same was denied for lack of merit.25 dealings with its clients/prospective buyers.

94
Nevertheless, contrary to the findings of the Court of Appeals, MMPCI cannot be bound by the agency. On the other hand, the Court of Appeals faulted MMPCI in failing to adopt measures to
contract procured by Atty. Linsangan and solicited by Baluyot. prevent misrepresentation, and declared that in view of MMPCI's acceptance of the benefits of
Baluyot's misrepresentation, it can no longer deny responsibility therefor.
Baluyot was authorized to solicit and remit to MMPCI offers to purchase interment spaces obtained
on forms provided by MMPCI. The terms of the offer to purchase, therefore, are contained in such The Court does not agree. Pertinent to this case are the following provisions of the Civil Code:
forms and, when signed by the buyer and an authorized officer of MMPCI, becomes binding on
both parties. Art. 1898. If the agent contracts in the name of the principal, exceeding the scope of his authority,
and the principal does not ratify the contract, it shall be void if the party with whom the agent
The Offer to Purchase duly signed by Atty. Linsangan, and accepted and validated by MMPCI contracted is aware of the limits of the powers granted by the principal. In this case, however, the
showed a total list price of P132,250.00. Likewise, it was clearly stated therein that "Purchaser agent is liable if he undertook to secure the principal's ratification.
agrees that he has read or has had read to him this agreement, that he understands its terms and
conditions, and that there are no covenants, conditions, warranties or representations other than Art. 1910. The principal must comply with all the obligations that the agent may have contracted
those contained herein."37 By signing the Offer to Purchase, Atty. Linsangan signified that he within the scope of his authority.
understood its contents. That he and Baluyot had an agreement different from that contained in the
Offer to Purchase is of no moment, and should not affect MMPCI, as it was obviously made As for any obligation wherein the agent has exceeded his power, the principal is not bound except
outside Baluyot's authority. To repeat, Baluyot's authority was limited only to soliciting purchasers. when he ratifies it expressly or tacitly.
She had no authority to alter the terms of the written contract provided by MMPCI. The
document/letter "confirming" the agreement that Atty. Linsangan would have to pay the old price Art. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable with the
was executed by Baluyot alone. Nowhere is there any indication that the same came from MMPCI agent if the former allowed the latter to act as though he had full powers.
or any of its officers.
Thus, the acts of an agent beyond the scope of his authority do not bind the principal, unless he
It is a settled rule that persons dealing with an agent are bound at their peril, if they would hold the ratifies them, expressly or impliedly. Only the principal can ratify; the agent cannot ratify his own
principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, unauthorized acts. Moreover, the principal must have knowledge of the acts he is to ratify.44
and in case either is controverted, the burden of proof is upon them to establish it.38 The basis for
agency is representation and a person dealing with an agent is put upon inquiry and must discover Ratification in agency is the adoption or confirmation by one person of an act performed on his
upon his peril the authority of the agent.39 If he does not make such an inquiry, he is chargeable behalf by another without authority. The substance of the doctrine is confirmation after conduct,
with knowledge of the agent's authority and his ignorance of that authority will not be any amounting to a substitute for a prior authority. Ordinarily, the principal must have full knowledge at
excuse.40 the time of ratification of all the material facts and circumstances relating to the unauthorized act of
the person who assumed to act as agent. Thus, if material facts were suppressed or unknown,
As noted by one author, the ignorance of a person dealing with an agent as to the scope of the there can be no valid ratification and this regardless of the purpose or lack thereof in concealing
latter's authority is no excuse to such person and the fault cannot be thrown upon the principal.41 such facts and regardless of the parties between whom the question of ratification may arise.45
A person dealing with an agent assumes the risk of lack of authority in the agent. He cannot Nevertheless, this principle does not apply if the principal's ignorance of the material facts and
charge the principal by relying upon the agent's assumption of authority that proves to be circumstances was willful, or that the principal chooses to act in ignorance of the facts.46 However,
unfounded. The principal, on the other hand, may act on the presumption that third persons in the absence of circumstances putting a reasonably prudent man on inquiry, ratification cannot
dealing with his agent will not be negligent in failing to ascertain the extent of his authority as well be implied as against the principal who is ignorant of the facts.47
as the existence of his agency.42
No ratification can be implied in the instant case.
In the instant case, it has not been established that Atty. Linsangan even bothered to inquire
whether Baluyot was authorized to agree to terms contrary to those indicated in the written A perusal of Baluyot's Answer48 reveals that the real arrangement between her and Atty.
contract, much less bind MMPCI by her commitment with respect to such agreements. Even if Linsangan was for the latter to pay a monthly installment of P1,800.00 whereas Baluyot was to
Baluyot was Atty. Linsangan's friend and known to be an agent of MMPCI, her declarations and shoulder the counterpart amount of P1,455.00 to meet the P3,255.00 monthly installments as
actions alone are not sufficient to establish the fact or extent of her authority.43 Atty. Linsangan as indicated in the contract. Thus, every time an installment falls due, payment was to be made
a practicing lawyer for a relatively long period of time when he signed the contract should have through a check from Atty. Linsangan for P1,800.00 and a cash component of P1,455.00 from
been put on guard when their agreement was not reflected in the contract. More importantly, Atty. Baluyot.49 However, it appears that while Atty. Linsangan issued the post-dated checks, Baluyot
Linsangan should have been alerted by the fact that Baluyot failed to effect the transfer of rights failed to come up with her part of the bargain. This was supported by Baluyot's statements in her
earlier promised, and was unable to make good her written commitment, nor convince MMPCI to letter50 to Mr. Clyde Williams, Jr., Sales Manager of MMPCI, two days after she received the copy
assent thereto, as evidenced by several attempts to induce him to enter into other contracts for a of the Complaint. In the letter, she admitted that she was remiss in her duties when she consented
higher consideration. As properly pointed out by MMPCI, as a lawyer, a greater degree of caution to Atty. Linsangan's proposal that he will pay the old price while the difference will be shouldered
should be expected of Atty. Linsangan especially in dealings involving legal documents. He did not by her. She likewise admitted that the contract suffered arrearages because while Atty. Linsangan
even bother to ask for official receipts of his payments, nor inquire from MMPCI directly to issued the agreed checks, she was unable to give her share of P1,455.00 due to her own financial
ascertain the real status of the contract, blindly relying on the representations of Baluyot. A lawyer difficulties. Baluyot even asked for compassion from MMPCI for the error she committed.
by profession, he knew what he was doing when he signed the written contract, knew the meaning
and value of every word or phrase used in the contract, and more importantly, knew the legal Atty. Linsangan failed to show that MMPCI had knowledge of the arrangement. As far as MMPCI is
effects which said document produced. He is bound to accept responsibility for his negligence. concerned, the contract price was P132,250.00, as stated in the Offer to Purchase signed by Atty.
Linsangan and MMPCI's authorized officer. The down payment of P19,838.00 given by Atty.
The trial and appellate courts found MMPCI liable based on ratification and estoppel. For the trial Linsangan was in accordance with the contract as well. Payments of P3,235.00 for at least two
court, MMPCI's acts of accepting and encashing the checks issued by Atty. Linsangan as well as installments were likewise in accord with the contract, albeit made through a check and partly in
allowing Baluyot to receive checks drawn in the name of MMPCI confirm and ratify the contract of cash. In view of Baluyot's failure to give her share in the payment, MMPCI received only P1,800.00
95
checks, which were clearly insufficient payment. In fact, Atty. Linsangan would have incurred
arrearages that could have caused the earlier cancellation of the contract, if not for MMPCI's Being aware of the limits of Baluyot's authority, Atty. Linsangan cannot insist on what he claims to
application of some of the checks to his account. However, the checks alone were not sufficient to be the terms of Contract No. 28660. The agreement, insofar as the P95,000.00 contract price is
cover his obligations. concerned, is void and cannot be enforced as against MMPCI. Neither can he hold Baluyot liable
for damages under the same contract, since there is no evidence showing that Baluyot undertook
If MMPCI was aware of the arrangement, it would have refused the latter's check payments for to secure MMPCI's ratification. At best, the "agreement" between Baluyot and Atty. Linsangan
being insufficient. It would not have applied to his account the P1,800.00 checks. Moreover, the bound only the two of them. As far as MMPCI is concerned, it bound itself to sell its interment
fact that Baluyot had to practically explain to MMPCI's Sales Manager the details of her space to Atty. Linsangan for P132,250.00 under Contract No. 28660, and had in fact received
"arrangement" with Atty. Linsangan and admit to having made an error in entering such several payments in accordance with the same contract. If the contract was cancelled due to
arrangement confirm that MMCPI had no knowledge of the said agreement. It was only when arrearages, Atty. Linsangan's recourse should only be against Baluyot who personally undertook
Baluyot filed her Answer that she claimed that MMCPI was fully aware of the agreement. to pay the difference between the true contract price of P132,250.00 and the original proposed
price of P95,000.00. To surmise that Baluyot was acting on behalf of MMPCI when she promised
Neither is there estoppel in the instant case. The essential elements of estoppel are (i) conduct of to shoulder the said difference would be to conclude that MMPCI undertook to pay itself the
a party amounting to false representation or concealment of material facts or at least calculated to difference, a conclusion that is very illogical, if not antithetical to its business interests.
convey the impression that the facts are otherwise than, and inconsistent with, those which the
party subsequently attempts to assert; (ii) intent, or at least expectation, that this conduct shall be However, this does not preclude Atty. Linsangan from instituting a separate action to recover
acted upon by, or at least influence, the other party; and (iii) knowledge, actual or constructive, of damages from Baluyot, not as an agent of MMPCI, but in view of the latter's breach of their
the real facts.51 separate agreement. To review, Baluyot obligated herself to pay P1,455.00 in addition to Atty.
Linsangan's P1,800.00 to complete the monthly installment payment under the contract, which, by
While there is no more question as to the agency relationship between Baluyot and MMPCI, there her own admission, she was unable to do due to personal financial difficulties. It is undisputed that
is no indication that MMPCI let the public, or specifically, Atty. Linsangan to believe that Baluyot Atty. Linsangan issued the P1,800.00 as agreed upon, and were it not for Baluyot's failure to
had the authority to alter the standard contracts of the company. Neither is there any showing that provide the balance, Contract No. 28660 would not have been cancelled. Thus, Atty. Linsangan
prior to signing Contract No. 28660, MMPCI had any knowledge of Baluyot's commitment to Atty. has a cause of action against Baluyot, which he can pursue in another case.
Linsangan. One who claims the benefit of an estoppel on the ground that he has been misled by
the representations of another must not have been misled through his own want of reasonable WHEREFORE, the instant petition is GRANTED. The Decision of the Court of Appeals dated 22
care and circumspection.52 Even assuming that Atty. Linsangan was misled by MMPCI's June 2001 and its Resolution dated 12 December 2001 in CA- G.R. CV No. 49802, as well as the
actuations, he still cannot invoke the principle of estoppel, as he was clearly negligent in his Decision in Civil Case No. 88-1253 of the Regional Trial Court, Makati City Branch 57, are hereby
dealings with Baluyot, and could have easily determined, had he only been cautious and prudent, REVERSED and SET ASIDE. The Complaint in Civil Case No. 88-1253 is DISMISSED for lack of
whether said agent was clothed with the authority to change the terms of the principal's written cause of action. No pronouncement as to costs.
contract. Estoppel must be intentional and unequivocal, for when misapplied, it can easily become
a most convenient and effective means of injustice.53 In view of the lack of sufficient proof SO ORDERED.
showing estoppel, we refuse to hold MMPCI liable on this score.

Likewise, this Court does not find favor in the Court of Appeals' findings that "the authority of 32. G.R. No. 76931 May 29, 1991
defendant Baluyot may not have been expressly conferred upon her; however, the same may have
been derived impliedly by habit or custom which may have been an accepted practice in their ORIENT AIR SERVICES & HOTEL REPRESENTATIVES, petitioner,
company in a long period of time." A perusal of the records of the case fails to show any indication vs.
that there was such a habit or custom in MMPCI that allows its agents to enter into agreements for COURT OF APPEALS and AMERICAN AIR-LINES INCORPORATED, respondents.
lower prices of its interment spaces, nor to assume a portion of the purchase price of the interment
spaces sold at such lower price. No evidence was ever presented to this effect. G.R. No. 76933 May 29, 1991

As the Court sees it, there are two obligations in the instant case. One is the Contract No. 28660 AMERICAN AIRLINES, INCORPORATED, petitioner,
between MMPCI and by Atty. Linsangan for the purchase of an interment space in the former's vs.
cemetery. The other is the agreement between Baluyot and Atty. Linsangan for the former to COURT OF APPEALS and ORIENT AIR SERVICES & HOTEL REPRESENTATIVES,
shoulder the amount P1,455.00, or the difference between P95,000.00, the original price, and INCORPORATED, respondents.
P132,250.00, the actual contract price.

To repeat, the acts of the agent beyond the scope of his authority do not bind the principal unless PADILLA, J.:
the latter ratifies the same. It also bears emphasis that when the third person knows that the agent
was acting beyond his power or authority, the principal cannot be held liable for the acts of the This case is a consolidation of two (2) petitions for review on certiorari of a decision1 of the Court
agent. If the said third person was aware of such limits of authority, he is to blame and is not of Appeals in CA-G.R. No. CV-04294, entitled "American Airlines, Inc. vs. Orient Air Services and
entitled to recover damages from the agent, unless the latter undertook to secure the principal's Hotel Representatives, Inc." which affirmed, with modification, the decision2 of the Regional Trial
ratification.54 Court of Manila, Branch IV, which dismissed the complaint and granted therein defendant's
counterclaim for agent's overriding commission and damages.
This Court finds that Contract No. 28660 was validly entered into both by MMPCI and Atty.
Linsangan. By affixing his signature in the contract, Atty. Linsangan assented to the terms and The antecedent facts are as follows:
conditions thereof. When Atty. Linsangan incurred delinquencies in payment, MMCPI merely
enforced its rights under the said contract by canceling the same.
96
On 15 January 1977, American Airlines, Inc. (hereinafter referred to as American Air), an air carrier American will pay Orient Air Services commission on transportation sold hereunder by Orient Air
offering passenger and air cargo transportation in the Philippines, and Orient Air Services and Services or its sub-agents as follows:
Hotel Representatives (hereinafter referred to as Orient Air), entered into a General Sales Agency
Agreement (hereinafter referred to as the Agreement), whereby the former authorized the latter to (a) Sales agency commission
act as its exclusive general sales agent within the Philippines for the sale of air passenger
transportation. Pertinent provisions of the agreement are reproduced, to wit: American will pay Orient Air Services a sales agency commission for all sales of transportation by
Orient Air Services or its sub-agents over American's services and any connecting through air
WITNESSETH transportation, when made on American's ticket stock, equal to the following percentages of the
tariff fares and charges:
In consideration of the mutual convenants herein contained, the parties hereto agree as follows:
(i) For transportation solely between points within the United States and between such points and
1. Representation of American by Orient Air Services Canada: 7% or such other rate(s) as may be prescribed by the Air Traffic Conference of America.

Orient Air Services will act on American's behalf as its exclusive General Sales Agent within the (ii) For transportation included in a through ticket covering transportation between points other than
Philippines, including any United States military installation therein which are not serviced by an those described above: 8% or such other rate(s) as may be prescribed by the International Air
Air Carrier Representation Office (ACRO), for the sale of air passenger transportation. The Transport Association.
services to be performed by Orient Air Services shall include:
(b) Overriding commission
(a) soliciting and promoting passenger traffic for the services of American and, if necessary,
employing staff competent and sufficient to do so; In addition to the above commission American will pay Orient Air Services an overriding
commission of 3% of the tariff fares and charges for all sales of transportation over American's
(b) providing and maintaining a suitable area in its place of business to be used exclusively for the service by Orient Air Service or its sub-agents.
transaction of the business of American;
xxx xxx xxx
(c) arranging for distribution of American's timetables, tariffs and promotional material to sales
agents and the general public in the assigned territory; 10. Default

(d) servicing and supervising of sales agents (including such sub-agents as may be appointed by If Orient Air Services shall at any time default in observing or performing any of the provisions of
Orient Air Services with the prior written consent of American) in the assigned territory including if this Agreement or shall become bankrupt or make any assignment for the benefit of or enter into
required by American the control of remittances and commissions retained; and any agreement or promise with its creditors or go into liquidation, or suffer any of its goods to be
taken in execution, or if it ceases to be in business, this Agreement may, at the option of American,
(e) holding out a passenger reservation facility to sales agents and the general public in the be terminated forthwith and American may, without prejudice to any of its rights under this
assigned territory. Agreement, take possession of any ticket forms, exchange orders, traffic material or other property
or funds belonging to American.
In connection with scheduled or non-scheduled air passenger transportation within the United
States, neither Orient Air Services nor its sub-agents will perform services for any other air carrier 11. IATA and ATC Rules
similar to those to be performed hereunder for American without the prior written consent of
American. Subject to periodic instructions and continued consent from American, Orient Air The provisions of this Agreement are subject to any applicable rules or resolutions of the
Services may sell air passenger transportation to be performed within the United States by other International Air Transport Association and the Air Traffic Conference of America, and such rules
scheduled air carriers provided American does not provide substantially equivalent schedules or resolutions shall control in the event of any conflict with the provisions hereof.
between the points involved.
xxx xxx xxx
xxx xxx xxx
13. Termination
4. Remittances
American may terminate the Agreement on two days' notice in the event Orient Air Services is
Orient Air Services shall remit in United States dollars to American the ticket stock or exchange unable to transfer to the United States the funds payable by Orient Air Services to American under
orders, less commissions to which Orient Air Services is entitled hereunder, not less frequently this Agreement. Either party may terminate the Agreement without cause by giving the other 30
than semi-monthly, on the 15th and last days of each month for sales made during the preceding days' notice by letter, telegram or cable.
half month.
xxx xxx x x x3
All monies collected by Orient Air Services for transportation sold hereunder on American's ticket
stock or on exchange orders, less applicable commissions to which Orient Air Services is entitled On 11 May 1981, alleging that Orient Air had reneged on its obligations under the Agreement by
hereunder, are the property of American and shall be held in trust by Orient Air Services until failing to promptly remit the net proceeds of sales for the months of January to March 1981 in the
satisfactorily accounted for to American. amount of US $254,400.40, American Air by itself undertook the collection of the proceeds of
tickets sold originally by Orient Air and terminated forthwith the Agreement in accordance with
5. Commissions Paragraph 13 thereof (Termination). Four (4) days later, or on 15 May 1981, American Air
instituted suit against Orient Air with the Court of First Instance of Manila, Branch 24, for
97
Accounting with Preliminary Attachment or Garnishment, Mandatory Injunction and Restraining the rest of the appealed decision is affirmed.
Order4 averring the aforesaid basis for the termination of the Agreement as well as therein
defendant's previous record of failures "to promptly settle past outstanding refunds of which there Costs against American.8
were available funds in the possession of the defendant, . . . to the damage and prejudice of
plaintiff."5 American Air moved for reconsideration of the aforementioned decision, assailing the substance
thereof and arguing for its reversal. The appellate court's decision was also the subject of a Motion
In its Answer6 with counterclaim dated 9 July 1981, defendant Orient Air denied the material for Partial Reconsideration by Orient Air which prayed for the restoration of the trial court's ruling
allegations of the complaint with respect to plaintiff's entitlement to alleged unremitted amounts, with respect to the monetary awards. The Court of Appeals, by resolution promulgated on 17
contending that after application thereof to the commissions due it under the Agreement, plaintiff in December 1986, denied American Air's motion and with respect to that of Orient Air, ruled thus:
fact still owed Orient Air a balance in unpaid overriding commissions. Further, the defendant
contended that the actions taken by American Air in the course of terminating the Agreement as Orient's motion for partial reconsideration is denied insofar as it prays for affirmance of the trial
well as the termination itself were untenable, Orient Air claiming that American Air's precipitous court's award of exemplary damages and attorney's fees, but granted insofar as the rate of
conduct had occasioned prejudice to its business interests. exchange is concerned. The decision of January 27, 1986 is modified in paragraphs (1) and (2) of
the dispositive part so that the payment of the sums mentioned therein shall be at their Philippine
Finding that the record and the evidence substantiated the allegations of the defendant, the trial peso equivalent in accordance with the official rate of exchange legally prevailing on the date of
court ruled in its favor, rendering a decision dated 16 July 1984, the dispositive portion of which actual payment.9
reads:
Both parties appealed the aforesaid resolution and decision of the respondent court, Orient Air as
WHEREFORE, all the foregoing premises considered, judgment is hereby rendered in favor of petitioner in G.R. No. 76931 and American Air as petitioner in G.R. No. 76933. By resolution10 of
defendant and against plaintiff dismissing the complaint and holding the termination made by the this Court dated 25 March 1987 both petitions were consolidated, hence, the case at bar.
latter as affecting the GSA agreement illegal and improper and order the plaintiff to reinstate
defendant as its general sales agent for passenger tranportation in the Philippines in accordance The principal issue for resolution by the Court is the extent of Orient Air's right to the 3% overriding
with said GSA agreement; plaintiff is ordered to pay defendant the balance of the overriding commission. It is the stand of American Air that such commission is based only on sales of its
commission on total flown revenue covering the period from March 16, 1977 to December 31, services actually negotiated or transacted by Orient Air, otherwise referred to as "ticketed sales."
1980 in the amount of US$84,821.31 plus the additional amount of US$8,000.00 by way of proper As basis thereof, primary reliance is placed upon paragraph 5(b) of the Agreement which, in
3% overriding commission per month commencing from January 1, 1981 until such reinstatement reiteration, is quoted as follows:
or said amounts in its Philippine peso equivalent legally prevailing at the time of payment plus legal
interest to commence from the filing of the counterclaim up to the time of payment. Further, plaintiff 5. Commissions
is directed to pay defendant the amount of One Million Five Hundred Thousand (Pl,500,000.00)
pesos as and for exemplary damages; and the amount of Three Hundred Thousand (P300,000.00) a) . . .
pesos as and by way of attorney's fees.
b) Overriding Commission
Costs against plaintiff.7
In addition to the above commission, American will pay Orient Air Services an overriding
On appeal, the Intermediate Appellate Court (now Court of Appeals) in a decision promulgated on commission of 3% of the tariff fees and charges for all sales of transportation over American's
27 January 1986, affirmed the findings of the court a quo on their material points but with some services by Orient Air Services or its sub-agents. (Emphasis supplied)
modifications with respect to the monetary awards granted. The dispositive portion of the appellate
court's decision is as follows: Since Orient Air was allowed to carry only the ticket stocks of American Air, and the former not
having opted to appoint any sub-agents, it is American Air's contention that Orient Air can claim
WHEREFORE, with the following modifications — entitlement to the disputed overriding commission based only on ticketed sales. This is supposed
to be the clear meaning of the underscored portion of the above provision. Thus, to be entitled to
1) American is ordered to pay Orient the sum of US$53,491.11 representing the balance of the the 3% overriding commission, the sale must be made by Orient Air and the sale must be done
latter's overriding commission covering the period March 16, 1977 to December 31, 1980, or its with the use of American Air's ticket stocks.
Philippine peso equivalent in accordance with the official rate of exchange legally prevailing on
July 10, 1981, the date the counterclaim was filed; On the other hand, Orient Air contends that the contractual stipulation of a 3% overriding
commission covers the total revenue of American Air and not merely that derived from ticketed
2) American is ordered to pay Orient the sum of US$7,440.00 as the latter's overriding commission sales undertaken by Orient Air. The latter, in justification of its submission, invokes its designation
per month starting January 1, 1981 until date of termination, May 9, 1981 or its Philippine peso as the exclusive General Sales Agent of American Air, with the corresponding obligations arising
equivalent in accordance with the official rate of exchange legally prevailing on July 10, 1981, the from such agency, such as, the promotion and solicitation for the services of its principal. In effect,
date the counterclaim was filed by virtue of such exclusivity, "all sales of transportation over American Air's services are
necessarily by Orient Air."11
3) American is ordered to pay interest of 12% on said amounts from July 10, 1981 the date the
answer with counterclaim was filed, until full payment; It is a well settled legal principle that in the interpretation of a contract, the entirety thereof must be
taken into consideration to ascertain the meaning of its provisions.12 The various stipulations in
4) American is ordered to pay Orient exemplary damages of P200,000.00; the contract must be read together to give effect to all.13 After a careful examination of the
records, the Court finds merit in the contention of Orient Air that the Agreement, when interpreted
5) American is ordered to pay Orient the sum of P25,000.00 as attorney's fees. in accordance with the foregoing principles, entitles it to the 3% overriding commission based on
total revenue, or as referred to by the parties, "total flown revenue."
98
 By affirming this ruling of the trial court, respondent appellate court, in effect, compels American Air
As the designated exclusive General Sales Agent of American Air, Orient Air was responsible for to extend its personality to Orient Air. Such would be violative of the principles and essence of
the promotion and marketing of American Air's services for air passenger transportation, and the agency, defined by law as a contract whereby "a person binds himself to render some service or to
solicitation of sales therefor. In return for such efforts and services, Orient Air was to be paid do something in representation or on behalf of another, WITH THE CONSENT OR AUTHORITY
commissions of two (2) kinds: first, a sales agency commission, ranging from 7-8% of tariff fares OF THE LATTER .17 (emphasis supplied) In an agent-principal relationship, the personality of the
and charges from sales by Orient Air when made on American Air ticket stock; and second, an principal is extended through the facility of the agent. In so doing, the agent, by legal fiction,
overriding commission of 3% of tariff fares and charges for all sales of passenger transportation becomes the principal, authorized to perform all acts which the latter would have him do. Such a
over American Air services. It is immediately observed that the precondition attached to the first relationship can only be effected with the consent of the principal, which must not, in any way, be
type of commission does not obtain for the second type of commissions. The latter type of compelled by law or by any court. The Agreement itself between the parties states that "either
commissions would accrue for sales of American Air services made not on its ticket stock but on party may terminate the Agreement without cause by giving the other 30 days' notice by letter,
the ticket stock of other air carriers sold by such carriers or other authorized ticketing facilities or telegram or cable." (emphasis supplied) We, therefore, set aside the portion of the ruling of the
travel agents. To rule otherwise, i.e., to limit the basis of such overriding commissions to sales respondent appellate court reinstating Orient Air as general sales agent of American Air.
from American Air ticket stock would erase any distinction between the two (2) types of
commissions and would lead to the absurd conclusion that the parties had entered into a contract WHEREFORE, with the foregoing modification, the Court AFFIRMS the decision and resolution of
with meaningless provisions. Such an interpretation must at all times be avoided with every effort the respondent Court of Appeals, dated 27 January 1986 and 17 December 1986, respectively.
exerted to harmonize the entire Agreement. Costs against petitioner American Air.

An additional point before finally disposing of this issue. It is clear from the records that American SO ORDERED.
Air was the party responsible for the preparation of the Agreement. Consequently, any ambiguity in
this "contract of adhesion" is to be taken "contra proferentem", i.e., construed against the party
who caused the ambiguity and could have avoided it by the exercise of a little more care. Thus, B. Agency distinguished from other contracts
Article 1377 of the Civil Code provides that the interpretation of obscure words or stipulations in a 1. Agency vs Partnership
contract shall not favor the party who caused the obscurity.14 To put it differently, when several
interpretations of a provision are otherwise equally proper, that interpretation or construction is to 33. G.R. No. L-41182-3 April 16, 1988
be adopted which is most favorable to the party in whose favor the provision was made and who
did not cause the ambiguity.15 We therefore agree with the respondent appellate court's DR. CARLOS L. SEVILLA and LINA O. SEVILLA, petitioners-appellants,
declaration that: vs.
THE COURT OF APPEALS, TOURIST WORLD SERVICE, INC., ELISEO S.CANILAO, and
Any ambiguity in a contract, whose terms are susceptible of different interpretations, must be read SEGUNDINA NOGUERA, respondents-appellees.
against the party who drafted it.16

We now turn to the propriety of American Air's termination of the Agreement. The respondent SARMIENTO , J.:
appellate court, on this issue, ruled thus:
The petitioners invoke the provisions on human relations of the Civil Code in this appeal by
It is not denied that Orient withheld remittances but such action finds justification from paragraph 4 certiorari. The facts are beyond dispute:
of the Agreement, Exh. F, which provides for remittances to American less commissions to which
Orient is entitled, and from paragraph 5(d) which specifically allows Orient to retain the full amount xxx xxx xxx
of its commissions. Since, as stated ante, Orient is entitled to the 3% override. American's
premise, therefore, for the cancellation of the Agreement did not exist. . . ." On the strength of a contract (Exhibit A for the appellant Exhibit 2 for the appellees) entered into
on Oct. 19, 1960 by and between Mrs. Segundina Noguera, party of the first part; the Tourist
We agree with the findings of the respondent appellate court. As earlier established, Orient Air was World Service, Inc., represented by Mr. Eliseo Canilao as party of the second part, and hereinafter
entitled to an overriding commission based on total flown revenue. American Air's perception that referred to as appellants, the Tourist World Service, Inc. leased the premises belonging to the
Orient Air was remiss or in default of its obligations under the Agreement was, in fact, a situation party of the first part at Mabini St., Manila for the former-s use as a branch office. In the said
where the latter acted in accordance with the Agreement—that of retaining from the sales contract the party of the third part held herself solidarily liable with the party of the part for the
proceeds its accrued commissions before remitting the balance to American Air. Since the latter prompt payment of the monthly rental agreed on. When the branch office was opened, the same
was still obligated to Orient Air by way of such commissions. Orient Air was clearly justified in was run by the herein appellant Una 0. Sevilla payable to Tourist World Service Inc. by any airline
retaining and refusing to remit the sums claimed by American Air. The latter's termination of the for any fare brought in on the efforts of Mrs. Lina Sevilla, 4% was to go to Lina Sevilla and 3% was
Agreement was, therefore, without cause and basis, for which it should be held liable to Orient Air. to be withheld by the Tourist World Service, Inc.

On the matter of damages, the respondent appellate court modified by reduction the trial court's On or about November 24, 1961 (Exhibit 16) the Tourist World Service, Inc. appears to have been
award of exemplary damages and attorney's fees. This Court sees no error in such modification informed that Lina Sevilla was connected with a rival firm, the Philippine Travel Bureau, and, since
and, thus, affirms the same. the branch office was anyhow losing, the Tourist World Service considered closing down its office.
This was firmed up by two resolutions of the board of directors of Tourist World Service, Inc. dated
It is believed, however, that respondent appellate court erred in affirming the rest of the decision of Dec. 2, 1961 (Exhibits 12 and 13), the first abolishing the office of the manager and vice-president
the trial court.1âwphi1 We refer particularly to the lower court's decision ordering American Air to of the Tourist World Service, Inc., Ermita Branch, and the second,authorizing the corporate
"reinstate defendant as its general sales agent for passenger transportation in the Philippines in secretary to receive the properties of the Tourist World Service then located at the said branch
accordance with said GSA Agreement." office. It further appears that on Jan. 3, 1962, the contract with the appellees for the use of the
Branch Office premises was terminated and while the effectivity thereof was Jan. 31, 1962, the
99
appellees no longer used it. As a matter of fact appellants used it since Nov. 1961. Because of
this, and to comply with the mandate of the Tourist World Service, the corporate secretary Gabino 1. Appellant Mrs. Lina 0. Sevilla, a prominent figure and wife of an eminent eye, ear and nose
Canilao went over to the branch office, and, finding the premises locked, and, being unable to specialist as well as a imediately columnist had been in the travel business prior to the
contact Lina Sevilla, he padlocked the premises on June 4, 1962 to protect the interests of the establishment of the joint business venture with appellee Tourist World Service, Inc. and appellee
Tourist World Service. When neither the appellant Lina Sevilla nor any of her employees could Eliseo Canilao, her compadre, she being the godmother of one of his children, with her own
enter the locked premises, a complaint wall filed by the herein appellants against the appellees clientele, coming mostly from her own social circle (pp. 3-6 tsn. February 16,1965).
with a prayer for the issuance of mandatory preliminary injunction. Both appellees answered with
counterclaims. For apparent lack of interest of the parties therein, the trial court ordered the 2. Appellant Mrs. Sevilla was signatory to a lease agreement dated 19 October 1960 (Exh. 'A')
dismissal of the case without prejudice. covering the premises at A. Mabini St., she expressly warranting and holding [sic] herself
'solidarily' liable with appellee Tourist World Service, Inc. for the prompt payment of the monthly
The appellee Segundina Noguera sought reconsideration of the order dismissing her counterclaim rentals thereof to other appellee Mrs. Noguera (pp. 14-15, tsn. Jan. 18,1964).
which the court a quo, in an order dated June 8, 1963, granted permitting her to present evidence
in support of her counterclaim. 3. Appellant Mrs. Sevilla did not receive any salary from appellee Tourist World Service, Inc.,
which had its own, separate office located at the Trade & Commerce Building; nor was she an
On June 17,1963, appellant Lina Sevilla refiled her case against the herein appellees and after the employee thereof, having no participation in nor connection with said business at the Trade &
issues were joined, the reinstated counterclaim of Segundina Noguera and the new complaint of Commerce Building (pp. 16-18 tsn Id.).
appellant Lina Sevilla were jointly heard following which the court a quo ordered both cases
dismiss for lack of merit, on the basis of which was elevated the instant appeal on the following 4. Appellant Mrs. Sevilla earned commissions for her own passengers, her own bookings her own
assignment of errors: business (and not for any of the business of appellee Tourist World Service, Inc.) obtained from
the airline companies. She shared the 7% commissions given by the airline companies giving
I. THE LOWER COURT ERRED EVEN IN APPRECIATING THE NATURE OF PLAINTIFF- appellee Tourist World Service, Lic. 3% thereof aid retaining 4% for herself (pp. 18 tsn. Id.)
APPELLANT MRS. LINA O. SEVILLA'S COMPLAINT.
5. Appellant Mrs. Sevilla likewise shared in the expenses of maintaining the A. Mabini St. office,
II. THE LOWER COURT ERRED IN HOLDING THAT APPELLANT MRS. LINA 0. SEVILA'S paying for the salary of an office secretary, Miss Obieta, and other sundry expenses, aside from
ARRANGEMENT (WITH APPELLEE TOURIST WORLD SERVICE, INC.) WAS ONE MERELY OF desicion the office furniture and supplying some of fice furnishings (pp. 15,18 tsn. April 6,1965),
EMPLOYER-EMPLOYEE RELATION AND IN FAILING TO HOLD THAT THE SAID appellee Tourist World Service, Inc. shouldering the rental and other expenses in consideration for
ARRANGEMENT WAS ONE OF JOINT BUSINESS VENTURE. the 3% split in the co procured by appellant Mrs. Sevilla (p. 35 tsn Feb. 16,1965).

III. THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLANT MRS. LINA O. 6. It was the understanding between them that appellant Mrs. Sevilla would be given the title of
SEVILLA IS ESTOPPED FROM DENYING THAT SHE WAS A MERE EMPLOYEE OF branch manager for appearance's sake only (p. 31 tsn. Id.), appellee Eliseo Canilao admit that it
DEFENDANT-APPELLEE TOURIST WORLD SERVICE, INC. EVEN AS AGAINST THE LATTER. was just a title for dignity (p. 36 tsn. June 18, 1965- testimony of appellee Eliseo Canilao pp. 38-39
tsn April 61965-testimony of corporate secretary Gabino Canilao (pp- 2-5, Appellants' Reply Brief)
IV. THE LOWER COURT ERRED IN NOT HOLDING THAT APPELLEES HAD NO RIGHT TO
EVICT APPELLANT MRS. LINA O. SEVILLA FROM THE A. MABINI OFFICE BY TAKING THE Upon the other hand, appellee TWS contend that the appellant was an employee of the appellee
LAW INTO THEIR OWN HANDS. Tourist World Service, Inc. and as such was designated manager.1

V. THE LOWER COURT ERRED IN NOT CONSIDERING AT .ALL APPELLEE NOGUERA'S xxx xxx xxx
RESPONSIBILITY FOR APPELLANT LINA O. SEVILLA'S FORCIBLE DISPOSSESSION OF THE
A. MABINI PREMISES. The trial court2 held for the private respondent on the premise that the private respondent, Tourist
World Service, Inc., being the true lessee, it was within its prerogative to terminate the lease and
VI. THE LOWER COURT ERRED IN FINDING THAT APPELLANT APPELLANT MRS. LINA O. padlock the premises. 3 It likewise found the petitioner, Lina Sevilla, to be a mere employee of said
SEVILLA SIGNED MERELY AS GUARANTOR FOR RENTALS. Tourist World Service, Inc. and as such, she was bound by the acts of her employer. 4 The
respondent Court of Appeal 5 rendered an affirmance.
On the foregoing facts and in the light of the errors asigned the issues to be resolved are:
The petitioners now claim that the respondent Court, in sustaining the lower court, erred.
1. Whether the appellee Tourist World Service unilaterally disco the telephone line at the branch Specifically, they state:
office on Ermita;
I
2. Whether or not the padlocking of the office by the Tourist World Service was actionable or not;
and THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS
DISCRETION IN HOLDING THAT "THE PADLOCKING OF THE PREMISES BY TOURIST
3. Whether or not the lessee to the office premises belonging to the appellee Noguera was WORLD SERVICE INC. WITHOUT THE KNOWLEDGE AND CONSENT OF THE APPELLANT
appellees TWS or TWS and the appellant. LINA SEVILLA ... WITHOUT NOTIFYING MRS. LINA O. SEVILLA OR ANY OF HER
EMPLOYEES AND WITHOUT INFORMING COUNSEL FOR THE APPELLANT (SEVILIA), WHO
In this appeal, appealant Lina Sevilla claims that a joint bussiness venture was entered into by and IMMEDIATELY BEFORE THE PADLOCKING INCIDENT, WAS IN CONFERENCE WITH THE
between her and appellee TWS with offices at the Ermita branch office and that she was not an CORPORATE SECRETARY OF TOURIST WORLD SERVICE (ADMITTEDLY THE PERSON
employee of the TWS to the end that her relationship with TWS was one of a joint business WHO PADLOCKED THE SAID OFFICE), IN THEIR ATTEMP AMICABLY SETTLE THE
venture appellant made declarations showing: CONTROVERSY BETWEEN THE APPELLANT (SEVILLA) AND THE TOURIST WORLD
100
SERVICE ... (DID NOT) ENTITLE THE LATTER TO THE RELIEF OF DAMAGES" (ANNEX "A" Worlds Ermita office, she had bound herself in solidum as and for rental payments, an
PP. 7,8 AND ANNEX "B" P. 2) DECISION AGAINST DUE PROCESS WHICH ADHERES TO THE arrangement that would be like claims of a master-servant relationship. True the respondent Court
RULE OF LAW. would later minimize her participation in the lease as one of mere guaranty, 12 that does not make
her an employee of Tourist World, since in any case, a true employee cannot be made to part with
II his own money in pursuance of his employer's business, or otherwise, assume any liability thereof.
In that event, the parties must be bound by some other relation, but certainly not employment.
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS
DISCRETION IN DENYING APPELLANT SEVILLA RELIEF BECAUSE SHE HAD "OFFERED TO In the second place, and as found by the Appellate Court, '[w]hen the branch office was opened,
WITHDRAW HER COMP PROVIDED THAT ALL CLAIMS AND COUNTERCLAIMS LODGED BY the same was run by the herein appellant Lina O. Sevilla payable to Tourist World Service, Inc. by
BOTH APPELLEES WERE WITHDRAWN." (ANNEX "A" P. 8) any airline for any fare brought in on the effort of Mrs. Lina Sevilla. 13 Under these circumstances,
it cannot be said that Sevilla was under the control of Tourist World Service, Inc. "as to the means
III used." Sevilla in pursuing the business, obviously relied on her own gifts and capabilities.

THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS It is further admitted that Sevilla was not in the company's payroll. For her efforts, she retained 4%
DISCRETION IN DENYING-IN FACT NOT PASSING AND RESOLVING-APPELLANT SEVILLAS in commissions from airline bookings, the remaining 3% going to Tourist World. Unlike an
CAUSE OF ACTION FOUNDED ON ARTICLES 19, 20 AND 21 OF THE CIVIL CODE ON employee then, who earns a fixed salary usually, she earned compensation in fluctuating amounts
RELATIONS. depending on her booking successes.

IV The fact that Sevilla had been designated 'branch manager" does not make her, ergo, Tourist
World's employee. As we said, employment is determined by the right-of-control test and certain
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS economic parameters. But titles are weak indicators.
DISCRETION IN DENYING APPEAL APPELLANT SEVILLA RELIEF YET NOT RESOLVING HER
CLAIM THAT SHE WAS IN JOINT VENTURE WITH TOURIST WORLD SERVICE INC. OR AT In rejecting Tourist World Service, Inc.'s arguments however, we are not, as a consequence,
LEAST ITS AGENT COUPLED WITH AN INTEREST WHICH COULD NOT BE TERMINATED OR accepting Lina Sevilla's own, that is, that the parties had embarked on a joint venture or otherwise,
REVOKED UNILATERALLY BY TOURIST WORLD SERVICE INC.6 a partnership. And apparently, Sevilla herself did not recognize the existence of such a relation. In
her letter of November 28, 1961, she expressly 'concedes your [Tourist World Service, Inc.'s] right
As a preliminary inquiry, the Court is asked to declare the true nature of the relation between Lina to stop the operation of your branch office 14 in effect, accepting Tourist World Service, Inc.'s
Sevilla and Tourist World Service, Inc. The respondent Court of see fit to rule on the question, the control over the manner in which the business was run. A joint venture, including a partnership,
crucial issue, in its opinion being "whether or not the padlocking of the premises by the Tourist presupposes generally a of standing between the joint co-venturers or partners, in which each
World Service, Inc. without the knowledge and consent of the appellant Lina Sevilla entitled the party has an equal proprietary interest in the capital or property contributed 15 and where each
latter to the relief of damages prayed for and whether or not the evidence for the said appellant party exercises equal rights in the conduct of the business.16 furthermore, the parties did not hold
supports the contention that the appellee Tourist World Service, Inc. unilaterally and without the themselves out as partners, and the building itself was embellished with the electric sign "Tourist
consent of the appellant disconnected the telephone lines of the Ermita branch office of the World Service, Inc. 17in lieu of a distinct partnership name.
appellee Tourist World Service, Inc.7 Tourist World Service, Inc., insists, on the other hand, that
Lina SEVILLA was a mere employee, being "branch manager" of its Ermita "branch" office and that It is the Court's considered opinion, that when the petitioner, Lina Sevilla, agreed to (wo)man the
inferentially, she had no say on the lease executed with the private respondent, Segundina private respondent, Tourist World Service, Inc.'s Ermita office, she must have done so pursuant to
Noguera. The petitioners contend, however, that relation between the between parties was one of a contract of agency. It is the essence of this contract that the agent renders services "in
joint venture, but concede that "whatever might have been the true relationship between Sevilla representation or on behalf of another.18 In the case at bar, Sevilla solicited airline fares, but she
and Tourist World Service," the Rule of Law enjoined Tourist World Service and Canilao from did so for and on behalf of her principal, Tourist World Service, Inc. As compensation, she
taking the law into their own hands, 8 in reference to the padlocking now questioned. received 4% of the proceeds in the concept of commissions. And as we said, Sevilla herself based
on her letter of November 28, 1961, pre-assumed her principal's authority as owner of the
The Court finds the resolution of the issue material, for if, as the private respondent, Tourist World business undertaking. We are convinced, considering the circumstances and from the respondent
Service, Inc., maintains, that the relation between the parties was in the character of employer and Court's recital of facts, that the ties had contemplated a principal agent relationship, rather than a
employee, the courts would have been without jurisdiction to try the case, labor disputes being the joint managament or a partnership..
exclusive domain of the Court of Industrial Relations, later, the Bureau Of Labor Relations,
pursuant to statutes then in force. 9 But unlike simple grants of a power of attorney, the agency that we hereby declare to be
compatible with the intent of the parties, cannot be revoked at will. The reason is that it is one
In this jurisdiction, there has been no uniform test to determine the evidence of an employer- coupled with an interest, the agency having been created for mutual interest, of the agent and the
employee relation. In general, we have relied on the so-called right of control test, "where the principal. 19 It appears that Lina Sevilla is a bona fide travel agent herself, and as such, she had
person for whom the services are performed reserves a right to control not only the end to be acquired an interest in the business entrusted to her. Moreover, she had assumed a personal
achieved but also the means to be used in reaching such end." 10 Subsequently, however, we obligation for the operation thereof, holding herself solidarily liable for the payment of rentals. She
have considered, in addition to the standard of right-of control, the existing economic conditions continued the business, using her own name, after Tourist World had stopped further operations.
prevailing between the parties, like the inclusion of the employee in the payrolls, in determining the Her interest, obviously, is not to the commissions she earned as a result of her business
existence of an employer-employee relationship.11 transactions, but one that extends to the very subject matter of the power of management
delegated to her. It is an agency that, as we said, cannot be revoked at the pleasure of the
The records will show that the petitioner, Lina Sevilla, was not subject to control by the private principal. Accordingly, the revocation complained of should entitle the petitioner, Lina Sevilla, to
respondent Tourist World Service, Inc., either as to the result of the enterprise or as to the means damages.
used in connection therewith. In the first place, under the contract of lease covering the Tourist
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As we have stated, the respondent Court avoided this issue, confining itself to the telephone (10) Acts and actions refered into article 21, 26, 27, 28, 29, 30, 32, 34, and 35.
disconnection and padlocking incidents. Anent the disconnection issue, it is the holding of the
Court of Appeals that there is 'no evidence showing that the Tourist World Service, Inc. The respondent, Eliseo Canilao, as a joint tortfeasor is likewise hereby ordered to respond for the
disconnected the telephone lines at the branch office. 20 Yet, what cannot be denied is the fact same damages in a solidary capacity.
that Tourist World Service, Inc. did not take pains to have them reconnected. Assuming, therefore,
that it had no hand in the disconnection now complained of, it had clearly condoned it, and as Insofar, however, as the private respondent, Segundina Noguera is concerned, no evidence has
owner of the telephone lines, it must shoulder responsibility therefor. been shown that she had connived with Tourist World Service, Inc. in the disconnection and
padlocking incidents. She cannot therefore be held liable as a cotortfeasor.
The Court of Appeals must likewise be held to be in error with respect to the padlocking incident.
For the fact that Tourist World Service, Inc. was the lessee named in the lease con-tract did not The Court considers the sums of P25,000.00 as and for moral damages,24 P10,000.00 as
accord it any authority to terminate that contract without notice to its actual occupant, and to exemplary damages, 25 and P5,000.00 as nominal 26 and/or temperate27 damages, to be just,
padlock the premises in such fashion. As this Court has ruled, the petitioner, Lina Sevilla, had fair, and reasonable under the circumstances.
acquired a personal stake in the business itself, and necessarily, in the equipment pertaining
thereto. Furthermore, Sevilla was not a stranger to that contract having been explicitly named WHEREFORE, the Decision promulgated on January 23, 1975 as well as the Resolution issued on
therein as a third party in charge of rental payments (solidarily with Tourist World, Inc.). She could July 31, 1975, by the respondent Court of Appeals is hereby REVERSED and SET ASIDE. The
not be ousted from possession as summarily as one would eject an interloper. private respondent, Tourist World Service, Inc., and Eliseo Canilao, are ORDERED jointly and
severally to indemnify the petitioner, Lina Sevilla, the sum of 25,00.00 as and for moral damages,
The Court is satisfied that from the chronicle of events, there was indeed some malevolent design the sum of P10,000.00, as and for exemplary damages, and the sum of P5,000.00, as and for
to put the petitioner, Lina Sevilla, in a bad light following disclosures that she had worked for a rival nominal and/or temperate damages.
firm. To be sure, the respondent court speaks of alleged business losses to justify the closure '21
but there is no clear showing that Tourist World Ermita Branch had in fact sustained such reverses, Costs against said private respondents.
let alone, the fact that Sevilla had moonlit for another company. What the evidence discloses, on
the other hand, is that following such an information (that Sevilla was working for another SO ORDERED.
company), Tourist World's board of directors adopted two resolutions abolishing the office of
'manager" and authorizing the corporate secretary, the respondent Eliseo Canilao, to effect the
takeover of its branch office properties. On January 3, 1962, the private respondents ended the 2. Agency vs Sales
lease over the branch office premises, incidentally, without notice to her.
34. G.R. No. L-25653 February 28, 1985
It was only on June 4, 1962, and after office hours significantly, that the Ermita office was
padlocked, personally by the respondent Canilao, on the pretext that it was necessary to Protect COMMISSIONER OF INTERNAL REVENUE, petitioner
the interests of the Tourist World Service. " 22 It is strange indeed that Tourist World Service, Inc. vs.
did not find such a need when it cancelled the lease five months earlier. While Tourist World MANILA MACHINERY & SUPPLY COMPANY and the COURT OF TAX APPEALS,
Service, Inc. would not pretend that it sought to locate Sevilla to inform her of the closure, but respondents.
surely, it was aware that after office hours, she could not have been anywhere near the premises.
Capping these series of "offensives," it cut the office's telephone lines, paralyzing completely its
business operations, and in the process, depriving Sevilla articipation therein. PLANA, J.:

This conduct on the part of Tourist World Service, Inc. betrays a sinister effort to punish Sevillsa it Appeal by the Commissioner of Internal Revenue from the decision of the Court of Tax Appeals in
had perceived to be disloyalty on her part. It is offensive, in any event, to elementary norms of CTA Case No. 1250 ordering the refund to respondent Manila Machinery & Supply Co. of P
justice and fair play. 21,620.36 allegedly erroneously paid as commercial broker's percentage tax.

We rule therefore, that for its unwarranted revocation of the contract of agency, the private The following partial stipulation of facts outlines the two different modes of business operation of
respondent, Tourist World Service, Inc., should be sentenced to pay damages. Under the Civil private respondent (petitioner in the CTA ):
Code, moral damages may be awarded for "breaches of contract where the defendant acted ... in
bad faith. 23 (1) as sales representative of certain United States manufacturers and/or suppliers, petitioner's
transactions or activities are outlined as follows:
We likewise condemn Tourist World Service, Inc. to pay further damages for the moral injury done
to Lina Sevilla from its brazen conduct subsequent to the cancellation of the power of attorney (1) Philippine buyer ascertains from petitioner whether or not a certain machinery or equipment it
granted to her on the authority of Article 21 of the Civil Code, in relation to Article 2219 (10) thereof desires to buy is available from the U.S. manufacturers or suppliers represented by the former and,
— if available, requests for price quotations of desired machinery or equipment;

ART. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to (2) If agreeable, Philippine buyer places purchase order either directly with the United States
morals, good customs or public policy shall compensate the latter for the damage.24 manufacturer and/or supplier or with petitioner who forwards it to the U.S. manufacturer;

ART. 2219. Moral damages25 may be recovered in the following and analogous cases: (3) Upon notification that the purchase order is accepted, the Philippine buyer opens with a local
bank a letter of credit in favor of the United States manufacturer or supplier to cover payment of
xxx xxx xxx the goods ordered;

102
(4) United States manufacturer or supplier ships the goods to Philippine buyer and collects from (t) "Commercial broker" includes persons other than importers, manufacturer, producers, or bona
the U.S. correspondent of the local bank where the letter of credit was opened, payment of the fide employees, who, for compensation or profit, sell or bring about sales for purchases of
goods; merchandise for other persons, or bring proposed buyers and sellers together, or negotiate freights
or other business for owners of vessels, or other means of transportation, or for the skippers, or
(5) United States manufacturer or supplier credits the petitioner for commission. (CTA rec., pp. 70- consignors or consignees of freight carried by vessels or other means of transportation. The term
73.) includes commission merchants.

(2) as distributor of United States manufacturers and/or suppliers, its (petitioner's) transactions or One of the purposes of petitioner corporation, as stated in its articles of incorporation, is "to make
activities are outlined as follows: and enter into all kinds of contracts, agreements, and obligation with any persons, corporation or
corporations, or other associations for the purchasing, acquiring, selling, or otherwise disposing of
(1) Philippine buyer ascertains from petitioner whether or not a certain machinery or equipment goods, wares, and merchandise of all kinds, either as principal or agent, upon commission,
which the said buyer desires to purchase is available from the U.S. manufacturers or suppliers for consignment, or indent orders." (BIR rec., pp. 43- 48.) Petitioner is, therefore, authorized to act
whom petitioner acts as distributor and, if available, requests for price quotation of the desired either as principal or agent in the transaction of its business. However, the evidence of record
machinery or equipment; regarding petitioner's transactions which gave rise to the income in question indicates the status of
petitioner as an independent dealer and not as a commercial broker. Petitioner's contracts with
(2) Petitioner furnishes the Philippine buyer with price quotation based on price list f.o.b. factory several U.S. manufacturers indubitably show that it acted as an independent dealer. Pertinent
which is furnished petitioner and fixed by the United States manufacturer or supplier; portions of these contracts read:

(3) If agreeable, Philippine buyer places the purchase order with the petitioner; Joy Manufacturing Company

(4) Upon notice of the acceptance of the purchase order, the buyer opens with a local bank a letter l. Subject to the terms and conditions hereinafter set forth, the Company grants to the Distributor
of credit in favor of the petitioner's agent in San Francisco, California, United States of America to the exclusive right to purchase for resale the following listed articles and machines. ...,
cover the price of the goods ordered; manufactured or sold by the Company within the territory indicated hereinafter. (Emphasis
supplied; Distributor's Contract, CTA rec., p. 78.)
(5) Petitioner prepares the purchase instructions in accordance with the purchase order of the
Philippine buyer and forwards the same to its agent in the United States; Briggs & Straton Corporation

(6) The said agent procures the goods from the U.S. manufacturer or supplier; Distributor' is an individual or firm under agreement with Briggs & Straton Corporation, whose
principal business is the resale of products or commodities at wholesale to Dealers, etc., ... .
(7) United States manufacturer or supplier invoices goods for petitioner's agent in San Francisco, Distributor shall not act as the agent for the Company under this agreement, nor shall Distributor
California; have any right or power hereunder to act for or to bind the company in any respect or to pledge its
credit ... (Emphasis supplied; Distributor Agreement, CTA rec., p. 83.)
(8) Petitioner's agent prepares sales invoice of the petitioner and ships the goods to the Philippine
buyer. (CTA rec., pp. 70-73.) The Jeffrey Manufacturing Company

It appears that during the tax period in question, respondent taxpayer realized an income of P The purpose of this agreement is to effect through the Representative a wider sales outlet for the
630,635.62 from both its activities as sales representative and as distributor of American Manufacturer's products. This is to be accomplished by the Representative purchasing certain
manufacturers/suppliers and paid thereon P 37,837.94 as broker's percentage tax on the products, hereinafter listed, and produced by the Manufacturer, for resale, and diligently promoting
assumption that the income consisted entirely of commissions. Later however respondent sought a their sale in the Representative's territory. (Emphasis supplied; Export Representative Agreement,
partial refund of P 21,620.36 on the ground that of the total income of P 630,635.62, P 360,339.35 CTA rec., p. 85.)
was not broker's commission but simply overprice or profit (plus exchange income on overprice)
realized from ordinary sales of machineries and equipment it had purchased from American Toledo Scale Corporation
companies.
II. (a) To sell only to the Distributor Toledo Machines for use in the Distributor's territory, except the
After the request for refund had been denied by the Bureau of Internal Revenue, the taxpayer following machines. . . .
appealed to the Court of Tax Appeals from which it obtained as aforesaid a favorable judgment,
which is now assailed. IV. (d) The responsibility of the Company for merchandise ordered. by the Distributor ... shall end
with its delivery f. o. b. factory, all risks of fire, loss or damage after the shipment has been
The single issue posed in this petition for review is whether the P 360,339.35 earned by delivered f.o.b. factory or while in possession of any transportation company ... , shall be borne by
respondent taxpayer in its capacity "as distributor" of American machineries and equipment should the Distributor.
be considered as commission subject to commercial broker's tax under the Tax Code or profit from
sales which is not subject thereto. V. (h) ... It is expressly the intention of the parties hereto that the Distributor's status is that of an
independent contractor. (Emphasis supplied; Export Distributor's Sales Agreement, CTA rec., pp.
The merit of respondent's stand is clear on the face of the appealed decision - 90-93.)

Petitioner (taxpayer) contends that it is not a commercial broker within the definition provided in Respondent cites the agreement of petitioner with the Toledo Scale Corporation (CTA rec., pp. 90-
Section 194(t) of the Revenue Code, which reads: 93.), which authorizes petitioner "to solicit sales of" certain products of the latter corporation, as an
indication of brokerage. But respondent merely quoted that portion wherein petitioner is authorized
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to act as agent or representative but did not mention petitioner's equal authority to act as 3. Lease of Work of Service
distributor or independent dealer with respect to the same corporation.
36. G.R. No. L-21601 December 28, 1968
A perusal of the records of the case at bar equally yields the conclusion that petitioner, through its
agent, M.S. Smith in San Francisco, California, U.S.A. (BIR rec., pp. 49- 50), was the purchaser NIELSON & COMPANY, INC., plaintiff-appellant,
and owner of the machineries it sent to the Philippine buyers. This conclusion is established by the vs.
fact that when petitioner received purchase order from local buyers and there was no stock LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.
available, it sent the orders to its agent in California and required the latter "to purchase from ..."
the U.S. manufacturers or suppliers the items called for in the purchase orders (See BIR rec., pp. RESOLUTION
63, 79, 98, 111 & 124.) Petitioner was in turn paid through the letters of credit opened by the
Philippine buyers with local banks in favor of agent M.S. Smith. (See BIR rec., pp- 59-128.) ZALDIVAR, J.:

The facts (1) that petitioner shouldered the losses resulting from some of the transactions in Lepanto seeks the reconsideration of the decision rendered on December 17, 1966. The motion
questions (See BIR rec., pp. 21-22); (2) that if petitioner had no stock available in the Philippines, it for reconsideration is based on two sets of grounds — the first set consisting of four principal
forwarded the purchase order to its agent in California who procured the machineries from U.S. grounds, and the second set consisting of five alternative grounds, as follows:
manufacturers (BIR rec., Exh. pp. 53-56); and (3) that the U.S. Manufacturers invoiced the goods
to petitioner's agent in California who prepared the sales invoice and shipped the goods to the Principal Grounds:
Philippine buyers (See CTA rec., Stifacts, pp. 70-73) negate agency.
1. The court erred in overlooking and failing to apply the proper law applicable to the agency or
In effect, the instant petition controverts the factual findings of the court a quo. It is well settled that management contract in question, namely, Article 1733 of the Old Civil Code (Article 1920 of the
in passing upon petitions for review of the decisions of the Court of Tax Appeals, this Court is new), by virtue of which said agency was effectively revoked and terminated in 1945 when, as
generally confined to questions of law. The findings of fact of said Court are not to be disturbed stated in paragraph 20 of the complaint, "defendant voluntarily ... prevented plaintiff from resuming
unless clearly shown to be unsupported by substantial evidence. (Rules of Court, Rule 44, Section management and operation of said mining properties."
2. Republic Act 1125, Sections 18-19.) Substantial evidence has been construed to mean not
necessarily preponderant proof as is required in ordinary civil action, but such kind of "relevant 2. The court erred in holding that paragraph II of the management contract (Exhibit C) suspended
evidence as a reasonable man might accept as adequate in support of a conclusion." (De Lamera the period of said contract.
vs. Court of Agrarian Relations, et al., 17 SCRA 368.) There is no circumstance of record
indicating that the findings of the lower court are not supported by substantial evidence. 3. The court erred in reversing the ruling of the trial judge, based on well-settled jurisprudence of
this Supreme Court, that the management agreement was only suspended but not extended on
WHEREFORE, the appealed decision is affirmed. account of the war.

SO ORDERED. 4. The court erred in reversing the finding of the trial judge that Nielson's action had prescribed, but
considering only the first claim and ignoring the prescriptibility of the other claims.
35. G.R. No. L-28071 October 13, 1967
Alternative Grounds:
PHILIPPINE ASSOCIATION OF FREE LABOR UNIONS (PAFLU), petitioners,
vs. 5. The court erred in holding that the period of suspension of the contract on account of the war
COURT OF INDUSTRIAL RELATIONS, PHILIPPINE LABOR ALLIANCE COUNCIL (PLAC), and lasted from February 1942 to June 26, 1948.
PHILIPPINE BLOOMING MILLS COMPANY, respondents.
6. Assuming arguendo that Nielson is entitled to any relief, the court erred in awarding as damages
RESOLUTION (a) 10% of the cash dividends declared and paid in December, 1941; (b) the management fee of
P2,500.00 for the month of January, 1942; and (c) the full contract price for the extended period of
DIZON, J.: sixty months, since these damages were neither demanded nor proved and, in any case, not
allowable under the general law of damages.
In CIR Case No. 1859-MC — a petition for certification election — the respondent court, in its order
of August 29, 1967, directed the holding — under its supervision — of a certification election in the 7. Assuming arguendo that appellant is entitled to any relief, the court erred in ordering appellee to
Pasig and Balintawak plants of the respondent Philippine Blooming Mills Company. issue and deliver to appellant shares of stock together with fruits thereof.

The Petition for certification election abovementioned was filed by respondent Philippine Labor 8. The court erred in awarding to appellant an undetermined amount of shares of stock and/or
Alliance Council (PLAC) to have itself declared the sole collective bargaining agent of the workers cash, which award cannot be ascertained and executed without further litigation.
and employees of the respondent company at Pasig, Rizal. Acting thereon the respondent court,
on January 13, 1967, directed the posting of appropriate notices at the premises of the respondent 9. The court erred in rendering judgment for attorney's fees.
company.
We are going to dwell on these grounds in the order they are presented.

1. In its first principal ground Lepanto claims that its own counsel and this Court had overlooked
the real nature of the management contract entered into by and between Lepanto and Nielson,
and the law that is applicable on said contract. Lepanto now asserts for the first time and this is
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done in a motion for reconsideration - that the management contract in question is a contract of agency is representation, while in the lease of work or services the basis is employment. The
agency such that it has the right to revoke and terminate the said contract, as it did terminate the lessor of services does not represent his employer, while the agent represents his principal.
same, under the law of agency, and particularly pursuant to Article 1733 of the Old Civil Code Manresa, in his "Commentarios al Codigo Civil Español" (1931, Tomo IX, pp. 372-373), points out
(Article 1920 of the New Civil Code). that the element of representation distinguishes agency from lease of services, as follows:

We have taken note that Lepanto is advancing a new theory. We have carefully examined the Nuestro art. 1.709 como el art. 1.984 del Codigo de Napoleon y cuantos textos legales citamos en
pleadings filed by Lepanto in the lower court, its memorandum and its brief on appeal, and never las concordancias, expresan claramente esta idea de la representacion, "hacer alguna cosa por
did it assert the theory that it has the right to terminate the management contract because that cuenta o encargo de otra" dice nuestro Codigo; "poder de hacer alguna cosa para el mandante o
contract is one of agency which it could terminate at will. While it is true that in its ninth and tenth en su nombre" dice el Codigo de Napoleon, y en tales palabras aparece vivo y luminoso el
special affirmative defenses, in its answer in the court below, Lepanto pleaded that it had the right concepto y la teoria de la representacion, tan fecunda en ensenanzas, que a su sola luz es como
to terminate the management contract in question, that plea of its right to terminate was not based se explican las diferencias que separan el mandato del arrendamiento de servicios, de los
upon the ground that the relation between Lepanto and Nielson was that of principal and agent but contratos inominados, del consejo y de la gestion de negocios.
upon the ground that Nielson had allegedly not complied with certain terms of the management
contract. If Lepanto had thought of considering the management contract as one of agency it could En efecto, en el arrendamiento de servicios al obligarse para su ejecucion, se trabaja, en verdad,
have amended its answer by stating exactly its position. It could have asserted its theory of agency para el dueno que remunera la labor, pero ni se le representa ni se obra en su nombre....
in its memorandum for the lower court and in its brief on appeal. This, Lepanto did not do. It is the
rule, and the settled doctrine of this Court, that a party cannot change his theory on appeal — that On the basis of the interpretation of Article 1709 of the old Civil Code, Article 1868 of the new Civil
is, that a party cannot raise in the appellate court any question of law or of fact that was not raised Code has defined the contract of agency in more explicit terms, as follows:
in the court below or which was not within the issue made by the parties in their pleadings (Section
19, Rule 49 of the old Rules of Court, and also Section 18 of the new Rules of Court; Hautea vs. By the contract of agency a person binds himself to render some service or to do something in
Magallon, L-20345, November 28, 1964; Northern Motors, Inc. vs. Prince Line, L-13884, February representation or on behalf of another, with the consent or authority of the latter.
29, 1960; American Express Co. vs. Natividad, 46 Phil. 207; Agoncillo vs. Javier, 38 Phil. 424 and
Molina vs. Somes, 24 Phil 49). There is another obvious distinction between agency and lease of services. Agency is a
preparatory contract, as agency "does not stop with the agency because the purpose is to enter
At any rate, even if we allow Lepanto to assert its new theory at this very late stage of the into other contracts." The most characteristic feature of an agency relationship is the agent's power
proceedings, this Court cannot sustain the same. to bring about business relations between his principal and third persons. "The agent is destined to
execute juridical acts (creation, modification or extinction of relations with third parties). Lease of
Lepanto contends that the management contract in question (Exhibit C) is one of agency because: services contemplate only material (non-juridical) acts." (Reyes and Puno, "An Outline of Philippine
(1) Nielson was to manage and operate the mining properties and mill on behalf, and for the Civil Law," Vol. V, p. 277).
account, of Lepanto; and (2) Nielson was authorized to represent Lepanto in entering, on
Lepanto's behalf, into contracts for the hiring of laborers, purchase of supplies, and the sale and In the light of the interpretations we have mentioned in the foregoing paragraphs let us now
marketing of the ores mined. All these, Lepanto claims, show that Nielson was, by the terms of the determine the nature of the management contract in question. Under the contract, Nielson had
contract, destined to execute juridical acts not on its own behalf but on behalf of Lepanto under the agreed, for a period of five years, with the right to renew for a like period, to explore, develop and
control of the Board of Directors of Lepanto "at all times". Hence Lepanto claims that the contract operate the mining claims of Lepanto, and to mine, or mine and mill, such pay ore as may be
is one of agency. Lepanto then maintains that an agency is revocable at the will of the principal found therein and to market the metallic products recovered therefrom which may prove to be
(Article 1733 of the Old Civil Code), regardless of any term or period stipulated in the contract, and marketable, as well as to render for Lepanto other services specified in the contract. We gather
it was in pursuance of that right that Lepanto terminated the contract in 1945 when it took over and from the contract that the work undertaken by Nielson was to take complete charge subject at all
assumed exclusive management of the work previously entrusted to Nielson under the contract. times to the general control of the Board of Directors of Lepanto, of the exploration and
Lepanto finally maintains that Nielson as an agent is not entitled to damages since the law gives to development of the mining claims, of the hiring of a sufficient and competent staff and of sufficient
the principal the right to terminate the agency at will. and capable laborers, of the prospecting and development of the mine, of the erection and
operation of the mill, and of the benefication and marketing of the minerals found on the mining
Because of Lepanto's new theory We consider it necessary to determine the nature of the properties; and in carrying out said obligation Nielson should proceed diligently and in accordance
management contract — whether it is a contract of agency or a contract of lease of services. with the best mining practice. In connection with its work Nielson was to submit reports, maps,
Incidentally, we have noted that the lower court, in the decision appealed from, considered the plans and recommendations with respect to the operation and development of the mining
management contract as a contract of lease of services. properties, make recommendations and plans on the erection or enlargement of any existing mill,
dispatch mining engineers and technicians to the mining properties as from time to time may
Article 1709 of the Old Civil Code, defining contract of agency, provides: reasonably be required to investigate and make recommendations without cost or expense to
Lepanto. Nielson was also to "act as purchasing agent of supplies, equipment and other necessary
By the contract of agency, one person binds himself to render some service or do something for purchases by Lepanto, provided, however, that no purchase shall be made without the prior
the account or at the request of another. approval of Lepanto; and provided further, that no commission shall be claimed or retained by
Nielson on such purchase"; and "to submit all requisition for supplies, all constricts and
Article 1544, defining contract of lease of service, provides: arrangement with engineers, and staff and all matters requiring the expenditures of money,
present or future, for prior approval by Lepanto; and also to make contracts subject to the prior
In a lease of work or services, one of the parties binds himself to make or construct something or approve of Lepanto for the sale and marketing of the minerals mined from said properties, when
to render a service to the other for a price certain. said products are in a suitable condition for marketing."1

In both agency and lease of services one of the parties binds himself to render some service to the It thus appears that the principal and paramount undertaking of Nielson under the management
other party. Agency, however, is distinguished from lease of work or services in that the basis of contract was the operation and development of the mine and the operation of the mill. All the other
105
undertakings mentioned in the contract are necessary or incidental to the principal undertaking —
these other undertakings being dependent upon the work on the development of the mine and the GENTLEMEN:
operation of the mill. In the performance of this principal undertaking Nielson was not in any way
executing juridical acts for Lepanto, destined to create, modify or extinguish business relations After an examination of your property by our engineers, we have decided to offer as we hereby
between Lepanto and third persons. In other words, in performing its principal undertaking Nielson offer to underwrite the entire issue of stock of a corporation to be formed for the purpose of taking
was not acting as an agent of Lepanto, in the sense that the term agent is interpreted under the over said properties, said corporation to have an authorized capital of P1,750,000.00, of which
law of agency, but as one who was performing material acts for an employer, for a compensation. P700,000.00 will be issued in escrow to the claim-owners in exchange for their claims, and the
balance of P1,050,000.00 we will sell to the public at par or take ourselves.
It is true that the management contract provides that Nielson would also act as purchasing agent
of supplies and enter into contracts regarding the sale of mineral, but the contract also provides The arrangement will be under the following conditions:
that Nielson could not make any purchase, or sell the minerals, without the prior approval of
Lepanto. It is clear, therefore, that even in these cases Nielson could not execute juridical acts 1. The subscriptions for cash shall be payable 50% at time of subscription and the balance subject
which would bind Lepanto without first securing the approval of Lepanto. Nielson, then, was to act to the call of the Board of Directors of the proposed corporation.
only as an intermediary, not as an agent.
2. We shall have an underwriting and brokerage commission of 10% of the P1,050,000.00 to be
Lepanto contends that the management contract in question being one of agency it had the right to sold for cash to the public, said commission to be payable from the first payment of 50% on each
terminate the contract at will pursuant to the provision of Article 1733 of the old Civil Code. We subscription.
find, however, a proviso in the management contract which militates against this stand of Lepanto.
Paragraph XI of the contract provides: 3. We will bear the cost of preparing and mailing any prospectus that may be required, but no such
prospectus will be sent out until the text thereof has been first approved by the Board of Directors
Both parties to this agreement fully recognize that the terms of this Agreement are made possible of the proposed corporation.
only because of the faith or confidence that the Officials of each company have in the other;
therefore, in order to assure that such confidence and faith shall abide and continue, NIELSON 4. That after the organization of the corporation, all operating contract be entered into between
agrees that LEPANTO may cancel this Agreement at any time upon ninety (90) days written ourselves and said corporation, under the terms which the property will be developed and mined
notice, in the event that NIELSON for any reason whatsoever, except acts of God, strike and other and a mill erected, under our supervision, our compensation to be P2,000.00 per month until the
causes beyond its control, shall cease to prosecute the operation and development of the property is put on a profitable basis and P2,500.00 per month plus 10% of the net profits for a
properties herein described, in good faith and in accordance with approved mining practice. period of five years thereafter.

It is thus seen, from the above-quoted provision of paragraph XI of the management contract, that 5. That we shall have the option to renew said operating contract for an additional period of five
Lepanto could not terminate the agreement at will. Lepanto could terminate or cancel the years, on the same basis as the original contract, upon the expiration thereof.
agreement by giving notice of termination ninety days in advance only in the event that Nielson
should prosecute in bad faith and not in accordance with approved mining practice the operation It is understood that the development and mining operations on said property, and the erection of
and development of the mining properties of Lepanto. Lepanto could not terminate the agreement the mill thereon, and the expenditures therefor shall be subject to the general control of the Board
if Nielson should cease to prosecute the operation and development of the mining properties by of Directors of the proposed corporation, and, in case you accept this proposition, that a detailed
reason of acts of God, strike and other causes beyond the control of Nielson. operating contract will be entered into, covering the relationships between the parties.

The phrase "Both parties to this agreement fully recognize that the terms of this agreement are Yours very truly,
made possible only because of the faith and confidence of the officials of each company have in (Sgd.) L. R. Nielson
the other" in paragraph XI of the management contract does not qualify the relation between
Lepanto and Nielson as that of principal and agent based on trust and confidence, such that the Pursuant to the provisions of paragraph 2 of this offer, Messrs. Nielson & Co., took subscriptions
contractual relation may be terminated by the principal at any time that the principal loses trust and for One Million Fifty Thousand Pesos (P1,050,000.00) in shares of our Company and their
confidence in the agent. Rather, that phrase simply implies the circumstance that brought about underwriting and brokerage commission has been paid. More than fifty per cent of these
the execution of the management contract. Thus, in the annual report for 19362, submitted by Mr. subscriptions have been paid to the Company in cash. The claim owners have transferred their
C. A. Dewit, President of Lepanto, to its stockholders, under date of March 15, 1937, we read the claims to the Corporation, but the P700,000.00 in stock which they are to receive therefor, is as yet
following: held in escrow.

To the stockholders Immediately upon the formation of the Corporation Messrs. Nielson & Co., assumed the
Management of the property under the control of the Board of Directors. A modification in the
xxx xxx xxx Management Contract was made with the consent of all the then stockholders, in virtue of which
the compensation of Messrs. Nielson & Co., was increased to P2,500.00 per month when mill
The incorporation of our Company was effected as a result of negotiations with Messrs. Nielson & construction began. The formal Management Contract was not entered into until January 30, 1937.
Co., Inc., and an offer by these gentlemen to Messrs. C. I. Cookes and V. L. Lednicky, dated
August 11, 1936, reading as follows: xxx xxx xxx

Messrs. Cookes and Lednicky, Manila, March 15, 1937

Present
(Sgd.) C. A. DeWitt President
Re: Mankayan Copper Mines
106
We can gather from the foregoing statements in the annual report for 1936, and from the provision We want to say a little more on these points, however. Paragraph II of the management contract
of paragraph XI of the Management contract, that the employment by Lepanto of Nielson to provides as follows:
operate and manage its mines was principally in consideration of the know-how and technical In the event of inundation, flooding of the mine, typhoon, earthquake or any other force majeure,
services that Nielson offered Lepanto. The contract thus entered into pursuant to the offer made by war, insurrection, civil commotion, organized strike, riot, fire, injury to the machinery or other event
Nielson and accepted by Lepanto was a "detailed operating contract". It was not a contract of or cause reasonably beyond the control of NIELSON and which adversely affects the work of
agency. Nowhere in the record is it shown that Lepanto considered Nielson as its agent and that mining and milling; NIELSON shall report such fact to LEPANTO and without liability or breach of
Lepanto terminated the management contract because it had lost its trust and confidence in the terms of this Agreement, the same shall remain in suspense, wholly or partially during the
Nielson. terms of such inability. (Emphasis supplied)

The contention of Lepanto that it had terminated the management contract in 1945, following the A reading of the above-quoted paragraph II cannot but convey the idea that upon the happening of
liberation of the mines from Japanese control, because the relation between it and Nielson was any of the events enumerated therein, which adversely affects the work of mining and milling, the
one of agency and as such it could terminate the agency at will, is, therefore, untenable. On the agreement is deemed suspended for as long as Nielson is unable to perform its work of mining
other hand, it can be said that, in asserting that it had terminated or cancelled the management and milling because of the adverse effects of the happening of the event on the work of mining and
contract in 1945, Lepanto had thereby violated the express terms of the management contract. milling. During the period when the adverse effects on the work of mining and milling exist, neither
The management contract was renewed to last until January 31, 1947, so that the contract had yet party in the contract would be held liable for non-compliance of its obligation under the contract. In
almost two years to go — upon the liberation of the mines in 1945. There is no showing that other words, the operation of the contract is suspended for as long as the adverse effects of the
Nielson had ceased to prosecute the operation and development of the mines in good faith and in happening of any of those events had impeded or obstructed the work of mining and milling. An
accordance with approved mining practice which would warrant the termination of the contract analysis of the phraseology of the above-quoted paragraph II of the management contract readily
upon ninety days written notice. In fact there was no such written notice of termination. It is an supports the conclusion that it is the agreement, or the contract, that is suspended. The phrase
admitted fact that Nielson ceased to operate and develop the mines because of the war — a cause "the same" can refer to no other than the term "Agreement" which immediately precedes it. The
beyond the control of Nielson. Indeed, if the management contract in question was intended to "Agreement" may be wholly or partially suspended, and this situation will depend on whether the
create a relationship of principal and agent between Lepanto and Nielson, paragraph XI of the event wholly or partially affected adversely the work of mining and milling. In the instant case, the
contract should not have been inserted because, as provided in Article 1733 of the old Civil Code, war had adversely affected — and wholly at that — the work of mining and milling. We have clearly
agency is essentially revocable at the will of the principal — that means, with or without cause. But stated in Our decision the circumstances brought about by the war which caused the whole or total
precisely said paragraph XI was inserted in the management contract to provide for the cause for suspension of the agreement or of the management contract.
its revocation. The provision of paragraph XI must be given effect.
LEPANTO itself admits that the management contract was suspended. We quote from the brief of
In the construction of an instrument where there are several provisions or particulars, such a LEPANTO:
construction is, if possible, to be adopted as will give effect to all,3 and if some stipulation of any
contract should admit of several meanings, it shall be understood as bearing that import which is Probably, what Nielson meant was, it was prevented by Lepanto to assume again the
most adequate to render it effectual.4 management of the mine in 1945, at the precise time when defendant was at the feverish phase of
rehabilitation and although the contract had already been suspended. (Lepanto's Brief, p. 9).
It is Our considered view that by express stipulation of the parties, the management contract in
question is not revocable at the will of Lepanto. We rule that this management contract is not a ... it was impossible, as a result of the destruction of the mine, for the plaintiff to manage and
contract of agency as defined in Article 1709 of the old Civil Code, but a contract of lease of operate the same and because, as provided in the agreement, the contract was suspended by
services as defined in Article 1544 of the same Code. This contract can not be unilaterally revoked reason of the war (Lepanto's Brief, pp. 9-10).
by Lepanto.
Clause II, by its terms, is clear that the contract is suspended in case fortuitous event or force
The first ground of the motion for reconsideration should, therefore, be brushed aside. majeure, such as war, adversely affects the work of mining and milling. (Lepanto's Brief, p. 49).

2. In the second, third and fifth grounds of its motion for reconsideration, Lepanto maintains that Lepanto is correct when it said that the obligations under the contract were suspended upon the
this Court erred, in holding that paragraph 11 of the management contract suspended the period of happening of any of the events enumerated in paragraph II of the management contract. Indeed,
said contract, in holding that the agreement was not only suspended but was extended on account those obligations were suspended because the contract itself was suspended. When we talk of a
of the war, and in holding that the period of suspension on account of the war lasted from contract that has been suspended we certainly mean that the contract temporarily ceased to be
February, 1942 to June 26, 1948. We are going to discuss these three grounds together because operative, and the contract becomes operative again upon the happening of a condition — or
they are interrelated. when a situation obtains — which warrants the termination of the suspension of the contract.

In our decision we have dwelt lengthily on the points that the management contract was In Our decision We pointed out that the agreement in the management contract would be
suspended because of the war, and that the period of the contract was extended for a period suspended when two conditions concur, namely: (1) the happening of the event constituting a
equivalent to the time when Nielson was unable to perform the work of mining and milling because force majeure that was reasonably beyond the control of Nielson, and (2) that the event
of the adverse effects of the war on the work of mining and milling. constituting the force majeure adversely affected the work of mining and milling. The suspension,
therefore, would last not only while the event constituting the force majeure continued to occur but
It is the contention of Lepanto that the happening of those events, and the effects of those events, also for as long as the adverse effects of the force majeure on the work of mining and milling had
simply suspended the performance of the obligations by either party in the contract, but did not not been eliminated. Under the management contract the happening alone of the event
suspend the period of the contract, much less extended the period of the contract. constituting the force majeure which did not affect adversely the work of mining and milling would
not suspend the period of the contract. It is only when the two conditions concur that the period of
We have conscientiously considered the arguments of Lepanto in support of these three grounds, the agreement is suspended.
but We are not persuaded to reconsider the rulings that We made in Our decision.
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It is not denied that because of the war, in February 1942, the mine, the original mill, the original management contract was entered into. As early as August 1936 Nielson negotiated with Messrs.
power plant, the supplies and equipment, and all installations at the Mankayan mines of Lepanto, C. I. Cookes and V. L. Lednicky for the operation of the Mankayan mines and it was the result of
were destroyed upon order of the United States Army, to prevent their utilization by the enemy. It is those negotiations that Lepanto was incorporated; that it was Nielson that helped to capitalize
not denied that for the duration of the war Nielson could not undertake the work of mining and Lepanto, and that after the formation of the corporation (Lepanto) Nielson immediately assumed
milling. When the mines were liberated from the enemy in August, 1945, the condition of the the management of the mining properties of Lepanto. It was not until January 30, 1937 when the
mines, the mill, the power plant and other installations, was not the same as in February 1942 management contract in question was entered into between Lepanto and Nielson (Exhibit A).
when they were ordered destroyed by the US army. Certainly, upon the liberation of the mines
from the enemy, the work of mining and milling could not be undertaken by Nielson under the A contract for the management and operation of mines calls for a speculative and risky venture on
same favorable circumstances that obtained before February 1942. The work of mining and the part of the manager-operator. The manager-operator invests its technical know-how,
milling, as undertaken by Nielson in January, 1942, could not be resumed by Nielson soon after undertakes back-breaking efforts and tremendous spade-work, so to say, in the first years of its
liberation because of the adverse effects of the war, and this situation continued until June of management and operation of the mines, in the expectation that the investment and the efforts
1948. Hence, the suspension of the management contract did not end upon the liberation of the employed might be rewarded later with success. This expected success may never come. This
mines in August, 1945. The mines and the mill and the installations, laid waste by the ravages of had happened in the very case of the Mankayan mines where, as recounted by Mr. Lednicky of
war, had to be reconstructed and rehabilitated, and it can be said that it was only on June 26, 1948 Lepanto, various persons and entities of different nationalities, including Lednicky himself, invested
that the adverse effects of the war on the work of mining and milling had ended, because it was on all their money and failed. The manager-operator may not strike sufficient ore in the first, second,
that date that the operation of the mines and the mill was resumed. The period of suspension third, or fourth year of the management contract, or he may not strike ore even until the end of the
should, therefore, be reckoned from February 1942 until June 26, 1948, because it was during this fifth year. Unless the manager-operator strikes sufficient quantity of ore he cannot expect profits or
period that the war and the adverse effects of the war on the work of mining and milling had lasted. reward for his investment and efforts. In the case of Nielson, its corps of competent engineers,
The mines and the installations had to be rehabilitated because of the adverse effects of the war. geologists, and technicians begun working on the Mankayan mines of Lepanto since the latter part
The work of rehabilitation started soon after the liberation of the mines in August, 1945 and lasted of 1936, and continued their work without success and profit through 1937, 1938, and the earlier
until June 26, 1948 when, as stated in Lepanto's annual report to its stockholders for the year part of 1939. It was only in December of 1939 when the efforts of Nielson started to be rewarded
1948, "June 28, 1948 marked the official return to operation of this company at its properties at when Lepanto realized profits and the first dividends were declared. From that time on Nielson
Mankayan, Mountain Province, Philippines" (Exh. F-1). could expect profit to come to it — as in fact Lepanto declared dividends for 1940 and 1941 — if
the development and operation of the mines and the mill would continue unhampered. The
Lepanto would argue that if the management contract was suspended at all the suspension should operation, and the expected profits, however, would still be subject to hazards due to the
cease in August of 1945, contending that the effects of the war should cease upon the liberation of occurrence of fortuitous events, fires, earthquakes, strikes, war, etc., constituting force majeure,
the mines from the enemy. This contention cannot be sustained, because the period of which would result in the destruction of the mines and the mill. One of these diverse causes, or
rehabilitation was still a period when the physical effects of the war — the destruction of the mines one after the other, may consume the whole period of the contract, and if it should happen that
and of all the mining installations — adversely affected, and made impossible, the work of mining way the manager-operator would reap no profit to compensate for the first years of spade-work
and milling. Hence, the period of the reconstruction and rehabilitation of the mines and the and investment of efforts and know-how. Hence, in fairness to the manager-operator, so that he
installations must be counted as part of the period of suspension of the contract. may not be deprived of the benefits of the work he had accomplished, the force majeure clause is
incorporated as a standard clause in contracts for the management and operation of mines.
Lepanto claims that it would not be unfair to end the period of suspension upon the liberation of the
mines because soon after the liberation of the mines Nielson insisted to resume the management The nature of the contract for the management and operation of mines justifies the interpretation of
work, and that Nielson was under obligation to reconstruct the mill in the same way that it was the force majeure clause, that a period equal to the period of suspension due to force majeure
under obligation to construct the mill in 1937. This contention is untenable. It is true that Nielson should be added to the original term of the contract by way of an extension. We, therefore,
insisted to resume its management work after liberation, but this was only for the purpose of reiterate the ruling in Our decision that the management contract in the instant case was
restoring the mines, the mill, and other installations to their operating and producing condition as of suspended from February, 1942 to June 26, 1948, and that from the latter date the contract had
February 1942 when they were ordered destroyed. It is not shown by any evidence in the record, yet five years to go.
that Nielson had agreed, or would have agreed, that the period of suspension of the contract would
end upon the liberation of the mines. This is so because, as found by this Court, the intention of 3. In the fourth ground of its motion for reconsideration, Lepanto maintains that this Court erred in
the parties in the management contract, and as understood by them, the management contract reversing the finding of the trial court that Nielson's action has prescribed, by considering only the
was suspended for as long as the adverse effects of the force majeure on the work of mining and first claim and ignoring the prescriptibility of the other claims.
milling had not been removed, and the contract would be extended for as long as it was
suspended. Under the management contract Nielson had the obligation to erect and operate the This ground of the motion for reconsideration has no merit.
mill, but not to erect or reconstruct the mill in case of its destruction by force majeure.
In Our decision We stated that the claims of Nielson are based on a written document, and, as
It is the considered view of this court that it would not be fair to Nielson to consider the suspension such, the cause of action prescribes in ten years.5 Inasmuch as there are different claims which
of the contract as terminated upon the liberation of the mines because then Nielson would be accrued on different dates the prescriptive periods for all the claims are not the same. The claims
placed in a situation whereby it would have to suffer the adverse effects of the war on the work of of Nielson that have been awarded by this Court are itemized in the dispositive part of the
mining and milling. The evidence shows that as of January 1942 the operation of the mines under decision.
the management of Nielson was already under beneficial conditions, so much so that dividends
were already declared by Lepanto for the years 1939, 1940 and 1941. To make the management The first item of the awards in Our decision refers to Nielson's compensation in the sum of
contract immediately operative after the liberation of the mines from the Japanese, at the time P17,500.00, which is equivalent to 10% of the cash dividends declared by Lepanto in December,
when the mines and all its installations were laid waste as a result of the war, would be to place 1941. As we have stated in Our decision, this claim accrued on December 31, 1941, and the right
Nielson in a situation whereby it would lose all the benefits of what it had accomplished in placing to commence an action thereon started on January 1, 1942. We declared that the action on this
the Lepanto mines in profitable operation before the outbreak of the war in December, 1941. The claim did not prescribe although the complaint was filed on February 6, 1958 — or after a lapse of
record shows that Nielson started its management operation way back in 1936, even before the 16 years, 1 month and 5 days — because of the operation of the moratorium law.
108
 management contract, and Nielson's cause of action regarding these claims prescribes in ten
We declared that under the applicable decisions of this Court6 the moratorium period of 8 years, 2 years. Corollary to Our ruling that the management contract was suspended from February, 1942
months and 8 days should be deducted from the period that had elapsed since the accrual of the until June 26, 1948, and that the contract was extended for five years from June 26, 1948, the right
cause of action to the date of the filing of the complaint, so that there is a period of less than 8 of action of Nielson to claim for what is due to it during that period of extension accrued during the
years to be reckoned for the purpose of prescription. period from June 26, 1948 till the end of the five-year extension period or until June 26, 1953. And
so, even if We reckon June 26, 1948 as the starting date of the ten-year period in connection with
This claim of Nielson is covered by Executive Order No. 32, issued on March 10, 1945, which the prescriptibility of the claims involved in items 3, 4, 5, 6 and 7 of the awards in the decision, it is
provides as follows: obvious that when the complaint was filed on February 6, 1958 the ten-year prescriptive period
had not yet lapsed.
Enforcement of payments of all debts and other monetary obligations payable in the Philippines,
except debts and other monetary obligations entered into in any area after declaration by In Our decision We have also ruled that the right of action of Nielson against Lepanto had not
Presidential Proclamation that such area has been freed from enemy occupation and control, is prescribed because of the arbitration clause in the Management contract. We are satisfied that
temporarily suspended pending action by the Commonwealth Government. (41 O.G. 56-57; there is evidence that Nielson had asked for arbitration, and an arbitration committee had been
Emphasis supplied) constituted. The arbitration committee, however, failed to bring about any settlement of the
differences between Nielson and Lepanto. On June 25, 1957 counsel for Lepanto definitely
Executive Order No. 32 covered all debts and monetary obligation contracted before the war (or advised Nielson that they were not entertaining any claim of Nielson. The complaint in this case
before December 8, 1941) and those contracted subsequent to December 8, 1941 and during the was filed on February 6, 1958.
Japanese occupation. Republic Act No. 342, approved on July 26, 1948, lifted the moratorium
provided for in Executive Order No. 32 on pre-war (or pre-December 8, 1941) debts of debtors who 4. In the sixth ground of its motion for reconsideration, Lepanto maintains that this Court "erred in
had not filed war damage claims with the United States War Damage Commission. In other words, awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the
after the effectivity of Republic Act No. 342, the debt moratorium was limited: (1) to debts and other management fee of P2,500.00 for the month of January 1942; and (c) the full contract price for the
monetary obligations which were contracted after December 8, 1941 and during the Japanese extended period of 60 months, since the damages were never demanded nor proved and, in any
occupation, and (2) to those pre-war (or pre-December 8, 1941) debts and other monetary case, not allowable under the general law on damages."
obligations where the debtors filed war damage claims. That was the situation up to May 18, 1953
when this Court declared Republic Act No. 342 unconstitutional.7 It has been held by this Court, We have stated in Our decision that the original agreement in the management contract regarding
however, that from March 10, 1945 when Executive Order No. 32 was issued, to May 18, 1953 the compensation of Nielson was modified, such that instead of receiving a monthly compensation
when Republic Act No. 342 was declared unconstitutional — or a period of 8 years, 2 months and of P2,500.00 plus 10% of the net profits from the operation of the properties for the preceding
8 days — the debt moratorium was in force, and had the effect of suspending the period of month,11 Nielson would receive a compensation of P2,500.00 a month, plus (1) 10% of the
prescription.8 dividends declared and paid, when and as paid, during the period of the contract, and at the end of
each year, (2) 10% of any depletion reserve that may be set up, and (3) 10% of any amount
Lepanto is wrong when in its motion for reconsideration it claims that the moratorium provided for expended during the year out of surplus earnings for capital account.
in Executive Order No. 32 was continued by Republic Act No. 342 "only with respect to debtors of
pre-war obligations or those incurred prior to December 8, 1941," and that "the moratorium was It is shown that in December, 1941, cash dividends amounting to P175,000.00 was declared by
lifted and terminated with respect to obligations incurred after December 8, 1941."9 Lepanto.12 Nielson, therefore, should receive the equivalent of 10% of this amount, or the sum of
P17,500.00. We have found that this amount was not paid to Nielson.
This Court has held that Republic Act No. 342 does not apply to debts contracted during the war
and did not lift the moratorium in relations thereto.10 In the case of Abraham, et al. vs. Intestate In its motion for reconsideration, Lepanto inserted a photographic copy of page 127 of its cash
Estate of Juan C. Ysmael, et al., L-16741, Jan. 31, 1962, this Court said: disbursement book, allegedly for 1941, in an effort to show that this amount of P17,500.00 had
been paid to Nielson. It appears, however, in this photographic copy of page 127 of the cash
Respondents, however, contend that Republic Act No. 342, which took effect on July 26, 1948, disbursement book that the sum of P17,500.00 was entered on October 29 as "surplus a/c Nielson
lifted the moratorium on debts contracted during the Japanese occupation. The court has already & Co. Inc." The entry does not make any reference to dividends or participation of Nielson in the
held that Republic Act No. 342 did not lift the moratorium on debts contracted during the war (Uy profits. On the other hand, in the photographic copy of page 89 of the 1941 cash disbursement
vs. Kalaw Katigbak, G.R. No. L-1830, Dec. 31, 1949) but modified Executive Order No. 32 as to book, also attached to the motion for reconsideration, there is an entry for P17,500.00 on April 23,
pre-war debts, making the protection available only to debtors who had war damage claims (Sison 1941 which states "Accts. Pay. Particip. Nielson & Co. Inc." This entry for April 23, 1941 may really
v. Mirasol, G.R. No. L-4711, Oct. 3, 1952). be the participation of Nielson in the profits based on dividends declared in April 1941 as shown in
Exhibit L. But in the same Exhibit L it is not stated that any dividend was declared in October 1941.
We therefore reiterate the ruling in Our decision that the claim involved in the first item awarded to On the contrary it is stated in Exhibit L that dividends were declared in December 1941. We cannot
Nielson had not prescribed. entertain this piece of evidence for several reasons: (1) because this evidence was not presented
during the trial in the court below; (2) there is no showing that this piece of evidence is newly
What we have stated herein regarding the non-prescription of the cause of action of the claim discovered and that Lepanto was not in possession of said evidence when this case was being
involved in the first item in the award also holds true with respect to the second item in the award, tried in the court below; and (3) according to Exhibit L cash dividends of P175,000.00 were
which refers to Nielson's claim for management fee of P2,500.00 for January, 1942. Lepanto declared in December, 1941, and so the sum of P17,500.00 which appears to have been paid to
admits that this second item, like the first, is a monetary obligation. The right of action of Nielson Nielson in October 1941 could not be payment of the equivalent of 10% of the cash dividends that
regarding this claim accrued on January 31, 1942. were later declared in December, 1941.

As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium law is not As regards the management fee of Nielson corresponding to January, 1942, in the sum of
applicable. That is the reason why in Our decision We did not discuss the question of prescription P2,500.00, We have also found that Nielson is entitled to be paid this amount, and that this
regarding these items. The claims of Nielson involved in these items are based on the amount was not paid by Lepanto to Nielson. Whereas, Lepanto was able to prove that it had paid
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the management fees of Nielson for November and December, 1941,13 it was not able to present the like in the transaction of the ordinary business of banking, savings and loan, and trust
any evidence to show that the management fee of P2,500.00 for January, 1942 had been paid. corporations. (As amended by Act No. 2792, and Act No. 3518; Emphasis supplied.)

It having been declared in Our decision, as well as in this resolution, that the management contract From the above-quoted provision of Section 16 of the Corporation Law, the consideration for which
had been extended for 5 years, or sixty months, from June 27, 1948 to June 26, 1953, and that the shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits. Shares of
cause of action of Nielson to claim for its compensation during that period of extension had not stock are given the special name "stock dividends" only if they are issued in lieu of undistributed
prescribed, it follows that Nielson should be awarded the management fees during the whole profits. If shares of stocks are issued in exchange of cash or property then those shares do not fall
period of extension, plus the 10% of the value of the dividends declared during the said period of under the category of "stock dividends". A corporation may legally issue shares of stock in
extension, the 10% of the depletion reserve that was set up, and the 10% of any amount expended consideration of services rendered to it by a person not a stockholder, or in payment of its
out of surplus earnings for capital account. indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued
in exchange of property, because services is equivalent to property.14 Likewise a share of stock
5. In the seventh ground of its motion for reconsideration, Lepanto maintains that this Court erred issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. But a
in ordering Lepanto to issue and deliver to Nielson shares of stock together with fruits thereof. share of stock thus issued should be part of the original capital stock of the corporation upon its
organization, or part of the stocks issued when the increase of the capitalization of a corporation is
In Our decision, We declared that pursuant to the modified agreement regarding the compensation properly authorized. In other words, it is the shares of stock that are originally issued by the
of Nielson which provides, among others, that Nielson would receive 10% of any dividends corporation and forming part of the capital that can be exchanged for cash or services rendered, or
declared and paid, when and as paid, Nielson should be paid 10% of the stock dividends declared property; that is, if the corporation has original shares of stock unsold or unsubscribed, either
by Lepanto during the period of extension of the contract. coming from the original capitalization or from the increased capitalization. Those shares of stock
may be issued to a person who is not a stockholder, or to a person already a stockholder in
It is not denied that on November 28, 1949, Lepanto declared stock dividends worth exchange for services rendered or for cash or property. But a share of stock coming from stock
P1,000,000.00; and on August 22, 1950, it declared stock dividends worth P2,000,000.00). In dividends declared cannot be issued to one who is not a stockholder of a corporation.
other words, during the period of extension Lepanto had declared stock dividends worth
P3,000,000.00. We held in Our decision that Nielson is entitled to receive l0% of the stock A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or
dividends declared, or shares of stock worth P300,000.00 at the par value of P0.10 per share. We authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of
ordered Lepanto to issue and deliver to Nielson those shares of stocks as well as all the fruits or the corporation among the stockholders as dividends. A stock dividend of a corporation is a
dividends that accrued to said shares. dividend paid in shares of stock instead of cash, and is properly payable only out of surplus
profits.15 So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the
In its motion for reconsideration, Lepanto contends that the payment to Nielson of stock dividends dividend money to purchase additional shares of stock at par.16 When a corporation issues stock
as compensation for its services under the management contract is a violation of the Corporation dividends, it shows that the corporation's accumulated profits have been capitalized instead of
Law, and that it was not, and it could not be, the intention of Lepanto and Nielson — as contracting distributed to the stockholders or retained as surplus available for distribution, in money or kind,
parties — that the services of Nielson should be paid in shares of stock taken out of stock should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to
dividends declared by Lepanto. We have assiduously considered the arguments adduced by postpone said realization, in that the fund represented by the new stock has been transferred from
Lepanto in support of its contention, as well as the answer of Nielson in this connection, and We surplus to assets and no longer available for actual distribution.17 Thus, it is apparent that stock
have arrived at the conclusion that there is merit in the contention of Lepanto. dividends are issued only to stockholders. This is so because only stockholders are entitled to
dividends. They are the only ones who have a right to a proportional share in that part of the
Section 16 of the Corporation Law, in part, provides as follows: surplus which is declared as dividends. A stock dividend really adds nothing to the interest of the
stockholder; the proportional interest of each stockholder remains the same.18If a stockholder is
No corporation organized under this Act shall create or issue bills, notes or other evidence of debt, deprived of his stock dividends - and this happens if the shares of stock forming part of the stock
for circulation as money, and no corporation shall issue stock or bonds except in exchange for dividends are issued to a non-stockholder — then the proportion of the stockholder's interest
actual cash paid to the corporation or for: (1) property actually received by it at a fair valuation changes radically. Stock dividends are civil fruits of the original investment, and to the owners of
equal to the par or issued value of the stock or bonds so issued; and in case of disagreement as to the shares belong the civil fruits.19
their value, the same shall be presumed to be the assessed value or the value appearing in
invoices or other commercial documents, as the case may be; and the burden or proof that the real The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion
present value of the property is greater than the assessed value or value appearing in invoices or of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable
other commercial documents, as the case may be, shall be upon the corporation, or for (2) profits division among the holders of the capital stock. It means the fund actually set aside, and declared
earned by it but not distributed among its stockholders or members; Provided, however, That no by the directors of the corporation as dividends and duly ordered by the director, or by the
stock or bond dividend shall be issued without the approval of stockholders representing not less stockholders at a corporate meeting, to be divided or distributed among the stockholders according
than two-thirds of all stock then outstanding and entitled to vote at a general meeting of the to their respective interests.20
corporation or at a special meeting duly called for the purpose.
It is Our considered view, therefore, that under Section 16 of the Corporation Law stock dividends
xxx xxx xxx can not be issued to a person who is not a stockholder in payment of services rendered. And so, in
the case at bar Nielson can not be paid in shares of stock which form part of the stock dividends of
No corporation shall make or declare any dividend except from the surplus profits arising from its Lepanto for services it rendered under the management contract. We sustain the contention of
business, or divide or distribute its capital stock or property other than actual profits among its Lepanto that the understanding between Lepanto and Nielson was simply to make the cash value
members or stockholders until after the payment of its debts and the termination of its existence by of the stock dividends declared as the basis for determining the amount of compensation that
limitation or lawful dissolution: Provided, That banking, savings and loan, and trust corporations should be paid to Nielson, in the proportion of 10% of the cash value of the stock dividends
may receive deposits and issue certificates of deposit, checks, drafts, and bills of exchange, and declared. And this conclusion of Ours finds support in the record.

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We had adverted to in Our decision that in 1940 there was some dispute between Lepanto and In view of Our ruling in this resolution that Nielson is not entitled to receive shares of stock as stock
Nielson regarding the application and interpretation of certain provisions of the original contract dividends in payment of its compensation under the management contract, We do not consider it
particularly with regard to the 10% participation of Nielson in the net profits, so that some necessary to discuss this ground of the motion for reconsideration. The awards in the present case
adjustments had to be made. In the minutes of the meeting of the Board of Directors of Lepanto on are all reduced to specific sums of money.
August 21, 1940, We read the following:
7. In the ninth ground of its motion for reconsideration Lepanto maintains that this Court erred in
The Chairman stated that he believed that it would be better to tie the computation of the 10% rendering judgment or attorney's fees.
participation of Nielson & Company, Inc. to the dividend, because Nielson will then be able to
definitely compute its net participation by the amount of the dividends declared. In addition to the The matter of the award of attorney's fees is within the sound discretion of this Court. In Our
dividend, we have been setting up a depletion reserve and it does not seem fair to burden the 10% decision We have stated the reason why the award of P50,000.00 for attorney's fees is considered
participation of Nielson with the depletion reserve, as the depletion reserve should not be by this Court as reasonable.
considered as an operating expense. After a prolonged discussion, upon motion duly made and
seconded, it was — Accordingly, We resolve to modify the decision that We rendered on December 17, 1966, in the
sense that instead of awarding Nielson shares of stock worth P300,000.00 at the par value of ten
RESOLVED, That the President, be, and he hereby is, authorized to enter into an agreement with centavos (P0.10) per share based on the stock dividends declared by Lepanto on November 28,
Nielson & Company, Inc., modifying Paragraph V of management contract of January 30, 1937, 1949 and August 20, 1950, together with their fruits, Nielson should be awarded the sum of
effective January 1, 1940, in such a way that Nielson & Company, Inc. shall receive 10% of any P300,000.00 which is an amount equivalent to 10% of the cash value of the stock dividends thus
dividends declared and paid, when and as paid during the period of the contract and at the end of declared, as part of the compensation due Nielson under the management contract. The
each year, 10% of any depletion reserve that may be set up and 10% of any amount expended dispositive portion of the decision should, therefore, be amended, to read as follows:
during the year out of surplus earnings for capital account. (Emphasis supplied.)
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court
From the sentence, "The Chairman stated that he believed that it would be better to tie the a quo and enter in lieu thereof another, ordering the appellee Lepanto to pay the appellant Nielson
computation of the 10% participation of Nielson & Company, Inc., to the dividend, because Nielson the different amounts as specified hereinbelow:
will then be able to definitely compute its net participation by the amount of the dividends declared"
the idea is conveyed that the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was (1) Seventeen thousand five hundred pesos (P17,500.00), equivalent to 10% of the cash dividends
to make the value of the dividends declared — whether the dividends were in cash or in stock — of December, 1941, with legal interest thereon from the date of the filing of the complaint;
as the basis for determining the amount of compensation that should be paid to Nielson, in the
proportion of 10% of the cash value of the dividends so declared. It does not mean, however, that (2) Two thousand five hundred pesos (P2,500.00) as management fee for January 1942, with legal
the compensation of Nielson would be taken from the amount actually declared as cash dividend interest thereon from the date of the filing of the complaint;
to be distributed to the stockholder, nor from the shares of stocks to be issued to the stockholders
as stock dividends, but from the other assets or funds of the corporation which are not burdened (3) One hundred fifty thousand pesos (P150,000.00), representing management fees for the sixty-
by the dividends thus declared. In other words, if, for example, cash dividends of P300,000.00 are month period of extension of the management contract, with legal interest thereon from the date of
declared, Nielson would be entitled to a compensation of P30,000.00, but this P30,000.00 should the filing of the complaint;
not be taken from the P300,000.00 to be distributed as cash dividends to the stockholders but from
some other funds or assets of the corporation which are not included in the amount to answer for (4) One million four hundred thousand pesos (P1,400,000.00), equivalent to 10% of the cash
the cash dividends thus declared. This is so because if the P30,000.00 would be taken out from dividends declared during the period of extension of the management contract, with legal interest
the P300,000.00 declared as cash dividends, then the stockholders would not be getting thereon from the date of the filing of the complaint;
P300,000.00 as dividends but only P270,000.00. There would be a dilution of the dividend that
corresponds to each share of stock held by the stockholders. Similarly, if there were stock (5) Three hundred thousand pesos (P300,000.00), equivalent to 10% of the cash value of the
dividends worth one million pesos that were declared, which means an issuance of ten million stock dividends declared on November 28, 1949 and August 20, 1950, with legal interest thereon
shares at the par value of ten centavos per share, it does not mean that Nielson would be given from the date of the filing of the complaint;
100,000 shares. It only means that Nielson should be given the equivalent of 10% of the aggregate
cash value of those shares issued as stock dividends. That this was the understanding of Nielson (6) Fifty three thousand nine hundred twenty eight pesos and eighty eight centavos (P53,928.88),
itself is borne out by the fact that in its appeal brief Nielson urged that it should be paid equivalent to 10% of the depletion reserve set up during the period of extension, with legal interest
"P300,000.00 being 10% of the P3,000,000.00 stock dividends declared on November 28, 1949 thereon from the date of the filing of the complaint;
and August 20, 1950...."21
(7) Six hundred ninety four thousand three hundred sixty four pesos and seventy six centavos
We, therefore, reconsider that part of Our decision which declares that Nielson is entitled to shares (P694,364.76), equivalent to 10% of the expenses for capital account during the period of
of stock worth P300,000.00 based on the stock dividends declared on November 28, 1949 and on extension, with legal interest thereon from the date of the filing of the complaint;
August 20, 1950, together with all the fruits accruing thereto. Instead, We declare that Nielson is
entitled to payment by Lepanto of P300,000.00 in cash, which is equivalent to 10% of the money (8) Fifty thousand pesos (P50,000.00) as attorney's fees; and
value of the stock dividends worth P3,000,000.00 which were declared on November 28, 1949 and
on August 20, 1950, with interest thereon at the rate of 6% from February 6, 1958. (9) The costs.

6. In the eighth ground of its motion for reconsideration Lepanto maintains that this Court erred in It is so ordered.
awarding to Nielson an undetermined amount of shares of stock and/or cash, which award can not
be ascertained and executed without further litigation.

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 4. Agency vs Independent Contractor The foregoing reports were ruled out as "double hearsay" by the Court of Appeals and hence
inadmissible. This ruling is now assigned as error. It is contended: first, that said reports were
37. G.R. No. L-12986 March 31, 1966 admitted by the trial court without objection on the part of respondents; secondly, that with respect
to the police report (Exhibit V-Africa) which appears signed by a Detective Zapanta allegedly "for
THE SPOUSES BERNABE AFRICA and SOLEDAD C. AFRICA, and the HEIRS OF DOMINGA Salvador Capacillo," the latter was presented as witness but respondents waived their right to
ONG, petitioners-appellants, cross-examine him although they had the opportunity to do so; and thirdly, that in any event the
vs. said reports are admissible as an exception to the hearsay rule under section 35 of Rule 123, now
CALTEX (PHIL.), INC., MATEO BOQUIREN and THE COURT OF APPEALS, respondents- Rule 130.
appellees.
The first contention is not borne out by the record. The transcript of the hearing of September 17,
MAKALINTAL., J.: 1953 (pp. 167-170) shows that the reports in question, when offered as evidence, were objected to
by counsel for each of respondents on the ground that they were hearsay and that they were
This case is before us on a petition for review of the decision of the Court of Appeals, which "irrelevant, immaterial and impertinent." Indeed, in the court's resolution only Exhibits J, K, K-5 and
affirmed that of the Court of First Instance of Manila dismissing petitioners' second amended X-6 were admitted without objection; the admission of the others, including the disputed ones,
complaint against respondents. carried no such explanation.

The action is for damages under Articles 1902 and 1903 of the old Civil Code. It appears that in On the second point, although Detective Capacillo did take the witness stand, he was not
the afternoon of March 18, 1948 a fire broke out at the Caltex service station at the corner of examined and he did not testify as to the facts mentioned in his alleged report (signed by Detective
Antipolo street and Rizal Avenue, Manila. It started while gasoline was being hosed from a tank Zapanta). All he said was that he was one of those who investigated "the location of the fire and, if
truck into the underground storage, right at the opening of the receiving tank where the nozzle of possible, gather witnesses as to the occurrence, and that he brought the report with him. There
the hose was inserted. The fire spread to and burned several neighboring houses, including the was nothing, therefore, on which he need be cross-examined; and the contents of the report, as to
personal properties and effects inside them. Their owners, among them petitioners here, sued which he did not testify, did not thereby become competent evidence. And even if he had testified,
respondents Caltex (Phil.), Inc. and Mateo Boquiren, the first as alleged owner of the station and his testimony would still have been objectionable as far as information gathered by him from third
the second as its agent in charge of operation. Negligence on the part of both of them was persons was concerned.
attributed as the cause of the fire.
Petitioners maintain, however, that the reports in themselves, that is, without further testimonial
The trial court and the Court of Appeals found that petitioners failed to prove negligence and that evidence on their contents, fall within the scope of section 35, Rule 123, which provides that
respondents had exercised due care in the premises and with respect to the supervision of their "entries in official records made in the performance of his duty by a public officer of the Philippines,
employees. or by a person in the performance of a duty specially enjoined by law, are prima facie evidence of
the facts therein stated."
The first question before Us refers to the admissibility of certain reports on the fire prepared by the
Manila Police and Fire Departments and by a certain Captain Tinio of the Armed Forces of the There are three requisites for admissibility under the rule just mentioned: (a) that the entry was
Philippines. Portions of the first two reports are as follows: made by a public officer, or by another person specially enjoined by law to do so; (b) that it was
made by the public officer in the performance of his duties, or by such other person in the
1. Police Department report: — performance of a duty specially enjoined by law; and (c) that the public officer or other person had
sufficient knowledge of the facts by him stated, which must have been acquired by him personally
Investigation disclosed that at about 4:00 P.M. March 18, 1948, while Leandro Flores was or through official information (Moran, Comments on the Rules of Court, Vol. 3 [1957] p. 398).
transferring gasoline from a tank truck, plate No. T-5292 into the underground tank of the Caltex
Gasoline Station located at the corner of Rizal Avenue and Antipolo Street, this City, an unknown Of the three requisites just stated, only the last need be considered here. Obviously the material
Filipino lighted a cigarette and threw the burning match stick near the main valve of the said facts recited in the reports as to the cause and circumstances of the fire were not within the
underground tank. Due to the gasoline fumes, fire suddenly blazed. Quick action of Leandro Flores personal knowledge of the officers who conducted the investigation. Was knowledge of such facts,
in pulling off the gasoline hose connecting the truck with the underground tank prevented a terrific however, acquired by them through official information? As to some facts the sources thereof are
explosion. However, the flames scattered due to the hose from which the gasoline was spouting. It not even identified. Others are attributed to Leopoldo Medina, referred to as an employee at the
burned the truck and the following accessorias and residences. gas station were the fire occurred; to Leandro Flores, driver of the tank truck from which gasoline
was being transferred at the time to the underground tank of the station; and to respondent Mateo
2. The Fire Department report: — Boquiren, who could not, according to Exhibit V-Africa, give any reason as to the origin of the fire.
To qualify their statements as "official information" acquired by the officers who prepared the
In connection with their allegation that the premises was (sic) subleased for the installation of a reports, the persons who made the statements not only must have personal knowledge of the facts
coca-cola and cigarette stand, the complainants furnished this Office a copy of a photograph taken stated but must have the duty to give such statements for record.1
during the fire and which is submitted herewith. it appears in this picture that there are in the
premises a coca-cola cooler and a rack which according to information gathered in the The reports in question do not constitute an exception to the hearsay rule; the facts stated therein
neighborhood contained cigarettes and matches, installed between the gasoline pumps and the were not acquired by the reporting officers through official information, not having been given by
underground tanks. the informants pursuant to any duty to do so.

The report of Captain Tinio reproduced information given by a certain Benito Morales regarding the The next question is whether or not, without proof as to the cause and origin of the fire, the
history of the gasoline station and what the chief of the fire department had told him on the same doctrine of res ipsa loquitur should apply so as to presume negligence on the part of appellees.
subject. Both the trial court and the appellate court refused to apply the doctrine in the instant case on the
grounds that "as to (its) applicability ... in the Philippines, there seems to he nothing definite," and
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that while the rules do not prohibit its adoption in appropriate cases, "in the case at bar, however, damages to the building owned by Jones. Alleging that the damages to his building amounted to
we find no practical use for such doctrine." The question deserves more than such summary $516.95, Jones sued the Shell Petroleum Corporation for the recovery of that amount. The judge
dismissal. The doctrine has actually been applied in this jurisdiction, in the case of Espiritu vs. of the district court, after hearing the testimony, concluded that plaintiff was entitled to a recovery
Philippine Power and Development Co. (CA-G.R. No. 3240-R, September 20, 1949), wherein the and rendered judgment in his favor for $427.82. The Court of Appeals for the First Circuit reversed
decision of the Court of Appeals was penned by Mr. Justice J.B.L. Reyes now a member of the this judgment, on the ground the testimony failed to show with reasonable certainty any negligence
Supreme Court. on the part of the Shell Petroleum Corporation or any of its agents or employees. Plaintiff applied
to this Court for a Writ of Review which was granted, and the case is now before us for decision.
The facts of that case are stated in the decision as follows:
In resolving the issue of negligence, the Supreme Court of Louisiana held:
In the afternoon of May 5, 1946, while the plaintiff-appellee and other companions were loading
grass between the municipalities of Bay and Calauan, in the province of Laguna, with clear Plaintiff's petition contains two distinct charges of negligence — one relating to the cause of the fire
weather and without any wind blowing, an electric transmission wire, installed and maintained by and the other relating to the spreading of the gasoline about the filling station.
the defendant Philippine Power and Development Co., Inc. alongside the road, suddenly parted,
and one of the broken ends hit the head of the plaintiff as he was about to board the truck. As a Other than an expert to assess the damages caused plaintiff's building by the fire, no witnesses
result, plaintiff received the full shock of 4,400 volts carried by the wire and was knocked were placed on the stand by the defendant.
unconscious to the ground. The electric charge coursed through his body and caused extensive
and serious multiple burns from skull to legs, leaving the bone exposed in some parts and causing Taking up plaintiff's charge of negligence relating to the cause of the fire, we find it established by
intense pain and wounds that were not completely healed when the case was tried on June 18, the record that the filling station and the tank truck were under the control of the defendant and
1947, over one year after the mishap. operated by its agents or employees. We further find from the uncontradicted testimony of
plaintiff's witnesses that fire started in the underground tank attached to the filling station while it
The defendant therein disclaimed liability on the ground that the plaintiff had failed to show any was being filled from the tank truck and while both the tank and the truck were in charge of and
specific act of negligence, but the appellate court overruled the defense under the doctrine of res being operated by the agents or employees of the defendant, extended to the hose and tank truck,
ipsa loquitur. The court said: and was communicated from the burning hose, tank truck, and escaping gasoline to the building
owned by the plaintiff.
The first point is directed against the sufficiency of plaintiff's evidence to place appellant on its
defense. While it is the rule, as contended by the appellant, that in case of noncontractual Predicated on these circumstances and the further circumstance of defendant's failure to explain
negligence, or culpa aquiliana, the burden of proof is on the plaintiff to establish that the proximate the cause of the fire or to show its lack of knowledge of the cause, plaintiff has evoked the doctrine
cause of his injury was the negligence of the defendant, it is also a recognized principal that of res ipsa loquitur. There are many cases in which the doctrine may be successfully invoked and
"where the thing which caused injury, without fault of the injured person, is under the exclusive this, we think, is one of them.
control of the defendant and the injury is such as in the ordinary course of things does not occur if
he having such control use proper care, it affords reasonable evidence, in the absence of the Where the thing which caused the injury complained of is shown to be under the management of
explanation, that the injury arose from defendant's want of care." defendant or his servants and the accident is such as in the ordinary course of things does not
happen if those who have its management or control use proper care, it affords reasonable
And the burden of evidence is shifted to him to establish that he has observed due care and evidence, in absence of explanation by defendant, that the accident arose from want of care. (45
diligence. (San Juan Light & Transit Co. v. Requena, 244, U.S. 89, 56 L. ed. 680.) This rule is C.J. #768, p. 1193).
known by the name of res ipsa loquitur (the transaction speaks for itself), and is peculiarly
applicable to the case at bar, where it is unquestioned that the plaintiff had every right to be on the This statement of the rule of res ipsa loquitur has been widely approved and adopted by the courts
highway, and the electric wire was under the sole control of defendant company. In the ordinary of last resort. Some of the cases in this jurisdiction in which the doctrine has been applied are the
course of events, electric wires do not part suddenly in fair weather and injure people, unless they following, viz.: Maus v. Broderick, 51 La. Ann. 1153, 25 So. 977; Hebert v. Lake Charles Ice, etc.,
are subjected to unusual strain and stress or there are defects in their installation, maintenance Co., 111 La. 522, 35 So. 731, 64 L.R.A. 101, 100 Am. St. Rep. 505; Willis v. Vicksburg, etc., R.
and supervision; just as barrels do not ordinarily roll out of the warehouse windows to injure Co., 115 La. 63, 38 So. 892; Bents v. Page, 115 La. 560, 39 So. 599.
passersby, unless some one was negligent. (Byrne v. Boadle, 2 H & Co. 722; 159 Eng. Reprint
299, the leading case that established that rule). Consequently, in the absence of contributory The principle enunciated in the aforequoted case applies with equal force here. The gasoline
negligence (which is admittedly not present), the fact that the wire snapped suffices to raise a station, with all its appliances, equipment and employees, was under the control of appellees. A
reasonable presumption of negligence in its installation, care and maintenance. Thereafter, as fire occurred therein and spread to and burned the neighboring houses. The persons who knew or
observed by Chief Baron Pollock, "if there are any facts inconsistent with negligence, it is for the could have known how the fire started were appellees and their employees, but they gave no
defendant to prove." explanation thereof whatsoever. It is a fair and reasonable inference that the incident happened
because of want of care.
It is true of course that decisions of the Court of Appeals do not lay down doctrines binding on the
Supreme Court, but we do not consider this a reason for not applying the particular doctrine of res In the report submitted by Captain Leoncio Mariano of the Manila Police Department (Exh. X-1
ipsa loquitur in the case at bar. Gasoline is a highly combustible material, in the storage and sale Africa) the following appears:
of which extreme care must be taken. On the other hand, fire is not considered a fortuitous event,
as it arises almost invariably from some act of man. A case strikingly similar to the one before Us is Investigation of the basic complaint disclosed that the Caltex Gasoline Station complained of
Jones vs. Shell Petroleum Corporation, et al., 171 So. 447: occupies a lot approximately 10 m x 10 m at the southwest corner of Rizal Avenue and Antipolo.
Arthur O. Jones is the owner of a building in the city of Hammon which in the year 1934 was The location is within a very busy business district near the Obrero Market, a railroad crossing and
leased to the Shell Petroleum Corporation for a gasoline filling station. On October 8, 1934, during very thickly populated neighborhood where a great number of people mill around t
the term of the lease, while gasoline was being transferred from the tank wagon, also operated by
the Shell Petroleum Corporation, to the underground tank of the station, a fire started with resulting until
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gasoline The next issue is whether Caltex should be held liable for the damages caused to appellants. This
issue depends on whether Boquiren was an independent contractor, as held by the Court of
tever be theWactjvities of these peopleor lighting a cigarette cannot be excluded and this Appeals, or an agent of Caltex. This question, in the light of the facts not controverted, is one of
constitute a secondary hazard to its operation which in turn endangers the entire neighborhood to law and hence may be passed upon by this Court. These facts are: (1) Boquiren made an
conflagration. admission that he was an agent of Caltex; (2) at the time of the fire Caltex owned the gasoline
station and all the equipment therein; (3) Caltex exercised control over Boquiren in the
Furthermore, aside from precautions already taken by its operator the concrete walls south and management of the state; (4) the delivery truck used in delivering gasoline to the station had the
west adjoining the neighborhood are only 2-1/2 meters high at most and cannot avoid the flames name of CALTEX painted on it; and (5) the license to store gasoline at the station was in the name
from leaping over it in case of fire. of Caltex, which paid the license fees. (Exhibit T-Africa; Exhibit U-Africa; Exhibit X-5 Africa; Exhibit
X-6 Africa; Exhibit Y-Africa).
Records show that there have been two cases of fire which caused not only material damages but
desperation and also panic in the neighborhood. In Boquiren's amended answer to the second amended complaint, he denied that he directed one
of his drivers to remove gasoline from the truck into the tank and alleged that the "alleged driver, if
Although the soft drinks stand had been eliminated, this gasoline service station is also used by its one there was, was not in his employ, the driver being an employee of the Caltex (Phil.) Inc. and/or
operator as a garage and repair shop for his fleet of taxicabs numbering ten or more, adding the owners of the gasoline station." It is true that Boquiren later on amended his answer, and that
another risk to the possible outbreak of fire at this already small but crowded gasoline station. among the changes was one to the effect that he was not acting as agent of Caltex. But then
again, in his motion to dismiss appellants' second amended complaint the ground alleged was that
The foregoing report, having been submitted by a police officer in the performance of his duties on it stated no cause of action since under the allegations thereof he was merely acting as agent of
the basis of his own personal observation of the facts reported, may properly be considered as an Caltex, such that he could not have incurred personal liability. A motion to dismiss on this ground
exception to the hearsay rule. These facts, descriptive of the location and objective circumstances is deemed to be an admission of the facts alleged in the complaint.
surrounding the operation of the gasoline station in question, strengthen the presumption of
negligence under the doctrine of res ipsa loquitur, since on their face they called for more stringent Caltex admits that it owned the gasoline station as well as the equipment therein, but claims that
measures of caution than those which would satisfy the standard of due diligence under ordinary the business conducted at the service station in question was owned and operated by Boquiren.
circumstances. There is no more eloquent demonstration of this than the statement of Leandro But Caltex did not present any contract with Boquiren that would reveal the nature of their
Flores before the police investigator. Flores was the driver of the gasoline tank wagon who, alone relationship at the time of the fire. There must have been one in existence at that time. Instead,
and without assistance, was transferring the contents thereof into the underground storage when what was presented was a license agreement manifestly tailored for purposes of this case, since it
the fire broke out. He said: "Before loading the underground tank there were no people, but while was entered into shortly before the expiration of the one-year period it was intended to operate.
the loading was going on, there were people who went to drink coca-cola (at the coca-cola stand) This so-called license agreement (Exhibit 5-Caltex) was executed on November 29, 1948, but
which is about a meter from the hole leading to the underground tank." He added that when the made effective as of January 1, 1948 so as to cover the date of the fire, namely, March 18, 1948.
tank was almost filled he went to the tank truck to close the valve, and while he had his back This retroactivity provision is quite significant, and gives rise to the conclusion that it was designed
turned to the "manhole" he, heard someone shout "fire." precisely to free Caltex from any responsibility with respect to the fire, as shown by the clause that
Caltex "shall not be liable for any injury to person or property while in the property herein licensed,
Even then the fire possibly would not have spread to the neighboring houses were it not for it being understood and agreed that LICENSEE (Boquiren) is not an employee, representative or
another negligent omission on the part of defendants, namely, their failure to provide a concrete agent of LICENSOR (Caltex)."
wall high enough to prevent the flames from leaping over it. As it was the concrete wall was only 2-
1/2 meters high, and beyond that height it consisted merely of galvanized iron sheets, which would But even if the license agreement were to govern, Boquiren can hardly be considered an
predictably crumple and melt when subjected to intense heat. Defendants' negligence, therefore, independent contractor. Under that agreement Boquiren would pay Caltex the purely nominal sum
was not only with respect to the cause of the fire but also with respect to the spread thereof to the of P1.00 for the use of the premises and all the equipment therein. He could sell only Caltex
neighboring houses. Products. Maintenance of the station and its equipment was subject to the approval, in other words
control, of Caltex. Boquiren could not assign or transfer his rights as licensee without the consent
There is an admission on the part of Boquiren in his amended answer to the second amended of Caltex. The license agreement was supposed to be from January 1, 1948 to December 31,
complaint that "the fire was caused through the acts of a stranger who, without authority, or 1948, and thereafter until terminated by Caltex upon two days prior written notice. Caltex could at
permission of answering defendant, passed through the gasoline station and negligently threw a any time cancel and terminate the agreement in case Boquiren ceased to sell Caltex products, or
lighted match in the premises." No evidence on this point was adduced, but assuming the did not conduct the business with due diligence, in the judgment of Caltex. Termination of the
allegation to be true — certainly any unfavorable inference from the admission may be taken contract was therefore a right granted only to Caltex but not to Boquiren. These provisions of the
against Boquiren — it does not extenuate his negligence. A decision of the Supreme Court of contract show the extent of the control of Caltex over Boquiren. The control was such that the
Texas, upon facts analogous to those of the present case, states the rule which we find acceptable latter was virtually an employee of the former.
here. "It is the rule that those who distribute a dangerous article or agent, owe a degree of
protection to the public proportionate to and commensurate with a danger involved ... we think it is Taking into consideration the fact that the operator owed his position to the company and the latter
the generally accepted rule as applied to torts that 'if the effects of the actor's negligent conduct could remove him or terminate his services at will; that the service station belonged to the
actively and continuously operate to bring about harm to another, the fact that the active and company and bore its tradename and the operator sold only the products of the company; that the
substantially simultaneous operation of the effects of a third person's innocent, tortious or criminal equipment used by the operator belonged to the company and were just loaned to the operator
act is also a substantial factor in bringing about the harm, does not protect the actor from liability.' and the company took charge of their repair and maintenance; that an employee of the company
(Restatement of the Law of Torts, vol. 2, p. 1184, #439). Stated in another way, "The intention of supervised the operator and conducted periodic inspection of the company's gasoline and service
an unforeseen and unexpected cause, is not sufficient to relieve a wrongdoer from consequences station; that the price of the products sold by the operator was fixed by the company and not by the
of negligence, if such negligence directly and proximately cooperates with the independent cause operator; and that the receipts signed by the operator indicated that he was a mere agent, the
in the resulting injury." (MacAfee, et al. vs. Traver's Gas Corporation, 153 S.W. 2nd 442.)
114
finding of the Court of Appeals that the operator was an agent of the company and not an The notice to file appellant's brief was mailed to Atty. Briones on July 30, 1998. The registry return
independent contractor should not be disturbed. card shows that it was received by the addressee on August 6, 1998. Counsel was given thirty (30)
days from receipt of the notice within which to file the brief. Atty. Briones failed to file the required
To determine the nature of a contract courts do not have or are not bound to rely upon the name or brief within the period which expired on September 5, 1998.
title given it by the contracting parties, should thereby a controversy as to what they really had
intended to enter into, but the way the contracting parties do or perform their respective obligations On April 28, 1999, the Court ordered Atty. Briones to show cause why he should not be
stipulated or agreed upon may be shown and inquired into, and should such performance conflict disciplinarily dealt with or held in contempt for such failure and to submit the required brief within
with the name or title given the contract by the parties, the former must prevail over the latter. ten (10) days from notice. Atty. Briones failed to comply with the Court's directive within the
(Shell Company of the Philippines, Ltd. vs. Firemens' Insurance Company of Newark, New Jersey, specified period. Copy of said resolution was returned to the Court unserved without specific
100 Phil. 757). reason.

The written contract was apparently drawn for the purpose of creating the apparent relationship of On August 9, 1999, the Court issued a resolution stating among others that the resolution of April
employer and independent contractor, and of avoiding liability for the negligence of the employees 28, 1999 is considered served on Atty. Briones by substituted service pursuant to Section 8, Rule
about the station; but the company was not satisfied to allow such relationship to exist. The 13 of the 1997 Rules of Civil Procedure. The Court also referred the matter of the repeated failure
evidence shows that it immediately assumed control, and proceeded to direct the method by which of Atty. Briones to file appellant's brief to the Integrated Bar of the Philippines (IBP) for evaluation,
the work contracted for should be performed. By reserving the right to terminate the contract at will, report and recommendation. The administrative case was docketed as CBD Case No. 00-690.
it retained the means of compelling submission to its orders. Having elected to assume control and
to direct the means and methods by which the work has to be performed, it must be held liable for In a letter dated September 27, 1999, IBP Commissioner Victoria Gonzales-De Los Reyes
the negligence of those performing service under its direction. We think the evidence was sufficient informed Atty. Briones of the Court's referral of the matter to the IBP and required him to file his
to sustain the verdict of the jury. (Gulf Refining Company v. Rogers, 57 S.W. 2d, 183). Comment within five (5) days from receipt of the letter. The registry return card shows that the
letter was received by the agent of Atty. Briones on October 7, 1999. Atty. Briones, however, did
Caltex further argues that the gasoline stored in the station belonged to Boquiren. But no cash not file any Comment.
invoices were presented to show that Boquiren had bought said gasoline from Caltex. Neither was
there a sales contract to prove the same. Commissioner De Los Reyes submitted her Report dated January 25, 2000 with the following
observation and recommendation:
As found by the trial court the Africas sustained a loss of P9,005.80, after deducting the amount of
P2,000.00 collected by them on the insurance of the house. The deduction is now challenged as "Unfortunately, despite the lapse of the required period of time within which to submit his
erroneous on the ground that Article 2207 of the New Civil Code, which provides for the Comment, respondent failed to do so despite due notice as evidenced by the registry return card.
subrogation of the insurer to the rights of the insured, was not yet in effect when the loss took
place. However, regardless of the silence of the law on this point at that time, the amount that As can be gleaned from the files, G.R. No. 130965 has remained pending in view of the
should be recovered be measured by the damages actually suffered, otherwise the principle negligence of Atty. Briones to file the required appellant's brief. It is therefore evident that
prohibiting unjust enrichment would be violated. With respect to the claim of the heirs of Ong respondent violated Rule 18.03 of Canon 18 of the Code of Professional Responsibility to wit:
P7,500.00 was adjudged by the lower court on the basis of the assessed value of the property
destroyed, namely, P1,500.00, disregarding the testimony of one of the Ong children that said A lawyer shall not neglect a legal matter entrusted to him, and his negligence in connection
property was worth P4,000.00. We agree that the court erred, since it is of common knowledge therewith shall render him liable.
that the assessment for taxation purposes is not an accurate gauge of fair market value, and in this
case should not prevail over positive evidence of such value. The heirs of Ong are therefore Likewise, respondent's repeated failure to file the appellant's brief and his Comment to the
entitled to P10,000.00. Commission in connection with the Supreme Court Resolution dated August 9, 1999 are
apparently tantamount to wilfull disobedience to the lawful orders of the Honorable Supreme Court
Wherefore, the decision appealed from is reversed and respondents-appellees are held liable which could not be tolerated, and respondent should not be allowed to go scot-free.
solidarily to appellants, and ordered to pay them the aforesaid sum of P9,005.80 and P10,000.00,
respectively, with interest from the filing of the complaint, and costs. IN VIEW OF THE FOREGOING, the undersigned Commissioner finds that Atty. David P. Briones
had the propensity of defying lawful orders, and recommends that for his violation of Rule 18.03 of
the Canon 18 of the Code of Professional Responsibility, he be SUSPENDED from the practice of
5. Negotiorum Gestio law profession for a period of six (6) months."

38. A.C. No. 5486 August 15, 2001 On March 18, 2000, the Board of Governors of the IBP passed Resolution No. XIV-2000-56
[Formerly A.C. CBD Case No. 00-690] stating:

In Re: Atty. David Briones. "RESOLVED to ADOPT and APPROVE, as it is hereby ADOPTED and APPROVED, the Report
and Recommendation of the Investigating Commissioner of the above-entitled case, herein made
PUNO, J.: part of this Resolution/Decision as annex "A"; and, finding the recommendation fully supported by
the evidence on record and the applicable laws and rules, Respondent is SUSPENDED/or
This matter arose from the continued failure of Atty. David P. Briones, counsel for accused- BARRED from the practice of law for six (6) months for violation of Rule 18.03 of the Canon 18 of
appellant in G.R. No. 130965 (People of the Philippines vs. Restituto Cabacan) pending before the the Code of Professional Responsibility."
Second Division of this Court, to file the required appellant's brief.
On May 26, 2000, Atty. Briones filed with the IBP a Motion for Reconsideration/Reinvestigation.
The motion was grounded on the alleged denial of due process in the course of the investigation.
115
Atty. Briones claimed that he filed a Comment on the administrative case but the same was not shall serve his client with competence and diligence and he should never neglect a legal matter
considered by the investigating commissioner. Neither did the IBP conduct a formal investigation. entrusted to him.3

On July 29, 2000, the Board of Governors of the IBP issued Resolution No. XIV-2000-439 denying IN VIEW WHEREOF, Atty. David P. Briones is SUSPENDED from the practice of law for six (6)
the motion for reconsideration, thus: months effective immediately. Let a copy of this Decision be furnished to the Office of the Bar
Confidant, the Integrated Bar of the Philippines, and to all the courts.
"RESOLVED to DENY Respondent’s Motion for Reconsideration of the Board’s Decision in the
above-entitled case there being no substantive reason to reverse the finding therein, moreover, the SO ORDERED.
pleading is improper as the remedy of the respondent is to file the appropriate Motion with the
Supreme Court within fifteen (15) days from receipt of notice of said Decision pursuant to Section
12 (c) of Rule 139-B." 6. Agent vs Servant
On October 5, 2000, Atty. Briones filed with the Court a Manifestation praying that his Comment 39. G.R. No. L-2886 August 22, 1952
submitted to the IBP on October 13, 2000 be considered by the Court. He attached a copy of the
Comment to the Manifestation. GREGORIO ARANETA, INC., plaintiff-appellant,
vs.
Atty. Briones explained both in his Manifestation and his Comment that he failed to file an PAZ TUASON DE PATERNO and JOSE VIDAL, defendants-appellants.
appellant’s brief in G.R. No. 130965 because he never received a copy of the resolution requiring
him to file said brief. If ever a copy was received by his secretary, the latter was not able to give it
to him because he had already ceased practicing law. He further explained that the case was TUASON, J.:
assigned to him as member of the IBP Tarlac Legal Aid Office. After filing the Notice of Appeal, he
resigned from the Legal Aid Office because of his failing health. Hence, he presumed that the This is a three-cornered contest between the purchasers, the seller, and the mortgagee of certain
relatives of the accused would engage the services of a new counsel, or would go directly to the portions (approximately 40,703 square meters) of a big block of residential land in the district of
IBP Legal Aid Office. He admitted that he forgot to notify the Legal Aid Office about the case. Santa Mesa, Manila. The plaintiff, which is the purchaser, and the mortgagee elevated this appeal.
Though not an appellant, the seller and mortgagor has made assignments of error in her brief,
We adopt the recommendation of the IBP. some to strengthen the judgment and others for the purpose of new trial.

The failure of the counsel to submit the required brief within the reglementary period is an offense The case is extremely complicated and multiple issues were raised.
that entails disciplinary action.1 The pernicious effect of Atty. Briones’ omission cannot be
gainsaid. His failure to file an appellant’s brief in G.R. No. 130965 has caused the appeal to remain The salient facts in so far as they are not controverted are these. Paz Tuason de Paterno is the
inactive for more than a year, to the prejudice of his client, the accused himself, who continues to registered owner of the aforesaid land, which was subdivided into city lots. Most of these lots were
languish in jail pending the resolution of his case. The accused in a criminal case has the right to a occupied by lessees who had contracts of lease which were to expire on December 31,1952, and
swift and just disposition of his case. Lawyers are obliged to protect, not defeat, such right. carried a stipulation to the effect that in the event the owner and lessor should decide to sell the
property the lessees were to be given priority over other buyers if they should desire to buy their
We have considered the explanation of Atty. Briones for his failure to comply with the Court’s leaseholds, all things being equal. Smaller lots were occupied by tenants without formal contract.
directive and we find the same unsatisfactory. Such omission can be attributed to pure negligence
on the part of Atty. Briones which we deem inexcusable. He cannot deny that his office received a In 1940 and 1941 Paz Tuason obtained from Jose Vidal several loans totalling P90,098 and
copy of the Court’s resolution ordering him to submit an appellant’s brief. The registry return card constituted a first mortgage on the aforesaid property to secure the debt. In January and April,
shows that the notice to file appellant’s brief was received by the addressee on August 6, 1998. To 1943, she obtained additional loans of P30,000 and P20,000 upon the same security. On each of
exonerate himself from liability, Atty. Briones claims that his secretary did not forward to him the the last-mentioned occasions the previous contract of mortgage was renewed and the amounts
mail matters received in his office. He, however, cannot pass the blame to his secretary as he is received were consolidated. In the first novated contract the time of payment was fixed at two
personally responsible for his own communications. As a member of the Bar, he is expected to years and in the second and last at four years. New conditions not relevant here were also
exercise due diligence in the practice of his profession. He should not have passively waited for his incorporated into the new contracts.
secretary to inform him about the letters and communications received in his law office, especially
those coming from the courts. He should have taken the initiative to check with her if there are There was, besides, a separate written agreement entitled "Penalidad del Documento de Novacion
important matters requiring his action or attention. Neither is the cessation of his law practice an de Esta Fecha" which, unlike the principal contracts, was not registered. The tenor of this separate
excuse for his failure to file the required brief. Even if it were true that Atty. Briones has stopped agreement, all copies, of which were alleged to have been destroyed or lost, was in dispute and
practicing law, he still could not ignore the directives coming from the Court. It does not appear became the subject of conflicting evidence. The lower court did not make categorical findings on
from the records of G.R. No. 130965 that Atty. Briones has withdrawn his appearance. Unless he this point, however, and it will be our task to do so at the appropriate place in this decision.
has withdrawn his appearance in the case, the Court would still consider him as counsel for the
accused-appellant and he is expected to comply with all its orders and directives. In 1943 Paz Tuason decided to sell the entire property for the net amount of P400,000 and entered
into negotiations with Gregorio Araneta, Inc. for this purpose. The result of the negotiations was
It should be stressed that every case a lawyer accepts deserves his full attention, diligence, skill the execution on October 19, 1943, of a contract called "Promesa de Compra y Venta" and
and competence, regardless of its importance and whether he accepts it for a fee or for free.2 A identified as Exhibit "1." This contract provided that subject to the preferred right of the lessees and
lawyer’s fidelity to the cause of his client requires him to be ever mindful of the responsibilities that that of Jose Vidal as mortgagee, Paz Tuason would sell to Gregorio Araneta, Inc. and the latter
should be expected of him. He is mandated to exert his best efforts to protect within the bounds of would buy for the said amount of P400,000 the entire estate under these terms.
the law the interest of his client. The Code of Professional Responsibility dictates that a lawyer

116
In furtherance of this promise to buy and sell, letters were sent the lessees giving them until Vendor to the Vendee is duly cancelled in the office of the Register of Deeds, or sooner at the
August 31, 1943, an option to buy the lots they occupied at the price and terms stated in said option of the Vendee.
letters. Most of the tenants who held contracts of lease took advantage of the opportunity thus
extended and after making the stipulated payments were giving their deeds of conveyance. These This Deed of Sale is executed by the Vendor free from all liens and encumbrances, with the only
sales, as far as the record would show, have been respected by the seller. exception of the existing lease contracts on parcels Nos. 1, 10, 11, and 16, which lease contracts
will expire on December 31, 1953, with the understanding, however, that this sale is being
With the elimination of the lots sold or be sold to the tenants there remained unencumbered, executed free from any option or right on the part of the lessees to purchase the lots respectively
except for the mortgage to Jose Vidal, Lots 1, 8-16 and 18 which have an aggregate area of leased by them.
14,810.20 square meters; and on December 2, 1943, Paz Tuason and Gregorio Araneta, Inc.
executed with regard to these lots an absolute deed of sale, the terms of which, except in two It is therefore clearly understood that the Vendor will pay the existing mortgage on her property in
respects, were similar to those of the sale to the lessees. This deed, copy of which is attached to favor of Jose Vidal.
the plaintiff's complaint as Exhibit A, provided, among other things, as follows:
The liquidation of the amounts respectively due between the Vendor and the Vendee in connection
The aforesaid lots are being sold by he Vendor to the Vendee separately at the prices mentioned with the rents and real estate taxes as stipulated in paragraph (9) of the contract entitled "Promesa
in paragraph (6) of the aforesaid contract entitled "Promesa de Compra y Venta," making a total de Compara y Venta" will be adjusted between the parties in a separate document.
sum of One Hundred Thirty-Nine Thousand Eighty-three pesos and Thirty-two centavos
(P139,083.32), ninety (90%) per cent of which amount, i.e., the sum of One Hundred Twenty-five Should any of the aforesaid lessees of lots Nos. 2, 3, 4, 5, 6, 7, 9 and 17 fail to carry out their
Thousand One Hundred Seventy-four Pesos and Ninety-nine centavos (P125,174.99), the Vendor respective obligations under the option to purchase exercised by them so that the rights of the
acknowledges to have received by virtue of the advance of One Hundred Ninety Thousand lessee to purchase the respective property leased by him is cancelled, the Vendor shall be bound
(P190,000) Pesos made by the Vendee to the Vendor upon the execution of the aforesaid contract to sell the same to the herein Vendee, Gregorio Araneta, Incorporated, in conformity with the terms
entitled "Promesa de Compra y Venta". The balance of Sixty-Four Thousand Eight Hundred and conditions provided in the aforesaid contract of "Promesa de Compra y Venta";
Twenty-five Pesos and One centavo (P64,825.01) between the sum of P125,174.99, has been
returned by the Vendor to the Vendee, which amount the Vendee acknowledges to have received The documentary stamps to be affixed to this deed will be for the account of the Vendor while the
by these presents; expenses for the registration of this document will be for the account of the Vendee.

The aforesaid sum of P190,000 was delivered by the Vendee to the Vendor by virtue of four The remaining area of the property of the Vendor subject to Transfer Certificates of Title Nos.
checks issued by the Vendee against the Bank of the Philippine Islands, as follows: 60471 and 60472, are lots Nos. 2, 3, 4, 5, 6, 7, 9, and 17, all of the Consolidation of lots Nos. 20
and 117 of plan II-4755, G.L.R.O. Record No. 7680.
No. C-286445 in favor of Paz Tuason de Paterno
Before the execution of the above deed, that is, on October 20, 1943, the day immediately
P13,476.62 following the signing of the agreement to buy and sell, Paz Tuason had offered to Vidal the check
for P143,150 mentioned in Exhibit A, in full settlement of her mortgage obligation, but the
No. C-286444 in favor of the City Treasurer, Manila mortgagee had refused to receive that check or to cancel the mortgage, contending that by the
separate agreement before mentioned payment of the mortgage was not to be effected totally or
3,373.38 partially before the end of four years from April, 1943.

No. C-286443 in favor of Jose Vidal Because of this refusal of Vidal's Paz Tuason, through Atty. Alfonso Ponce Enrile, commenced an
action against the mortgagee in October or the early paret of November 1943. the record of that
30,000.00 case was destroyed and no copy of the complaint was presented in evidence. Attached to the
complaint or deposited with the clerk of court by Attorney Ponce Enrile simultaneously with the
No. C-286442 in favor of Jose Vidal docketing of the suit were the check for P143,150 previously turned down by Vidal, another
certified check for P12,932.61, also drawn by Gregorio Araneta, Inc., in favor of Vidal, and one
143,150.00 ordinary check for P30,000 issued by Paz Tuazon. These three checks were supposed to cover
the whole indebtedness to Vidal including the principal and interest up to that time and the penalty
Total provided in the separate agreement.

P190,000.00 But the action against Vidal never came on for trial and the record and the checks were destroyed
during the war operations in January or February, 1945; and neither was the case reconstituted
afterward. This failure of the suit for the cancellation of Vidal's mortgage, coupled with the
In view of the foregoing liquidation, the vendor acknowledges fully and unconditionally, having destruction of the checks tendered to the mortgagee, the nullification of the bank deposit on which
received the sum of P125,174.99 of the present legal currency and hereby expressly declares that those checks had been drawn, and the tremendous rise of real estate value following the
she will not hold the Vendee responsible for any loss that she might suffer due to the fact that two termination of the war, gave occasion to the breaking off the schemes outlined in Exhibits 1 and A;
of the checks paid to her by the Vendee were issued in favor of Jose Vidal and the latter has, up to Paz Tuason after liberation repudiated them for the reasons to be hereafter set forth. The instant
the present time, not yet collected the same. action was the offshoot, begun by Gregorio Araneta, Inc. to compel Paz Tuason to deliver to the
plaintiff a clear title to the lots described in Exhibit A free from all liens and encumbrances, and a
The ten (10%) per cent balance of the purchase price not yet paid in the total sum of P13,908.33 deed of cancellation of the mortgage to Vidal. Vidal came into the case in virtue of a summon
will be paid by the Vendee to the Vendor when the existing mortgage over the property sold by the issued by order of the court, and filed a cross-claim against Paz Tuazon to foreclose his mortgage.

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It should be stated that the outset that all the parties are in agreement that Vidal's loans are still she had not trusted the said attorneys she would not have been so foolish as to affix her signature
outstanding. Paz Tuason's counsel concede that the tender of payment to Vidal was legally to a contract so one-sided.
defective and did not operate to discharge the mortgage, while the plaintiff is apparently
uninterested in this feature of the case considering the matter one largely between the mortgagor The evidence does not support the defendant. Except in two particulars, Exhibit A was a
and the mortgagee, although to a certain degree this notion is incorrect. At any rate, the points of substantial compliance with Exhibit 1 in furtherance of which Exhibit A was made. One departure
discord between Paz Tuason and Vidal concern only the accrual of interest on the loans, Vidal's was the proviso that 10 per cent of the purchase price should be paid only after Vidal's mortgage
claim to attorney's fees, and the application of the debt moratorium law which the debtor now should have been cancelled. This provisional deduction was not onerous or unusual. It was not
invokes. These matters will be taken up in the discussion of the controversy between Paz Tuason onerous or unusual that the vendee should withhold a relatively small portion of the purchase price
and Jose Vidal. before all the impediments to the final consummation of the sale had been removed. The tenants
who had bought their lots had been granted the privilege to deduct as much as 40 per cent of the
The principal bone of contention between Gregorio Araneta, Inc., and Paz Tuason was the validity stipulated price pending discharge of the mortgage, although his percentage was later reduced to
of the deed of sale of Exhibit A on which the suit was predicated. The lower court's judgment was 10 as in the case of Gregorio Araneta, Inc. It has also been that the validity of the sales to the
that this contract was invalid and was so declared, "sin per juicio de que la demandada Paz tenants has not been contested; that these sales embraced in the aggregate 24,245.40 square
Tuason de Paterno pague a la entidad demandante todas las cantidades que habia estado meters for P260,916.68 as compared to 14,811.20 square meters sold to Gregorio Araneta, Inc.
recibiendo de lareferida entidad demandante, en concepto de pago de losterrenos, en moneda for P139,083.32; that the seller has already received from the tenant purchasers 90 per cent of the
corriente, segun el cambio que debiaregir al tiempo de otorgarse la escritura segun la escalade purchase money.
"Ballentine", descontando, sin embargo, de dichas cantidades cualesquiera que la demandante
haya estadorecibiendo como alquileres de los terrenos supuestamentevendidos a ella." The court There is good reason to believe that had Gregorio Araneta, Inc. not insisted on charging to the
based its opinion that Exhibit 1. His Honor, Judge Sotero Rodas, agreedwith the defendant that defendant the loss of the checks deposited with the court, the sale in question would have gone
under paragraph 8 of Exhibit 1 there was to be no absolute sale to Gregorio Araneta, Inc., unless the smooth way of the sales to the tenants. Thus Dindo Gonzales, defendant's son, declared:
Vidal's mortgage was cancelled.
P. Despues de haberse presentado esta demanda, recuerda usted haber tenido conversacion con
In our opinion the trial court was in error in its interpretation of Exhibit 1. The contemplated Salvador Araneta acerca de este asunto?
execution of an absolute deed of sale was not contingent on the cancellation of Vidal's mortgage.
What Exhibit 1 did provide (eleventh paragraph) was that such deed of absolute sale should be R. Si Señor.
executed "una vez determinado los lotes que Paz Tuason podra vender a Gregorio Araneta, Inc."
The lots which could be sold to Gregorio Araneta, Inc. were definitely known by October 31, 1943, P. Usted fue quien se acerco al señor Salvador Araneta?
which was the expiry of the tenants' option to buy, and the lots included in the absolute of which
the occupants' option to buy lapsed unconditionally. Such deed as Exhibit A was then in a R. Si, señor.
condition to be made.
P. Quiero usted decir al Honorable Juzgado que era lo que usted dijo al señor Salvador Araneta?
Vidal's mortgage was not an obstacle to the sale. An amount had been set aside to take care of it,
and the parties, it would appear, were confident that the suit against the mortgagee would R. No creo que es propio que yo diga, por tratarse de mi madre.
succeed. The only doubt in their minds was in the amount to which Vidal was entitled. The failure
of the court to try and decide that the case was not foreseen either. P. En otras palabras, usted quiere decir que no quiere usted que se vuelva decir o repetir ante
este Honorable Juzgado lo que usted dijo al señor Salvador Araneta, pues, se trata de su madre?
This refutes, were think, the charge that there was undue rush on the part of the plaintiff to push
across the sale. The fact that simultaneously with Exhibit A similar deeds were given the lessees R. No, señor.
who had elected to buy their leaseholds, which comprise an area about twice as big as the lots
described in Exhibit A, and the further fact that the sale to the lessees have never been questioned P. Puede usted decirnos que quiso usted decir cuando que no quisiera decir?
and the proceeds thereof have been received by the defendant, should add to dispel any suspicion
of bad faith on the part of the plaintiff. If anyone was in a hurry it could have been the defendant. R. Voy a decir lo que Salvador Araneta, yo me acerque a Don Salvador Araneta, y yo le dije que
The clear preponderance of the evidence that Paz Tuason was pressed for cash and that the es una verguenza de que nosotros, en la familia tengamos que ir a la Corte por este, y tambien
payment of the mortgage was only an incident, or a necessary means to effectuate the sale. dije que mi madre de por si quiere vender el terreno a ellos, porque mi madre quiere pagar al
Otherwise she could have settled her mortgage obligation merely by selling a portion of her estate, señor Vidal, y que es una verguenza, siendo entre parientes, tener que venir por este; era lo que
say, some of the lots leased to tenants who, except two who were in concentration camps, were yo dije al señor Salvador Araneta.
only too anxious to buy and own the lots on which their houses were built.
xxx xxx xxx
Whatever the terms of Exhibit 1, the plaintiff and the defendant were at perfect liberty to make a
new agreement different from or even contrary to the provisions of that document. The validity of P. No recuerda usted tambien dijo al señor Salvador Araneta que usted no comulgaba con ella (su
the subsequent sale must of necessity depend on what it said and not on the provisions of the madre) en este asunto?
promise to buy and sell.
R. Si, Señor; porque yo creia que mi madre solamente queria anular esta venta, pero cuando me
It is as possible proof or fraud that the discrepancies between the two documents bear some dijo el señor La O y sus abogados que, encima de quitar la propiedad, todavia tendria ella que
attention. It was alleged that Attorneys Salvador Araneta and J. Antonio Araneta who the pagar al señor Vidal, este no veso claro.
defendant said had been her attorneys and had drawn Exhibit A, and not informed or had
misinformed her about its contents; that being English, she had not read the deed of sale; that if xxx xxx xxx

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P. Ahora bien; de tal suerte que, tal como nosotros desperendemos de su testimonio, tanto, usted in consideration of Jose Araneta's services rendered to her, to assign to him all her right, title and
como, su madre, esteban muy conformes en la venta, es asi? interest to and in certain lots not embraced in the sales to Gregorio Araneta, Inc. or the tenants.

R. Si, señor. However, the trial court hypothetically admitting the existence of the relation of principal and agent
between Paz Tuason and Jose Araneta, pointed out that not Jose Araneta but Gregorio Araneta,
The other stipulation embodied in Exhibit A which had no counterpart in Exhibit 1 was that by Inc. was the purchaser, and cited the well-known distinction between the corporation and its
which Gregorio Araneta Inc. would hold Paz Tuason liable for the lost checks and which, as stated, stockholders. In other words, the court opined that the sale to Gregorio Araneta, Inc. was not a
appeared to be at the root of the whole trouble between the plaintiff and the defendant. sale to Jose Araneta the agent or broker.

The stipulation reads: The defendant would have the court ignore this distinction and apply to this case the other well-
known principle which is thus stated in 18 C.J.S. 380: "The courts, at law and in equity, will
In view of the foregoing liquidation, the Vendor acknowledges fully and unconditionally, having disregard the fiction of corporate entity apart from the members of the corporation when it is
received the sum of P125,174.99 of the present legal currency and hereby expressly declares that attempted to be used as a means of accomplishing a fraud or an illegal act.".
she will not hold the Vendee responsible for any loss that she might suffer due to the fact that two
of the checks paid to her by the Vendee were used in favor of Jose Vidal and the latter has, up to It will at once be noted that this principle does not fit in with the facts of the case at bar. Gregorio
the present time, not yet collected the same. Araneta, Inc. had long been organized and engaged in real estate business. The corporate entity
was not used to circumvent the law or perpetrate deception. There is no denying that Gregorio
It was argued that no person in his or her right senses would knowingly have agreed to a covenant Araneta, Inc. entered into the contract for itself and for its benefit as a corporation. The contract
so iniquitous and unreasonable. and the roles of the parties who participated therein were exactly as they purported to be and were
fully revealed to the seller. There is no pretense, nor is there reason to suppose, that if Paz
In the light of all the circumstances, it is difficult to believe that the defendant was deceived into Tuason had known Jose Araneta to Gregorio Araneta, Inc's president, which she knew, she would
signing Exhibit A, in spite of the provision of which she and her son complaint. Intelligent and well not have gone ahead with the deal. From her point of view and from the point of view of public
educated who had been managing her affairs, she had an able attorney who was assisting her in interest, it would have made no difference, except for the brokerage fee, whether Gregorio
the suit against Vidal, a case which was instituted precisely to carry into effect Exhibit A or Exhibit Araneta, Inc. or Jose Araneta was the purchaser. Under these circumstances the result of the
1, and a son who is leading citizen and a business-man and knew the English language very well if suggested disregard of a technicality would be, not to stop the commission of deceit by the
she did not. Dindo Gonzalez took active part in, if he was not the initiator of the negotiations that purchaser but to pave the way for the evasion of a legitimate and binding commitment buy the
led to the execution of Exhibit 1, of which he was an attesting witness besides. If the defendant seller. The principle invoked by the defendant is resorted to by the courts as a measure or
signed Exhibit A without being apprised of its import, it can hardly be conceived that she did not protection against deceit and not to open the door to deceit. "The courts," it has been said, "will not
have her attorney or her son read it to her afterward. The transaction involved the alienation of ignore the corporate entity in order to further the perpetration of a fraud." (18 C.J.S. 381.)
property then already worth a fortune and now assessed by the defendant at several times higher.
Doubts in defendant's veracity are enhanced by the fact that she denied or at least pretended in The corporate theory aside, and granting for the nonce that Jose Araneta and Gregorio Araneta,
her answer to be ignorant of the existence of Exhibit A, and that only after she was confronted with Inc. were identical and that the acts of one where the acts of the other, the relation between the
the signed copy of the document on the witness did she spring up the defense of fraud. It would defendant and Jose Araneta did not fall within the purview of article 1459 of the Spanish Civil
look as if she gambled on the chance that no signed copy of the deed had been saved from the Code.1
war. She could not have forgotten having signed so important a document even if she had not
understood some of its provisions. Agency is defined in article 1709 in broad term, and we have not come across any commentary or
decision dealing directly with the precise meaning of agency as employed in article 1459. But in
From the unreasonableness and inequity of the aforequoted Exhibit A it is not to be presumed that the opinion of Manresa(10 Manresa 4th ed. 100), agent in the sense there used is one who
the defendant did not understand it. It was highly possible that she did not attach much importance accepts another's representation to perform in his name certain acts of more or less
to it, convinced that Vidal could be forced to accept the checks and not foreseeing the fate that lay transcendency, while Scaevola (Vol. 23, p. 403) says that the agent's in capacity to buy his
in store for the case against the mortgagee. principal's property rests in the fact that the agent and the principal form one juridicial person. In
this connection Scaevola observes that the fear that greed might get the better of the sentiments of
Technical objections are made against the deed of sale. loyalty and disinterestedness which should animate an administrator or agent, is the reason
underlying various classes of incapacity enumerated in article 1459. And as American courts
First of these is that Jose Araneta, since deceased, was defendant's agent and at the same time commenting on similar prohibition at common law put it, the law does not trust human nature to
the president of Gregorio Araneta, Inc. resist the temptations likely to arise of antogonism between the interest of the seller and the buyer.

The trial court found that Jose Araneta was not Paz Tuason's agent or broker. This finding is So the ban of paragraph 2 of article 1459 connotes the idea of trust and confidence; and so where
contrary to the clear weight of the evidence, although the point would be irrelevant, if the court the relationship does not involve considerations of good faith and integrity the prohibition should
were right in its holding that Exhibit A was void on another ground, i.e., it was inconsistent with not and does not apply. To come under the prohibition, the agent must be in a fiduciary with his
Exhibit 1. principal.

Without taking into account defendant's Exhibit 7 and 8, which the court rejected and which, in our Tested by this standard, Jose Araneta was not an agent within the meaning of article 1459. By
opinion, should have been admitted, Exhibit 1 is decisive of the defendant's assertion. In Exhibits 7 and 8 he was to be nothing more than a go-between or middleman between the
paragraph 8 of Exhibit 1 Jose Araneta was referred to as defendant's agent or broker "who acts in defendant and the purchaser, bringing them together to make the contract themselves. There was
this transaction" and who as such was to receive a commission of 5 per cent, although the no confidence to be betrayed. Jose Araneta was not authorize to make a binding contract for the
commission was to be charged to the purchasers, while in paragraph 13 the defendant promised, defendant. He was not to sell and he did not sell the defendant's property. He was to look for a
buyer and the owner herself was to make, and did make, the sale. He was not to fix the price of
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the sale because the price had been already fixed in his commission. He was not to make the occupation and in Japanese currency," the checks "became obsolete as the account subject
terms of payment because these, too, were clearly specified in his commission. In fine, Jose thereto is considered null and void in accordance with Executive Order No. 49 of the President of
Araneta was left no power or discretion whatsoever, which he could abuse to his advantage and to the Philippines", according to the Bank.
the owner's prejudice.
Whether the Bank of the Philippines could lawfully limit the negotiability of certified checks to a
Defendant's other ground for repudiating Exhibit A is that the law firm of Araneta & Araneta who period less than the period provided by the Statute of Limitations does not seem material. The
handled the preparation of that deed and represented by Gregorio Araneta, Inc. were her attorneys limitation imposed by the Bank as to time would adversely affect the payee, Jose Vidal, who is not
also. On this point the trial court's opinion is likewise against the defendant. trying to recover on the instruments but on the contrary rejected them from the outset, insisting that
the payment was premature. As far as Vidal was concerned, it was of no importance whether the
Since attorney Ponce Enrile was the defendant's lawyer in the suit against Vidal, it was not likely certification was or was not restricted. On the other hand, neither the plaintiff nor the defendant
that she employed Atty. Salvador Araneta and J. Antonio Araneta as her attorneys in her dealings now insists that Vidal should present, or should have presented, the checks for collection. They in
with Gregorio Araneta, Inc., knowing, as she did, their identity with the buyer. If she had needed fact agree that the offer of those checks to Vidal did not, for technical reason, work to wipe out the
legal counsels, in this transaction it seems certain that she would have availed herself of the mortgage.
services of Mr. Ponce Enrile who was allegedly representing her in another case to pave the way
for the sale. But as to Gregorio Araneta and Paz Tuason, the conditions specified in the certification and the
prevailing regulations of the Bank were the law of the case. Not only this, but they were aware of
The fact that Attys. Salvador and Araneta and J. Antonio Araneta drew Exhibits 1 and A, undertook and abided by those regulations and practice, as instanced by the fact that the parties presented
to write the letters to the tenants and the deeds of sale to the latter, and charged the defendant the testimony to prove those regulations and practice. And that Gregorio Araneta, Inc. knew that Vidal
corresponding fees for all this work, did not themselves prove that they were the seller's attorneys. had not cashed the checks within 90 days is not, and could not successfully be denied.
These letters and documents were wrapped up with the contemplated sale in which Gregorio
Araneta, Inc. was interested, and could very well have been written by Attorneys Araneta and In these circumstances, the stipulation in Exhibit A that the defendant or seller "shall not hold the
Araneta in furtherance of Gregorio Araneta's own interest. In collecting the fees from the defendant vendee responsible for any loss of these checks" was unconscionable, void and unenforceable in
they did what any other buyer could have appropriately done since all such expenses normally so far as the said stipulation would stretch the defendant's liability for this checks beyond 90 days.
were to be defrayed by the seller. It was not in accord with law, equity or good conscience to hold a party responsible for something
he or she had no access to and could not make use of but which was under the absolute control
Granting that Attorney Araneta and Araneta were attorneys for the defendant, yet they were not and disposition of the other party. To make Paz Tuason responsible for those checks after they
forbidden to buy the property in question. Attorneys are only prohibited from buying their client's expired and when they were absolutely useless would be like holding an obligor to answer for the
property which is the subject of litigation. (Art. 1459, No. 5, Spanish Civil Code.) The questioned loss or destruction of something which the obligee kept in its safe with no power given the obligor
sale was effected before the subject thereof became involved in the present action. There was to protect it or interfere with the obligee's possession.
already at the time of the sale a litigation over this property between the defendant and Vidal, but
Attys. Salvador Araneta and J. Antonio Araneta were not her attorneys in that case. To the extent that the contract Exhibit A would hold the vendor responsible for those checks after
they had lapsed, the said contract was without consideration. The checks having become
From the pronouncement that Exhibit A is valid, however, it does not follow that the defendant obsolete, the benefit in exchange for which the defendant had consented to be responsible for
should be held liable for the loss of the certified checks attached to the complaint against Vidal or them had vanished. The sole motivation on her part for the stipulation was the fact that by the
deposited with the court, or of the funds against which they had been issued. The matter of who checks the mortgage might or was to be released. After 90 days the defendant stood to gain
should bear this loss does not depend upon the validity of the sale but on the extent and scope of absolutely nothing by them, which had become veritable scraps of paper, while the ownership of
the clause hereinbefore quoted as applied to the facts of the present case. the deposit had reverted to the plaintiff which alone could withdraw and make use of it.

The law and the evidence on this branch of the case revealed these facts, of some of which What the plaintiff could and should have done if the disputed stipulation was to be kept alive was
passing mention has already been made. to keep the funds accessible for the purpose of paying the mortgage, by writing new checks either
to Vidal or to the defendant, as was done with the check for P30,000, or placing the deposit at the
The aforesaid checks, one for P143,150 and one for P12,932.61, were issued by Gregorio defendant's disposal. The check for P30,000 intended for the penalty previously had been issued
Araneta, Inc. and payable to Vidal, and were drawn against the Bank of the Philippines with which in the name of Vidal and certified, too, but by mutual agreement it was changed to an ordinary
Gregorio Araneta, Inc. had a deposit in the certification stated that they were to be "void if not check payable to Paz Tuason. Although that check was also deposited with the court and lost, its
presented for payment date of acceptance" office (Bank) within 90 days from date of acceptance." loss undoubtedly was imputable to the defendant's account, and she did not seem to disown her
liability for it.
Under banking laws and practice, by the clarification" the funds represented by the check were
transferred from the credit of the maker to that of the payee or holder, and, for all intents and Let it be remembered that the idea of certifying the lost checks was all the plaintiff's. The plaintiff
purposes, the latter became the depositor of the drawee bank, with rights and duties of one such would not trust the defendant and studiously so arranged matters that she could not by any
relation." But the transfer of the corresponding funds from the credit of the depositor to that of that possibility put a finger on the money. For all the practical intents and purposes the plaintiff dealt
of the payee had to be co-extensive with the life of the checks, which in the case was 90 days. If directly with the mortgagee and excluded the defendant from meddling in the manner of payment
the checks were not presented for payment within that period they became invalid and the funds to Vidal. And let it also be kept in mind that Gregorio Araneta, Inc. was not a mere accommodator
were automatically restored to the credit of the drawer though not as a current deposit but as in writing these checks. It was as much interested in the cancellation of the mortgage as Paz
special deposit. This is the consensus of the evidence for both parties which does not materially Tuason.
differ on this proposition.
Coming down to Vidal's cross-claim Judge Rodas rendered no judgment other than declaring that
The checks were never collected and the account against which they were drawn was not used or the mortgage remained intact and subsisting. The amount to be paid Vidal was not named and the
claimed by Gregorio Araneta, Inc.; and since that account "was opened during the Japanese question whether interest and attorney's fees were due was not passed upon. The motion for
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reconsideration of the decision by Vidal's attorney's praying that Paz Tuason be sentenced to pay
the creditor P244,917.90 plus interest at the rate of 1 percent monthly from September 10, 1948 Vidal introduced oral evidence to the effect that he reserved unto himself in that agreement the
and that the mortgaged property be ordered sold in case of default within 90 days, and another right "to accept or refuse the total payment of the loan outstanding . . ., if at the time of such offer
motion by the defendant seeking specification of the amount she had to pay the mortgagee were of payment he considered it advantageous to his interest." This was gist of Vidal's testimony and
summarily denied by Judge Potenciano Pecson, to whom the motions were submitted, Judge that of Lucio M. Tiangco, one of Vidal's former attorneys who, as notary public, had authenticated
Rodas by that time having been appointed to the Court of Appeals. the document. Vidal's above testimony was ordered stricken out as hearsay, for Vidal was blind
and, according to him, only had his other lawyer read the document to him.
All the facts and evidence on this subject are on the record, however, and we may just as well
determine from these facts and evidence the amount to which the mortgagee is entitled, instead of We are of the opinion that the court erred in excluding Vidal's statement. There is no reason to
remanding the case for new trial, if only to avoid further delay if the disposition of this case. suspect that Vidal's attorney did not correctly read the paper to him. The reading was a
contemporaneous incident of the writing and the circumstances under which the document was
It is obvious that Vidal had a right to judgment for his credit and to foreclose the mortgage if the read precluded every possibility of design, premeditation, or fabrication.
credit was not paid.
Nevertheless, Vidal's testimony, like the testimony of Lucio M. Tiangco's, was based on
There is no dispute as to the amount of the principal and there is agreement that the loans made in recollection which, with the lapse of time, was for from infallible. By contrast, the testimony of
1943, in Japanese war notes, should be computed under the Ballantyne conversion table. As has Attorneys Ponce Enrile, Salvador Araneta, and J. Antonio Araneta does not suffer from such
been said, where the parties do not see eye-to-eye was in regard to the mortgagee's claim to weakness and is entitled to full faith and credit. The document was the subject of a close and
attorney's fees and interest from October, 1943, which was reached a considerable amount. It was concerted study on their part with the object of finding the rights and obligations of the mortgagee
contended that, having offered to pay Vidal her debt in that month, the defendant was relieved and the mortgagor in the premises and mapping out the course to be pursued. And the results of
thereafter from paying such interest. their study and deliberation were translated into concrete action and embodied in a letter which
has been preserved. In line with the results of their study, action was instituted in court to compel
It is to be recalled that Paz Tuason deposited with the court three checks which were intended to acceptance by Vidal of the checks consigned with the complaint, and before the suit was
cover the principal and interest up to October, 1943, plus the penalty provided in the instrument commenced, and with the document before him, Atty. Ponce Enrile, in behalf of his client, wrote
"Penalidad del Documento de Novacion de Esta Fecha." The mortgagor maintains that although Vidal demanding that he accept the payment and execute a deed of cancellation of the mortgage.
these checks may not have constituted a valid payment for the purpose of discharging the debt, In his letter Atty. Ponce Enrile reminded Vidal that the recital in the "Penalidad del Documento de
yet they did for the purpose of stopping the running of interest. The defendant draws attention to Novacion de Esta Fecha" was "to the effect that should the debtor wish to pay the debt before the
the following citations: expiration of the period the reinstated (two years) such debtor would have to pay, in addition to
interest due, the penalty of P30,000 — this is in addition to the penalty clause of 10 per cent of the
An offer in writing to pay a particular sum of money or to deliver a written instrument or specific total amount due inserted in the document of mortgage of January 20, 1943."
personal property is, if rejected, equivalent to the actual production and tender of the money,
instrument or property. (Sec. 24, Rule 123.) Atty. Ponce Enrile's concept of the agreement, formed after mature and careful reading of it, jibes
with the only possible reason for the insertion of the penalty provision. There was no reason for the
It is not accord with either the letter or the spirit of the law to impose upon the person affecting a penalty unless it was for defendant's paying her debt before the end of the agreed period. It was to
redemption of property, in addition to 12 per cent interest per annum up to the time of the offer to Vidal's interest that the mortgage be not settled in the near future, first, because his money was
redeem, a further payment of 6 per cent per annum from the date of the officer to redeem. (Fabros earning good interest and was guaranteed by a solid security, and second, which was more
vs. Villa Agustin, 18 Phil., 336.) important, he, in all probability, shared the common belief that Japanese war notes were headed
for a crash and that four years thence, judging by the trends of the war, the hostilities would be
A tender by the debtor of the amount of this debt, if made in the proper manner, will suspend the over.
running of interest on the debt for the time of such tender. (30 Am. Jur., 42.)
To say, as Vidal says, that the debtor could not pay the mortgage within four years and, at the
In the case of Fabrosa vs. Villa Agustin, supra, a parcel of land had been sold on execution to one same time, that there would be penalty if she paid after that period, would be a contradiction.
Tabliga. Within the period of redemption Fabros, to whom the land had been mortgaged by the Moreover, adequate remedy was provided for failure to pay or after the expiration of the mortgage:
execution debtor, had offered to redeem the land from the execution creditor and purchaser at increased rate or interest, foreclosure of the mortgage, and attorney's fees.
public auction. The trial court ruled that the redemptioner was not obliged to pay the stipulated
interest of 12 per cent after he offered to redeem the property; nevertheless he was sentenced to It is therefore to be concluded that the defendant's offer to pay Vidal in October, 1943, was in
pay 6 per cent interest from the date of the offer. accordance with the parties' contract and terminated the debtor's obligation to pay interest. The
technical defects of the consignation had to do with the discharge of the mortgage, which is
This court on appeal held that "there is no reason for this other (6 per cent) interest, which appears conceded on all sides to be still in force because of the defects. But the matter of the suspension
to be a penalty for delinquency while there was no delinquency." The court cited an earlier of the running of interest on the loan stands of a different footing and is governed by different
decision, Martinez vs. Campbell, 10 Phil., 626, where this doctrine was laid down: "When the right principles. These principles regard reality rather than technicality, substance rather than form.
of redemption is exercised within the term fixed by section 465 of the Code of Civil Procedure, and Good faith of the offer or and ability to make good the offer should in simple justice excuse the
an offer is made of the amount due for the repurchase of the property to which said right refers, it debtor from paying interest after the offer was rejected. A debtor can not be considered delinquent
is neither reasonable nor just that the repurchaser should pay interest on the redemption money who offered checks backed by sufficient deposit or ready to pay cash if the creditor chose that
after the time when he offered to repurchase and tendered the money therefor." means of payment. Technical defects of the offer cannot be adduced to destroy its effects when
the objection to accept the payment was based on entirely different grounds. If the creditor had
In the light of these decisions and law, the next query is; Did the mortgagor have the right under told the debtor that he wanted cash or an ordinary check, which Vidal now seems to think Paz
the contract to pay the mortgage on October 20, 1943? The answer to this question requires an Tuason should have tendered, certainly Vidal's wishes would have been fulfilled, gladly.
inquiry into the provision of the "Penalidad del Documento de Novacion de Esta Fecha."
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The plain truth was that the mortgagee bent all his efforts to put off the payment, and thanks to the There shall be no special judgments as to costs of either instance.
defects which he now, with obvious inconsistency, points out, the mortgage has not perished with
the checks. Paras, C.J., Pablo, Bengzon, Padilla, Bautista Angelo and Labrador, JJ., concur.

Falling within the reasons for the stoppage of interest are attorney's fees. In fact there is less merit
in the claim for attorney's fees than in the claim for interest; for the creditor it was who by his RESOLUTION
refusal brought upon himself this litigation, refusal which, as just shown, resulted greatly to his
benefit. December 22, 1952

Vidal, however, is entitled to the penalty, a point which the debtor seems to a grant. The TUASON, J.:
suspension of the running of the interest is premised on the thesis that the debt was considered
paid as of the date the offer to pay the principal was made. It is precisely the mortgagor's The motion for reconsideration of the plaintiff, Gregorio Araneta, Inc., and the defendant, Paz
contention that he was to pay said penalty if and when she paid the mortgage before the expiration Tuason de Paterno, are in large part devoted to the question, extensively discussed in the
of the four-year period provided in the mortgage contract. This penalty was designed to take the decision, of the validity of the contract of sale Exhibit A. The arguments are not new and at least
place of the interest which the creditor would be entitled to collect if the duration of the mortgage were given due consideration in the deliberation and study of the case. We find no reason for
had not been cut short and from which interest the debtor has been relieved. "In obligations with a disturbing our decision on this phase of the case.
penalty clause the penalty shall substitute indemnity for damages and the payment of interest. . ."
(Art. 1152, Civil Code of Spain.). The plaintiff-appellant's alternative proposition — to wit: "Should this Honorable Court declare that
the purchase price was not paid and that plaintiff has to bear the loss due to the invalidation of the
To summarize, the following are our findings and decision: occupation currency, its loss should be limited to: (a) the purchase price of P139,083.32 less
P47,825.70 which plaintiff paid and the defendant actually collected during the occupation, or the
The contract of sale Exhibit A was valid and enforceable, but the loss of the checks for P143,150 sum of P92,233.32, or at most, (b) the purchase price of the lot in the sum of P139,083.32," — as
and P12,932.61 and invalidation of the corresponding deposit is to be borne by the buyer. well as the alleged over-payment by the defendant-appellee, may be taken up in the liquidation
Gregorio Araneta, Inc. the value of these checks as well as the several payments made by Paz under the reservation in the judgment that "the court (below) shall hold a rehearing for the purpose
Tuason to Gregorio Araneta, Inc. shall be deducted from the sum of P190,000 which the buyer of liquidation as herein provided" and "shall also hear and decide all other controversies relative to
advanced to the seller on the execution of Exhibit 1. the liquidation which may have been overlooked in this decision, in the manner not inconsistent
with the above findings and judgment."
The buyer shall be entitled to the rents on the land which was the subject of the sale, rents which
may have been collected by Paz Tuason after the date of the sale. These payments and disbursement are matters of accounting which, not having been put directly
in issue or given due attention at the trial and in the appealed decision, can better be treshed out in
Paz Tuason shall pay Jose Vidal the amount of the mortgage and the stipulated interest up to the proposed rehearing where each party will have an opportunity to put forward his views and
October 20,1943, plus the penalty of P30,000, provided that the loans obtained during the reasons, with supporting evidence if necessary, on how the various items in question should be
Japanese occupation shall be reduced according to the Ballantyne scale of payment, and provided regarded and credited, in the light of our decision.
that the date basis of the computation as to the penalty is the date of the filing of the suit against
Vidal. As to Jose Vidal's motion: There is nothing to add to or detract from what has been said in the
decision relative to the interest on the loans and attorney's fees. There are no substantial features
Paz Tuason shall pay the amount that shall have been found due under the contracts of mortgage of the case that have not been weighed carefully in arriving at our conclusions. It is our considered
within 90 days from the time the court's judgment upon the liquidation shall have become final, opinion that the decision is in accord with law, reason and equity.
otherwise the property mortgaged shall be ordered sold provided by law.
The vehement protest that this court should not modify the conclusion of the lower court on interest
Vidal's mortgage is superior to the purchaser's right under Exhibit A, which is hereby declared and attorney's fees is actually and entirely contrary to the cross-claimant's own suggestion in his
subject to said mortgage. Should Gregorio Araneta, Inc. be forced to pay the mortgage, it will be brief. From page 20 of his brief, we copy these passages:
subrogated to the right of the mortgagee.
We submit that this Honorable Court is in a position now to render judgment in the foreclosure of
This case will be remanded to the court of origin with instruction to hold a rehearing for the mortgage suit as no further issue of fact need be acted upon by the trial court. Defendant Paz
purpose of liquidation as herein provided. The court also shall hear and decide all other Tuason has admitted the amount of capital due. That is a fact. She only requests that interest be
controversies relative to the liquidation which may have been overlooked at this decision, in a granted up to October 20,1943, and that the moratorium law be applied. Whether this is possible
manner not inconsistent with the above findings and judgment. or not is a legal question, which can be decided by this court. Unnecessary loss of time and
expenses to the parties herein will be avoided by this Honorable Court by rendering judgment in
The mortgagor is not entitled to suspension of payment under the debt moratorium law or orders. the foreclosure of mortgage suit as follows:
Among other reasons: the bulk of the debt was a pre-war obligation and the moratorium as to such
obligations has been abrogated unless the debtor has suffered war damages and has filed claim xxx xxx xxx
for them; there is no allegation or proof that she has. In the second place, the debtor herself
caused her creditor to be brought into the case which resulted in the filing of the cross-claim to In reality, the judgment did not adjudicate the foreclosure of the mortgage nor did it fix the amount
foreclose the mortgage. In the third place, prompt settlement of the mortgage is necessary to the due on the mortgage. The pronouncement that the mortgage was in full force and effect was a
settlement of the dispute and liquidation between Gregorio Araneta, Inc. and Paz Tuason. If for no conclusion which the mortgagor did not and does not now question. There was therefore virtually
other reason, Paz Tuason would do well to forego the benefits of the moratorium law. no decision that could be executed.

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Vidal himself moved in the Court of First Instance for amendment of the decision alleging, 7. Agent vs Loan
correctly, that "the court failed to act on the cross-claim of Jose Vidal dated April 22, 1947, where
he demanded foreclosure of the mortgage . . . ." That motion like Paz Tuason's motion to complete 40. [G.R. No. L-29432. August 6, 1975.]
the judgment, was summarily denied.
JAI-ALAI CORPORATION OF THE PHILIPPINES, Petitioner, v. BANK OF THE PHILIPPINE
In strict accordance with the procedure, the case should have been remanded to the court of origin ISLAND, Respondent.
for further proceedings in the form stated by Paz Tuason's counsel. Both the mortgagor and the
mortgagee agree on this. We did not follow the above course believing it best, in the interest of the
parties themselves and following Vidal's attorney's own suggestion, to decide the controversies SYNOPSIS
between Vidal and Paz Tuason upon the records and the briefs already submitted.
Petitioner deposited in its current account with respondent bank several checks with a total face
The three motions for reconsideration are denied. value of P8,030.58, all acquired from Antonio J. Ramirez, a regular bettor at the jai-alai games and
a sale agent of the Inter-Island Gas Service, Inc., the payee of the checks. The deposits were all
Paras, C.J., Pablo, Bengzon, Padilla, Montemayor, Jugo, Bautista Angelo and Labrador, JJ., temporarily credited to petitioner’s account in accordance with the clause printed on the bank’s
concur. deposit slip. Subsequently, Ramirez resigned and after the checks had been submitted to inter-
bank clearing, the Inter-Island Gas discovered that all the indorsement made on the cheeks
purportedly by its cashiers, as well as the rubber stamp impression thereon reading "Inter-Island
RESOLUTION Gas Service, Inc.", were forgeries. It informed petitioner, the respondent, the drawers and the
drawee banks of the said checks and forgeries and filed a criminal complaint against its former
January 26, 1953 employee. In view of these circumstances, the respondent Bank debited the petitioner’s current
account and forwarded to the latter the checks containing the forged indorsements, which
TUASON, J.: petitioner refused to accept. Later, petitioner drew against its current account a check for
P135,000.00. This check was dishonored by respondent as its records showed that petitioner’s
In the second motion for reconsideration by defendant-appellee it is urged that the sale be balance after netting out the value of the checks with the forged indorsement, was insufficient to
resolved for failure of plaintiff-appellant to pay the entire purchase price of the property sold. cover the value of the check drawn. A complaint was filed by petitioner with the Court of First
Instance of Manila. The same was dismissed by the said court after due trial, as well as by the
Rescission of the contract, it is true, was alternative prayer in the cross-complaint, but the trial Court of Appeals, on appeal. Hence, this petition for review.
court declared the sale void in accordance with the main contention of the defendant, and passed
no judgment on the matter of rescission. For this reason, and because rescission was not pressed The Supreme Court ruled that respondent acted within legal bounds when it debited petitioner’s
on appeal, we deemed unnecessary, if not uncalled for, any pronouncement touching this point. account; that the payments made by the drawee banks to the respondent on account of the checks
with forged indorsements were ineffective; that on account thereof, no creditor-debtor relationship
In the second place, the nonpayment of a portion, albeit big portion, of the price was not, in our was created between the parties; that petitioner was grossly recreant in accepting the checks in
opinion, such failure as would justify recission under Articles 1124 and 1505 et seq. of the Civil question from Ramirez without making any inquiry as to authority to exchange checks belonging to
Code of Spain, which was still in force when this case was tried. "The general rule is that recission the payee-corporation; and that petitioner, in indorsing the said checks when it deposited them
will not be permitted for a slight or casual breach of the contract, but only for such breaches as are with respondent, guaranteed the genuineness of all prior indorsement thereon so that the
so substantial and fundamental as to defeat the object of the parties." (Song Fo & Co. vs. respondent, which relied upon its warranty, cannot be held liable for the resulting loss.
Hawaiian-Philippine Co., 47 Phil., 821, 827.)
Judgment affirmed
In the present case, the vendee did not fail or refuse to pay by plan or design, granting there was
failure or refusal to pay. As a matter of fact, the portion of the purchase price which is said not to
have been satisfied until now was actually received by checks by the vendor and deposited by her SYLLABUS
with the court in the suit against Vidal, in accordance with the understanding if not express
agreement between vendor and vendee. The question of who should bear the loss of this amount,
the checks having been destroyed and the funds against which they were drawn having become of 1. NEGOTIABLE INSTRUMENT; CHECKS; FORGED INDORSEMENTS EFFECT. — A forged
no value, was one of the most bitterly debated issues, and in adjudging the vendee to be the party signature in a negotiable instrument makes it wholly inoperative and no right to discharge it or
to shoulder the said loss and ordering the said vendee to pay the amount to the vendor, this enforce its payment can be acquired through or under the forged signature except against a party
Court's judgment was not, and was not intended to be, in the nature of an extension of time of who cannot invoke the forgery.
payment. In contemplation of the Civil Code there was no default, except possibly in connection
with the alleged overcharges by the vendee arising from honest mistakes of accounting, mistakes 2. ID.; ID.; ID.; NO RELATION OF CREDITOR-DEBTOR BETWEEN THE PARTIES CREATED
which, by our decision, are to be corrected in a new trial thereby ordered. EVEN IF DEPOSITARY OR COLLECTING BANK HAD ALREADY COLLECTED THE
PROCEEDS OF THE CHECKS WHEN IT DEBITED PETITIONER’S ACCOUNT; REASON. —
The second motion for reconsideration is, therefore, denied. Where the indorsement made on the checks were forged prior to their delivery to depositor, the
payments made by the drawee-banks to the collecting bank on account of the said checks were
ineffective. Such being the case, the relationship of creditor and debtor between the depositor and
the depository had not been validly effected, the checks not having properly and legitimately
converted into cash.

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3. ID.; ID.; ID.; COLLECTING BANKS HAS DUTY TO REIMBURSE TO DRAWEE-BANKS THE
VALUE OF CHECKS CONTAINING FORGED INDORSEMENT; RULING IN THE CASE OF Deposited Number Amount Number
GREAT EASTERN LIFE INSURANCE CO. v. HONGKONG & SHANGHAI BANK. — In Great
Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678 (1992), the Court ruled that it is 4/2/59 B-352680 P500.00 18
the obligation of the collecting bank to reimburse the drawee-bank the value of the checks
subsequently found to contain the forged indorsement of the payee. The reason is that the bank 4/20/59 A-156907 372.32 19
with which the check was deposited has no right to pay the sum stated therein to the forger "or to
anyone else upon a forged signature." "It was its duty to know," said the Court, "that (the payee’s) 4/24/59 A-156924 397.82 20
endorsement was genuine before cashing the check." The depositor must in turn shoulder the loss
of the amounts which the respondent, as its collecting agent, had no reimburse to the drawee- 5/4/59 B-364764 250.00 23
banks.
5/6/59 B-364775 250.00 24
4. ID.; ID.; ACCEPTANCE OF CHECKS INDORSED BY AN AGENT; RULING IN THE CASE OF
INSULAR DRUG CO. v. NATIONAL. — In Insular Drug Co. v. National, 58 Phil. 685 (1933), the 2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to the
Court made the pronouncement that." . .The right of an agent to indorse commercial paper is a Inter-Island Gas Service, Inc. or bearer:chanrob1es virtual 1aw library
very responsible power and will not be lightly inferred. A salesman with authority to collect money
belonging to his principal does not have the implied authority to indorse checks received in 4/13/59 B-335063 P 2108.70 21
payment. Any person taking checks made payable to a corporation which can act by agents, does
so at his peril, and must abide by the consequences if the agent who endorses the same is without 4/27/59 B-335072 P2210.94 22
authority."cralaw virtua1aw library
3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and payable to
5. ID.; ID.; LIABILITY OF AN INDORSER; NO LOSS TO BE SUFFERED BY A BANK WHO the Inter-Island Gas Service, Inc. or bearer:chanrob1es virtual 1aw library
RELIED ON INDORSER’S WARRANTY. — Under Section 67 of the Negotiable Instruments Law,
"Where a person places his indorsement on an instrument negotiable by delivery he incurs all the 5/18/59 VN430188 P940.8025cralaw:red
liability of an indorser," and under Section 66 of the same statute a general indorser warrants that
the instrument "is genuine and in all respects what it purports to be." Where the depositor indorsed 4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the
the checks with forged indorsement when it deposited them with the collecting bank, the former as Inter-Island Gas Service, Inc. order:chanrob1es virtual 1aw library
an endorser guaranteed the genuineness of all prior indorsement thereon. The collecting bank
which relied upon this warranty cannot be held liable for the resulting loss. 5/14/59 1860160 P 500.00 26

6. ID.; ID.; FORGED CHECKS; TRANSFER OF FUNDS FROM DRAWEE TO COLLECTING 5/18/59 1860660 P 500.00 27
BANK; APPLICATION OF ART. 2154 OF THE CIVIL CODE. — The transfer by the drawee-banks
of funds to the collecting bank on account of forged checks would be ineffectual when made under All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a
the mistaken and valid assumption that the indorsement of the payee thereon were genuine. sales agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon deposit,
Under Article 2154 of the New Civil Code "If something is received when there is no right to temporarily credited to the petitioner’s account in accordance with the clause printed on the
demand it and it was unduly delivered through mistake, the obligation to return it arises," By virtue deposit slips issued by the respondent and which reads:jgc:chanrobles.com.ph
thereof, there can be no valid payment of money by drawee-banks to the collecting bank on
account of forged checks. "Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received for
deposit, is provisional only, until such time as the proceeds thereof, in current funds or solvent
credits, shall have been actually received by the Bank and the latter reserves to itself the right to
DECISION charge back the item to the account of its depositor, at any time before that event, regardless of
whether or not the item itself can be returned."cralaw virtua1aw library

CASTRO, J.: About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and after
the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered that all the
indorsements made on the checks purportedly by its cashiers, Santiago Amplayo and Vicenta
This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the Mucor (who were merely authorized to deposit checks issued payable to the said company) as well
petitioner) for review of the decision of the Court of Appeals in C.A.-G.R. 34042-R dated June 25, as the rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.," were forgeries. In
1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the respondent). due time, the Inter-Island Gas advised the petitioner, the respondent, the drawers and the drawee-
banks of the said checks about the forgeries, and filed a criminal complaint against Ramirez with
From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were the Office of the City Fiscal of Manila. 1
deposited by the petitioner in its current account with the respondent bank. The particulars of these
checks are as follows:chanrob1es virtual 1aw library The respondent’s cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated
August 31, 1959, called up the petitioner’s cashier, Manuel Garcia, and advised the latter that in
1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to view of the circumstances he would debit the value of the checks against the petitioner’s account
the Inter-Island Gas Service Inc. or order:chanrob1es virtual 1aw library as soon as they were returned by the respective drawee-banks.

Date Check Exhibit

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Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded their delivery to the petitioner. In legal contemplation, therefore, the payments made by the
reimbursement to their respective accounts from the drawee-banks, which in turn demanded from drawee-banks to the respondent on account of the said checks were ineffective; and, such being
the respondent, as collecting bank, the return of the amounts they had paid on account thereof. the case, the relationship of creditor and debtor between the petitioner and the respondent had not
When the drawee-banks returned the checks to the respondent, the latter paid their value which been validly effected, the checks not having been properly and legitimately converted into cash. 4
the former in turn paid to the Inter-Island Gas. The respondent, for its part, debited the petitioner’s
current account and forwarded to the latter the checks containing the forged indorsements, which In Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 5 the Court ruled that it is the
the petitioner, however, refused to accept. obligation of the collecting bank to reimburse the drawee-bank the value of the checks
subsequently found to contain the forged indorsement of the payee. The reason is that the bank
On October 8, 1959 the petitioner drew against its current account with the respondent a check for with which the check was deposited has no right to pay the sum stated therein to the forger "or
P135,000 payable to the order of the Mariano Olondriz y Cia. in payment of certain shares of anyone else upon a forged signature." "It was its duty to know," said the Court, "that [the payee’s]
stock. The check was, however, dishonored by the respondent as its records showed that as of endorsement was genuine before cashing the check." The petitioner must in turn shoulder the loss
October 8, 1959 the current account of the petitioner, after netting out the value of the checks of the amounts which the respondent; as its collecting agent, had to reimburse to the drawee-
P8,030.58) with the forged indorsements, had a balance of only P128,257.65. banks.

The petitioner then filed a complaint against the respondent with the Court of First Instance of We do not consider material for the purposes of the case at bar that more than three months had
Manila, which was however dismissed by the trial court after due trial, and as well by the Court of elapsed since the proceeds of the checks in question were collected by the Respondent. The
Appeals, on appeal. record shows that the respondent had acted promptly after being informed that the indorsements
on the checks were forged. Moreover, having received the checks merely for collection and
Hence, the present recourse. deposit, the respondent cannot he expected to know or ascertain the genuineness of all prior
indorsements on the said checks. Indeed, having itself indorsed them to the respondent in
The issues posed by the petitioner in the instant petition may be briefly stated as accordance with the rules and practices of commercial banks, of which the Court takes due
follows:chanrob1es virtual 1aw library cognizance, the petitioner is deemed to have given the warranty prescribed in Section 66 of the
Negotiable Instruments Law that every single one of those checks "is genuine and in all respects
(a) Whether the respondent had the right to debit the petitioner’s current account in the amount what it purports to be.."
corresponding to the total value of the checks in question after more than three months had
elapsed from the date their value was credited to the petitioner’s account:(b) Whether the The petitioner was, moreover, grossly recreant in accepting the checks in question from Ramirez.
respondent is estopped from claiming that the amount of P8,030.58, representing the total value of It could not have escaped the attention of the petitioner that the payee of all the checks was a
the checks with the forged indorsements, had not been properly credited to the petitioner’s corporation — the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere
account, since the same had already been paid by the drawee-banks and received in due course individual who was admittedly a habitue at its jai-alai games without making any inquiry as to his
by the respondent; and(c) On the assumption that the respondent had improperly debited the authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. v. National 6
petitioner’s current account, whether the latter is entitled to damages. the Court made the pronouncement that.

These three issues interlock and will be resolved jointly. ". . . The right of an agent to indorse commercial paper is a very responsible power and will not be
lightly inferred. A salesman with authority to collect money belonging to his principal does not have
In our opinion, the respondent acted within legal bounds when it debited the petitioner’s account. the implied authority to indorse checks received in payment. Any person taking checks made
When the petitioner deposited the checks with the respondent, the nature of the relationship payable to a corporation, which can act only by agents, does so at his peril, and must abide by the
created at that stage was one of agency, that is, the bank was to collect from the drawees of the consequences if the agent who indorses the same is without authority." (underscoring supplied)
checks the corresponding proceeds. It is true that the respondent had already collected the
proceeds of the checks when it debited the petitioner’s account, so that following the rule in Gullas It must be noted further that three of the checks in question are crossed checks, namely, exhs. 21,
v. Philippine National Bank 2 it might be argued that the relationship between the parties had 25 and 27, which may only be deposited, but not encashed; yet, the petitioner negligently accepted
become that of creditor and debtor as to preclude the respondent from using the petitioner’s funds them for cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer instruments
to make payments not authorized by the latter. It is our view nonetheless that no creditor-debtor would not, in our view, exculpate the petitioner from liability with respect to them. The fact that they
relationship was created between the parties. are bearer checks and at the same time crossed checks should have aroused the petitioner’s
suspicion as to the title of Ramirez over them and his authority to cash them (apparently to
Section 23 of the Negotiable Instruments Law (Act 2031) states that 3 — purchase jai-alai tickets from the petitioner), it appearing on their face that a corporate entity — the
Inter Island Gas Service, Inc. — was the payee thereof and Ramirez delivered the said checks to
"When a signature is forged or made without the authority of the person whose signature it the petitioner ostensibly on the strength of the payee’s cashiers’ indorsements.
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto, can be acquired through or At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places his
under such signature, unless the party against whom it is sought to enforce such right is precluded indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser," and
from setting up the forgery or want of authority."cralaw virtua1aw library under Section 66 of the same statute a general indorser warrants that the instrument "is genuine
and in all respects what it purports to be." Considering that the petitioner indorsed the said checks
Since under the foregoing provision, a forged signature in a negotiable instrument is wholly when it deposited them with the respondent, the petitioner as an indorser guaranteed the
inoperative and no right to discharge it or enforce its payment can be acquired through or under genuineness of all prior indorsements thereon. The respondent which relied upon the petitioner’s
the forged signature except against a party who cannot invoke the forgery, it stands to reason, warranty should not be held liable for the resulting loss. This conclusion applied similarly to exh. 22
upon the facts of record, that the respondent, as a collecting bank which indorsed the checks to which is an uncrossed bearer instrument, for under Section 65 of the Negotiable Instrument Law.
the drawee-banks for clearing, should be liable to the latter for reimbursement, for, as found by the "Every person negotiating an instrument by delivery . . . warrants (a) That the instrument is
court a quo and by the appellate court, the indorsements on the checks had been forged prior to genuine and in all respects what it purports to be." Under that same section this warranty "extends
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in favor of no holder other than the immediate transferee," which, in the case at bar, would be the
Respondent.

The provision in the deposit slip issued by the respondent which stipulates that it "reserves to itself
the right to charge back the item to the account of its depositor," at any time before "current funds
or solvent credits shall have been actually received by the Bank," would not materially affect the
conclusion we have reached. That stipulation prescribes that there must be an actual receipt by
the bank of current funds or solvent credits; but as we have earlier indicated the transfer by the
drawee-banks of funds to the respondent on account of the checks in question was ineffectual
because made under the mistaken and valid assumption that the indorsements of the payee
thereon were genuine. Under article 2154 of the New Civil Code "If something is received when
there is no right to demand it and it was unduly delivered through mistake, the obligation to return it
arises." There was, therefore, in contemplation of law, no valid payment of money made by the
drawee-banks to the respondent on account of the questioned checks.

ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioner’s cost.

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