Aurbach vs.

Sanitary Wares
(Partnership; Joint Venture; Foreign and Domestic Corp)

F: This consolidated petition assailed the decision of the CA directing a certain MANNER OF ELECTION
OF OFFICERS IN THE BOARD OF DIRECTORS
*There are two groups in this case, the Lagdameo group composed of Filipino investors and the
American Standard Inc. (ASI) composed of foreign investors.
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the
parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated
that the parties' intention was to form a corporation and not a joint venture.

I: The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during
its annual stockholders' meeting held on March 8, 1983. To answer this question the following factors
should be determined:
*(1) the nature of the business established by the parties whether it was a joint venture or a corporation
and

H:
While certain provisions of the Agreement would make it appear that the parties thereto disclaim
being partners or joint venturers such disclaimer is directed at third parties and is not inconsistent
with, and does not preclude, the existence of two distinct groups of stockholders in Saniwares
one of which (the Philippine Investors) shall constitute the majority, and the other ASI shall
constitute the minority stockholder. In any event, the evident intention of the Philippine
Investors and ASI in entering into the Agreement is to enter into a joint venture enterprise
An examination of the Agreement shows that certain provisions were inccuded to protect the
interests of ASI as the minority. For example, the vote of 7 out of 9 directors is required in certain
enumerated corporate acts. ASI is contractually entitled to designate a member of the Executive
Committee and the vote of this member is required for certain transactions
The Agreement also requires a 75% super-majority vote for the amendment of the articles and
by-laws of Saniwares. ASI is also given the right to designate the president and plant manager
.The Agreement further provides that the sales policy of Saniwares shall be that which is
normally followed by ASI and that Saniwares should not export "Standard" products otherwise
than through ASI's Export Marketing Services. Under the Agreement, ASI agreed to provide
technology and know-how to Saniwares and the latter paid royalties for the same.
The legal concept of a joint venture is of common law origin. It has no precise legal definition
but it has been generally understood to mean an organization formed for some temporary
purpose. It is in fact hardly distinguishable from the partnership, since their elements are similar
community of interest in the business, sharing of profits and losses, and a mutual right of control.
The main distinction cited by most opinions in common law jurisdictions is that the partnership
contemplates a general business with some degree of continuity, while the joint venture is
formed for the execution of a single transaction, and is thus of a temporary nature.
Litong Lim vs Phil. Gear Industries, Inc., GR No. 136448, 3 November 1999
FACTS
Antonio Chua and Peter Yao entered into a contract in behalf of Ocean Quest Fishing Corporation for
the purchase of fishing nets from respondent Philippine Fishing Gear Industries, Inc. Chua and Yao
claimed that they were engaged in business venture with petitioner Lim Tong Lim, who, however, was
not a signatory to the contract. The buyers failed to pay the fishing nets. Respondent filed a collection
against Chua, Yao and petitioner Lim in their capacities as general partners because it turned out that
Ocean Quest Fishing Corporation is a non-existent corporation. The trial court issued a Writ of
Preliminary Attachment, which the sheriff enforced by attaching the fishing nets. The trial court rendered
its decision ruling that respondent was entitled to the Writ of Attachment and that Chua, Yao and Lim, as
general partners, were jointly liable to pay respondent. Lim appealed to the Court of Appeals, but the
appellate court affirmed the decision of the trial court that petitioner Lim is a partner and may thus be
held liable as such. Hence, the present petition. Petitioner claimed that since his name did not appear on
any of the contracts and since he never directly transacted with the respondent corporation, ergo, he
cannot be held liable.

ISSUE
WON petitioner can be held liable as a general partner.

HELD
The Supreme Court denied the petition. The Court ruled that having reaped the benefits of the
contract entered into by Chua and Yao, with whom he had an existing relationship, petitioner Lim is
deemed a part of said association and is covered by the doctrine of corporation by estoppel. The Court
also ruled that under the principle of estoppel, those acting on behalf of a corporation and those
benefited by it, knowing it to be without valid existence, are held liable as general partners.

G.R. No. 143340 August 15, 2001
LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners,
vs.
LAMBERTO T. CHUA, respondent.
FACTS
Lamberto Chua alleged that in 1977, he verbally entered into a partnership with Jacinto in the distribution of
Shellane LPG. For business convenience, Lamberto and Jacinto allegedly agreed to register the business name
of their partnership, SHELLITE GAS APPLIANCE CENTER, under the name of Jacinto as a sole
proprietorship. Both Lamberto and Jacinto contributed P100,000.00 to the partnership, with the intention that the
profits would be equally divided between them.
The partnership allegedly had Jacinto as manager, assisted by Josephine Sy, sister-in-law of
Lamberto. Upon Jacintos death in the later part of 1989, his daughter, Lilibeth took over the operations of Shellite
without Lambertos consent. Despite Lambertos repeated demands for accounting, she failed to comply.
On June 22m 1992, Lamberto filed a complaint against Lilibeth with the RTC. RTC decided in favor of
Lamberto.
Lilibeth questions the correctness of the finding that a partnership existed between Lamberto and
Jacinto. In the absence of any written document to show such partnership between Lamberto and Jacinto, Lilibeth
argues that these courts were proscribed from hearing the testimonies of Lamberto and his witness, Josephine, to
prove the alleged partnership three (3) years after Jacintos death.
To support the argument, Lilibeth invokes the DEAD MANS STATUTE OR SURVIVORSHIP RULE under
Sec. 23, Rule 130. Lilibeth thus implores this Court to rule that the testimonies of Lamberto and his alter ego,
Josephine, should not have been admitted to prove certain claims against a deceased person (Jacinto).
ISSUE
Whether or not the DEAD MANS STATUTE applies to this case so as to render inadmissible Lambertos
testimony and that if his witness, Josephine.
HELD
No. The Dead Mans Statute provides that if one party to the alleged transaction is precluded from
testifying by death, insanity, or other mental disabilities, the surviving party is not entitled to the undue advantage
of giving his own contradicted and unexplained account of the transaction.
Lilibeth filed a compulsory counterclaim against Lamberto in their answer before the RTC, and with the
filing of their counterclaim, Lilibeth herself effectively removed this case from the ambit of the Dead Mans
Statute. Well entrenched is the rule that when it is the executor or administrator or representatives of the estate
that sets up the counterclaim, Lamberto, may testify to occurrences before the death of the deceased to defeat the
counterclaim. Moreover, as defendant in the counterclaim, Lamberto is not disqualified from testifying as to
matters of fact occurring before the death of the deceased, said action not having been bought against but by the
estate or representatives of the deceased.
The testimony of Josephine is not covered by the Dead Mans Statute for the simple reason that she is
not a party or assignor of a party to a case or persons in whose behalf a case is prosecuted. Lamberto offered
the testimony of Josephine to establish the existence of the partnership between Lamberto and Jacinto. Lilibeths
insistence that Josephine is the alter ego of Lamberto does not make her an assignor because of the term
assignor of a party means assignor of a cause of action which has arisen, and not the assignor of a right
assigned before any cause of action has arisen. Plainly then, Josephine is merely a witness of Lamberto, latter
being the plaintiff.
Lilibeths reliance alone on the Dead Mans Statue to defeat Lambertos claim cannot prevail over the
factual findings that a partnership was established between Lamberto and Jacinto. Based not only on the
testimonial evidence, but the documentary evidence as well, they considered the evidence for Lamberto as
sufficient to prove the formation of a partnership, albeit an informal one.

Ona vs. CIR

F: In 1944 Lorenzo Ona was appointed administrator of the estate of his late wife Julia Bunales. The
administrator submitted the project of partition, which was approved by the court. However, there was no
attempt was made to divide the properties among his 5 children. Instead, the properties remained under
the management of Lorenzo who used the said properties in business by leasing or selling them and
investing the income derived therefrom.
In the years 1944 to 1954, respondent CIR did treat petitioners as co-owners, not liable to corporate tax,
and it was only from 1955 that CIR considered them as having formed an unregistered partnership.

I: W/N an unregistered partnership was formed.

H:
Yes. It is admitted that all profits from these ventures were divided among petitioners
proportionately in accordance with their respective shares in the inheritance.
From the moment petitioners allowed not only the incomes from their respective shares but
even the properties themselves to be used by Lorenzo as a common fund in undertaking
several transactions or business, with the intention of deriving profit to be shared by them
proportionately, such act was tantamount to actually contributing such incomes to a common
fund and, in effect they thereby formed an unregistered partnership taxable by law.


Obillos vs. CIR
(Profit merely incidental)
F: This case is about the income tax liability of four brothers and sisters who sold two parcels of land
which they had acquired from their father.
Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on
the total profit of P134,336 in addition to individual income tax on their shares thereof He assessed
P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42%
accumulated interest, or a total of P71,074.56.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership
or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code]

I: W/N an unregistered partnership was formed.

H:
No. Their original purpose was to divide the lots for residential purposes. If later on they found it
not feasible to build their residences on the lots because of the high cost of construction, then
they had no choice but to resell the same to dissolve the co-ownership.
The division of the profit was merely incidental to the dissolution of the co-ownership which was
in the nature of things a temporary state. It had to be terminated sooner or later.
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.


Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES
CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN
YOUNG and AVELINO V. CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B.
LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM,
CHARLES CHAMSAY and LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN
YOUNG, AVELINO V. CRUZ and the COURT OF APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

GUTIERREZ, JR., J .:
These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-
G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then
Intermediate Appellate Court and directed that in all subsequent elections for directors of Sanitary Wares
Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot nominate more than three
(3) directors; that the Filipino stockholders shall not interfere in ASI's choice of its three (3) nominees;
that, on the other hand, the Filipino stockholders can nominate only six (6) candidates and in the event
they cannot agree on the six (6) nominees, they shall vote only among themselves to determine who the
six (6) nominees will be, with cumulative voting to be allowed but without interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing
and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for
foreign partners, European or American who could help in its expansion plans. On August 15, 1962, ASI,
a foreign corporation domiciled in Delaware, United States entered into an Agreement with Saniwares
and some Filipino investors whereby ASI and the Filipino investors agreed to participate in the
ownership of an enterprise which would engage primarily in the business of manufacturing in the
Philippines and selling here and abroad vitreous china and sanitary wares. The parties agreed that the
business operations in the Philippines shall be carried on by an incorporated enterprise and that the
name of the corporation shall initially be "Sanitary Wares Manufacturing Corporation."
The Agreement has the following provisions relevant to the issues in these cases on the nomination and
election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in the form
annexed hereto as Exhibit A and, insofar as permitted under Philippine law, shall
specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of Directors, which
shall consist of nine individuals. As long as American-Standard shall own at least 30% of
the outstanding stock of the Corporation, three of the nine directors shall be designated
by American-Standard, and the other six shall be designated by the other stockholders of
the Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority group,
including the grant of veto powers over a number of corporate acts and the right to designate certain
officers, such as a member of the Executive Committee whose vote was required for important corporate
transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the
Board of Investments for availment of incentives with the condition that at least 60% of the capital stock
of the corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation prospered.
Unfortunately, with the business successes, there came a deterioration of the initially harmonious
relations between the two groups. According to the Filipino group, a basic disagreement was due to their
desire to expand the export operations of the company to which ASI objected as it apparently had other
subsidiaries of joint joint venture groups in the countries where Philippine exports were contemplated.
On March 8, 1983, the annual stockholders' meeting was held. The meeting was presided by Baldwin
Young. The minutes were taken by the Secretary, Avelino Cruz. After disposing of the preliminary items
in the agenda, the stockholders then proceeded to the election of the members of the board of directors.
The ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin and David P.
Whittingham. The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A. Boncan,
Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then nominated
Mr. Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay. The chairman, Baldwin Young
ruled the last two nominations out of order on the basis of section 5 (a) of the Agreement, the consistent
practice of the parties during the past annual stockholders' meetings to nominate only nine persons as
nominees for the nine-member board of directors, and the legal advice of Saniwares' legal counsel. The
following events then, transpired:
... There were protests against the action of the Chairman and heated arguments ensued.
An appeal was made by the ASI representative to the body of stockholders present that a
vote be taken on the ruling of the Chairman. The Chairman, Baldwin Young, declared the
appeal out of order and no vote on the ruling was taken. The Chairman then instructed
the Corporate Secretary to cast all the votes present and represented by proxy equally for
the 6 nominees of the Philippine Investors and the 3 nominees of ASI, thus effectively
excluding the 2 additional persons nominated, namely, Luciano E. Salazar and Charles
Chamsay. The ASI representative, Mr. Jaqua protested the decision of the Chairman and
announced that all votes accruing to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-
G.R. SP No. 05617) were being cumulatively voted for the three ASI nominees and
Charles Chamsay, and instructed the Secretary to so vote. Luciano E. Salazar and other
proxy holders announced that all the votes owned by and or represented by them
467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being voted cumulatively in
favor of Luciano E. Salazar. The Chairman, Baldwin Young, nevertheless instructed the
Secretary to cast all votes equally in favor of the three ASI nominees, namely, Wolfgang
Aurbach, John Griffin and David Whittingham and the six originally nominated by Rogelio
Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, and Baldwin Young. The Secretary then certified for the
election of the following Wolfgang Aurbach, John Griffin, David Whittingham Ernesto
Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A.
Boncan, Baldwin Young. The representative of ASI then moved to recess the meeting
which was duly seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP
No. 05617). This motion to adjourn was accepted by the Chairman, Baldwin Young, who
announced that the motion was carried and declared the meeting adjourned. Protests
against the adjournment were registered and having been ignored, Mr. Jaqua the ASI
representative, stated that the meeting was not adjourned but only recessed and that the
meeting would be reconvened in the next room. The Chairman then threatened to have
the stockholders who did not agree to the decision of the Chairman on the casting of
votes bodily thrown out. The ASI Group, Luciano E. Salazar and other stockholders,
allegedly representing 53 or 54% of the shares of Saniwares, decided to continue the
meeting at the elevator lobby of the American Standard Building. The continued meeting
was presided by Luciano E. Salazar, while Andres Gatmaitan acted as Secretary. On the
basis of the cumulative votes cast earlier in the meeting, the ASI Group nominated its four
nominees; Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay.
Luciano E. Salazar voted for himself, thus the said five directors were certified as elected
directors by the Acting Secretary, Andres Gatmaitan, with the explanation that there was
a tie among the other six (6) nominees for the four (4) remaining positions of directors
and that the body decided not to break the tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities and
Exchange Commission (SEC). The first petition filed was for preliminary injunction by Saniwares,
Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo
and George F. Lee against Luciano Salazar and Charles Chamsay. The case was denominated as SEC
Case No. 2417. The second petition was for quo warranto and application for receivership by Wolfgang
Aurbach, John Griffin, David Whittingham, Luciano E. Salazar and Charles Chamsay against the group
of Young and Lagdameo (petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was
docketed as SEC Case No. 2718. Both sets of parties except for Avelino Cruz claimed to be the
legitimate directors of the corporation.
The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision
upholding the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar and
Chamsay. The ASI Group and Salazar appealed the decision to the SEC en banc which affirmed the
hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by
Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP
No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were
consolidated and the appellate court in its decision ordered the remand of the case to the Securities and
Exchange Commission with the directive that a new stockholders' meeting of Saniwares be ordered
convoked as soon as possible, under the supervision of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of
Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David
P. Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF
PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING
THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN
SANIWARES, THUS DEPRIVING PETITIONERS AND THE CORPORATION THEY
REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS
INTO THE AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH
ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following
grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual
agreements entered into by stockholders and the replacement of the conditions of such
agreements with terms never contemplated by the stockholders but merely dictated by
the CA .
11.2. The Amended decision would likewise sanction the deprivation of the property rights
of stockholders without due process of law in order that a favored group of stockholders
may be illegally benefitted and guaranteed a continuing monopoly of the control of a
corporation. (pp. 14-15, Rollo-75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING
THAT THE STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS,
FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE
LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE
PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8
MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo-
75951)
The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its
annual stockholders' meeting held on March 8, 1983. To answer this question the following factors
should be determined: (1) the nature of the business established by the parties whether it was a joint
venture or a corporation and (2) whether or not the ASI Group may vote their additional 10% equity
during elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established among themselves
a joint venture or some other relation depends upon their actual intention which is determined in
accordance with the rules governing the interpretation and construction of contracts. (Terminal Shares,
Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg.
Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the
parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated
that the parties' intention was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the parties hereto
partners or joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR
No. 75875)
They object to the admission of other evidence which tends to show that the parties' agreement was to
establish a joint venture presented by the Lagdameo and Young Group on the ground that it
contravenes the parol evidence rule under section 7, Rule 130 of the Revised Rules of Court. According
to them, the Lagdameo and Young Group never pleaded in their pleading that the "Agreement" failed to
express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been reduced to
writing, it is to be considered as containing all such terms, and therefore, there can be,
between the parties and their successors in interest, no evidence of the terms of the
agreement other than the contents of the writing, except in the following cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the true intent
and agreement of the parties or the validity of the agreement is put in issue by the
pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties,
to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear that the parties thereto
disclaim being partners or joint venturers such disclaimer is directed at third parties and is
not inconsistent with, and does not preclude, the existence of two distinct groups of
stockholders in Saniwares one of which (the Philippine Investors) shall constitute the
majority, and the other ASI shall constitute the minority stockholder. In any event, the
evident intention of the Philippine Investors and ASI in entering into the Agreement is to
enter into ajoint venture enterprise, and if some words in the Agreement appear to be
contrary to the evident intention of the parties, the latter shall prevail over the former (Art.
1370, New Civil Code). The various stipulations of a contract shall be interpreted together
attributing to the doubtful ones that sense which may result from all of them taken jointly
(Art. 1374, New Civil Code). Moreover, in order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall be principally considered. (Art.
1371, New Civil Code). (Part I, Original Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the parties joined their
efforts in furtherance of an enterprise for their joint profit, the question whether they
intended by their agreement to create a joint adventure, or to assume some other relation
is a question of fact for the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653;
Pyroa v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96
33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as well as the testimonial
evidence presented by the Lagdameo and Young Group shows that the parties agreed to establish a
joint venture and not a corporation. The history of the organization of Saniwares and the unusual
arrangements which govern its policy making body are all consistent with a joint venture and not with an
ordinary corporation. As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the
Agreement with ASI in behalf of the Philippine nationals. He testified that ASI agreed to
accept the role of minority vis-a-vis the Philippine National group of investors, on the
condition that the Agreement should contain provisions to protect ASI as the minority.
An examination of the Agreement shows that certain provisions were included to protect
the interests of ASI as the minority. For example, the vote of 7 out of 9 directors is
required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is
contractually entitled to designate a member of the Executive Committee and the vote of
this member is required for certain transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for the amendment of the articles
and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to
designate the president and plant manager [Sec. 5 (6)]. The Agreement further provides
that the sales policy of Saniwares shall be that which is normally followed by ASI [Sec. 13
(a)] and that Saniwares should not export "Standard" products otherwise than through
ASI's Export Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to
provide technology and know-how to Saniwares and the latter paid royalties for the same.
(At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of
the board of directors for certain actions, in effect gave ASI (which designates 3 directors
under the Agreement) an effective veto power. Furthermore, the grant to ASI of the right
to designate certain officers of the corporation; the super-majority voting requirements for
amendments of the articles and by-laws; and most significantly to the issues of tms case,
the provision that ASI shall designate 3 out of the 9 directors and the other stockholders
shall designate the other 6, clearly indicate that there are two distinct groups in
Saniwares, namely ASI, which owns 40% of the capital stock and the Philippine National
stockholders who own the balance of 60%, and that 2) ASI is given certain protections as
the minority stockholder.
Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the
selection of the nine directors on a six to three ratio. Each group is assured of a fixed number of
directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also
testified that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint venturers in respect of any transaction hereunder"
was merely to obviate the possibility of the enterprise being treated as partnership for tax purposes and
liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities
of a local firm are constrained to seek the technology and marketing assistance of huge multinational
corporations of the developed world. Arrangements are formalized where a foreign group becomes a
minority owner of a firm in exchange for its manufacturing expertise, use of its brand names, and other
such assistance. However, there is always a danger from such arrangements. The foreign group may,
from the start, intend to establish its own sole or monopolistic operations and merely uses the joint
venture arrangement to gain a foothold or test the Philippine waters, so to speak. Or the covetousness
may come later. As the Philippine firm enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to completely or predominantly take over the
entire company. This undermining of joint ventures is not consistent with fair dealing to say the least. To
the extent that such subversive actions can be lawfully prevented, the courts should extend protection
especially in industries where constitutional and legal requirements reserve controlling ownership to
Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of stockholders to enter
into agreements regarding the exercise of their voting rights.
Sec. 100. Agreements by stockholders.-
xxx xxx xxx
2. An agreement between two or more stockholders, if in writing and signed by the parties
thereto, may provide that in exercising any voting rights, the shares held by them shall be
voted as therein provided, or as they may agree, or as determined in accordance with a
procedure agreed upon by them.
Appellants contend that the above provision is included in the Corporation Code's chapter
on close corporations and Saniwares cannot be a close corporation because it has 95
stockholders. Firstly, although Saniwares had 95 stockholders at the time of the disputed
stockholders meeting, these 95 stockholders are not separate from each other but are
divisible into groups representing a single Identifiable interest. For example, ASI, its
nominees and lawyers count for 13 of the 95 stockholders. The YoungYutivo family count
for another 13 stockholders, the Chamsay family for 8 stockholders, the Santos family for
9 stockholders, the Dy family for 7 stockholders, etc. If the members of one family and/or
business or interest group are considered as one (which, it is respectfully submitted, they
should be for purposes of determining how closely held Saniwares is there were as of 8
March 1983, practically only 17 stockholders of Saniwares. (Please refer to discussion in
pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11 December 1984 and Annex "A"
thereof).
Secondly, even assuming that Saniwares is technically not a close corporation because it
has more than 20 stockholders, the undeniable fact is that it is a close-held corporation.
Surely, appellants cannot honestly claim that Saniwares is a public issue or a widely held
corporation.
In the United States, many courts have taken a realistic approach to joint venture
corporations and have not rigidly applied principles of corporation law designed primarily
for public issue corporations. These courts have indicated that express arrangements
between corporate joint ventures should be construed with less emphasis on the ordinary
rules of law usually applied to corporate entities and with more consideration given to the
nature of the agreement between the joint venturers (Please see Wabash Ry v. American
Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des Moines Union Ry;
254 Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic Coast Line Ry; 240 N.C. 495,.82
S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d 903; Hathway v. Porter Royalty
Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138 U.S. 262; "The
Legal Status of Joint Venture Corporations", 11 Vand Law Rev. p. 680,1958). These
American cases dealt with legal questions as to the extent to which the requirements
arising from the corporate form of joint venture corporations should control, and the courts
ruled that substantial justice lay with those litigants who relied on the joint venture
agreement rather than the litigants who relied on the orthodox principles of corporation
law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint venture deviate from the
traditional pattern of corporation management. A noted authority has pointed out that just
as in close corporations, shareholders' agreements in joint venture corporations often
contain provisions which do one or more of the following: (1) require greater than majority
vote for shareholder and director action; (2) give certain shareholders or groups of
shareholders power to select a specified number of directors; (3) give to the shareholders
control over the selection and retention of employees; and (4) set up a procedure for the
settlement of disputes by arbitration (See I O' Neal, Close Corporations, 1971 ed.,
Section 1.06a, pp. 15-16) (Decision of SEC Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that
agreements regarding the exercise of voting rights are allowed only in close corporations.
As Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this provision
necessarily imply that these agreements can be valid only in close corporations as
defined by the Code? Suppose that a corporation has twenty five stockholders, and
therefore cannot qualify as a close corporation under section 96, can some of them enter
into an agreement to vote as a unit in the election of directors? It is submitted that there is
no reason for denying stockholders of corporations other than close ones the right to
enter into not voting or pooling agreements to protect their interests, as long as they do
not intend to commit any wrong, or fraud on the other stockholders not parties to the
agreement. Of course, voting or pooling agreements are perhaps more useful and more
often resorted to in close corporations. But they may also be found necessary even in
widely held corporations. Moreover, since the Code limits the legal meaning of close
corporations to those which comply with the requisites laid down by section 96, it is
entirely possible that a corporation which is in fact a close corporation will not come within
the definition. In such case, its stockholders should not be precluded from entering into
contracts like voting agreements if these are otherwise valid. (Campos & Lopez-Campos,
op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the designation or
nomination of directors restricts the right of the Agreement's signatories to vote for
directors, such contractual provision, as correctly held by the SEC, is valid and binding
upon the signatories thereto, which include appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity during
elections of Saniwares' board of directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the management
of the corporation is spelled out in the Agreement. Section 5(a) hereof says that three of
the nine directors shall be designated by ASI and the remaining six by the other
stockholders, i.e., the Filipino stockholders. This allocation of board seats is obviously in
consonance with the minority position of ASI.
Having entered into a well-defined contractual relationship, it is imperative that the parties
should honor and adhere to their respective rights and obligations thereunder. Appellants
seem to contend that any allocation of board seats, even in joint venture corporations, are
null and void to the extent that such may interfere with the stockholder's rights to
cumulative voting as provided in Section 24 of the Corporation Code. This Court should
not be prepared to hold that any agreement which curtails in any way cumulative voting
should be struck down, even if such agreement has been freely entered into by
experienced businessmen and do not prejudice those who are not parties thereto. It may
well be that it would be more cogent to hold, as the Securities and Exchange Commission
has held in the decision appealed from, that cumulative voting rights may be voluntarily
waived by stockholders who enter into special relationships with each other to pursue and
implement specific purposes, as in joint venture relationships between foreign and local
stockholders, so long as such agreements do not adversely affect third parties.
In any event, it is believed that we are not here called upon to make a general rule on this
question. Rather, all that needs to be done is to give life and effect to the particular
contractual rights and obligations which the parties have assumed for themselves.
On the one hand, the clearly established minority position of ASI and the contractual
allocation of board seats Cannot be disregarded. On the other hand, the rights of the
stockholders to cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to uphold the second over the first.
Upon further reflection, we feel that the proper and just solution to give due consideration
to both factors suggests itself quite clearly. This Court should recognize and uphold the
division of the stockholders into two groups, and at the same time uphold the right of the
stockholders within each group to cumulative voting in the process of determining who
the group's nominees would be. In practical terms, as suggested by appellant Luciano E.
Salazar himself, this means that if the Filipino stockholders cannot agree who their six
nominees will be, a vote would have to be taken among the Filipino stockholders only.
During this voting, each Filipino stockholder can cumulate his votes. ASI, however,
should not be allowed to interfere in the voting within the Filipino group. Otherwise, ASI
would be able to designate more than the three directors it is allowed to designate under
the Agreement, and may even be able to get a majority of the board seats, a result which
is clearly contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or circumvention
of the Anti-Dummy Law (Com. Act No. 108, as amended) and the nationalization
requirements of the Constitution and the laws if ASI is allowed to nominate more than
three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote
their additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a
corporation the right to cumulate their votes in electing directors. Petitioner Salazar adds that this right if
granted to the ASI Group would not necessarily mean a violation of the Anti-Dummy Act
(Commonwealth Act 108, as amended). He cites section 2-a thereof which provides:
And provided finally that the election of aliens as members of the board of directors or
governing body of corporations or associations engaging in partially nationalized activities
shall be allowed in proportion to their allowable participation or share in the capital of
such entities. (amendments introduced by Presidential Decree 715, section 1,
promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point
of query, however, is whether or not that provision is applicable to a joint venture with clearly defined
agreements:
The legal concept of ajoint venture is of common law origin. It has no precise legal
definition but it has been generally understood to mean an organization formed for some
temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly
distinguishable from the partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a mutual right of control.
Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043
[1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]). The
main distinction cited by most opinions in common law jurisdictions is that the partnership
contemplates a general business with some degree of continuity, while the joint venture is
formed for the execution of a single transaction, and is thus of a temporary nature. (Tufts
v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE
2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not entirely
accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or
universal, and a particular partnership may have for its object a specific undertaking. (Art.
1783, Civil Code). It would seem therefore that under Philippine law, a joint venture is a
form of partnership and should thus be governed by the law of partnerships. The
Supreme Court has however recognized a distinction between these two business forms,
and has held that although a corporation cannot enter into a partnership contract, it may
however engage in a joint venture with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906
[1954]) (Campos and Lopez-Campos Comments, Notes and Selected Cases,
Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts generally apply to a
contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the question of whether
or not the ASI Group may vote their additional equity lies in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the
allocation of director seats under Section 5 (a) of the "Agreement," and the right of each group of
stockholders to cumulative voting in the process of determining who the group's nominees would be
under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement
relates to the manner of nominating the members of the board of directors while Section 3 (a) (1) relates
to the manner of voting for these nominees.
This is the proper interpretation of the Agreement of the parties as regards the election of members of
the board of directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be
beholden to them would obliterate their minority status as agreed upon by the parties. As aptly stated by
the appellate court:
... ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board
seats, a result which is clearly contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or circumvention
of the Anti-Dummy Law (Com. Act No. 108, as amended) and the nationalization
requirements of the Constitution and the laws if ASI is allowed to nominate more than
three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the consideration as
regards the possible domination by the foreign investors of the enterprise in violation of the
nationalization requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act. In
this regard, petitioner Salazar's position is that the Anti-Dummy Act allows the ASI group to elect board
directors in proportion to their share in the capital of the entity. It is to be noted, however, that the same
law also limits the election of aliens as members of the board of directors in proportion to their allowance
participation of said entity. In the instant case, the foreign Group ASI was limited to designate three
directors. This is the allowable participation of the ASI Group. Hence, in future dealings, this limitation of
six to three board seats should always be maintained as long as the joint venture agreement exists
considering that in limiting 3 board seats in the 9-man board of directors there are provisions already
agreed upon and embodied in the parties' Agreement to protect the interests arising from the minority
status of the foreign investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed
by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto
V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and
George F. Lee as the duly elected directors of Saniwares at the March 8,1983 annual stockholders'
meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a
cumulative voting during the election of the board of directors of the enterprise as ruled by the appellate
court and submits that the six (6) directors allotted the Filipino stockholders should be selected by
consensus pursuant to section 5 (a) of the Agreement which uses the word "designate" meaning
"nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot determined by
the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors
should not be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the
Agreement. As we stated earlier, section 3(a) (1) relates to the manner of voting for these nominees
which is cumulative voting while section 5(a) relates to the manner of nominating the members of the
board of directors. The petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot now
impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot, however, be ignored. The validity of the cumulative voting procedure is dependent on
the directors thus elected being genuine members of the Filipino group, not voters whose interest is to
increase the ASI share in the management of Saniwares. The joint venture character of the enterprise
must always be taken into account, so long as the company exists under its original agreement.
Cumulative voting may not be used as a device to enable ASI to achieve stealthily or indirectly what they
cannot accomplish openly. There are substantial safeguards in the Agreement which are intended to
preserve the majority status of the Filipino investors as well as to maintain the minority status of the
foreign investors group as earlier discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the
petition in G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is
MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo,
Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are
declared as the duly elected directors of Saniwares at the March 8,1983 annual stockholders' meeting.
In all other respects, the questioned decision is AFFIRMED. Costs against the petitioners in G.R. Nos.
75975-76 and G.R. No. 75875.
SO ORDERED.
Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.



Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 136448 November 3, 1999
LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J .:
A partnership may be deemed to exist among parties who agree to borrow money to pursue a business
and to divide the profits or losses that may arise therefrom, even if it is shown that they have not
contributed any capital of their own to a "common fund." Their contribution may be in the form of credit
or industry, not necessarily cash or fixed assets. Being partner, they are all liable for debts incurred by or
on behalf of the partnership. The liability for a contract entered into on behalf of an unincorporated
association or ostensible corporation may lie in a person who may not have directly transacted on its
behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision
of the Court of Appeals in CA-GR CV
41477,
1
which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is
hereby affirmed.
2

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the
CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets
covered by the Agreement plus P68,000.00 representing the unpaid price
of the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiff's invoices and
computed on their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for
P385,377.80 dated February 9, 1990;
ii. Accrued interest for P27,904.02 on Invoice No. 14413 for
P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for
P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing
P500.00 per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges
on the nets counted from September 20, 1990 (date of attachment) to
September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount P600,045.00, this Court noted that these
items were attached to guarantee any judgment that may be rendered in favor of
the plaintiff but, upon agreement of the parties, and, to avoid further deterioration
of the nets during the pendency of this case, it was ordered sold at public auction
for not less than P900,000.00 for which the plaintiff was the sole and winning
bidder. The proceeds of the sale paid for by plaintiff was deposited in court. In
effect, the amount of P900,000.00 replaced the attached property as a guaranty
for any judgment that plaintiff may be able to secure in this case with the
ownership and possession of the nets and floats awarded and delivered by the
sheriff to plaintiff as the highest bidder in the public auction sale. It has also been
noted that ownership of the nets [was] retained by the plaintiff until full payment
[was] made as stipulated in the invoices; hence, in effect, the plaintiff attached its
own properties. It [was] for this reason also that this Court earlier ordered the
attachment bond filed by plaintiff to guaranty damages to defendants to be
cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to serve as
its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff
may be entitled to in this case will have to be satisfied from the amount of
P900,000.00 as this amount replaced the attached nets and floats. Considering,
however, that the total judgment obligation as computed above would amount to
only P840,216.92, it would be inequitable, unfair and unjust to award the excess
to the defendants who are not entitled to damages and who did not put up a single
centavo to raise the amount of P900,000.00 aside from the fact that they are not
the owners of the nets and floats. For this reason, the defendants are hereby
relieved from any and all liabilities arising from the monetary judgment obligation
enumerated above and for plaintiff to retain possession and ownership of the nets
and floats and for the reimbursement of the P900,000.00 deposited by it with the
Clerk of Court.
SO ORDERED.
3

The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract
dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing
Gear Industries, Inc. (herein respondent). They claimed that they were engaged in a business venture
with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The total price of the
nets amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold to the
Corporation.
4

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents filed a
collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities as general partners, on the
allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission.
5
On September 20, 1990, the lower court
issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on
board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a
reasonable time within which to pay. He also turned over to respondent some of the nets which were in
his possession. Peter Yao filed an Answer, after which he was deemed to have waived his right to cross-
examine witnesses and to present evidence on his behalf, because of his failure to appear in
subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and
Crossclaim and moved for the lifting of the Writ of Attachment.
6
The trial court maintained the Writ, and
upon motion of private respondent, ordered the sale of the fishing nets at a public auction. Philippine
Fishing Gear Industries won the bidding and deposited with the said court the sales proceeds of
P900,000.
7

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear
Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were
jointly liable to pay respondent.
8

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies
of the witnesses presented and (2) on a Compromise Agreement executed by the three
9
in Civil Case
No. 1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a
declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a declaration of
ownership of fishing boats; (d) an injunction and (e) damages.
10
The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4)
vessels sold in the amount of P5,750,000.00 including the fishing net. This
P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor
of JL Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3
Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00
whatever the deficiency shall be shouldered and paid to JL Holding
Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao.
11

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but
that joint liability could be presumed from the equal distribution of the profit and loss.
21

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing
business and may thus be held liable as a such for the fishing nets and floats purchased by and for the
use of the partnership. The appellate court ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong Lim
undertook a partnership for a specific undertaking, that is for commercial fishing . . . .
Oviously, the ultimate undertaking of the defendants was to divide the profits among
themselves which is what a partnership essentially is . . . . By a contract of partnership,
two or more persons bind themselves to contribute money, property or industry to a
common fund with the intention of dividing the profits among themselves (Article 1767,
New Civil Code).
13

Hence, petitioner brought this recourse before this Court.
14

The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following
grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE
AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A
SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR
OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM
PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING
LIABILITY TO PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT
OF PETITIONER LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats from respondent, the
Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have
entered into a partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from respondent, petitioner
controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He
asserts that the CA based its finding on the Compromise Agreement alone. Furthermore, he disclaims
any direct participation in the purchase of the nets, alleging that the negotiations were conducted by
Chua and Yao only, and that he has not even met the representatives of the respondent company.
Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease
" dated February 1, 1990, showed that he had merely leased to the two the main asset of the purported
partnership the fishing boat F/B Lourdes. The lease was for six months, with a monthly rental of
P37,500 plus 25 percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly
showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil
Code which provides:
Art. 1767 By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing
the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the following
factual findings:
15

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial
fishing to join him, while Antonio Chua was already Yao's partner;
(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to acquire
two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim,
to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of
Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security
for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry
docking and other expenses for the boats would be shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and
Chua entrusted the ownership papers of two other boats, Chua's FB Lady Anne
Mel and Yao's FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought
nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72
by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of
commercial documents; (b) reformation of contracts; (c) declaration of ownership of
fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed
between the parties-litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage
in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured
from Jesus Lim who was petitioner's brother. In their Compromise Agreement, they subsequently
revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally
among them the excess or loss. These boats, the purchase and the repair of which were financed with
borrowed money, fell under the term "common fund" under Article 1767. The contribution to such fund
need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed
that any loss or profit from the sale and operation of the boats would be divided equally among them
also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of
the nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired
in furtherance of their business. It would have been inconceivable for Lim to involve himself so much in
buying the boat but not in the acquisition of the aforesaid equipment, without which the business could
not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership
engaged in the fishing business. They purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and operations thereof would be divided
among them.
We stress that under Rule 45, a petition for review like the present case should involve only questions of
law. Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any
cogent proof that the present action is embraced by one of the exceptions to the rule.
16
In assailing the
factual findings of the two lower courts, petitioner effectively goes beyond the bounds of a petition for
review under Rule 45.
Compromise Agreement
Not the Sole Basis of Partnership
Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership was
the Compromise Agreement. He also claims that the settlement was entered into only to end the dispute
among them, but not to adjudicate their preexisting rights and obligations. His arguments are baseless.
The Agreement was but an embodiment of the relationship extant among the parties prior to its
execution.
A proper adjudication of claimants' rights mandates that courts must review and thoroughly appraise all
relevant facts. Both lower courts have done so and have found, correctly, a preexisting partnership
among the parties. In implying that the lower courts have decided on the basis of one piece of document
alone, petitioner fails to appreciate that the CA and the RTC delved into the history of the document and
explored all the possible consequential combinations in harmony with law, logic and fairness. Verily, the
two lower courts' factual findings mentioned above nullified petitioner's argument that the existence of a
partnership was based only on the Compromise Agreement.
Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua and
Yao, not a partner in the fishing venture. His argument allegedly finds support in the Contract of Lease
and the registration papers showing that he was the owner of the boats, including F/B Lourdes where
the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of
his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the
three of them. No lessor would do what petitioner did. Indeed, his consent to the sale proved that there
was a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in
which debts were undertaken in order to finance the acquisition and the upgrading of the vessels which
would be used in their fishing business. The sale of the boats, as well as the division among the three of
the balance remaining after the payment of their loans, proves beyond cavil that F/B Lourdes, though
registered in his name, was not his own property but an asset of the partnership. It is not uncommon to
register the properties acquired from a loan in the name of the person the lender trusts, who in this case
is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd for petitioner to sell his property to pay a debt
he did not incur, if the relationship among the three of them was merely that of lessor-lessee, instead of
partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua
and Yao, and not to him. Again, we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof: Provided however, That
when any such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped
from denying its corporate existence. "The reason behind this doctrine is obvious an unincorporated
association has no personality and would be incompetent to act and appropriate for itself the power and
attributes of a corporation as provided by law; it cannot create agents or confer authority on another to
act in its behalf; thus, those who act or purport to act as its representatives or agents do so without
authority and at their own risk. And as it is an elementary principle of law that a person who acts as an
agent without authority or without a principal is himself regarded as the principal, possessed of all the
right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts performed as such agent.
17

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the
first instance, an unincorporated association, which represented itself to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith
on such representation. It cannot allege lack of personality to be sued to evade its responsibility for a
contract it entered into and by virtue of which it received advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated
it as a corporation and received benefits from it, may be barred from denying its corporate existence in a
suit brought against the alleged corporation. In such case, all those who benefited from the transaction
made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for
contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the
nets it sold. The only question here is whether petitioner should be held jointly
18
liable with Chua and
Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible
corporation should be held liable. Since his name does not appear on any of the contracts and since he
never directly transacted with the respondent corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which
has earlier been proven to be an asset of the partnership. He in fact questions the attachment of the
nets, because the Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation.
Although it was never legally formed for unknown reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in representation of it. Clearly, under the law on estoppel,
those acting on behalf of a corporation and those benefited by it, knowing it to be without valid existence,
are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having
reaped the benefits of the contract entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of
corporation by estoppel. We reiterate the ruling of the Court in Alonso v. Villamor:
19

A litigation is not a game of technicalities in which one, more deeply schooled and skilled
in the subtle art of movement and position, entraps and destroys the other. It is, rather, a
contest in which each contending party fully and fairly lays before the court the facts in
issue and then, brushing aside as wholly trivial and indecisive all imperfections of form
and technicalities of procedure, asks that justice be done upon the merits. Lawsuits,
unlike duels, are not to be won by a rapier's thrust. Technicality, when it deserts its proper
office as an aid to justice and becomes its great hindrance and chief enemy, deserves
scant consideration from courts. There should be no vested rights in technicalities.
Third Issue:
Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree
with the Court of Appeals that this issue is now moot and academic. As previously discussed, F/B
Lourdes was an asset of the partnership and that it was placed in the name of petitioner, only to assure
payment of the debt he and his partners owed. The nets and the floats were specifically manufactured
and tailor-made according to their own design, and were bought and used in the fishing venture they
agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated in the
invoices is proper. Besides, by specific agreement, ownership of the nets remained with Respondent
Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., pls. see concurring opinion.
Separate Opinions
VITUG, J ., concurring opinion;
I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice Artemio V.
Panganiban, particularly the finding that Antonio Chua, Peter Yao and petitioner Lim Tong Lim have
incurred the liabilities of general partners. I merely would wish to elucidate a bit, albeit briefly, the liability
of partners in a general partnership.
When a person by his act or deed represents himself as a partner in an existing partnership or with one
or more persons not actual partners, he is deemed an agent of such persons consenting to such
representation and in the same manner, if he were a partner, with respect to persons who rely upon the
representation.
1
The association formed by Chua, Yao and Lim, should be, as it has been deemed, a de
facto partnership with all the consequent obligations for the purpose of enforcing the rights of third
persons. The liability of general partners (in a general partnership as so opposed to a limited
partnership) is laid down in Article 1816
2
which posits that all partners shall be liable pro rata beyond the
partnership assets for all the contracts which may have been entered into in its name, under its
signature, and by a person authorized to act for the partnership. This rule is to be construed along with
other provisions of the Civil Code which postulate that the partners can be held solidarily liable with the
partnership specifically in these instances (1) where, by any wrongful act or omission of any partner
acting in the ordinary course of the business of the partnership or with the authority of his co-partners,
loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred,
the partnership is liable therefor to the same extent as the partner so acting or omitting to act; (2) where
one partner acting within the scope of his apparent authority receives money or property of a third
person and misapplies it; and (3) where the partnership in the course of its business receives money or
property of a third person and the money or property so received is misapplied by any partner while it is
in the custody of the partnership
3
consistently with the rules on the nature of civil liability in delicts
and quasi-delicts.

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 143340 August 15, 2001
LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners,
vs.
LAMBERTO T. CHUA, respondent.
GONZAGA-REYES, J .:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the Decision
1
of the
Court of Appeals dated January 31, 2000 in the case entitled "Lamberto T. Chua vs. Lilibeth Sunga
Chan and Cecilia Sunga" and of the Resolution dated May 23, 2000 denying the motion for
reconsideration of herein petitioners Lilibeth Sunga and Cecilia Sunga (hereafter collectively referred to
as petitioners).
The pertinent facts of this case are as follows:
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth Sunga
Chan (hereafter petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia), daughter and wife,
respectively of the deceased Jacinto L. Sunga (hereafter Jacinto), for "Winding Up of Partnership Affairs,
Accounting, Appraisal and Recovery of Shares and Damages with Writ of Preliminary Attachment" with
the Regional Trial Court, Branch 11, Sindangan, Zamboanga del Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the distribution of
Shellane Liquefied Petroleum Gas (LPG) in Manila. For business convenience, respondent and Jacinto
allegedly agreed to register the business name of their partnership, SHELLITE GAS APPLIANCE
CENTER (hereafter Shellite), under the name of Jacinto as a sole proprietorship. Respondent allegedly
delivered his initial capital contribution of P100,000.00 to Jacinto while the latter in turn produced
P100,000.00 as his counterpart contribution, with the intention that the profits would be equally divided
between them. The partnership allegedly had Jacinto as manager, assisted by Josephine Sy (hereafter
Josephine), a sister of the wife respondent, Erlinda Sy. As compensation, Jacinto would receive a
manager's fee or remuneration of 10% of the gross profit and Josephine would receive 10% of the net
profits, in addition to her wages and other remuneration from the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation went
quite and was profitable. Respondent claimed that he could attest to success of their business because
of the volume of orders and deliveries of filled Shellane cylinder tanks supplied by Pilipinas Shell
Petroleum Corporation. While Jacinto furnished respondent with the merchandise inventories, balance
sheets and net worth of Shellite from 1977 to 1989, respondent however suspected that the amount
indicated in these documents were understated and undervalued by Jacinto and Josephine for their own
selfish reasons and for tax avoidance.
Upon 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 management of
Shellite without respondent's consent. Despite respondent's repeated demands upon petitioners for
accounting, inventory, appraisal, winding up and restitution of his net shares in the partnership,
petitioners failed to comply. Petitioner Lilibeth allegedly continued the operations of Shellite, converting
to her own use and advantage its properties.
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out the alibis and reasons to
evade respondent's demands, she disbursed out of the partnership funds the amount of P200,000.00
and partially paid the same to respondent. Petitioner Lilibeth allegedly informed respondent that the
P200,000.00 represented partial payment of the latter's share in the partnership, with a promise that the
former would make the complete inventory and winding up of the properties of the business
establishment. Despite such commitment, petitioners allegedly failed to comply with their duty to
account, and continued to benefit from the assets and income of Shellite to the damage and prejudice of
respondent.
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities and
Exchange Commission (SEC) in Manila, not the Regional Trial Court in Zamboanga del Norte had
jurisdiction over the action. Respondent opposed the motion to dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in from and substance denied the
motion to dismiss.
On January 30, 1993, petitioners filed their Answer with Compulsory Counter-claims, contending that
they are not liable for partnership shares, unreceived income/profits, interests, damages and attorney's
fees, that respondent does not have a cause of action against them, and that the trial court has no
jurisdiction over the nature of the action, the SEC being the agency that has original and exclusive
jurisdiction over the case. As counterclaim, petitioner sought attorney's fees and expenses of litigation.
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the claim for
winding up of partnership affairs, accounting and recovery of shares in partnership affairs, accounting
and recovery of shares in partnership assets/properties should be dismissed and prosecuted against the
estate of deceased Jacinto in a probate or intestate proceeding.
On August 16, 1993, the trial denied the second motion to dismiss for lack of merit.
On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and Mandamus with the
Court of Appeals docketed as CA-G.R. SP No. 32499 questioning the denial of the motion to dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of merit.
On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner, "as
petitioners failed to show that a reversible error was committed by the appellate court."
2

On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was remanded
to the trial court on April 26, 1995.
On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of the
case of January 17, 1996. Respondent presented his evidence while petitioners were considered to
have waived their right to present evidence for their failure to attend the scheduled date for reception of
evidence despite notice.
On October 7, 1997, the trial court rendered its Decision ruling for respondent. The dispositive of the
Decision reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
as follows:
(1) DIRECTING them to render an accounting in acceptable form under accounting
procedures and standards of the properties, assets, income and profits of the Shellite
Gas Appliance Center Since the time of death of Jacinto L. Sunga, from whom they
continued the business operations including all businesses derived from Shellite Gas
Appliance Center, submit an inventory, and appraisal of all these properties, assets,
income, profits etc. to the Court and to plaintiff for approval or disapproval;
(2) ORDERING them to return and restitute to the partnership any and all properties,
assets, income and profits they misapplied and converted to their own use and advantage
the legally pertain to the plaintiff and account for the properties mentioned in pars. A and
B on pages 4-5 of this petition as basis;
(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the
plaintiff in the partnership of the listed properties, assets and good will (sic) in schedules
A, B and C, on pages 4-5 of the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from
the partnership from 1988 to May 30, 1992, when the plaintiff learned of the closure of the
store the sum of P35,000.00 per month, with legal rate of interest until fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its business
activities pursuant to law, after delivering to the plaintiff all the interest, shares,
participation and equity in the partnership, or the value thereof in money or money's
worth, if the properties are not physically divisible;
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith
and hold them liable to the plaintiff the sum of P50,000.00 as moral and exemplary
damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorney's (sic) and
P25,000.00 as litigation expenses.
NO special pronouncements as to COSTS.
SO ORDERED."
3

On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case to the
Court of Appeals.
On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the Decision
reads:
"WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all
respects."
4

On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner.
Hence, this petition wherein petitioner relies upon following grounds:
"1. The Court of Appeals erred in making a legal conclusion that there existed a partnership
between respondent Lamberto T. Chua and the late Jacinto L. Sunga upon the latter'' invitation
and offer and that upon his death the partnership assets and business were taken over by
petitioners.
2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did
not apply in the instant case.
3. The Court of Appeals erred in making the legal conclusion that there was competent and
credible evidence to warrant the finding of a partnership, and assuming arguendo that indeed
there was a partnership, the finding of highly exaggerated amounts or values in the partnership
assets and profits."
5

Petitioners question the correctness of the finding of the trial court and the Court of Appeals that a
partnership existed between respondent and Jacinto from 1977 until Jacinto's death. In the absence of
any written document to show such partnership between respondent and Jacinto, petitioners argues that
these courts were proscribes from hearing the testimonies of respondent and his witness, Josephine, to
prove the alleged partnership three years after Jacinto's death. To support this argument, petitioners
invoke the "Dead Man's Statute' or "Survivorship Rule" under Section 23, Rule 130 of the Rules of Court
that provides:
"SEC. 23. Disqualification by reason of death or insanity of adverse party. Parties or assignors
of parties to a case, or persons in whose behalf a case is prosecuted, against an executor or
administrator or other representative of a deceased person, or against a person of unsound
mind, upon a claim or demand against the estate of such deceased person, or against such
person of unsound mind, cannot testify as to any matter of fact occurring before the death of
such deceased person or before such person became of unsound mind."
Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego,
Josephine, should not have been admitted to prove certain claims against a deceased person (Jacinto),
now represented by petitioners.
We are not persuaded.
A partnership may be constituted in any form, except where immovable property of real rights are
contributed thereto, in which case a public instrument shall necessary.
6
Hence, based on the intention of
the parties, as gathered from the facts and ascertained from their language and conduct, a verbal
contract of partnership may arise.
7
The essential profits that must be proven to that a partnership was
agreed upon are (1) mutual contribution to a common stock, and (2) a joint interest in the
profits.
8
Understandably so, in view of the absence of the written contract of partnership between
respondent and Jacinto, respondent resorted to the introduction of documentary and testimonial
evidence to prove said partnership. The crucial issue to settle then is to whether or not the "Dead Man's
Statute" applies to this case so as to render inadmissible respondent's testimony and that of his witness,
Josephine.
The "Dead Man's Statute" provides that if one party to the alleged transaction is precluded from
testifying by death, insanity, or other mental disabilities, the surviving party is not entitled to the undue
advantage of giving his own uncontradicted and unexplained account of the transaction.
9
But before this
rule can be successfully invoked to bar the introduction of testimonial evidence, it is necessary that:
"1. The witness is a party or assignor of a party to case or persons in whose behalf a case in
prosecuted.
2. The action is against an executor or administrator or other representative of a deceased
person or a person of unsound mind;
3. The subject-matter of the action is a claim or demand against the estate of such deceased
person or against person of unsound mind;
4. His testimony refers to any matter of fact of which occurred before the death of such deceased
person or before such person became of unsound mind."
10

Two reasons forestall the application of the "Dead Man's Statute" to this case.
First, petitioners filed a compulsory counterclaim
11
against respondents in their answer before the trial
court, and with the filing of their counterclaim, petitioners themselves effectively removed this case from
the ambit of the "Dead Man's Statute".
12
Well entrenched is the rule that when it is the executor or
administrator or representatives of the estates that sets up the counterclaim, the plaintiff, herein
respondent, may testify to occurrences before the death of the deceased to defeat the
counterclaim.
13
Moreover, as defendant in the counterclaim, respondent is not disqualified from testifying
as to matters of facts occurring before the death of the deceased, said action not having been brought
against but by the estate or representatives of the deceased.
14

Second, the testimony of Josephine is not covered by the "Dead Man's Statute" for the simple reason
that she is not "a party or assignor of a party to a case or persons in whose behalf a case is prosecuted."
Records show that respondent offered the testimony of Josephine to establish the existence of the
partnership between respondent and Jacinto. Petitioners' insistence that Josephine is the alter ego of
respondent does not make her an assignor because the term "assignor" of a party means "assignor of a
cause of action which has arisen, and not the assignor of a right assigned before any cause of action
has arisen."
15
Plainly then, Josephine is merely a witness of respondent, the latter being the party
plaintiff.
We are not convinced by petitioners' allegation that 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 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 any way categorically
say that she was forced to be a witness of respondent.
Also, the fact that Josephine is the sister of the wife of respondent does not diminish the value of her
testimony since relationship per se, without more, does not affect the credibility of witnesses.
16

Petitioners' reliance alone on the "Dead 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 established
between respondent and Jacinto. Based not only on the testimonial evidence, but the documentary
evidence as well, the trial court and the Court of Appeals considered the evidence for respondent as
sufficient to prove the formation of partnership, albeit an informal one.
Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial
precedents, a factual matter like the finding of the existence of a partnership between respondent and
Jacinto cannot be inquired into by this Court on review.
17
This Court can no longer be tasked to go over
the proofs presented by the parties and analyze, assess and weigh them to ascertain if the trial court
and the appellate court were correct in according superior credit to this or that piece of evidence of one
party or the other.
18
It must be also pointed out that petitioners failed to attend the presentation of
evidence of respondent. Petitioners cannot now turn to this Court to question the admissibility and
authenticity of the documentary evidence of respondent when petitioners failed to object to the
admissibility of the evidence at the time that such evidence was offered.
19

With regard to petitioners' insistence that laches and/or prescription should have extinguished
respondent's claim, we agree with the trial court and the Court of Appeals that the action for accounting
filed by respondents three (3) years after Jacinto's death was well within the prescribed period. The Civil
Code provides that an action to enforce an oral contract prescribes in six (6) years
20
while the right to
demand an accounting for a partner's interest as against the person continuing the business accrues at
the date of dissolution, in the absence of any contrary agreement.
21
Considering that the death of a
partner results in the dissolution of the partnership
22
, in this case, it was 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 the partnership, the dissolution did not immediately
terminate the partnership. The Civil Code
23
expressly provides that upon dissolution, the partnership
continues and its legal personality is retained until the complete winding up of its business, culminating
in its termination.
24

In a desperate bid to cast doubt on the validity of the oral partnership between respondent and Jacinto,
petitioners maintain that said partnership that had initial capital of P200,000.00 should have been
registered with the Securities and Exchange Commission (SEC) since registration is mandated by the
Civil Code, True, Article 1772 of the Civil Code requires that partnerships with a capital of P3,000.00 or
more must register with the SEC, however, this registration requirement is not mandatory. Article 1768
of the Civil Code
25
explicitly provides that the partnership retains its juridical personality even if it fails to
register. The failure to register the contract of partnership does not invalidate the same as among the
partners, so long as the contract has the essential requisites, because the main purpose of registration
is to give notice to third parties, and it can be assumed that the members themselves knew of the
contents of their contract.
26
In the case at bar, non-compliance with this directory provision of the law will
not invalidate the partnership considering that the totality of the evidence proves that respondent and
Jacinto indeed forged the partnership in question.
WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is
AFFIRMED.
SO ORDERED.1wphi1.nt
Melo, Vitug, Panganiban, and Sandoval-Gutierrez, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19342 May 25, 1972
LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA, MARIANO B.
OA, LUZ B. OA, VIRGINIA B. OA and LORENZO B. OA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and
Special Attorney Purificacion Ureta for respondent.

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

Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in line with the
ruling of the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-
9692, Jan. 6, 1958, so that the questioned assessment refers solely to the income tax
proper for the years 1955 and 1956 and the "Compromise for non-filing," the latter item
obviously referring to the compromise in lieu of the criminal liability for failure of
petitioners to file the corporate income tax returns for said years. (See Exh. 17, page 86,
BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS
FORMED AN UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS
WERE CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS
DERIVED FROM TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE
LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO
THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES
OWNED IN COMMON AND THE LOANS RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;
V .
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS
PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE
SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by
the Court of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by
them from the deceased Julia Buales and the profits derived from transactions involving the same, or,
must they be deemed to have formed an unregistered partnership subject to tax under Sections 24 and
84(b) of the National Internal Revenue Code? (2) Assuming they have formed an unregistered
partnership, should this not be only in the sense that they invested as a common fund the profits earned
by the properties owned by them in common and the loans granted to them upon the security of the said
properties, with the result that as far as their respective shares in the inheritance are concerned, the total
income thereof should be considered as that of co-owners and not of the unregistered partnership? And
(3) assuming again that they are taxable as an unregistered partnership, should not the various amounts
already paid by them for the same years 1955 and 1956 as individual income taxes on their respective
shares of the profits accruing from the properties they owned in common be deducted from the
deficiency corporate taxes, herein involved, assessed against such unregistered partnership by the
respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate was
judicially approved as early as May 16, 1949, and presumably petitioners have been holding their
respective shares in their inheritance since those dates admittedly under the administration or
management of the head of the family, the widower and father Lorenzo T. Oa, the assessment in
question refers to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal Revenue
did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he
considered them as having formed an unregistered partnership. At least, there is nothing in the record
indicating that an earlier assessment had already been made. Such being the case, and We see no
reason how it could be otherwise, it is easily understandable why petitioners' position that they are co-
owners and not unregistered co-partners, for the purposes of the impugned assessment, cannot be
upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed
earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves
pursuant to the project of partition approved in 1949, "the properties remained under the management of
Lorenzo T. Oa who used said properties in business by leasing or selling them and investing the
income derived therefrom and the proceed from the sales thereof in real properties and securities," as a
result of which said properties and investments steadily increased yearly from P87,860.00 in "land
account" and P17,590.00 in "building account" in 1949 to P175,028.68 in "investment account,"
P135.714.68 in "land account" and P169,262.52 in "building account" in 1956. And all these became
possible because, admittedly, petitioners never actually received any share of the income or profits from
Lorenzo T. Oa and instead, they allowed him to continue using said shares as part of the common fund
for their ventures, even as they paid the corresponding income taxes on the basis of their respective
shares of the profits of their common business as reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to
holding the properties inherited by them. Indeed, it is admitted that during the material years herein
involved, some of the said properties were sold at considerable profit, and that with said profit,
petitioners engaged, thru Lorenzo T. Oa, in the purchase and sale of corporate securities. It is likewise
admitted that all the profits from these ventures were divided among petitioners proportionately in
accordance with their respective shares in the inheritance. In these circumstances, it is Our considered
view that from the moment petitioners allowed not only the incomes from their respective shares of the
inheritance but even the inherited properties themselves to be used by Lorenzo T. Oa as a common
fund in undertaking several transactions or in business, with the intention of deriving profit to be shared
by them proportionally, such act was tantamonut to actually contributing such incomes to a common
fund and, in effect, they thereby formed an unregistered partnership within the purview of the above-
mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered
as co-owners rather than unregistered co-partners within the contemplation of our corporate tax laws
aforementioned. Before the partition and distribution of the estate of the deceased, all the income
thereof does belong commonly to all the heirs, obviously, without them becoming thereby unregistered
co-partners, but it does not necessarily follow that such status as co-owners continues until the
inheritance is actually and physically distributed among the heirs, for it is easily conceivable that after
knowing their respective shares in the partition, they might decide to continue holding said shares under
the common management of the administrator or executor or of anyone chosen by them and engage in
business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any
inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal
Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the
appellants therein to be unregistered co-partners for tax purposes, that their common fund "was not
something they found already in existence" and that "it was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in all
instances where an inheritance is not actually divided, there can be no unregistered co-partnership. As
already indicated, for tax purposes, the co-ownership of inherited properties is automatically converted
into an unregistered partnership the moment the said common properties and/or the incomes derived
therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their
respective shares in the inheritance as determined in a project partition either duly executed in an
extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding.
The reason for this is simple. From the moment of such partition, the heirs are entitled already to their
respective definite shares of the estate and the incomes thereof, for each of them to manage and
dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he
becomes liable individually for all taxes in connection therewith. If after such partition, he allows his
share to be held in common with his co-heirs under a single management to be used with the intent of
making profit thereby in proportion to his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is
formed. This is exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that:
"The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived," and, for that matter, on any other provision of said code on partnerships is unavailing.
In Evangelista, supra, this Court clearly differentiated the concept of partnerships under the Civil Code
from that of unregistered partnerships which are considered as "corporations" under Sections 24 and
84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice,
elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our Internal Revenue Code
includes "partnerships" among the entities subject to the tax on "corporations", said Code
must allude, therefore, to organizations which are not necessarily "partnerships", in the
technical sense of the term. Thus, for instance, section 24 of said Code exempts from the
aforementioned tax "duly registered general partnerships," which constitute precisely one
of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section
84(b) of said Code, "the term corporation includes partnerships, no matter how created or
organized." This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in confirmity with the usual requirements of
the law on partnerships, in order that one could be deemed constituted for purposes of
the tax on corporation. Again, pursuant to said section 84(b),the term "corporation"
includes, among others, "joint accounts,(cuentas en participacion)" and "associations",
none of which has a legal personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that personality as a condition
essential to the existence of the partnerships therein referred to. In fact, as above stated,
"duly registered general co-partnerships" which are possessed of the aforementioned
personality have been expressly excluded by law (sections 24 and 84[b]) from the
connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership"
it includes not only a partnership as known in common law but, as well, a
syndicate, group, pool, joint venture, or other unincorporated organization
which carries on any business, financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. ... .
(7A Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or
other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on. ... . (8 Merten's Law
of Federal Income Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes
these partnerships with the exception only of duly registered general copartnerships
within the purview of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned, and are
subject to the income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G.
R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-
ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the
corporate taxes in question, of their inherited properties from those acquired by them subsequently, We
consider as justified the following ratiocination of the Tax Court in denying their motion for
reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered
partnership, the holding should be limited to the business engaged in apart from the
properties inherited by petitioners. In other words, the taxable income of the partnership
should be limited to the income derived from the acquisition and sale of real properties
and corporate securities and should not include the income derived from the inherited
properties. It is admitted that the inherited properties and the income derived therefrom
were used in the business of buying and selling other real properties and corporate
securities. Accordingly, the partnership income must include not only the income derived
from the purchase and sale of other properties but also the income of the inherited
properties.
Besides, as already observed earlier, the income derived from inherited properties may be considered
as individual income of the respective heirs only so long as the inheritance or estate is not distributed or,
at least, partitioned, but the moment their respective known shares are used as part of the common
assets of the heirs to be used in making profits, it is but proper that the income of such shares should be
considered as the part of the taxable income of an unregistered partnership. This, We hold, is the clear
intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in
the aforementioned resolution denying petitioners' motion for reconsideration of the decision of said
court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the
herein petitioners have formed an unregistered partnership and, therefore,
have to be taxed as such, it might be recalled that the petitioners in their
individual income tax returns reported their shares of the profits of the
unregistered partnership. We think it only fair and equitable that the
various amounts paid by the individual petitioners as income tax on their
respective shares of the unregistered partnership should be deducted from
the deficiency income tax found by this Honorable Court against the
unregistered partnership. (page 7, Memorandum for the Petitioner in
Support of Their Motion for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the partnership
must be reduced by the amounts of income tax paid by each petitioner on his share of
partnership profits. This is not correct; rather, it should be the other way around. The
partnership profits distributable to the partners (petitioners herein) should be reduced by
the amounts of income tax assessed against the partnership. Consequently, each of the
petitioners in his individual capacity overpaid his income tax for the years in question, but
the income tax due from the partnership has been correctly assessed. Since the
individual income tax liabilities of petitioners are not in issue in this proceeding, it is not
proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid
as individual income tax cannot be credited as part payment of the taxes herein in question. It is argued
that to sanction the view of the Tax Court is to oblige petitioners to pay double income tax on the same
income, and, worse, considering the time that has lapsed since they paid their individual income taxes,
they may already be barred by prescription from recovering their overpayments in a separate action. We
do not agree. As We see it, the case of petitioners as regards the point under discussion is simply that of
a taxpayer who has paid the wrong tax, assuming that the failure to pay the corporate taxes in question
was not deliberate. Of course, such taxpayer has the right to be reimbursed what he has erroneously
paid, but the law is very clear that the claim and action for such reimbursement are subject to the bar of
prescription. And since the period for the recovery of the excess income taxes in the case of herein
petitioners has already lapsed, it would not seem right to virtually disregard prescription merely upon the
ground that the reason for the delay is precisely because the taxpayers failed to make the proper return
and payment of the corporate taxes legally due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly above suspicion in their conduct vis-a-
vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm
with costs against petitioners.
Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.
Reyes, J.B.L. and Teehankee, JJ., concur in the result.
Castro, J., took no part.
Concepcion, C.J., is on leave.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS,
brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.

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