G.R. No.

126881

October 3, 2000

HEIRS OF TAN ENG KEE, petitioners,

vs.
COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President TAN
ENG LAY,respondents.
DE LEON, JR., J.:
In this petition for review on certiorari, petitioners pray for the reversal of the Decision1 dated March
13, 1996 of the former Fifth Division2 of the Court of Appeals in CA-G.R. CV No. 47937, the
dispositive portion of which states:
THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the
complaint dismissed.
The facts are:
Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law
spouse of the decedent, joined by their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio,
collectively known as herein petitioners HEIRS OF TAN ENG KEE, filed suit against the decedent's
brother TAN ENG LAY on February 19, 1990. The complaint,3 docketed as Civil Case No. 1983-R in
the Regional Trial Court of Baguio City was for accounting, liquidation and winding up of the alleged
partnership formed after World War II between Tan Eng Kee and Tan Eng Lay. On March 18, 1991,
the petitioners filed an amended complaint4 impleading private respondent herein BENGUET
LUMBER COMPANY, as represented by Tan Eng Lay. The amended complaint was admitted by the
trial court in its Order dated May 3, 1991.5
The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan
Eng Lay, pooling their resources and industry together, entered into a partnership engaged in the
business of selling lumber and hardware and construction supplies. They named their enterprise
"Benguet Lumber" which they jointly managed until Tan Eng Kee's death. Petitioners herein averred
that the business prospered due to the hard work and thrift of the alleged partners. However, they
claimed that in 1981, Tan Eng Lay and his children caused the conversion of the partnership
"Benguet Lumber" into a corporation called "Benguet Lumber Company." The incorporation was
purportedly a ruse to deprive Tan Eng Kee and his heirs of their rightful participation in the profits of
the business. Petitioners prayed for accounting of the partnership assets, and the dissolution,
winding up and liquidation thereof, and the equal division of the net assets of Benguet Lumber.
After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment6 on April 12, 1995, to wit:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
a) Declaring that Benguet Lumber is a joint venture which is akin to a particular partnership;
b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or
partners in a business venture and/or particular partnership called Benguet Lumber and as
such should share in the profits and/or losses of the business venture or particular
partnership;

c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet
Lumber Co. Inc. and as such the heirs or legal representatives of the deceased Tan Eng Kee
have a legal right to share in said assets;
d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as
partner in a particular partnership have descended to the plaintiffs who are his legal heirs.
e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of
Benguet Lumber Company Inc. to render an accounting of all the assets of Benguet Lumber
Company, Inc. so the plaintiffs know their proper share in the business;
f) Ordering the appointment of a receiver to preserve and/or administer the assets of
Benguet Lumber Company, Inc. until such time that said corporation is finally liquidated are
directed to submit the name of any person they want to be appointed as receiver failing in
which this Court will appoint the Branch Clerk of Court or another one who is qualified to act
as such.
g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in
filing the instant case.
h) Dismissing the counter-claim of the defendant for lack of merit.
SO ORDERED.
Private respondent sought relief before the Court of Appeals which, on March 13, 1996, rendered
the assailed decision reversing the judgment of the trial court. Petitioners' motion for
reconsideration7 was denied by the Court of Appeals in a Resolution8 dated October 11, 1996.
Hence, the present petition.
As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and
Wilborn Tan for the use of allegedly falsified documents in a judicial proceeding. Petitioners
complained that Exhibits "4" to "4-U" offered by the defendants before the trial court, consisting of
payrolls indicating that Tan Eng Kee was a mere employee of Benguet Lumber, were fake, based on
the discrepancy in the signatures of Tan Eng Kee. They also filed Criminal Cases Nos. 78857-78870
against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan, for alleged
falsification of commercial documents by a private individual. On March 20, 1999, the Municipal Trial
Court of Baguio City, Branch 1, wherein the charges were filed, rendered judgment9 dismissing the
cases for insufficiency of evidence.
In their assignment of errors, petitioners claim that:
I
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO
PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY
BECAUSE: (A) THERE WAS NO FIRM ACCOUNT; (B) THERE WAS NO FIRM
LETTERHEADS SUBMITTED AS EVIDENCE; (C) THERE WAS NO CERTIFICATE OF
PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO PROFITS AND LOSSES; AND
(E) THERE WAS NO TIME FIXED FOR THE DURATION OF THE PARTNERSHIP (PAGE
13, DECISION).

II
THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELFSERVING TESTIMONY OF RESPONDENT TAN ENG LAY THAT BENGUET LUMBER
WAS A SOLE PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY AN EMPLOYEE
THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING
FACTS WHICH WERE DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT
SUPPORT THE EXISTENCE OF A PARTNERSHIP JUST BECAUSE THERE WAS NO
ARTICLES OF PARTNERSHIP DULY RECORDED BEFORE THE SECURITIES AND
EXCHANGE COMMISSION:
a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING
AT THE BENGUET LUMBER COMPOUND;
b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE
EMPLOYEES OF BENGUET LUMBER;
c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE
EMPLOYEES THEREIN;
d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING
THE PRICES OF STOCKS TO BE SOLD TO THE PUBLIC; AND
e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS
TO THE SUPPLIERS (PAGE 18, DECISION).
IV
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO
PARTNERSHIP JUST BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO
TAN AND VERONICA CHOI, TOGETHER WITH THEIR WITNESS BEATRIZ TANDOC,
ADMITTED THAT THEY DO NOT KNOW WHEN THE ESTABLISHMENT KNOWN IN
BAGUIO CITY AS BENGUET LUMBER WAS STARTED AS A PARTNERSHIP (PAGE 1617, DECISION).
V
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO
PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY
BECAUSE THE PRESENT CAPITAL OR ASSETS OF BENGUET LUMBER IS DEFINITELY
MORE THAN P3,000.00 AND AS SUCH THE EXECUTION OF A PUBLIC INSTRUMENT
CREATING A PARTNERSHIP SHOULD HAVE BEEN MADE AND NO SUCH PUBLIC
INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17, DECISION).
As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not
be disturbed on appeal if such are supported by the evidence.10 Our jurisdiction, it must be
emphasized, does not include review of factual issues. Thus:

Filing of petition with Supreme Court. A party desiring to appeal by certiorari from a
judgment or final order or resolution of the Court of Appeals, the Sandiganbayan, the
Regional Trial Court or other courts whenever authorized by law, may file with the Supreme
Court a verified petition for review on certiorari. The petition shall raise only questions of law
which must be distinctly set forth.11 [emphasis supplied]
Admitted exceptions have been recognized, though, and when present, may compel us to analyze
the evidentiary basis on which the lower court rendered judgment. Review of factual issues is
therefore warranted:
(1) when the factual findings of the Court of Appeals and the trial court are contradictory;
(2) when the findings are grounded entirely on speculation, surmises, or conjectures;
(3) when the inference made by the Court of Appeals from its findings of fact is manifestly
mistaken, absurd, or impossible;
(4) when there is grave abuse of discretion in the appreciation of facts;
(5) when the appellate court, in making its findings, goes beyond the issues of the case, and
such findings are contrary to the admissions of both appellant and appellee;
(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;
(7) when the Court of Appeals fails to notice certain relevant facts which, if properly
considered, will justify a different conclusion;
(8) when the findings of fact are themselves conflicting;
(9) when the findings of fact are conclusions without citation of the specific evidence on
which they are based; and
(10) when the findings of fact of the Court of Appeals are premised on the absence of
evidence but such findings are contradicted by the evidence on record.12
In reversing the trial court, the Court of Appeals ruled, to wit:
We note that the Court a quo over extended the issue because while the plaintiffs mentioned
only the existence of a partnership, the Court in turn went beyond that by justifying the
existence of a joint venture.
When mention is made of a joint venture, it would presuppose parity of standing between the
parties, equal proprietary interest and the exercise by the parties equally of the conduct of
the business, thus:
xxx

xxx

xxx

We have the admission that the father of the plaintiffs was not a partner of the Benguet
Lumber before the war. The appellees however argued that (Rollo, p. 104; Brief, p. 6) this is
because during the war, the entire stocks of the pre-war Benguet Lumber were confiscated if
not burned by the Japanese. After the war, because of the absence of capital to start a

lumber and hardware business, Lay and Kee pooled the proceeds of their individual
businesses earned from buying and selling military supplies, so that the common fund would
be enough to form a partnership, both in the lumber and hardware business. That Lay and
Kee actually established the Benguet Lumber in Baguio City, was even testified to by
witnesses. Because of the pooling of resources, the post-war Benguet Lumber was
eventually established. That the father of the plaintiffs and Lay were partners, is obvious from
the fact that: (1) they conducted the affairs of the business during Kee's lifetime, jointly, (2)
they were the ones giving orders to the employees, (3) they were the ones preparing orders
from the suppliers, (4) their families stayed together at the Benguet Lumber compound, and
(5) all their children were employed in the business in different capacities.
xxx

xxx

xxx

It is obvious that there was no partnership whatsoever. Except for a firm name, there was no
firm account, no firm letterheads submitted as evidence, no certificate of partnership, no
agreement as to profits and losses, and no time fixed for the duration of the partnership.
There was even no attempt to submit an accounting corresponding to the period after the
war until Kee's death in 1984. It had no business book, no written account nor any
memorandum for that matter and no license mentioning the existence of a partnership
[citation omitted].
Also, the exhibits support the establishment of only a proprietorship. The certification dated
March 4, 1971, Exhibit "2", mentioned co-defendant Lay as the only registered owner of the
Benguet Lumber and Hardware. His application for registration, effective 1954, in fact
mentioned that his business started in 1945 until 1985 (thereafter, the incorporation). The
deceased, Kee, on the other hand, was merely an employee of the Benguet Lumber
Company, on the basis of his SSS coverage effective 1958, Exhibit "3". In the Payrolls,
Exhibits "4" to "4-U", inclusive, for the years 1982 to 1983, Kee was similarly listed only as an
employee; precisely, he was on the payroll listing. In the Termination Notice, Exhibit "5", Lay
was mentioned also as the proprietor.
xxx

xxx

xxx

We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in
any form, but when an immovable is constituted, the execution of a public instrument
becomes necessary. This is equally true if the capitalization exceeds P3,000.00, in which
case a public instrument is also necessary, and which is to be recorded with the Securities
and Exchange Commission. In this case at bar, we can easily assume that the business
establishment, which from the language of the appellees, prospered (pars. 5 & 9, Complaint),
definitely exceeded P3,000.00, in addition to the accumulation of real properties and to the
fact that it is now a compound. The execution of a public instrument, on the other hand, was
never established by the appellees.
And then in 1981, the business was incorporated and the incorporators were only Lay and
the members of his family. There is no proof either that the capital assets of the partnership,
assuming them to be in existence, were maliciously assigned or transferred by Lay,
supposedly to the corporation and since then have been treated as a part of the latter's
capital assets, contrary to the allegations in pars. 6, 7 and 8 of the complaint.
These are not evidences supporting the existence of a partnership:

1) That Kee was living in a bunk house just across the lumber store, and then in a room in
the bunk house in Trinidad, but within the compound of the lumber establishment, as testified
to by Tandoc; 2) that both Lay and Kee were seated on a table and were "commanding
people" as testified to by the son, Elpidio Tan; 3) that both were supervising the laborers, as
testified to by Victoria Choi; and 4) that Dionisio Peralta was supposedly being told by Kee
that the proceeds of the 80 pieces of the G.I. sheets were added to the business.
Partnership presupposes the following elements [citation omitted]: 1) a contract, either oral or
written. However, if it involves real property or where the capital is P3,000.00 or more, the
execution of a contract is necessary; 2) the capacity of the parties to execute the contract; 3)
money property or industry contribution; 4) community of funds and interest, mentioning
equality of the partners or one having a proportionate share in the benefits; and 5) intention
to divide the profits, being the true test of the partnership. The intention to join in the
business venture for the purpose of obtaining profits thereafter to be divided, must be
established. We cannot see these elements from the testimonial evidence of the appellees.
As can be seen, the appellate court disputed and differed from the trial court which had adjudged
that TAN ENG KEE and TAN ENG LAY had allegedly entered into a joint venture. In this connection,
we have held that whether a partnership exists is a factual matter; consequently, since the appeal is
brought to us under Rule 45, we cannot entertain inquiries relative to the correctness of the
assessment of the evidence by the court a quo.13 Inasmuch as the Court of Appeals and the trial
court had reached conflicting conclusions, perforce we must examine the record to determine if the
reversal was justified.
The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet
Lumber. A contract of partnership is defined by law as one where:
. . . two or more persons bind themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.14
Thus, in order to constitute a partnership, it must be established that (1) two or more persons
bound themselves to contribute money, property, or industry to a common fund, and (2) they
intend to divide the profits among themselves.15 The agreement need not be formally
reduced into writing, since statute allows the oral constitution of a partnership, save in two
instances: (1) when immovable property or real rights are contributed,16 and (2) when the
partnership has a capital of three thousand pesos or more.17 In both cases, a public
instrument is required.18 An inventory to be signed by the parties and attached to the public
instrument is also indispensable to the validity of the partnership whenever immovable
property is contributed to the partnership.19
The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture, which
it said is akin to a particular partnership.20 A particular partnership is distinguished from a joint
adventure, to wit:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal
partnership, with no firm name and no legal personality. In a joint account, the participating
merchants can transact business under their own name, and can be individually liable
therefor.

(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION,
although the business of pursuing to a successful termination may continue for a number of
years; a partnership generally relates to a continuing business of various transactions of a
certain kind.21
A joint venture "presupposes generally a parity of standing between the joint co-ventures or partners,
in which each party has an equal proprietary interest in the capital or property contributed, and
where each party exercises equal rights in the conduct of the business."22 Nonetheless, in Aurbach,
et. al. v. Sanitary Wares Manufacturing Corporation, et. al.,23 we expressed the view that a joint
venture may be likened to a particular partnership, thus:
The legal concept of a joint venture is of common law origin. It has no precise legal definition,
but it has been generally understood to mean an organization formed for some temporary
purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is hardly distinguishable from the
partnership, since their elements are similar community of interest in the business,
sharing of profits and losses, and a mutual right of control. (Blackner v. McDermott, 176 F.
2d. 498, [1949]; Carboneau v. Peterson, 95 P.2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal.
2d. 183, 288 P.2d. 12 289 P.2d. 242 [1955]). The main distinction cited by most opinions in
common law jurisdiction is that the partnership contemplates a general business with some
degree of continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. (Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d.
500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed.
811 [1920]). This observation is not entirely accurate in this jurisdiction, since under the Civil
Code, a partnership may be particular or universal, and a particular partnership may have for
its object a specific undertaking. (Art. 1783, 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. Bolaos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981).
Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of
partnership but there is none. The alleged partnership, though, was never formally organized. In
addition, petitioners point out that the New Civil Code was not yet in effect when the partnership was
allegedly formed sometime in 1945, although the contrary may well be argued that nothing
prevented the parties from complying with the provisions of the New Civil Code when it took effect
on August 30, 1950. But all that is in the past. The net effect, however, is that we are asked to
determine whether a partnership existed based purely on circumstantial evidence. A review of the
record persuades us that the Court of Appeals correctly reversed the decision of the trial court. The
evidence presented by petitioners falls short of the quantum of proof required to establish a
partnership.
Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay,
could have expounded on the precise nature of the business relationship between them. In the
absence of evidence, we cannot accept as an established fact that Tan Eng Kee allegedly
contributed his resources to a common fund for the purpose of establishing a partnership. The
testimonies to that effect of petitioners' witnesses is directly controverted by Tan Eng Lay. It should
be noted that it is not with the number of witnesses wherein preponderance lies;24 the quality of their
testimonies is to be considered. None of petitioners' witnesses could suitably account for the
beginnings of Benguet Lumber Company, except perhaps for Dionisio Peralta whose deceased wife
was related to Matilde Abubo.25 He stated that when he met Tan Eng Kee after the liberation, the
latter asked the former to accompany him to get 80 pieces of G.I. sheets supposedly owned by both

brothers.26Tan Eng Lay, however, denied knowledge of this meeting or of the conversation between
Peralta and his brother.27 Tan Eng Lay consistently testified that he had his business and his brother
had his, that it was only later on that his said brother, Tan Eng Kee, came to work for him. Be that as
it may, co-ownership or co-possession (specifically here, of the G.I. sheets) is not an indicium of the
existence of a partnership.28
Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly
in existence, Tan Eng Kee never asked for an accounting. The essence of a partnership is that the
partners share in the profits and losses.29 Each has the right to demand an accounting as long as the
partnership exists.30 We have allowed a scenario wherein "[i]f excellent relations exist among the
partners at the start of the business and all the partners are more interested in seeing the firm grow
rather than get immediate returns, a deferment of sharing in the profits is perfectly plausible."31 But in
the situation in the case at bar, the deferment, if any, had gone on too long to be plausible. A person
is presumed to take ordinary care of his concerns.32 As we explained in another case:
In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second
place, she did not furnish any help or intervention in the management of the theatre. In the
third place, it does not appear that she has even demanded from defendant any accounting
of the expenses and earnings of the business. Were she really a partner, her first concern
should have been to find out how the business was progressing, whether the expenses were
legitimate, whether the earnings were correct, etc. She was absolutely silent with respect to
any of the acts that a partner should have done; all that she did was to receive her share of
P3,000.00 a month, which cannot be interpreted in any manner than a payment for the use
of the premises which she had leased from the owners. Clearly, plaintiff had always acted in
accordance with the original letter of defendant of June 17, 1945 (Exh. "A"), which shows
that both parties considered this offer as the real contract between them.33 [emphasis
supplied]
A demand for periodic accounting is evidence of a partnership.34 During his lifetime, Tan Eng Kee
appeared never to have made any such demand for accounting from his brother, Tang Eng Lay.
This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of payrolls
purporting to show that Tan Eng Kee was an ordinary employee of Benguet Lumber, as it was then
called. The authenticity of these documents was questioned by petitioners, to the extent that they
filed criminal charges against Tan Eng Lay and his wife and children. As aforesaid, the criminal
cases were dismissed for insufficiency of evidence. Exhibits "4" to "4-U" in fact shows that Tan Eng
Kee received sums as wages of an employee. In connection therewith, Article 1769 of the Civil Code
provides:
In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other are
not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such
co-owners or co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property which the
returns are derived;

(4) The receipt by a person of a share of the profits of a business is a prima facie evidence
that he is a partner in the business, but no such inference shall be drawn if such profits were
received in payment:
(a) As a debt by installment or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the
business;
(e) As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise.
In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an employee,
not a partner. Even if the payrolls as evidence were discarded, petitioners would still be back to
square one, so to speak, since they did not present and offer evidence that would show that Tan
Eng Kee received amounts of money allegedly representing his share in the profits of the enterprise.
Petitioners failed to show how much their father, Tan Eng Kee, received, if any, as his share in the
profits of Benguet Lumber Company for any particular period. Hence, they failed to prove that Tan
Eng Kee and Tan Eng Lay intended to divide the profits of the business between themselves, which
is one of the essential features of a partnership.
Nevertheless, petitioners would still want us to infer or believe the alleged existence of a partnership
from this set of circumstances: that Tan Eng Lay and Tan Eng Kee were commanding the
employees; that both were supervising the employees; that both were the ones who determined the
price at which the stocks were to be sold; and that both placed orders to the suppliers of the Benguet
Lumber Company. They also point out that the families of the brothers Tan Eng Kee and Tan Eng
Lay lived at the Benguet Lumber Company compound, a privilege not extended to its ordinary
employees.
However, private respondent counters that:
Petitioners seem to have missed the point in asserting that the above enumerated powers
and privileges granted in favor of Tan Eng Kee, were indicative of his being a partner in
Benguet Lumber for the following reasons:
(i) even a mere supervisor in a company, factory or store gives orders and directions to his
subordinates. So long, therefore, that an employee's position is higher in rank, it is not
unusual that he orders around those lower in rank.
(ii) even a messenger or other trusted employee, over whom confidence is reposed by the
owner, can order materials from suppliers for and in behalf of Benguet Lumber. Furthermore,
even a partner does not necessarily have to perform this particular task. It is, thus, not an
indication that Tan Eng Kee was a partner.
(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this
privilege was not accorded to other employees, the undisputed fact remains that Tan Eng
Kee is the brother of Tan Eng Lay. Naturally, close personal relations existed between them.

Whatever privileges Tan Eng Lay gave his brother, and which were not given the other
employees, only proves the kindness and generosity of Tan Eng Lay towards a blood
relative.
(iv) and even if it is assumed that Tan Eng Kee was quarreling with Tan Eng Lay in
connection with the pricing of stocks, this does not adequately prove the existence of a
partnership relation between them. Even highly confidential employees and the owners of a
company sometimes argue with respect to certain matters which, in no way indicates that
they are partners as to each other.35
In the instant case, we find private respondent's arguments to be well-taken. Where circumstances
taken singly may be inadequate to prove the intent to form a partnership, nevertheless, the collective
effect of these circumstances may be such as to support a finding of the existence of the parties'
intent.36 Yet, in the case at bench, even the aforesaid circumstances when taken together are not
persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was involved in the
operations of Benguet Lumber, but in what capacity is unclear. We cannot discount the likelihood
that as a member of the family, he occupied a niche above the rank-and-file employees. He would
have enjoyed liberties otherwise unavailable were he not kin, such as his residence in the Benguet
Lumber Company compound. He would have moral, if not actual, superiority over his fellow
employees, thereby entitling him to exercise powers of supervision. It may even be that among his
duties is to place orders with suppliers. Again, the circumstances proffered by petitioners do not
provide a logical nexus to the conclusion desired; these are not inconsistent with the powers and
duties of a manager, even in a business organized and run as informally as Benguet Lumber
Company.
There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak
of. Hence, the petition must fail.
WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is
herebyAFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.

G.R. No. 127405

September 20, 2001

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,

vs.
COURT OF APPEALS and NENITA A. ANAY, respondent.
RESOLUTION
YNARES-SANTIAGO, J.:
The inherent powers of a Court to amend and control its processes and orders so as to make them
conformable to law and justice includes the right to reverse itself, especially when in its honest
opinion it has committed an error or mistake in judgment, and that to adhere to its decision will cause
injustice to a party litigant.1
On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed a Motion for
Reconsideration of our Decision dated October 4, 2000. They maintain that there was no partnership
between petitioner Belo, on the one hand, and respondent Nenita A. Anay, on the other hand; and
that the latter being merely an employee of petitioner Tocao.
After a careful review of the evidence presented, we are convinced that, indeed, petitioner Belo
acted merely as guarantor of Geminesse Enterprise. This was categorically affirmed by respondent's
own witness, Elizabeth Bantilan, during her cross-examination. Furthermore, Bantilan testified that it
was Peter Lo who was the company's financier. Thus:
Q - You mentioned a while ago the name William Belo. Now, what is the role of William
Belo with Geminesse Enterprise?
A - William Belo is the friend of Marjorie Tocao and he was the guarantor of the
company.
Q

What do you mean by guarantor?

A - He guarantees the stocks that she owes somebody who is Peter Lo and he acts as
guarantor for us. We can borrow money from him.
Q

You mentioned a certain Peter Lo. Who is this Peter Lo?

Peter Lo is based in Singapore.

What is the role of Peter Lo in the Geminesse Enterprise?

He is the one fixing our orders that open the L/C.

You mean Peter Lo is the financier?

Yes, he is the financier.

Q - And the defendant William Belo is merely the guarantor of Geminesse Enterprise,
am I correct?

Yes, sir2

The foregoing was neither refuted nor contradicted by respondent's evidence. It should be recalled
that the business relationship created between petitioner Tocao and respondent Anay was an
informal partnership, which was not even recorded with the Securities and Exchange Commission.
As such, it was understandable that Belo, who was after all petitioner Tocao's good friend and
confidante, would occasionally participate in the affairs of the business, although never in a formal or
official capacity.3 Again, respondent's witness, Elizabeth Bantilan, confirmed that petitioner Belo's
presence in Geminesse Enterprise's meetings was merely as guarantor of the company and to help
petitioner Tocao.4
Furthermore, no evidence was presented to show that petitioner Belo participated in the profits of the
business enterprise. Respondent herself professed lack of knowledge that petitioner Belo received
any share in the net income of the partnership.5 On the other hand, petitioner Tocao declared that
petitioner Belo was not entitled to any share in the profits of Geminesse Enterprise.6 With no
participation in the profits, petitioner Belo cannot be deemed a partner since the essence of a
partnership is that the partners share in the profits and losses.7
Consequently, inasmuch as petitioner Belo was not a partner in Geminesse Enterprise, respondent
had no cause of action against him and her complaint against him should accordingly be dismissed.
As regards the award of damages, petitioners argue that respondent should be deemed in bad faith
for failing to account for stocks of Geminesse Enterprise amounting to P208,250.00 and that,
accordingly, her claim for damages should be barred to that extent. We do not agree. Given the
circumstances surrounding private respondent's sudden ouster from the partnership by petitioner
Tocao, her act of withholding whatever stocks were in her possession and control was justified, if
only to serve as security for her claims against the partnership. However, while we do not agree that
the same renders private respondent in bad faith and should bar her claim for damages, we find that
the said sum of P208,250.00 should be deducted from whatever amount is finally adjudged in her
favor on the basis of the formal account of the partnership affairs to be submitted to the Regional
Trial Court.
WHEREFORE, based on the foregoing, the Motion for Reconsideration of petitioners is PARTIALLY
GRANTED. The Regional Trial Court of Makati is hereby ordered to DISMISS the complaint,
docketed as Civil Case No. 88-509, as against petitioner William T. Belo only. The sum of
P208,250.00 shall be deducted from whatever amount petitioner Marjorie Tocao shall be held liable
to pay respondent after the normal accounting of the partnership affairs.
SO ORDERED.

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents

GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint venture for income
tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on
May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels
of land were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels
of land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners
realized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net
profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.70 as alleged deficiency
corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed
of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968
and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject
to the taxes prescribed under Section 24, both of the National Internal Revenue Code 1 that the
unregistered partnership was subject to corporate income tax as distinguished from profits derived from
the partnership by them which is subject to individual income tax; and that the availment of tax amnesty
under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities
but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were
required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA
Case No. 3045. In due course, the respondent court by a majority decision of March 30,
1987, 2 affirmed the decision and action taken by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was
in fact formed by petitioners which like a corporation was subject to corporate income tax distinct from
that imposed on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the petitioners,
there was no adequate basis for the conclusion that they thereby formed an unregistered partnership
which made "hem liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the
respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS
FORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE
INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN
OPPOSITION THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE
TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD
WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA
CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE
EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS
FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH
AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage
their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they gained net profits from the rental
income. Thus, the Collector of Internal Revenue demanded the payment of income tax on a
corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for corporations and
the real estate dealers' fixed tax. With respect to the tax on corporations, the issue
hinges on the meaning of the terms corporation and partnership as used in sections
24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected,
and paid annually upon the total net income received in the preceding taxable year
from all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including duly registered

general co-partnerships (companies collectives), a tax upon such income equal to

the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participation),
associations or insurance companies, but does not include duly registered general
co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.
Pursuant to this article, the essential elements of a partnership are two, namely: (a)
an agreement to contribute money, property or industry to a common fund; and (b)
intent to divide the profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to,
and did, contribute money and property to a common fund. Hence, the issue narrows
down to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to
engage in real estate transactions for monetary gain and then divide the same
among themselves, because:
1. Said common fund was not something they found already in existence. It was not
a property inherited by them pro indiviso. They created it purposely. What is more
they jointly borrowed a substantial portion thereof in order to establish said common
fund.
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3,
1944, they purchased 21 lots for P18,000.00. This was soon followed, on April 23,
1944, by the acquisition of another real estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24)
acquired and transcations undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly indicative of a pattern or
common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by petitioners in
February, 1943. In other words, one cannot but perceive a character of habituality
peculiar to business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal
uses, of petitioners herein. The properties were leased separately to several
persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way
of rentals. Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one
person, namely, Simeon Evangelists, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit
notes and checks. Thus, the affairs relative to said properties have been handled as
if the same belonged to a corporation or business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be
exact, over fifteen (15) years, since the first property was acquired, and over twelve
(12) years, since Simeon Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence.
They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to
leave no room for doubt on the existence of said intent in petitioners herein. Only one
or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits among
themselves. Respondent commissioner and/ or his representative just assumed these conditions to
be present on the basis of the fact that petitioners purchased certain parcels of land and became coowners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the common
fund or even the properties acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor
make any improvements thereon. In 1966, they bought another three (3) parcels of land from one
seller. It was only 1968 when they sold the two (2) parcels of land after which they did not make any
additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The
transactions were isolated. The character of habituality peculiar to business transactions for the
purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under
the management of one of the partners. Such condition existed for over fifteen (15) years. None of
the circumstances are present in the case at bar. The co-ownership started only in 1965 and ended
in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code
lays down the rule for determining when a transaction should be deemed a
partnership or a co-ownership. Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether
such co-owners or co-possessors do or do not share any profits made by the use of
the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived;

From the above it appears that the fact that those who agree to form a co- ownership
share or do not share any profits made by the use of the property held in common
does not convert their venture into a partnership. Or the sharing of the gross returns
does not of itself establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. This only means that, aside
from the circumstance of profit, the presence of other elements constituting
partnership is necessary, such as the clear intent to form a partnership, the existence
of a juridical personality different from that of the individual partners, and the freedom
to transfer or assign any interest in the property by one with the consent of the
others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635636)
It is evident that an isolated transaction whereby two or more persons contribute
funds to buy certain real estate for profit in the absence of other circumstances
showing a contrary intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to
share the gross returns of that enterprise in proportion to their contribution, but who
severally retain the title to their respective contribution, are not thereby rendered
partners. They have no common stock or capital, and no community of interest as
principal proprietors in the business itself which the proceeds derived. (Elements of
the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect
thereto; nor does an agreement to share the profits and losses on the sale of land
create a partnership; the parties are only tenants in common. (Clark vs. Sideway,
142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of
realty, holding as tenants in common, and to divide the profits of disposing of it, the
brother and the other not being entitled to share in plaintiffs commission, no
partnership existed as between the three parties, whatever their relation may have
been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the
same; (b) generally participating in both profits and losses; (c) and such a community
of interest, as far as third persons are concerned as enables each party to make
contract, manage the business, and dispose of the whole property.-Municipal Paving
Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between the
owners, though they may use it for the purpose of making gains; and they may,
without becoming partners, agree among themselves as to the management, and
use of such property and the application of the proceeds therefrom. (Spurlock vs.
Wilson, 142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form
a partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership. The
two isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross profits as co- owners and
paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have
been formed, since there is no such existing unregistered partnership with a distinct personality nor
with assets that can be held liable for said deficiency corporate income tax, then petitioners can be
held individually liable as partners for this unpaid obligation of the partnership p. 7 However, as
petitioners have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they
are thereby relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax
Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby
rendered relieving petitioners of the corporate income tax liability in this case, without
pronouncement as to costs.
SO ORDERED.

G.R. No. 159333

January 31, 2007

ARSENIO T. MENDIOLA, Petitioner,

vs.
COURT OF APPEALS, NATIONAL LABOR RELATIONS COMMISSION, PACIFIC FOREST
RESOURCES, PHILS., INC. and/or CELLMARK AB, Respondents.
RESOLUTION
PUNO, CJ:
For resolution is the Motion for Reconsideration1 dated September 23, 2006 filed by respondent
Pacific Forest Resources, Inc. (Pacfor), of the Decision2 of this Court dated July 31, 2006, where we
held:
IN VIEW THEREOF, the petition is GRANTED. The Court of Appeals January 30, 2003 Decision in
CA-G.R. SP No. 71028 and July 30, 2003 Resolution, affirming the December 20, 2001 Decision of
the National Labor Relations Commission, are ANNULED and SET ASIDE. The July 30, 2001
Decision of the Labor Arbiter is REINSTATED with the MODIFICATION that the amount
of P250,000.00 representing an alleged increase in petitioners salary shall be deducted from the
grant of separation pay for lack of evidence.
SO ORDERED.
The dispositive portion of the July 30, 2001 Decision of the Labor Arbiter reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered ordering herein respondents
Cellmark AB and Pacific Forest Resources, Inc., jointly and severally to compensate complainant
Arsenio T. Mendiola separation pay equivalent to at least one month for every year of service,
whichever is higher (sic), as reinstatement is no longer feasible by reason of the strained relations of
the parties equivalent to five (5) months in the amount of $32,000.00 plus the sum of P250,000.00;
pay complainant the sum of P500,000.00 as moral and exemplary damages and ten percent (10%)
of the amounts awarded as and for attorneys fees.
All other claims are dismissed for lack of basis.

1avv phi1.net

SO ORDERED.
The Labor Arbiters decision held Cellmark solidarily liable with respondent Pacfor. However, as
respondent Pacfor pointed out in its Motion for Reconsideration, the courts never acquired
jurisdiction over the person of Cellmark. Respondent Cellmark is the parent corporation of
respondent Pacfor. It is a corporation duly organized under the laws of Sweden, with principal office
in Gothenburg, Sweden. It did not receive any summons from any court or quasi-judicial body with
regard to the instant case, nor did it voluntarily submit itself to the jurisdiction of the Labor Arbiter.
1avvphi 1.net

With regard to the other issues, no substantial arguments have been raised by respondent Pacfor.
These issues have been thoroughly discussed by this Court in its July 31, 2006 decision.
IN VIEW WHEREOF, the petitioners Motion for Reconsideration is PARTIALLY GRANTED. The
judgment rendered by the Labor Arbiter dated July 30, 2001, shall be without effect only as to
respondent Cellmark AB.SO ORDERED.

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, ACG.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 7597576)
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, RolloGR 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 closeheld 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 AntiDummy 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.

G.R. No. 97212 June 30, 1993

BENJAMIN YU, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS COMPANY
LIMITED, WILLY CO, RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN JENG and CHEN HOFU, respondents.
Jose C. Guico for petitioner.
Wilfredo Cortez for private respondents.

FELICIANO, J.:
Petitioner Benjamin Yu was formerly the Assistant General Manager of the marble quarrying and
export business operated by a registered partnership with the firm name of "Jade Mountain Products
Company Limited" ("Jade Mountain"). The partnership was originally organized on 28 June 1984
with Lea Bendal and Rhodora Bendal as general partners and Chin Shian Jeng, Chen Ho-Fu and Yu
Chang, all citizens of the Republic of China (Taiwan), as limited partners. The partnership business
consisted of exploiting a marble deposit found on land owned by the Sps. Ricardo and Guillerma
Cruz, situated in Bulacan Province, under a Memorandum Agreement dated 26 June 1984 with the
Cruz spouses. 1 The partnership had its main office in Makati, Metropolitan Manila.
Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant
General Manager with a monthly salary of P4,000.00. According to petitioner Yu, however, he
actually received only half of his stipulated monthly salary, since he had accepted the promise of the
partners that the balance would be paid when the firm shall have secured additional operating funds
from abroad. Benjamin Yu actually managed the operations and finances of the business; he had
overall supervision of the workers at the marble quarry in Bulacan and took charge of the
preparation of papers relating to the exportation of the firm's products.
Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and
Rhodora Bendal sold and transferred their interests in the partnership to private respondent Willy Co
and to one Emmanuel Zapanta. Mr. Yu Chang, a limited partner, also sold and transferred his
interest in the partnership to Willy Co. Between Mr. Emmanuel Zapanta and himself, private
respondent Willy Co acquired the great bulk of the partnership interest. The partnership now
constituted solely by Willy Co and Emmanuel Zapanta continued to use the old firm name of Jade
Mountain, though they moved the firm's main office from Makati to Mandaluyong, Metropolitan
Manila. A Supplement to the Memorandum Agreement relating to the operation of the marble quarry
was entered into with the Cruz spouses in February of 1988. 2 The actual operations of the business
enterprise continued as before. All the employees of the partnership continued working in the business,
all, save petitioner Benjamin Yu as it turned out.

On 16 November 1987, having learned of the transfer of the firm's main office from Makati to
Mandaluyong, petitioner Benjamin Yu reported to the Mandaluyong office for work and there met
private respondent Willy Co for the first time. Petitioner was informed by Willy Co that the latter had
bought the business from the original partners and that it was for him to decide whether or not he
was responsible for the obligations of the old partnership, including petitioner's unpaid salaries.
Petitioner was in fact not allowed to work anymore in the Jade Mountain business enterprise. His
unpaid salaries remained unpaid. 3

On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid
salaries accruing from November 1984 to October 1988, moral and exemplary damages and
attorney's fees, against Jade Mountain, Mr. Willy Co and the other private respondents. The
partnership and Willy Co denied petitioner's charges, contending in the main that Benjamin Yu was
never hired as an employee by the present or new partnership. 4
In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner had
been illegally dismissed. The Labor Arbiter decreed his reinstatement and awarded him his claim for
unpaid salaries, backwages and attorney's fees. 5
On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the Labor
Arbiter and dismissed petitioner's complaint in a Resolution dated 29 November 1990. The NLRC
held that a new partnership consisting of Mr. Willy Co and Mr. Emmanuel Zapanta had bought the
Jade Mountain business, that the new partnership had not retained petitioner Yu in his original
position as Assistant General Manager, and that there was no law requiring the new partnership to
absorb the employees of the old partnership. Benjamin Yu, therefore, had not been illegally
dismissed by the new partnership which had simply declined to retain him in his former managerial
position or any other position. Finally, the NLRC held that Benjamin Yu's claim for unpaid wages
should be asserted against the original members of the preceding partnership, but these though
impleaded had, apparently, not been served with summons in the proceedings before the Labor
Arbiter. 6
Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set aside
and annul the Resolution of the NLRC as a product of grave abuse of discretion amounting to lack or
excess of jurisdiction.
The basic contention of petitioner is that the NLRC has overlooked the principle that a partnership
has a juridical personality separate and distinct from that of each of its members. Such independent
legal personality subsists, petitioner claims, notwithstanding changes in the identities of the partners.
Consequently, the employment contract between Benjamin Yu and the partnership Jade Mountain
could not have been affected by changes in the latter's membership. 7
Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the
partnership which had hired petitioner Yu as Assistant General Manager had been extinguished and
replaced by a new partnerships composed of Willy Co and Emmanuel Zapanta; and (2) if indeed a
new partnership had come into existence, whether petitioner Yu could nonetheless assert his rights
under his employment contract as against the new partnership.
In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal
effect of the changes in the membership of the partnership was the dissolution of the old partnership
which had hired petitioner in 1984 and the emergence of a new firm composed of Willy Co and
Emmanuel Zapanta in 1987.
The applicable law in this connection of which the NLRC seemed quite unaware is found in the
Civil Code provisions relating to partnerships. Article 1828 of the Civil Code provides as follows:
Art. 1828. The dissolution of a partnership is the change in the relation of the
partners caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business. (Emphasis supplied)
Article 1830 of the same Code must also be noted:

Art. 1830. Dissolution is caused:

(1) without violation of the agreement between the partners;
xxx xxx xxx
(b) by the express will of any partner, who must act in
good faith, when no definite term or particular
undertaking is specified;
xxx xxx xxx
(2) in contravention of the agreement between the
partners, where the circumstances do not permit a
dissolution under any other provision of this article, by
the express will of any partner at any time;
xxx xxx xxx
(Emphasis supplied)
In the case at bar, just about all of the partners had sold their partnership interests (amounting to
82% of the total partnership interest) to Mr. Willy Co and Emmanuel Zapanta. The record does not
show what happened to the remaining 18% of the original partnership interest. The acquisition of
82% of the partnership interest by new partners, coupled with the retirement or withdrawal of the
partners who had originally owned such 82% interest, was enough to constitute a new partnership.
The occurrence of events which precipitate the legal consequence of dissolution of a partnership do
not, however, automatically result in the termination of the legal personality of the old partnership.
Article 1829 of the Civil Code states that:
[o]n dissolution the partnership is not terminated, but continues until the winding up
of partnership affairs is completed.
In the ordinary course of events, the legal personality of the expiring partnership persists for the
limited purpose of winding up and closing of the affairs of the partnership. In the case at bar, it is
important to underscore the fact that the business of the old partnership was simply continued by the
new partners, without the old partnership undergoing the procedures relating to dissolution and
winding up of its business affairs. In other words, the new partnership simply took over the business
enterprise owned by the preceeding partnership, and continued using the old name of Jade
Mountain Products Company Limited, without winding up the business affairs of the old partnership,
paying off its debts, liquidating and distributing its net assets, and then re-assembling the said assets
or most of them and opening a new business enterprise. There were, no doubt, powerful tax
considerations which underlay such an informal approach to business on the part of the retiring and
the incoming partners. It is not, however, necessary to inquire into such matters.
What is important for present purposes is that, under the above described situation, not only the
retiring partners (Rhodora Bendal, et al.) but also the new partnership itself which continued the
business of the old, dissolved, one, are liable for the debts of the preceding partnership. In Singson,
et al. v. Isabela Saw Mill, et al, 8 the Court held that under facts very similar to those in the case at bar, a
withdrawing partner remains liable to a third party creditor of the old partnership. 9 The liability of the new

partnership, upon the other hand, in the set of circumstances obtaining in the case at bar, is established
in Article 1840 of the Civil Code which reads as follows:

Art. 1840. In the following cases creditors of the dissolved partnership

are also creditors of the person or partnership continuing the business:
(1) When any new partner is admitted into an existing partnership, or when any
partner retires and assigns (or the representative of the deceased partner assigns)
his rights in partnership property to two or more of the partners, or to one or more of
the partners and one or more third persons, if the business is continued without
liquidation of the partnership affairs;
(2) When all but one partner retire and assign (or the representative of a deceased
partner assigns) their rights in partnership property to the remaining partner,
who continues the business without liquidation of partnership affairs, either alone or
with others;
(3) When any Partner retires or dies and the business of the dissolved partnership is
continued as set forth in Nos. 1 and 2 of this Article, with the consent of the retired
partners or the representative of the deceased partner, but without any assignment
of his right in partnership property;
(4) When all the partners or their representatives assign their rights in partnership
property to one or more third persons who promise to pay the debts and who
continue the business of the dissolved partnership;
(5) When any partner wrongfully causes a dissolution and remaining partners
continue the businessunder the provisions of article 1837, second paragraph, No.
2, either alone or with others, andwithout liquidation of the partnership affairs;
(6) When a partner is expelled and the remaining partners continue the business
either alone or with others without liquidation of the partnership affairs;
The liability of a third person becoming a partner in the partnership continuing the
business, under this article, to the creditors of the dissolved partnership shall be
satisfied out of the partnership property only, unless there is a stipulation to the
contrary.
When the business of a partnership after dissolution is continued under any
conditions set forth in this article the creditors of the retiring or deceased partner or
the representative of the deceased partner, have a prior right to any claim of the
retired partner or the representative of the deceased partner against the person or
partnership continuing the business on account of the retired or deceased partner's
interest in the dissolved partnership or on account of any consideration promised for
such interest or for his right in partnership property.
Nothing in this article shall be held to modify any right of creditors to set assignment
on the ground of fraud.
xxx xxx xxx

(Emphasis supplied)
Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade
Mountain which continued the business of the old one without liquidation of the partnership affairs.
Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin Yu in respect of his claim for
unpaid wages, is entitled to priority vis-a-visany claim of any retired or previous partner insofar as
such retired partner's interest in the dissolved partnership is concerned. It is not necessary for the
Court to determine under which one or mare of the above six (6) paragraphs, the case at bar would
fall, if only because the facts on record are not detailed with sufficient precision to permit such
determination. It is, however, clear to the Court that under Article 1840 above, Benjamin Yu is
entitled to enforce his claim for unpaid salaries, as well as other claims relating to his employment
with the previous partnership, against the new Jade Mountain.
It is at the same time also evident to the Court that the new partnership was entitled to appoint and
hire a new general or assistant general manager to run the affairs of the business enterprise take
over. An assistant general manager belongs to the most senior ranks of management and a new
partnership is entitled to appoint a top manager of its own choice and confidence. The non-retention
of Benjamin Yu as Assistant General Manager did not therefore constitute unlawful termination, or
termination without just or authorized cause. We think that the precise authorized cause for
termination in the case at bar was redundancy. 10 The new partnership had its own new General
Manager, apparently Mr. Willy Co, the principal new owner himself, who personally ran the business of
Jade Mountain. Benjamin Yu's old position as Assistant General Manager thus became superfluous or
redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation pay at the rate of one month's
pay for each year of service that he had rendered to the old partnership, a fraction of at least six (6)
months being considered as a whole year.

While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its employ,
we consider that Benjamin Yu was very shabbily treated by the new partnership. The old partnership
certainly benefitted from the services of Benjamin Yu who, as noted, previously ran the whole marble
quarrying, processing and exporting enterprise. His work constituted value-added to the business
itself and therefore, the new partnership similarly benefitted from the labors of Benjamin Yu. It is
worthy of note that the new partnership did not try to suggest that there was any cause consisting of
some blameworthy act or omission on the part of Mr. Yu which compelled the new partnership to
terminate his services. Nonetheless, the new Jade Mountain did not notify him of the change in
ownership of the business, the relocation of the main office of Jade Mountain from Makati to
Mandaluyong and the assumption by Mr. Willy Co of control of operations. The treatment (including
the refusal to honor his claim for unpaid wages) accorded to Assistant General Manager Benjamin
Yu was so summary and cavalier as to amount to arbitrary, bad faith treatment, for which the new
Jade Mountain may legitimately be required to respond by paying moral damages. This Court,
exercising its discretion and in view of all the circumstances of this case, believes that an indemnity
for moral damages in the amount of P20,000.00 is proper and reasonable.
In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of six
percent (6%) per annum on the amount of unpaid wages, and of his separation pay, computed from
the date of promulgation of the award of the Labor Arbiter. Finally, because the new Jade Mountain
compelled Benjamin Yu to resort to litigation to protect his rights in the premises, he is entitled to
attorney's fees in the amount of ten percent (10%) of the total amount due from private respondent
Jade Mountain.
WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the
Comment filed by private respondents is treated as their Answer to the Petition for Certiorari, and the
Decision of the NLRC dated 29 November 1990 is hereby NULLIFIED and SET ASIDE. A new

Decision is hereby ENTERED requiring private respondent Jade Mountain Products Company
Limited to pay to petitioner Benjamin Yu the following amounts:
(a) for unpaid wages which, as found by the Labor Arbiter, shall be
computed at the rate of P2,000.00 per month multiplied by thirty-six
(36) months (November 1984 to December 1987) in the total amount
of P72,000.00;
(b) separation pay computed at the rate of P4,000.00 monthly pay
multiplied by three (3) years of service or a total of P12,000.00;
(c) indemnity for moral damages in the amount of P20,000.00;
(d) six percent (6%) per annum legal interest computed on items (a)
and (b) above, commencing on 26 December 1989 and until fully
paid; and
(e) ten percent (10%) attorney's fees on the total amount due from
private respondent Jade Mountain.
Costs against private respondents.
SO ORDERED.

[G.R. No. 30616 : December 10, 1990.]

192 SCRA 110
EUFRACIO D. ROJAS, Plaintiff-Appellant, vs. CONSTANCIO B.
MAGLANA,Defendant-Appellee.
DECISION
PARAS, J.:
This is a direct appeal to this Court from a decision ** of the then Court of First Instance of
Davao, Seventh Judicial District, Branch III, in Civil Case No. 3518, dismissing appellant's
complaint.
As found by the trial court, the antecedent facts of the case are as follows:
On January 14, 1955, Maglana and Rojas executed their Articles of Co-Partnership (Exhibit
"A") called Eastcoast Development Enterprises (EDE) with only the two of them as partners.
The partnership EDE with an indefinite term of existence was duly registered on January 21,
1955 with the Securities and Exchange Commission.
One of the purposes of the duly-registered partnership was to "apply or secure timber and/or
minor forests products licenses and concessions over public and/or private forest lands and
to operate, develop and promote such forests rights and concessions." (Rollo, p. 114).
A duly registered Articles of Co-Partnership was filed together with an application for a timber
concession covering the area located at Cateel and Baganga, Davao with the Bureau of
Forestry which was approved and Timber License No. 35-56 was duly issued and became the
basis of subsequent renewals made for and in behalf of the duly registered partnership EDE.
Under the said Articles of Co-Partnership, appellee Maglana shall manage the business affairs
of the partnership, including marketing and handling of cash and is authorized to sign all
papers and instruments relating to the partnership, while appellant Rojas shall be the logging
superintendent and shall manage the logging operations of the partnership. It is also provided
in the said articles of co-partnership that all profits and losses of the partnership shall be
divided share and share alike between the partners.
During the period from January 14, 1955 to April 30, 1956, there was no operation of said
partnership (Record on Appeal [R.A.] p. 946).
Because of the difficulties encountered, Rojas and Maglana decided to avail of the services of
Pahamotang as industrial partner.
On March 4, 1956, Maglana, Rojas and Agustin Pahamotang executed their Articles of CoPartnership (Exhibit "B" and Exhibit "C") under the firm name EASTCOAST DEVELOPMENT
ENTERPRISES (EDE). Aside from the slight difference in the purpose of the second partnership
which is to hold and secure renewal of timber license instead of to secure the license as in the
first partnership and the term of the second partnership is fixed to thirty (30) years,
everything else is the same.
The partnership formed by Maglana, Pahamotang and Rojas started operation on May 1, 1956,
and was able to ship logs and realize profits. An income was derived from the proceeds of the
logs in the sum of P643,633.07 (Decision, R.A. 919).

On October 25, 1956, Pahamotang, Maglana and Rojas executed a document entitled
"CONDITIONAL SALE OF INTEREST IN THE PARTNERSHIP, EASTCOAST DEVELOPMENT
ENTERPRISE" (Exhibits "C" and "D") agreeing among themselves that Maglana and Rojas shall
purchase the interest, share and participation in the Partnership of Pahamotang assessed in
the amount of P31,501.12. It was also agreed in the said instrument that after payment of
the sum of P31,501.12 to Pahamotang including the amount of loan secured by Pahamotang
in favor of the partnership, the two (Maglana and Rojas) shall become the owners of all
equipment contributed by Pahamotang and the EASTCOAST DEVELOPMENT ENTERPRISES,
the name also given to the second partnership, be dissolved. Pahamotang was paid in fun on
August 31, 1957. No other rights and obligations accrued in the name of the second
partnership (R.A. 921).
After the withdrawal of Pahamotang, the partnership was continued by Maglana and Rojas
without the benefit of any written agreement or reconstitution of their written Articles of
Partnership (Decision, R.A. 948).
On January 28, 1957, Rojas entered into a management contract with another logging
enterprise, the CMS Estate, Inc. He left and abandoned the partnership (Decision, R.A. 947).
On February 4, 1957, Rojas withdrew his equipment from the partnership for use in the newly
acquired area (Decision, R.A. 948).
The equipment withdrawn were his supposed contributions to the first partnership and was
transferred to CMS Estate, Inc. by way of chattel mortgage (Decision, R.A. p. 948).
On March 17, 1957, Maglana wrote Rojas reminding the latter of his obligation to contribute,
either in cash or in equipment, to the capital investments of the partnership as well as his
obligation to perform his duties as logging superintendent.
Two weeks after March 17, 1957, Rojas told Maglana that he will not be able to comply with
the promised contributions and he will not work as logging superintendent. Maglana then told
Rojas that the latter's share will just be 20% of the net profits. Such was the sharing from
1957 to 1959 without complaint or dispute (Decision, R.A. 949).
: nad

Meanwhile, Rojas took funds from the partnership more than his contribution. Thus, in a letter
dated February 21, 1961 (Exhibit "10") Maglana notified Rojas that he dissolved the
partnership (R.A. 949).
On April 7, 1961, Rojas filed an action before the Court of First Instance of Davao against
Maglana for the recovery of properties, accounting, receivership and damages, docketed as
Civil Case No. 3518 (Record on Appeal, pp. 1-26).
Rojas' petition for appointment of a receiver was denied (R.A. 894).
Upon motion of Rojas on May 23, 1961, Judge Romero appointed commissioners to examine
the long and voluminous accounts of the Eastcoast Development Enterprises (Ibid., pp. 894895).
The motion to dismiss the complaint filed by Maglana on June 21, 1961 (Ibid., pp. 102-114)
was denied by Judge Romero for want of merit (Ibid., p. 125). Judge Romero also required
the inclusion of the entire year 1961 in the report to be submitted by the commissioners
(Ibid., pp. 138-143). Accordingly, the commissioners started examining the records and
supporting papers of the partnership as well as the information furnished them by the parties,
which were compiled in three (3) volumes.
On May 11, 1964, Maglana filed his motion for leave of court to amend his answer with
counterclaim, attaching thereto the amended answer (Ibid., pp. 26-336), which was granted
on May 22, 1964 (Ibid., p. 336).

On May 27, 1964, Judge M.G. Reyes approved the submitted Commissioners' Report (Ibid.,
p. 337).
On June 29, 1965, Rojas filed his motion for reconsideration of the order dated May 27, 1964
approving the report of the commissioners which was opposed by the appellee.
On September 19, 1964, appellant's motion for reconsideration was denied (Ibid., pp. 446451).
A mandatory pre-trial was conducted on September 8 and 9, 1964 and the following issues
were agreed upon to be submitted to the trial court:
(a) The nature of partnership and the legal relations of Maglana and Rojas after the
dissolution of the second partnership;
(b) Their sharing basis: whether in proportion to their contribution or share and share
alike;
(c) The ownership of properties bought by Maglana in his wife's name;
(d) The damages suffered and who should be liable for them; and
(e) The legal effect of the letter dated February 23, 1961 of Maglana dissolving the
partnership (Decision, R.A. pp. 895-896).
- nad

After trial, the lower court rendered its decision on March 11, 1968, the dispositive portion of
which reads as follows:
"WHEREFORE, the above facts and issues duly considered, judgment is hereby
rendered by the Court declaring that:
"1. The nature of the partnership and the legal relations of Maglana and Rojas after
Pahamotang retired from the second partnership, that is, after August 31, 1957, when
Pahamotang was finally paid his share the partnership of the defendant and the
plaintiff is one of a de facto and at will;
"2. Whether the sharing of partnership profits should be on the basis of computation,
that is the ratio and proportion of their respective contributions, or on the basis of
share and share alike this covered by actual contributions of the plaintiff and the
defendant and by their verbal agreement; that the sharing of profits and losses is on
the basis of actual contributions; that from 1957 to 1959, the sharing is on the basis
of 80% for the defendant and 20% for the plaintiff of the profits, but from 1960 to the
date of dissolution, February 23, 1961, the plaintiff's share will be on the basis of his
actual contribution and, considering his indebtedness to the partnership, the plaintiff
is not entitled to any share in the profits of the said partnership;
"3. As to whether the properties which were bought by the defendant and placed in
his or in his wife's name were acquired with partnership funds or with funds of the
defendant and the Court declares that there is no evidence that these properties
were acquired by the partnership funds, and therefore the same should not belong to
the partnership;
"4. As to whether damages were suffered and, if so, how much, and who caused them
and who should be liable for them the Court declares that neither parties is entitled
to damages, for as already stated above it is not a wise policy to place a price on the
right of a person to litigate and/or to come to Court for the assertion of the rights they
believe they are entitled to;
"5. As to what is the legal effect of the letter of defendant to the plaintiff dated February
23, 1961; did it dissolve the partnership or not the Court declares that the letter of

the defendant to the plaintiff dated February 23, 1961, in effect dissolved the
partnership;
"6. Further, the Court relative to the canteen, which sells foodstuffs, supplies, and
other merchandise to the laborers and employees of the Eastcoast Development
Enterprises, the COURT DECLARES THE SAME AS NOT BELONGING TO THE
PARTNERSHIP;
"7. That the alleged sale of forest concession Exhibit 9-B, executed by Pablo Angeles
David is VALID AND BINDING UPON THE PARTIES AND SHOULD BE CONSIDERED
AS PART OF MAGLANA'S CONTRIBUTION TO THE PARTNERSHIP;
"8. Further, the Court orders and directs plaintiff Rojas to pay or turn over to the
partnership the amount of P69,000.00 the profits he received from the CMS Estate,
Inc. operated by him;
"9. The claim that plaintiff Rojas should be ordered to pay the further sum of
P85,000.00 which according to him he is still entitled to receive from the CMS Estate,
Inc. is hereby denied considering that it has not yet been actually received, and further
the receipt is merely based upon an expectancy and/or still speculative;
"10. The Court also directs and orders plaintiff Rojas to pay the sum of P62,988.19 his
personal account to the partnership;
"11. The Court also credits the defendant the amount of P85,000.00 the amount he
should have received as logging superintendent, and which was not paid to him, and
this should be considered as part of Maglana's contribution likewise to the partnership;
and
"12. The complaint is hereby dismissed with costs against the plaintiff.

: rd

"SO ORDERED." Decision, Record on Appeal, pp. 985-989).

Rojas interposed the instant appeal.
The main issue in this case is the nature of the partnership and legal relationship of the
Maglana-Rojas after Pahamotang retired from the second partnership.
The lower court is of the view that the second partnership superseded the first, so that when
the second partnership was dissolved there was no written contract of co-partnership; there
was no reconstitution as provided for in the Maglana, Rojas and Pahamotang partnership
contract. Hence, the partnership which was carried on by Rojas and Maglana after the
dissolution of the second partnership was a de facto partnership and at will. It was considered
as a partnership at will because there was no term, express or implied; no period was fixed,
expressly or impliedly (Decision, R.A. pp. 962-963).
On the other hand, Rojas insists that the registered partnership under the firm name of
Eastcoast Development Enterprises (EDE) evidenced by the Articles of Co-Partnership dated
January 14, 1955 (Exhibit "A") has not been novated, superseded and/or dissolved by the
unregistered articles of co-partnership among appellant Rojas, appellee Maglana and Agustin
Pahamotang, dated March 4, 1956 (Exhibit "C") and accordingly, the terms and stipulations
of said registered Articles of Co-Partnership (Exhibit "A") should govern the relations between
him and Maglana. Upon withdrawal of Agustin Pahamotang from the unregistered partnership
(Exhibit "C"), the legally constituted partnership EDE (Exhibit "A") continues to govern the
relations between them and it was legal error to consider a de facto partnership between said
two partners or a partnership at will. Hence, the letter of appellee Maglana dated February
23, 1961, did not legally dissolve the registered partnership between them, being in
contravention of the partnership agreement agreed upon and stipulated in their Articles of
Co-Partnership (Exhibit "A"). Rather, appellant is entitled to the rights enumerated in Article

1837 of the Civil Code and to the sharing profits between them of "share and share alike" as
stipulated in the registered Articles of Co-Partnership (Exhibit "A").
After a careful study of the records as against the conflicting claims of Rojas and Maglana, it
appears evident that it was not the intention of the partners to dissolve the first partnership,
upon the constitution of the second one, which they unmistakably called an "Additional
Agreement" (Exhibit "9-B") (Brief for Defendant-Appellee, pp. 24-25). Except for the fact that
they took in one industrial partner; gave him an equal share in the profits and fixed the term
of the second partnership to thirty (30) years, everything else was the same. Thus, they
adopted the same name, EASTCOAST DEVELOPMENT ENTERPRISES, they pursued the same
purposes and the capital contributions of Rojas and Maglana as stipulated in both partnerships
call for the same amounts. Just as important is the fact that all subsequent renewals of Timber
License No. 35-36 were secured in favor of the First Partnership, the original licensee. To all
intents and purposes therefore, the First Articles of Partnership were only amended, in the
form of Supplementary Articles of Co-Partnership (Exhibit "C") which was never registered
(Brief for Plaintiff-Appellant, p. 5). Otherwise stated, even during the existence of the second
partnership, all business transactions were carried out under the duly registered articles. As
found by the trial court, it is an admitted fact that even up to now, there are still subsisting
obligations and contracts of the latter (Decision, R.A. pp. 950-957). No rights and obligations
accrued in the name of the second partnership except in favor of Pahamotang which was fully
paid by the duly registered partnership (Decision, R.A., pp. 919-921).
On the other hand, there is no dispute that the second partnership was dissolved by common
consent. Said dissolution did not affect the first partnership which continued to exist.
Significantly, Maglana and Rojas agreed to purchase the interest, share and participation in
the second partnership of Pahamotang and that thereafter, the two (Maglana and Rojas)
became the owners of equipment contributed by Pahamotang. Even more convincing, is the
fact that Maglana on March 17, 1957, wrote Rojas, reminding the latter of his obligation to
contribute either in cash or in equipment, to the capital investment of the partnership as well
as his obligation to perform his duties as logging superintendent. This reminder cannot refer
to any other but to the provisions of the duly registered Articles of Co-Partnership. As earlier
stated, Rojas replied that he will not be able to comply with the promised contributions and
he will not work as logging superintendent. By such statements, it is obvious that Roxas
understood what Maglana was referring to and left no room for doubt that both considered
themselves governed by the articles of the duly registered partnership.
Under the circumstances, the relationship of Rojas and Maglana after the withdrawal of
Pahamotang can neither be considered as a De Facto Partnership, nor a Partnership at Will,
for as stressed, there is an existing partnership, duly registered.
As to the question of whether or not Maglana can unilaterally dissolve the partnership in the
case at bar, the answer is in the affirmative.
Hence, as there are only two parties when Maglana notified Rojas that he dissolved the
partnership, it is in effect a notice of withdrawal.
Under Article 1830, par. 2 of the Civil Code, even if there is a specified term, one partner can
cause its dissolution by expressly withdrawing even before the expiration of the period, with
or without justifiable cause. Of course, if the cause is not justified or no cause was given, the
withdrawing partner is liable for damages but in no case can he be compelled to remain in
the firm. With his withdrawal, the number of members is decreased, hence, the dissolution.
And in whatever way he may view the situation, the conclusion is inevitable that Rojas and
Maglana shall be guided in the liquidation of the partnership by the provisions of its duly
registered Articles of Co-Partnership; that is, all profits and losses of the partnership shall be
divided "share and share alike" between the partners.

But an accounting must first be made and which in fact was ordered by the trial court and
accomplished by the commissioners appointed for the purpose.
On the basis of the Commissioners' Report, the corresponding contribution of the partners
from 1956-1961 are as follows: Eufracio Rojas who should have contributed P158,158.00,
contributed only P18,750.00 while Maglana who should have contributed P160,984.00,
contributed P267,541.44 (Decision, R.A. p. 976). It is a settled rule that when a partner who
has undertaken to contribute a sum of money fails to do so, he becomes a debtor of the
partnership for whatever he may have promised to contribute (Article 1786, Civil Code) and
for interests and damages from the time he should have complied with his obligation (Article
1788, Civil Code) (Moran, Jr. v. Court of Appeals, 133 SCRA 94 [1984]). Being a contract of
partnership, each partner must share in the profits and losses of the venture. That is the
essence of a partnership (Ibid., p. 95).
Thus, as reported in the Commissioners' Report, Rojas is not entitled to any profits. In their
voluminous reports which was approved by the trial court, they showed that on 50-50% basis,
Rojas will be liable in the amount of P131,166.00; on 80-20%, he will be liable for P40,092.96
and finally on the basis of actual capital contribution, he will be liable for P52,040.31.
Consequently, except as to the legal relationship of the partners after the withdrawal of
Pahamotang which is unquestionably a continuation of the duly registered partnership and
the sharing of profits and losses which should be on the basis of share and share alike as
provided for in the duly registered Articles of Co-Partnership, no plausible reason could be
found to disturb the findings and conclusions of the trial court.
: nad

As to whether Maglana is liable for damages because of such withdrawal, it will be recalled
that after the withdrawal of Pahamotang, Rojas entered into a management contract with
another logging enterprise, the CMS Estate, Inc., a company engaged in the same business
as the partnership. He withdrew his equipment, refused to contribute either in cash or in
equipment to the capital investment and to perform his duties as logging superintendent, as
stipulated in their partnership agreement. The records also show that Rojas not only
abandoned the partnership but also took funds in an amount more than his contribution
(Decision, R.A., p. 949).
In the given situation Maglana cannot be said to be in bad faith nor can he be liable for
damages.
PREMISES CONSIDERED, the assailed decision of the Court of First Instance of Davao, Branch
III, is hereby MODIFIED in the sense that the duly registered partnership of Eastcoast
Development Enterprises continued to exist until liquidated and that the sharing basis of the
partners should be on share and share alike as provided for in its Articles of Partnership, in
accordance with the computation of the commissioners. We also hereby AFFIRM the decision
of the trial court in all other respects.
: nad

SO ORDERED.

G.R. No. L-25532

February 28, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete
and Special Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.
REYES, J.B.L., J.:
A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September
1947 by herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav
Carlson, as the limited partners. The partners contributed, respectively, P20,000.00, P18,000.00 and
P2,000.00 to the partnership. On 1 October 1947, the limited partnership was registered with the
Securities and Exchange Commission. The firm engaged, among other activities, in the importation,
marketing, distribution and operation of automatic phonographs, radios, television sets and
amusement machines, their parts and accessories. It had an office and held itself out as a limited
partnership, handling and carrying merchandise, using invoices, bills and letterheads bearing its
trade-name, maintaining its own books of accounts and bank accounts, and had a quota allocation
with the Central Bank.
In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18
December 1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The
sale was duly recorded with the Securities and Exchange Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a corporation, without objection by
the herein petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an
assessment, consolidated the income of the firm and the individual incomes of the partners-spouses
Suter and Spirig resulting in a determination of a deficiency income tax against respondent Suter in
the amount of P2,678.06 for 1954 and P4,567.00 for 1955.
Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not
in accordance with law, but his request was denied. Unable to secure a reconsideration, he
appealed to the Court of Tax Appeals, which court, after trial, rendered a decision, on 11 November
1965, reversing that of the Commissioner of Internal Revenue.
The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax
court's aforesaid decision. It raises these issues:
(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be
disregarded for income tax purposes, considering that respondent William J. Suter and his wife, Julia
Spirig Suter actually formed a single taxable unit; and
(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent
William J. Suter and Julia Spirig Suter and the subsequent sale to them by the remaining partner,
Gustav Carlson, of his participation of P2,000.00 in the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and
Spirig and their subsequent acquisition of the interests of remaining partner Carlson in the

partnership dissolved the limited partnership, and if they did not, the fiction of juridical personality of
the partnership should be disregarded for income tax purposes because the spouses have exclusive
ownership and control of the business; consequently the income tax return of respondent Suter for
the years in question should have included his and his wife's individual incomes and that of the
limited partnership, in accordance with Section 45 (d) of the National Internal Revenue Code, which
provides as follows:
(d) Husband and wife. In the case of married persons, whether citizens, residents or nonresidents, only one consolidated return for the taxable year shall be filed by either spouse to
cover the income of both spouses; ....
In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his
marriage with limited partner Spirig and their acquisition of Carlson's interests in the partnership in
1948 is not a ground for dissolution of the partnership, either in the Code of Commerce or in the New
Civil Code, and that since its juridical personality had not been affected and since, as a limited
partnership, as contra distinguished from a duly registered general partnership, it is taxable on its
income similarly with corporations, Suter was not bound to include in his individual return the income
of the limited partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by
operation of law because of the marriage of the only general partner, William J. Suter to the
originally limited partner, Julia Spirig one year after the partnership was organized is rested by the
appellant upon the opinion of now Senator Tolentino in Commentaries and Jurisprudence on
Commercial Laws of the Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:
A husband and a wife may not enter into a contract of general copartnership, because under
the Civil Code, which applies in the absence of express provision in the Code of Commerce,
persons prohibited from making donations to each other are prohibited from entering
into universal partnerships. (2 Echaverri 196) It follows that the marriage of partners
necessarily brings about the dissolution of a pre-existing partnership. (1 Guy de Montella 58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co.,
Ltd. was not a universal partnership, but a particular one. As appears from Articles 1674 and 1675 of
the Spanish Civil Code, of 1889 (which was the law in force when the subject firm was organized in
1947), a universal partnership requires either that the object of the association be all the present
property of the partners, as contributed by them to the common fund, or else "all that the partners
may acquire by their industry or work during the existence of the partnership". William J. Suter
"Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the partners were
fixed sums of money, P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of
them was an industrial partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a
partnership that spouses were forbidden to enter by Article 1677 of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th
Edition, 1952, Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the
aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal,
pero o podran constituir sociedad particular? Aunque el punto ha sido muy debatido, nos
inclinamos a la tesis permisiva de los contratos de sociedad particular entre esposos, ya que
ningun precepto de nuestro Codigo los prohibe, y hay que estar a la norma general segun la

que toda persona es capaz para contratar mientras no sea declarado incapaz por la ley. La
jurisprudencia de la Direccion de los Registros fue favorable a esta misma tesis en su
resolution de 3 de febrero de 1936, mas parece cambiar de rumbo en la de 9 de marzo de
1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being
one of the causes provided for that purpose either by the Spanish Civil Code or the Code of
Commerce.
The appellant's view, that by the marriage of both partners the company became a single
proprietorship, is equally erroneous. The capital contributions of partners William J. Suter and Julia
Spirig were separately owned and contributed by them before their marriage; and after they were
joined in wedlock, such contributions remained their respective separate property under the Spanish
Civil Code (Article 1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become
common property of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical
personality of its own, distinct and separate from that of its partners (unlike American and English
law that does not recognize such separate juridical personality), the bypassing of the existence of
the limited partnership as a taxpayer can only be done by ignoring or disregarding clear statutory
mandates and basic principles of our law. The limited partnership's separate individuality makes it
impossible to equate its income with that of the component members. True, section 24 of the Internal
Revenue Code merges registered general co-partnerships (compaias colectivas) with the
personality of the individual partners for income tax purposes. But this rule is exceptional in its
disregard of a cardinal tenet of our partnership laws, and can not be extended by mere implication to
limited partnerships.
The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L13554, Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority
for disregarding the fiction of legal personality of the corporations involved therein are not applicable
to the present case. In the cited cases, the corporations were already subject to tax when the fiction
of their corporate personality was pierced; in the present case, to do so would exempt the limited
partnership from income taxation but would throw the tax burden upon the partners-spouses in their
individual capacities. The corporations, in the cases cited, merely served as business conduits
or alter egos of the stockholders, a factor that justified a disregard of their corporate personalities for
tax purposes. This is not true in the present case. Here, the limited partnership is not a mere
business conduit of the partner-spouses; it was organized for legitimate business purposes; it
conducted its own dealings with its customers prior to appellee's marriage, and had been filing its
own income tax returns as such independent entity. The change in its membership, brought about by
the marriage of the partners and their subsequent acquisition of all interest therein, is no ground for
withdrawing the partnership from the coverage of Section 24 of the tax code, requiring it to pay
income tax. As far as the records show, the partners did not enter into matrimony and thereafter buy
the interests of the remaining partner with the premeditated scheme or design to use the partnership
as a business conduit to dodge the tax laws. Regularity, not otherwise, is presumed.

As the limited partnership under consideration is taxable on its income, to require that income to be
included in the individual tax return of respondent Suter is to overstretch the letter and intent of the
law. In fact, it would even conflict with what it specifically provides in its Section 24: for the appellant
Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compaia
colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code
taxes the latter on its income, but not the former, because it is in the case of compaias
colectivas that the members, and not the firm, are taxable in their individual capacities for any
dividend or share of the profit derived from the duly registered general partnership (Section 26,
N.I.R.C.; Araas, Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 88-89).
lawphi1.nt

But it is argued that the income of the limited partnership is actually or constructively the income of
the spouses and forms part of the conjugal partnership of gains. This is not wholly correct. As
pointed out in Agapito vs. Molo 50 Phil. 779, and People's Bank vs. Register of Deeds of Manila, 60
Phil. 167, the fruits of the wife's parapherna become conjugal only when no longer needed to defray
the expenses for the administration and preservation of the paraphernal capital of the wife. Then
again, the appellant's argument erroneously confines itself to the question of the legal personality of
the limited partnership, which is not essential to the income taxability of the partnership since the law
taxes the income of even joint accounts that have no personality of their own. 1Appellant is, likewise,
mistaken in that it assumes that the conjugal partnership of gains is a taxable unit, which it is not.
What is taxable is the "income of both spouses" (Section 45 [d] in their individual capacities. Though
the amount of income (income of the conjugal partnership vis-a-vis the joint income of husband and
wife) may be the same for a given taxable year, their consequences would be different, as their
contributions in the business partnership are not the same.
The difference in tax rates between the income of the limited partnership being consolidated with,
and when split from the income of the spouses, is not a justification for requiring consolidation; the
revenue code, as it presently stands, does not authorize it, and even bars it by requiring the limited
partnership to pay tax on its own income.
FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.