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5.

Delectus Personae

Bautista refered to delectus personae as follows: “. . . For, in accordance with the principle of delectus
personae (selection of persons), one selects his partners on the basis of their personal qualifications
and qualities, such as solvency, ability, honesty, and trustworthiness, among others. It is for this
reason that there is mutual representation among the partners so that the act of one is considered the
act and responsibility of the others as well.” (BAUTISTA, at p. 95)

The best way to define the concept of delectus personae is that the contract of partnership creates the
most personal relationship between and among the partners which when broken, also breaks the bond
of the partnership. The doctrine emphasizes the personal-contractual relationship between and among
the partners as being more important than the property rights and the business enterprise created in
the partnership. Thus, Article 1770 of the Civil Code provides that “[a] partnership . . . must be
established for the common benefit or interest of the partners.”

The doctrine of delectus personae can be viewed in two ways:

Firstly, it is the embodiment of the principle of relativity or privity in contracts: a partnership


arrangement being primarily a contractual relationship, then the privity that is created by its
perfection is between and among the partners thereto at the point of perfection; and that such privity
cannot be extended beyond the partners without the consent of all the other parties to the contract of
partnership.

To illustrate the point, although Article 1810 of the Civil Code recognizes that “interest in the
partnership” is a property right of a partner, nevertheless under Article 1804, although a partner may
associate another person with him in his share, “the associate shall not be admitted into the
partnership without the consent of all the other partners, even if the partner having an associate
should be a manager.”

The privity created by the contract of partnership is of the group of partners who consent, that the
moment one partner is gone the privity is broken and the partnership contract is terminated. In other
words, if five parties come together into a partnership agreement, the privity retains its integrity
among the five, and not just between two or three or four of the members. Thus, under Article 1830,
the partnership is dissolved by the expulsion, death, insolvency, civil interdiction of any of the
partners.

Secondly, that the relationship established in a contract of partnership is of the most fiduciary
character, or of the most confidential manner, that once that thrust or confidence is lost, the contract
is deemed breached or at least at an end. This is fortified by the fact that the partners are mutual
agents to one another, and essentially the relationship between and among them is of fiduciary
character, and the character of every agency relation is that it is essentially revocable. Consequently,
when the articles of partnership provide for a definite term of existence, under Article 1830, a
partnership can be dissolved in midstream “By the express will of any partner, who must act in good
faith.” Even the separate juridical personality of the partnership enterprise cannot save the
partnership from being dissolved under the rule that the termination of the contract of partnership
terminates the separate juridical personality as well.

The features of mutual agency and delectus personae define the rights and liabilities of the partners in
a partnership arrangement, and constitute the underlying reason why partners are personally liable for
partnership debts beyond their contributions and to the extent of their separate properties.
In Ortega v. Court of Appeals, 245 SCRA 529 (1995), Justice Vitug wrote one of the best piece of
doctrinal description the nature and essence of the doctrine of delectus personae in every
partnership, thus –

The birth and life of a partnership at will is predicated on the mutual desire and consent of the
partners. The right to choose with whom a person wishes to associate himself is the very foundation
and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of
that mutual resolve, along with each partner’s capability to give it, and the absence of a cause for
dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure, dictate
a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of
bad faith can prevent the dissolution of the partnership but that it can result in a liability for damages.
(Ibid, at pp. 535-536)

In Tocao v. Court of Appeals, 342 SCRA 20 (2000), the Court held “An unjustified dissolution by a
partner can subject him to action for damages because by the mutual agency that arises in a
partnership, the doctrine of delectus personae allows the partners to have the power, although not
necessarily the right to dissolve the partnership.” (Ibid, at p. 37)

6. Partners Subject to Unlimited Liability

Both Articles 44 and 1768 of the Civil Code recognize that a partnership is granted with “a juridical
personality, separate and distinct from that of each . . . . partner or member,” and that Article 46
recognizes the legal capacity of the partnership therefore to enter into contracts, own and possess
properties, thus: “Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of their
organizations.”

The ordinary principle of “relativity” under the Law on Contracts that “Contracts take effect only
between the parties, their assigns and heirs” (Article 1311, New Civil Code), should mean that that
when a juridical person enters into a contract and assumes an obligation by reason thereof, its
members or constituents, and its agents, do not ordinarily become liable for the obligations assumed
by their principal. And yet, in defiance of the very essence of separate juridical personality of the
partnership, the general rule is that every partner is liable personally for his other property not
contributed to the partnership for partnership debts and obligations.

Articles 1816 and 1817 of the Civil Code thus provide that “[a]ll partners, including industrial ones,
shall be liable pro rata with all their property and after all the partnership assets have been exhausted
. . . [and that] [a]ny stipulation against [such] liability shall be void, except as among the
partners.” Why does the law make partners personally liable for partnership debts contracted as a
separate juridical person, and would such unlimited liability still apply without express provision of
law?

Even without any express provision of law and despite the separate juridical personality of the
partnership, unlimited liability would be the rule for partners in a partnership setting for the basic
reason that partners essentially occupy the position of sole proprietors albeit associated with other
sole proprietors; the basic rule is that sole proprietors are always unlimitedly liable for business debts
and obligations even as to their properties not used nor devoted for the business enterprise. The
reason why a sole proprietor is liable with his non-business assets for debts and liabilities arising from
a business venture is because he controls the business enterprise, and all profits go to him which he
can devote into non-business matters, and thereby he must also absorb the losses from the business.
Therefore if his business goes bankrupt, he cannot insist that his business creditors are limited only to
the business assets for the satisfaction of their claims, and as all benefits and profits can be channeled
to his personal non-business affairs, then his non-business properties must also be held liable for the
satisfaction of those claims; to rule otherwise would mean that the owner benefits fully on the profits,
but lets his creditors absorb the losses from the business. It is a commercial law truism that it is the
owner or equity holders of the business enterprise, and not the creditors, who must stand ready to
absorb the losses of the enterprise.

In a partnership setting, the partners are still collective owners of the business enterprise, as by the
principle of mutual agency they all have the power of management of the partnership affairs, and all
profits and gains are to their entire benefit and account. Thus, Article 1770 of the Civil Code provides
that every “partnership must be established for the common benefit or interest of the partners,” and
in turn Article 1799 provides that “[a]ny stipulation which excludes one or more partners from any
share in the profits or losses is void.” Therefore, despite the separate juridical personality of the
partnership enterprise, the partnership is still wholly owned, managed and controlled by the partners
as collective sole proprietors of the business enterprise, and consequently, they must bear the full
brunt of the reverses of the business. Since the partners benefit fully and personally from the
partnership’s profitable operations, they must thereby stand liable personally for the debts and
obligations contracted even in the partnership name. Otherwise (i.e., to provide for limited liability as
to allow creditors recourse only to the partnership assets), would be tantamount to letting the
partnership creditors take the risks and consequences of the losses of the partnership enterprise when
they draw no advantage from its profits.

VIII. PARTNERSHIP DISTINGUISHED FROM OTHER BUSINESS MEDIA

1. Distinguished from “Joint Venture”

Bautista, although confirming that a joint venture “is an association of two or more persons to carry
out a single business enterprise for profit . . . [and] embodies several of the essential elements or
characteristics of a partnership and bears such a close resemblance to it that the rights and liabilities
of joint adventures are largely governed by rules applied to partnership,” (BAUTISTA, at pp. 41-42)
nevertheless would distinguish a partnership and a joint venture in the following manner:

(a) “a joint venture is ordinarily limited to a single transaction [and] not intended to pursue a
continuous business;” whereas a partnership, “though it may exist for a single transaction, usually
contemplates the undertaking of a general and continuous business of a particular kind
which necessarily involves a series of transactions;” (Ibid, at p. 42.)

(b) in a joint venture, “the property used remains the undivided property of its contributor, whereas
in a partnership the same, as a rule, becomes the property of the business entity and hence of all the
partners;” (Ibid)

(c) In a joint venture, none of the co-venturers “can bind the joint adventure or his co-adventurers,
while a partner, when acting in pursuance of the firm business, binds not only himself as a principal
but, as their agent as well, also the partnership and his co-partners;” (Ibid) and

(d) A “joint adventure has no firm name, while a partnership is required to operate under a firm
name.” (Ibid)

To the writer, the foregoing distinctions only affirms the fact that a joint venture is a species of the
genus partnership as defined under Article 1767 of the Civil Code, since it contains the two essential
elements of the creation of a common fund and undertaking to divide profits; that in fact it is a
particular partnership for a specific undertaking fully recognized under Article 1783 covering “a specific
undertaking,” and Article 1830 that recognizes the dissolution of a partnership “By the termination of
the . . . particular undertaking specified in the agreement.” The position that in a joint venture the co-
venturers do not become mutual agents is a conclusion that can only be drawn if we premise that a
co-venture is not a species of partnerships. Finally, that a partnership adopts no firm name does not
make it void as a contract or a partnership, so also with a joint venture.

In any event, the distinction between a joint venture as a business medium not falling within the
ambit of Partnership Law, or as not constituting a species of partnerships, has really become mute
since inKilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110, 143 (1994), it was held:

Joint venture is defined as an association of persons or companies jointly undertaking some


commercial enterprise; generally all contribute assets and share risks. It requires a community of
interest in the performance of the subject matter, a right to direct and govern the policy in connection
therewith, and duty, which may be altered by agreement to share both in profit and losses. The acts
of working together in a joint project. (Ibid, citing BLACK’S LAW DICTIONARY, Sixth ed., at p. 839.)

In Torres v. Court of Appeals, 320 SCRA 428 (1999), the Court took no exception to defining the
terms, rights and obligations of the parties to a “Joint Venture Agreement” covering the development
of a subdivision project under provisions of the Civil Code governing partnerships. The Chapter on
Joint Ventures provides for a more thorough discussion of the joint venture as a medium of doing
business under Philippine setting.

2. Distinguished from Co-Ownership

Although the Law on Partnerships recognizes that partners have co-ownership interest in the
partnership properties (Article 1811, Civil Code), nonetheless a co-ownership constitutes merely a
property relation whereby two or more persons own pro-indiviso a property, but the relationship does
not seek the business or mercantile pursuit of the property relationship. In other words, a co-
ownership situation comes about other than by a contractual intent to pursue a business venture in
common, and consequently, no separate juridical personality arises from a purely co-ownership
relationship.

Without the contractual intent to pursue a business venture through a common fund, the fact that co-
owners happen to share in the profits that may be produced by the property owned in common, there
is still no partnership arrangement. Thus, Article 1769 of the Civil Code provides that “In determing
whether a partnership exists . . . 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. Distinguished from Joint Account (Sociedad de Cuentas en Participacion)

A joint account is governed under Article 239 of the Code of Commerce, and still referred to as a
corporate taxpayer under the National Internal Revenue Code. But its use is a rarity in our jurisdiction
because it does not lend itself to commercial or business efficiency, as shown by the discussion of its
features in Bourns v. Carman, 7 Phil. 117 (1906), thus –

. . . A partnership constituted in such manner, the existence of which was only known to those who
had an interest in the same, there being no mutual agreement between the partners, and without a
corporate name indicating to the public in some way that there were other people beside the one who
ostensibly managed and conducted the business, is exactly the accidental partnership of cuentas en
participacion defined in Article 239 of the Code of Commerce.
Those who contract with the person under whose name the business of such partnership of cuentas en
participacion is conducted, shall have only a right of action against such person and not against the
other persons interested, and the latter, on the other hand, shall have no right of action against the
third person who contracted with the manager unless such manager formally transfers his right to
them. (Art. 242 of the Code of Commerce) . . . (at pp. 119-120).

4. Distinguished from Agency

In a pure agency agreement, the agent is merely a legal extension of the personality of the principal
and thereby under the complete control of the principal.

The partnership relationship among the partners makes them mutual agents of one another, and
thereby the control that a principal has over his agent does not pertain between and among the
partners. Likewise, unlike in a pure agency relationship where the agent who acts within the scope of
his authority does not bind himself to the contract or transaction he enters into, in a partnership
situation, the partner binds not only the other partners and the partnership, but also himself in the
pursuit of the partnership enterprise.

In Binglangawa v. Constantino, 109 Phil. 168 (1960), the Court held that just because a duly
appointed agent has made personal advances for the expenses of the business venture that he had
been designated to administer, does not make him a partner of his principal.

In United States v. Muhn, 6 Phil. 164 (1906), it was held that the agent cannot escape the criminal
liabilities of the crime of estafa for conversion of the funds given to him by his principal by claiming
that he had become a partner when the books of accounts kept for the business showed that the
amount was charged to him since the same was “merely a method of keeping an account of the
business, so that the parties would know how much money had been invested and what the condition
thereof was at any particular time.” (Ibid, at p. 166)

5. Distinguished from the Business Trust

As compared to a partnership, a business trust is constituted by deed of trust which is easier and less
expensive to constitute for it is not bounded by any legal requirements like the registration
requirements for partnerships where the real property or more than P3,000 worth of property is
contributed to the partnership.

The creation of a business trust does not give rise to a separate juridical personality, and is mainly
governed by contractual doctrines and the common law principles on trust. There is no element of
mutual agency or co-ownership in a business trust relationship, and in fact the trust relationship is
centered upon the splitting in the properties contributed (the corpus) of the legal or naked title in the
trustee who then manages and control the properties, and beneficial or equitable title in the
beneficiary and for whose benefit the trustee shall manage and control the properties of the corpus.

6. Distinguished from the Corporation

The most important distinction between the corporation and the partnership are their legal capacities.
With the right of succession, a corporation has a stronger legal personality, enabling it to continue
despite the death, incapacity, withdrawal or insolvency of any of its stockholders or members. In a
partnership, the withdrawal, death, incapacity or insolvency of any partner would automatically bring
about the dissolution of the partnership. (Articles . 1828 and 1830, Civil Code.)
Limited liability is a main feature in a corporate setting, whereas partners are liable personally for
partnership debts not only to what they have invested in the partnership but even as to their other
properties. (Articles 1816, 1817, 1824, and 1839, Civil Code)

Generally, every partner is an agent of the partnership, (Articles 1803(1), 1818, and 1819, Civil
Code), and by his sole act, he can bind the partnership (Articles 1822 and 1823, Civil Code), whereas
in a corporation, only the Board of Directors or its duly authorized agents can bind the corporation.

In a partnership setting, although a partner has the power to sell or dispose of his capital interest or
proprietary interest, the buyer or transferee does not assume transferor’s position as partner, but
merely has a right to demand for accounting or distribution of the profits pertaining thereto. (Articles
1804 and 1813, Civil Code) In a corporate setting, every stockholder has the right to transfer his
shares in the corporation, and the buyer or transferee assumes the role of stockholder of said shares
when the transfer has been duly registered in the corporate books Section 63, Corporation Code. In
other words, the position of being partner is inherently not transferable, whereas, shares are freely
transferable in the corporate setting.

a. Does a Defective Incorporation Process Result into a Partnership?

The clear distinctions between the corporation and partnership can best be illustrated by discussing
the issue of whether a defective incorporation process that does not result into a corporate entity,
would at least result into a partnership.

It is a legal principle that when parties come together and all the elements of a particular contract are
present, although the parties may have nominated it otherwise, the law will impose such contractual
relationship upon them. In other words, the contract or relationship is what the law says it is, not how
the parties wish to call it. Therefore, it may agreed when five or more persons come together to
contribute money or property to a common venture or fund, with the intention of dividing the profits
among themselves, the parties may wish to call it otherwise, however, under the definition of the
Article 1767 of the Civil Code, it would still be a partnership, even if the parties had intended a
corporation but did not materialize because of certain registration deficiencies.

If the parties have in fact pursued the incorporation process, by executing and filing with the SEC the
articles of incorporation, then there should be no resulting partnership in the event that the
incorporation process does not bear fruition, based on the following grounds:

Firstly, both corporate and partnership relationships are fundamentally contractual relationship created
by the co-venturers who consent to come together under said relationships. If the parties had
intended to create an association in the form of a corporation, a partnership cannot be created in its
stead since such is not within their intent, and therefore does not constitute a part of their consent to
the contractual relationship.

More importantly, while partnership lies essentially within the norms of Contract Law, the corporation
gets it essence from a particular State-grant of separate juridical personality. In other words, parties
to a corporate venture are fully aware that it is the process of incorporation and the issuance of the
certificate of incorporation by which the corporate entity comes into being. There is therefore no doubt
in the minds of incorporators that they could effect a venture under a juridical being, and thereby
achieve both the advantages and suffer the burdens associated with such corporate medium, by the
mere meeting of minds.

Secondly, the important differences between the corporation and the partnership cannot lead one to
the conclusion that in the absence of the first, the contracting parties would have gone along with the
latter. Limited liability, centralized management and easy transferability of the units of ownership in a
corporation are by themselves strong factors for parties’ intention to be bound in the corporate
relationship, and one cannot presume that if these features are not met that they would in the
alternative wish to be covered by a partnership relationship, which has generally would involve
unlimited liability, mutual agency among the partners, and the delectus personae feature.

The essence of what constitutes the contractual relationship of partnership under Article 1767 is the
coming “together” or what is known in Partnership Law as “delectus personae” and not just the joint
venture. The essence of partnership is the personal relationship, i.e., that each would-be partner goes
into the venture precisely because he wants the other co-venturers, and no other person, to be with
him in the venture. A venturer who seeks to enter into a corporate relationship perhaps does not even
care about the personality of the other co-venturers, and fully aware that he himself and others have
the ability to transfer their investments to outsiders.

Nonetheless, there indications of a contrary view to the above. Under Section 21 of the Corporation
Code, when parties act and pretend to be a corporation, when in fact none exist, the law would impute
to them a juridical personality to validate the contract under the corporation by estoppel doctrine;
however, it would treat the parties as partners since it expressly makes them liable as “general
partners.”

Under such contrary view, the main issue would be the priority between the personal creditors of the
“partners” in a corporation by estoppel doctrine, and the “corporate” creditors of the corporation by
estoppel, as to the assets invested into the venture. The author would presume that it would have to
be the corporate creditors that would have priority over the “corporate” assets as this seems to be the
moving spirit of the corporation by estoppel doctrine.

This position of the author has been partially justified by the discussions of in Pioneer Insurance &
Surety Corp. v. Court of Appeals,175 SCRA 668 (1989), when it resolved the issue raised: “What legal
rules govern the relationship among co-investors whose agreements was to do business through the
corporate vehicle but who failed to (Ibid, at p. 681).

Quoting from American jurisprudence, the Supreme Court in Pioneer Insurance held that “there has
been the position that as among themselves the rights of the stockholders in a defectively
incorporated association should be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners (Quoting from CORPUS JURIS SECUNDUM
which cited Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), nevertheless it
has been held that “ordinarily persons who attempt, but fail, to form a corporation and who carry on
business under the corporate name occupy the position of partners inter se (Ibid, citing Lynch v.
Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913 A. 1065), and their rights as members of the
company to the property acquired by the company will be recognized.” (Ibid, citing Smith v. Schoodoc
Pond Packing Co., 84 A, 268m 109 Me. 555; Whipple v. Parker, 29 Mich 369).

Notwithstanding the foregoing, the Court took the position that such partnership relationship does not
exist, “for ordinarily persons cannot be made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall exist . . . and it should be implied only
when necessary to do justice between the parties; thus, one who takes no part except to subscribe for
stock in a proposed corporation which is never legally formed does not become a partner with other
subscribers who engage in business under the name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership and contributions. . . A partnership relation
between certain stockholders and other stockholders, who were also directors, will not be implied in
the absence of an agreement, so as to make the former liable to contribute for payment of debts
illegally contracted by the latter. (Ibid, at p.683, quoting from CORPUS JURIS SECUNDUM, Vol. 68, p.
464). Nor will it make the investor to a would-be corporation liable for losses sustained from its
operations under a partnership inter se theory.” (Ibid, at p. 685). The key elements in resolving the
issue seem to have been in Pioneer Insurance those of intent and participation in business activities.

The doctrinal pronouncement in Pioneer Insurance can be summarized as follows: When parties come
together intending to form a corporation, but no corporation is formed due to some legal cause, then:

(a) Parties who had intended to participate or actually participated in the business affairs of the
proposed corporation would be considered as partners under ade facto partnership, and would be
liable as such in an action for settlement of partnership obligations;

- Whereas, -

(b) Parties who took no part except to subscribe to shares of stock in a proposed corporation, do not
become partners with other subscribers who engaged in business under the name of the pretended
corporation, and are not liable for action for settlement of the alleged partnership contribution.

The doctrinal pronouncements in Pioneer Insurance are consistent with the distinctions between an
investor in partnership venture, where there is a clear intent to participate in the management of the
partnership business and for which limited liability is not afforded by law; and an investor in a
corporation, where under the principal ofcentralized management, there is no intent to participate in
the corporate operations, and for which limited liability is afforded by law.

On the other hand, where the parties to a venture merely use a business name that pretends there is
a corporation, when in fact they was no intention among the co-venturers to formally incorporate a
juridical entity, then there can be no doubt that what was really the meeting of minds among them
was a partnership, for in essence they agreed to set up a common fund (i.e., pursue a business
venture), with clear indication to divide the profits among themselves. This is exactly the situation
covered in the decision in Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728
(1999), where the liabilities of the parties were adjudged under the corporation by estoppel doctrine.
(See more detailed discussions in Chapter 5).

In Lim Tong Lim, the Court found that three co-venturers agreed “to engage in a fishing business,
which they started by buying boats worth P3.35 million, financed by a loan . . . In their Compromise
Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of
the boats, and to divide equally among themselves the excess or loss. . . These boats, the purchase
and the repair of which were financed with borrowed money, fell under the term ‘common fund’ under
Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible
like credit or industry. That the parties agreed that any loss or profit from the sale and operation of
the boats would be divided equally among them also shows that they had indeed formed a
partnership.” (Ibid, at p. 739)

The only complication in Lim Tong Lim was that the transaction upon which the personal liabilities of
the co-venturers was being pursued, was entered into on behalf of “Ocean Quest Fishing Corporation,”
although no such corporation existed nor was there any attempt to incorporate such entity.
Consequently, both the unlimited liability principle under Partnership Law and the corporation by
estoppel doctrine in Corporate Law were applied to determine the personal liability of each of the
partners in the business venture, which resulted in legal incongruency.

In a partnership, as a legal consequence of the application of the doctrine of mutual agency, every
partner shall be personally liable for partnership debts and liabilities, even when the underlying
transaction was effected by another partner, or even when a partner does not participate at all in the
affairs of the partnership. On the other hand, under the corporation by estoppel doctrine now
embodied in Section 21 of the Corporation Code, it is only the active or managing officers who assume
the liability of a general partner, thus: “All persons who assume to act as a corporation knowing it to
be without authority to do so shall be liable as general partners, for all debts, liabilities and damages
incurred or arising as a result thereof;” and that consequently, passive stockholders are not deemed
to be personally liable for debts incurred on behalf of the ostensible corporation.

This was in fact the defense raised by the petitioner in Lim Tong Lim, where he held that since he did
not participate actively in the business venture, then under the principles of corporation by estoppel
doctrine, he cannot be made personally liable for the debts incurred in pursuing the business venture.
Instead of holding that the primary doctrine to apply would be the rules of unlimited liability since
there was duly constituted a valid partnership, the Court instead humored the argument and went on
to also apply the corporation by estoppel doctrine with a jurisprudential twist when it held —

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. . . .
a third party who, knowing an association to be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may be barred from denying its corporate existence in a suit
brought against the alleged corporation. In such case, all those who benefited from the transaction
made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for
contracts they impliedly assented to or took advantage of. (Ibid, at p. 743)

The result is that by mixing principles in Partnership Law and Corporate Law in Lim Tong Lim, the
corporation by estoppel doctrine has grown out of the confines of Section 21 of the Corporation Code,
as to make liable as general partners, not only those parties to acted for the ostensible corporation,
but also all passive parties who knowing there is no such corporation sat back and benefited from the
venture.

6. Cooperative

A cooperative is a duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve lawful common social or economic end, making equitable
contributions to the capital required and accepting a fair share of the risks and benefits of the
undertaking in accordance with universally accepted cooperative principles. (Article 3, Cooperative
Development Authority Act [R.A. 6938]).

A cooperative, like an ordinary corporation and a partnership, has a juridical personality separate and
distinct from its members, and has limited liability feature. (Articles. 12 and 30, R.A. 6938)

The Tax Code defines a cooperative as an association conducted by the members thereof with the
money collected from among themselves and solely for their own protection and not for profit.
(Republic v. Sunlife Assurance Company of Canada, 473 SCRA 129 [2005]).

Unlike ordinary corporations, cooperatives are governed by principles of democratic control where the
members in primary cooperatives shall have equal voting rights on a one-member-one-vote principle
(Articles. 4(2), R.A. 6938); where the Board of Directors manages the affairs of the cooperative, but
it is the general assembly of full membership that exercises all the rights and performs all of the
obligations of the cooperative (Articles 5(3) and 34, R.A. 6938); and are under the supervision and
control of the Cooperative Development of Authority, and not the SEC.

Unlike a partnership which should be organized for profit, and a non-stock corporation which can be
organized for any eleemosynary purpose and no part of the net income is to be distributed to the
officers and members thereof, the primary objective of every cooperative is self-help: “to provide
goods and services to its members and thus enable them to attain increased income and savings,
investments, productivity, and purchasing power and promote among them equitable distribution of
net surplus through maximum utilization of economies of scale, cost-sharing and risk-sharing without
conducting the affairs of the cooperative for eleemosynary or charitable purposes.” (Article 7, R.A.
6938)

The Law on Cooperatives declares it a policy of the State to foster the creation and growth of
cooperatives as a practical vehicle for promoting self-reliance and harnessing people power towards
the attainment of economic development and social justice. (Article 2, R.A. 6938). In one case, the
Court held that cooperatives are established to provide a strong social and economic organization to
ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. (Corpuz
v. Grospe, 333 SCRA 425 [2000]).
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-17295 July 30, 1962

ANG PUE & COMPANY, ET AL., plaintiffs-appellants,


vs.
SECRETARY OF COMMERCE AND INDUSTRY, defendant-appellee.

Felicisimo E. Escaran for plaintiffs-appellants.


Office of the Solicitor General for defendant-appellee.

DIZON, J.:

Action for declaratory relief filed in the Court of First Instance of Iloilo by Ang Pue & Company, Ang
Pue and Tan Siong against the Secretary of Commerce and Industry to secure judgment "declaring
that plaintiffs could extend for five years the term of the partnership pursuant to the provisions of
plaintiffs' Amendment to the Article of Co-partnership."

The answer filed by the defendant alleged, in substance, that the extension for another five years of
the term of the plaintiffs' partnership would be in violation of the provisions of Republic Act No. 1180.

It appears that on May 1, 1953, Ang Pue and Tan Siong, both Chinese citizens, organized the
partnership Ang Pue & Company for a term of five years from May 1, 1953, extendible by their
mutual consent. The purpose of the partnership was "to maintain the business of general
merchandising, buying and selling at wholesale and retail, particularly of lumber, hardware and other
construction materials for commerce, either native or foreign." The corresponding articles of
partnership (Exhibit B) were registered in the Office of the Securities & Exchange Commission on
June 16, 1953.

On June 19, 1954 Republic Act No. 1180 was enacted to regulate the retail business. It provided,
among other things, that, after its enactment, a partnership not wholly formed by Filipinos could
continue to engage in the retail business until the expiration of its term.

On April 15, 1958 — prior to the expiration of the five-year term of the partnership Ang Pue &
Company, but after the enactment of the Republic Act 1180, the partners already mentioned
amended the original articles of part ownership (Exhibit B) so as to extend the term of life of the
partnership to another five years. When the amended articles were presented for registration in the
Office of the Securities & Exchange Commission on April 16, 1958, registration was refused upon
the ground that the extension was in violation of the aforesaid Act.

From the decision of the lower court dismissing the action, with costs, the plaintiffs interposed this
appeal.

The question before us is too clear to require an extended discussion. To organize a corporation or a
partnership that could claim a juridical personality of its own and transact business as such, is not a
matter of absolute right but a privilege which may be enjoyed only under such terms as the State
may deem necessary to impose. That the State, through Congress, and in the manner provided by
law, had the right to enact Republic Act No. 1180 and to provide therein that only Filipinos and
concerns wholly owned by Filipinos may engage in the retail business can not be seriously disputed.
That this provision was clearly intended to apply to partnership already existing at the time of the
enactment of the law is clearly showing by its provision giving them the right to continue engaging in
their retail business until the expiration of their term or life.

To argue that because the original articles of partnership provided that the partners could extend the
term of the partnership, the provisions of Republic Act 1180 cannot be adversely affect appellants
herein, is to erroneously assume that the aforesaid provision constitute a property right of which the
partners can not be deprived without due process or without their consent. The agreement contain
therein must be deemed subject to the law existing at the time when the partners came to agree
regarding the extension. In the present case, as already stated, when the partners amended the
articles of partnership, the provisions of Republic Act 1180 were already in force, and there can be
not the slightest doubt that the right claimed by appellants to extend the original term of their
partnership to another five years would be in violation of the clear intent and purpose of the law
aforesaid.

WHEREFORE, the judgment appealed from is affirmed, with costs.

Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Regala and Makalintal, JJ., concur.
Bautista Angelo and Reyes, J.B.L., JJ., took no part.
Republic of the Philippines
SUPREME COURT

SECOND DIVISION

G.R. No. 126881 October 3, 2000

HEIRS OF TAN ENG KEE, petitioners,


vs.
COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President TAN
ENG LAY,respondents.

DE LEON, JR., J.:

In this petition for review on certiorari, petitioners pray for the reversal of the 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:

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO


PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY
BECAUSE: (A) THERE WAS NO FIRM ACCOUNT; (B) THERE WAS NO FIRM
LETTERHEADS SUBMITTED AS EVIDENCE; (C) THERE WAS NO CERTIFICATE OF
PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO PROFITS AND LOSSES; AND
(E) THERE WAS NO TIME FIXED FOR THE DURATION OF THE PARTNERSHIP (PAGE
13, DECISION).

II

THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-


SERVING TESTIMONY OF RESPONDENT TAN ENG LAY THAT BENGUET LUMBER
WAS A SOLE PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY AN EMPLOYEE
THEREOF.

III

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING


FACTS WHICH WERE DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT
SUPPORT THE EXISTENCE OF A PARTNERSHIP JUST BECAUSE THERE WAS NO
ARTICLES OF PARTNERSHIP DULY RECORDED BEFORE THE SECURITIES AND
EXCHANGE COMMISSION:

a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING
AT THE BENGUET LUMBER COMPOUND;

b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE
EMPLOYEES OF BENGUET LUMBER;

c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE
EMPLOYEES THEREIN;

d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING
THE PRICES OF STOCKS TO BE SOLD TO THE PUBLIC; AND

e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS
TO THE SUPPLIERS (PAGE 18, DECISION).

IV

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 16-
17, DECISION).

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. Bolaños, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981).

Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of
partnership but there is none. The alleged partnership, though, was never formally organized. In
addition, petitioners point out that the New Civil Code was not yet in effect when the partnership was
allegedly formed sometime in 1945, although the contrary may well be argued that nothing
prevented the parties from complying with the provisions of the New Civil Code when it took effect
on August 30, 1950. But all that is in the past. The net effect, however, is that we are asked to
determine whether a partnership existed based purely on circumstantial evidence. A review of the
record persuades us that the Court of Appeals correctly reversed the decision of the trial court. The
evidence presented by petitioners falls short of the quantum of proof required to establish a
partnership.

Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay,
could have expounded on the precise nature of the business relationship between them. In the
absence of evidence, we cannot accept as an established fact that Tan Eng Kee allegedly
contributed his resources to a common fund for the purpose of establishing a partnership. The
testimonies to that effect of petitioners' witnesses is directly controverted by Tan Eng Lay. It should
be noted that it is not with the number of witnesses wherein preponderance lies;24 the quality of their
testimonies is to be considered. None of petitioners' witnesses could suitably account for the
beginnings of Benguet Lumber Company, except perhaps for Dionisio Peralta whose deceased wife
was related to Matilde Abubo.25 He stated that when he met Tan Eng Kee after the liberation, the
latter asked the former to accompany him to get 80 pieces of G.I. sheets supposedly owned by both
brothers.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.

Bellosillo, Mendoza, Quisumbing and Buena, JJ ., concur.


Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 127405 October 4, 2000

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,


vs.
COURT OF APPEALS and NENITA A. ANAY, respondents.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review of the Decision of the Court of Appeals in CA-G.R. CV No.
41616,1 affirming the Decision of the Regional Trial Court of Makati, Branch 140, in Civil Case No.
88-509.2

Fresh from her stint as marketing adviser of Technolux in Bangkok, Thailand, private respondent
Nenita A. Anay met petitioner William T. Belo, then the vice-president for operations of Ultra Clean
Water Purifier, through her former employer in Bangkok. Belo introduced Anay to petitioner Marjorie
Tocao, who conveyed her desire to enter into a joint venture with her for the importation and local
distribution of kitchen cookwares. Belo volunteered to finance the joint venture and assigned to Anay
the job of marketing the product considering her experience and established relationship with West
Bend Company, a manufacturer of kitchen wares in Wisconsin, U.S.A. Under the joint venture, Belo
acted as capitalist, Tocao as president and general manager, and Anay as head of the marketing
department and later, vice-president for sales. Anay organized the administrative staff and sales
force while Tocao hired and fired employees, determined commissions and/or salaries of the
employees, and assigned them to different branches. The parties agreed that Belo’s name should
not appear in any documents relating to their transactions with West Bend Company. Instead, they
agreed to use Anay’s name in securing distributorship of cookware from that company. The parties
agreed further that Anay would be entitled to: (1) ten percent (10%) of the annual net profits of the
business; (2) overriding commission of six percent (6%) of the overall weekly production; (3) thirty
percent (30%) of the sales she would make; and (4) two percent (2%) for her demonstration
services. The agreement was not reduced to writing on the strength of Belo’s assurances that he
was sincere, dependable and honest when it came to financial commitments.

Anay having secured the distributorship of cookware products from the West Bend Company and
organized the administrative staff and the sales force, the cookware business took off successfully.
They operated under the name of Geminesse Enterprise, a sole proprietorship registered in Marjorie
Tocao’s name, with office at 712 Rufino Building, Ayala Avenue, Makati City. Belo made good his
monetary commitments to Anay. Thereafter, Roger Muencheberg of West Bend Company invited
Anay to the distributor/dealer meeting in West Bend, Wisconsin, U.S.A., from July 19 to 21, 1987
and to the southwestern regional convention in Pismo Beach, California, U.S.A., from July 25-26,
1987. Anay accepted the invitation with the consent of Marjorie Tocao who, as president and general
manager of Geminesse Enterprise, even wrote a letter to the Visa Section of the U.S. Embassy in
Manila on July 13, 1987. A portion of the letter reads:

"Ms. Nenita D. Anay (sic), who has been patronizing and supporting West Bend Co. for twenty (20)
years now, acquired the distributorship of Royal Queen cookware for Geminesse Enterprise, is the
Vice President Sales Marketing and a business partner of our company, will attend in response to
the invitation." (Italics supplied.)3

Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook the task of saving the
business on account of the unsatisfactory sales record in the Makati and Cubao offices. On August
31, 1987, she received a plaque of appreciation from the administrative and sales people through
Marjorie Tocao4 for her excellent job performance. On October 7, 1987, in the presence of Anay,
Belo signed a memo5 entitling her to a thirty-seven percent (37%) commission for her personal sales
"up Dec 31/87." Belo explained to her that said commission was apart from her ten percent (10%)
share in the profits. On October 9, 1987, Anay learned that Marjorie Tocao had signed a
letter6 addressed to the Cubao sales office to the effect that she was no longer the vice-president of
Geminesse Enterprise. The following day, October 10, she received a note from Lina T. Cruz,
marketing manager, that Marjorie Tocao had barred her from holding office and conducting
demonstrations in both Makati and Cubao offices.7 Anay attempted to contact Belo. She wrote him
twice to demand her overriding commission for the period of January 8, 1988 to February 5, 1988
and the audit of the company to determine her share in the net profits. When her letters were not
answered, Anay consulted her lawyer, who, in turn, wrote Belo a letter. Still, that letter was not
answered.

Anay still received her five percent (5%) overriding commission up to December 1987. The following
year, 1988, she did not receive the same commission although the company netted a gross sales of
P13,300,360.00.

On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum of money with
damages8against Marjorie D. Tocao and William Belo before the Regional Trial Court of Makati,
Branch 140.

In her complaint, Anay prayed that defendants be ordered to pay her, jointly and severally, the
following: (1) P32,00.00 as unpaid overriding commission from January 8, 1988 to February 5, 1988;
(2) P100,000.00 as moral damages, and (3) P100,000.00 as exemplary damages. The plaintiff also
prayed for an audit of the finances of Geminesse Enterprise from the inception of its business
operation until she was "illegally dismissed" to determine her ten percent (10%) share in the net
profits. She further prayed that she be paid the five percent (5%) "overriding commission" on the
remaining 150 West Bend cookware sets before her "dismissal."

In their answer,9 Marjorie Tocao and Belo asserted that the "alleged agreement" with Anay that was
"neither reduced in writing, nor ratified," was "either unenforceable or void or inexistent." As far as
Belo was concerned, his only role was to introduce Anay to Marjorie Tocao. There could not have
been a partnership because, as Anay herself admitted, Geminesse Enterprise was the sole
proprietorship of Marjorie Tocao. Because Anay merely acted as marketing demonstrator of
Geminesse Enterprise for an agreed remuneration, and her complaint referred to either her
compensation or dismissal, such complaint should have been lodged with the Department of Labor
and not with the regular court.

Petitioners (defendants therein) further alleged that Anay filed the complaint on account of "ill-will
and resentment" because Marjorie Tocao did not allow her to "lord it over in the Geminesse
Enterprise." Anay had acted like she owned the enterprise because of her experience and expertise.
Hence, petitioners were the ones who suffered actual damages "including unreturned and
unaccounted stocks of Geminesse Enterprise," and "serious anxiety, besmirched reputation in the
business world, and various damages not less than P500,000.00." They also alleged that, to
"vindicate their names," they had to hire counsel for a fee of P23,000.00.
At the pre-trial conference, the issues were limited to: (a) whether or not the plaintiff was an
employee or partner of Marjorie Tocao and Belo, and (b) whether or not the parties are entitled to
damages.10

In their defense, Belo denied that Anay was supposed to receive a share in the profit of the
business. He, however, admitted that the two had agreed that Anay would receive a three to four
percent (3-4%) share in the gross sales of the cookware. He denied contributing capital to the
business or receiving a share in its profits as he merely served as a guarantor of Marjorie Tocao,
who was new in the business. He attended and/or presided over business meetings of the venture in
his capacity as a guarantor but he never participated in decision-making. He claimed that he wrote
the memo granting the plaintiff thirty-seven percent (37%) commission upon her dismissal from the
business venture at the request of Tocao, because Anay had no other income.

For her part, Marjorie Tocao denied having entered into an oral partnership agreement with Anay.
However, she admitted that Anay was an expert in the cookware business and hence, they agreed
to grant her the following commissions: thirty-seven percent (37%) on personal sales; five percent
(5%) on gross sales; two percent (2%) on product demonstrations, and two percent (2%) for
recruitment of personnel. Marjorie denied that they agreed on a ten percent (10%) commission on
the net profits. Marjorie claimed that she got the capital for the business out of the sale of the sewing
machines used in her garments business and from Peter Lo, a Singaporean friend-financier who
loaned her the funds with interest. Because she treated Anay as her "co-equal," Marjorie received
the same amounts of commissions as her. However, Anay failed to account for stocks valued at
P200,000.00.

On April 22, 1993, the trial court rendered a decision the dispositive part of which is as follows:

"WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. Ordering defendants to submit to the Court a formal account as to the partnership affairs for the
years 1987 and 1988 pursuant to Art. 1809 of the Civil Code in order to determine the ten percent
(10%) share of plaintiff in the net profits of the cookware business;

2. Ordering defendants to pay five percent (5%) overriding commission for the one hundred and fifty
(150) cookware sets available for disposition when plaintiff was wrongfully excluded from the
partnership by defendants;

3. Ordering defendants to pay plaintiff overriding commission on the total production which for the
period covering January 8, 1988 to February 5, 1988 amounted to P32,000.00;

4. Ordering defendants to pay P100,000.00 as moral damages and P100,000.00 as exemplary


damages, and

5. Ordering defendants to pay P50,000.00 as attorney’s fees and P20,000.00 as costs of suit.

SO ORDERED."

The trial court held that there was indeed an "oral partnership agreement between the plaintiff and
the defendants," based on the following: (a) there was an intention to create a partnership; (b) a
common fund was established through contributions consisting of money and industry, and (c) there
was a joint interest in the profits. The testimony of Elizabeth Bantilan, Anay’s cousin and the
administrative officer of Geminesse Enterprise from August 21, 1986 until it was absorbed by Royal
International, Inc., buttressed the fact that a partnership existed between the parties. The letter of
Roger Muencheberg of West Bend Company stating that he awarded the distributorship to Anay and
Marjorie Tocao because he was convinced that with Marjorie’s financial contribution and Anay’s
experience, the combination of the two would be invaluable to the partnership, also supported that
conclusion. Belo’s claim that he was merely a "guarantor" has no basis since there was no written
evidence thereof as required by Article 2055 of the Civil Code. Moreover, his acts of attending and/or
presiding over meetings of Geminesse Enterprise plus his issuance of a memo giving Anay 37%
commission on personal sales belied this. On the contrary, it demonstrated his involvement as a
partner in the business.

The trial court further held that the payment of commissions did not preclude the existence of the
partnership inasmuch as such practice is often resorted to in business circles as an impetus to
bigger sales volume. It did not matter that the agreement was not in writing because Article 1771 of
the Civil Code provides that a partnership may be "constituted in any form." The fact that Geminesse
Enterprise was registered in Marjorie Tocao’s name is not determinative of whether or not the
business was managed and operated by a sole proprietor or a partnership. What was registered with
the Bureau of Domestic Trade was merely the business name or style of Geminesse Enterprise.

The trial court finally held that a partner who is excluded wrongfully from a partnership is an innocent
partner. Hence, the guilty partner must give him his due upon the dissolution of the partnership as
well as damages or share in the profits "realized from the appropriation of the partnership business
and goodwill." An innocent partner thus possesses "pecuniary interest in every existing contract that
was incomplete and in the trade name of the co-partnership and assets at the time he was
wrongfully expelled."

Petitioners’ appeal to the Court of Appeals11 was dismissed, but the amount of damages awarded by
the trial court were reduced to P50,000.00 for moral damages and P50,000.00 as exemplary
damages. Their Motion for Reconsideration was denied by the Court of Appeals for lack of
merit.12 Petitioners Belo and Marjorie Tocao are now before this Court on a petition for review
on certiorari, asserting that there was no business partnership between them and herein private
respondent Nenita A. Anay who is, therefore, not entitled to the damages awarded to her by the
Court of Appeals.

Petitioners Tocao and Belo contend that the Court of Appeals erroneously held that a partnership
existed between them and private respondent Anay because Geminesse Enterprise "came into
being" exactly a year before the "alleged partnership" was formed, and that it was very unlikely that
petitioner Belo would invest the sum of P2,500,000.00 with petitioner Tocao contributing nothing,
without any "memorandum whatsoever regarding the alleged partnership."13

The issue of whether or not a partnership exists is a factual matter which are within the exclusive
domain of both the trial and appellate courts. This Court cannot set aside factual findings of such
courts absent any showing that there is no evidence to support the conclusion drawn by the court a
quo.14 In this case, both the trial court and the Court of Appeals are one in ruling that petitioners and
private respondent established a business partnership. This Court finds no reason to rule otherwise.

To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or more
persons bind themselves to contribute money, property or industry to a common fund; and (2)
intention on the part of the partners to divide the profits among themselves.15 It may be constituted in
any form; a public instrument is necessary only where immovable property or real rights are
contributed thereto.16 This implies that since a contract of partnership is consensual, an oral contract
of partnership is as good as a written one. Where no immovable property or real rights are involved,
what matters is that the parties have complied with the requisites of a partnership. The fact that there
appears to be no record in the Securities and Exchange Commission of a public instrument
embodying the partnership agreement pursuant to Article 1772 of the Civil Code17 did not cause the
nullification of the partnership. The pertinent provision of the Civil Code on the matter states:

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

Petitioners admit that private respondent had the expertise to engage in the business of
distributorship of cookware. Private respondent contributed such expertise to the partnership and
hence, under the law, she was the industrial or managing partner. It was through her reputation with
the West Bend Company that the partnership was able to open the business of distributorship of that
company’s cookware products; it was through the same efforts that the business was propelled to
financial success. Petitioner Tocao herself admitted private respondent’s indispensable role in
putting up the business when, upon being asked if private respondent held the positions of
marketing manager and vice-president for sales, she testified thus:

"A: No, sir at the start she was the marketing manager because there were no one to sell yet, it’s
only me there then her and then two (2) people, so about four (4). Now, after that when she recruited
already Oscar Abella and Lina Torda-Cruz these two (2) people were given the designation of
marketing managers of which definitely Nita as superior to them would be the Vice President."18

By the set-up of the business, third persons were made to believe that a partnership had indeed
been forged between petitioners and private respondents. Thus, the communication dated June 4,
1986 of Missy Jagler of West Bend Company to Roger Muencheberg of the same company states:

"Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the operations. Marge
does not have cookware experience. Nita Anay has started to gather former managers, Lina Torda
and Dory Vista. She has also gathered former demonstrators, Betty Bantilan, Eloisa Lamela,
Menchu Javier. They will continue to gather other key people and build up the organization. All they
need is the finance and the products to sell."19

On the other hand, petitioner Belo’s denial that he financed the partnership rings hollow in the face
of the established fact that he presided over meetings regarding matters affecting the operation of
the business. Moreover, his having authorized in writing on October 7, 1987, on a stationery of his
own business firm, Wilcon Builders Supply, that private respondent should receive thirty-seven
(37%) of the proceeds of her personal sales, could not be interpreted otherwise than that he had a
proprietary interest in the business. His claim that he was merely a guarantor is belied by that
personal act of proprietorship in the business. Moreover, if he was indeed a guarantor of future debts
of petitioner Tocao under Article 2053 of the Civil Code,20 he should have presented documentary
evidence therefor. While Article 2055 of the Civil Code simply provides that guaranty must be
"express," Article 1403, the Statute of Frauds, requires that "a special promise to answer for the
debt, default or miscarriage of another" be in writing.21

Petitioner Tocao, a former ramp model,22 was also a capitalist in the partnership. She claimed that
she herself financed the business. Her and petitioner Belo’s roles as both capitalists to the
partnership with private respondent are buttressed by petitioner Tocao’s admissions that petitioner
Belo was her boyfriend and that the partnership was not their only business venture together. They
also established a firm that they called "Wiji," the combination of petitioner Belo’s first name, William,
and her nickname, Jiji.23 The special relationship between them dovetails with petitioner Belo’s claim
that he was acting in behalf of petitioner Tocao. Significantly, in the early stage of the business
operation, petitioners requested West Bend Company to allow them to "utilize their banking and
trading facilities in Singapore" in the matter of importation and payment of the cookware
products.24The inevitable conclusion, therefore, was that petitioners merged their respective capital
and infused the amount into the partnership of distributing cookware with private respondent as the
managing partner.

The business venture operated under Geminesse Enterprise did not result in an employer-employee
relationship between petitioners and private respondent. While it is true that the receipt of a
percentage of net profits constitutes only prima facie evidence that the recipient is a partner in the
business,25 the evidence in the case at bar controverts an employer-employee relationship between
the parties. In the first place, private respondent had a voice in the management of the affairs of the
cookware distributorship,26 including selection of people who would constitute the administrative staff
and the sales force. Secondly, petitioner Tocao’s admissions militate against an employer-employee
relationship. She admitted that, like her who owned Geminesse Enterprise,27private respondent
received only commissions and transportation and representation allowances28 and not a fixed
salary.29 Petitioner Tocao testified:

"Q: Of course. Now, I am showing to you certain documents already marked as Exhs. ‘X’ and ‘Y.’
Please go over this. Exh. ‘Y’ is denominated `Cubao overrides’ 8-21-87 with ending August 21,
1987, will you please go over this and tell the Honorable Court whether you ever came across this
document and know of your own knowledge the amount ---

A: Yes, sir this is what I am talking about earlier. That’s the one I am telling you earlier a certain
percentage for promotions, advertising, incentive.

Q: I see. Now, this promotion, advertising, incentive, there is a figure here and words which I quote:
‘Overrides Marjorie Ann Tocao P21,410.50’ this means that you have received this amount?

A: Oh yes, sir.

Q: I see. And, by way of amplification this is what you are saying as one representing commission,
representation, advertising and promotion?

A: Yes, sir.

Q: I see. Below your name is the words and figure and I quote ‘Nita D. Anay P21,410.50’, what is
this?

A: That’s her overriding commission.

Q: Overriding commission, I see. Of course, you are telling this Honorable Court that there being the
same P21,410.50 is merely by coincidence?

A: No, sir, I made it a point that we were equal because the way I look at her kasi, you know in a
sense because of her expertise in the business she is vital to my business. So, as part of the
incentive I offer her the same thing.

Q: So, in short you are saying that this you have shared together, I mean having gotten from the
company P21,140.50 is your way of indicating that you were treating her as an equal?

A: As an equal.

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


A: Yes, sir.

Q: I am calling again your attention to Exh. ‘Y’ ‘Overrides Makati the other one is ---

A: That is the same thing, sir.

Q: With ending August 21, words and figure ‘Overrides Marjorie Ann Tocao P15,314.25’ the amount
there you will acknowledge you have received that?

A: Yes, sir.

Q: Again in concept of commission, representation, promotion, etc.?

A: Yes, sir.

Q: Okey. Below your name is the name of Nita Anay P15,314.25 that is also an indication that she
received the same amount?

A: Yes, sir.

Q: And, as in your previous statement it is not by coincidence that these two (2) are the same?

A: No, sir.

Q: It is again in concept of you treating Miss Anay as your equal?

A: Yes, sir." (Italics supplied.)30

If indeed petitioner Tocao was private respondent’s employer, it is difficult to believe that they shall
receive the same income in the business. In a partnership, each partner must share in the profits
and losses of the venture, except that the industrial partner shall not be liable for the losses.31 As an
industrial partner, private respondent had the right to demand for a formal accounting of the
business and to receive her share in the net profit.32

The fact that the cookware distributorship was operated under the name of Geminesse Enterprise, a
sole proprietorship, is of no moment. What was registered with the Bureau of Domestic Trade on
August 19, 1987 was merely the name of that enterprise.33 While it is true that in her undated
application for renewal of registration of that firm name, petitioner Tocao indicated that it would be
engaged in retail of "kitchenwares, cookwares, utensils, skillet,"34 she also admitted that the
enterprise was only "60% to 70% for the cookware business," while 20% to 30% of its business
activity was devoted to the sale of water sterilizer or purifier.35 Indubitably then, the business name
Geminesse Enterprise was used only for practical reasons - it was utilized as the common name for
petitioner Tocao’s various business activities, which included the distributorship of cookware.

Petitioners underscore the fact that the Court of Appeals did not return the "unaccounted and
unremitted stocks of Geminesse Enterprise amounting to P208,250.00."36 Obviously a ploy to offset
the damages awarded to private respondent, that claim, more than anything else, proves the
existence of a partnership between them. In Idos v. Court of Appeals, this Court said:

"The best evidence of the existence of the partnership, which was not yet terminated (though in the
winding up stage), were the unsold goods and uncollected receivables, which were presented to the
trial court. Since the partnership has not been terminated, the petitioner and private complainant
remained as co-partners. x x x."37

It is not surprising then that, even after private respondent had been unceremoniously booted out of
the partnership in October 1987, she still received her overriding commission until December 1987.

Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the partnership to reap
for herself and/or for petitioner Belo financial gains resulting from private respondent’s efforts to
make the business venture a success. Thus, as petitioner Tocao became adept in the business
operation, she started to assert herself to the extent that she would even shout at private respondent
in front of other people.38 Her instruction to Lina Torda Cruz, marketing manager, not to allow private
respondent to hold office in both the Makati and Cubao sales offices concretely spoke of her
perception that private respondent was no longer necessary in the business operation,39 and
resulted in a falling out between the two. However, a mere falling out or misunderstanding between
partners does not convert the partnership into a sham organization.40 The partnership exists until
dissolved under the law. Since the partnership created by petitioners and private respondent has no
fixed term and is therefore a partnership at will predicated on their mutual desire and consent, it may
be dissolved by the will of a partner. Thus:

"x x x. The right to choose with whom a person wishes to associate himself is the very foundation
and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of
that mutual resolve, along with each partner’s capability to give it, and the absence of cause for
dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure,
dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the
attendance of bad faith can prevent the dissolution of the partnership but that it can result in a
liability for damages."41

An unjustified dissolution by a partner can subject him to action for damages because by the mutual
agency that arises in a partnership, the doctrine of delectus personae allows the partners to have
the power, although not necessarily the right to dissolve the partnership.42

In this case, petitioner Tocao’s unilateral exclusion of private respondent from the partnership is
shown by her memo to the Cubao office plainly stating that private respondent was, as of October 9,
1987, no longer the vice-president for sales of Geminesse Enterprise.43 By that memo, petitioner
Tocao effected her own withdrawal from the partnership and considered herself as having ceased to
be associated with the partnership in the carrying on of the business. Nevertheless, the partnership
was not terminated thereby; it continues until the winding up of the business.44

The winding up of partnership affairs has not yet been undertaken by the partnership. This is
1âwphi1

manifest in petitioners’ claim for stocks that had been entrusted to private respondent in the pursuit
of the partnership business.

The determination of the amount of damages commensurate with the factual findings upon which it
is based is primarily the task of the trial court.45 The Court of Appeals may modify that amount only
when its factual findings are diametrically opposed to that of the lower court,46 or the award is
palpably or scandalously and unreasonably excessive.47 However, exemplary damages that are
awarded "by way of example or correction for the public good,"48 should be reduced to P50,000.00,
the amount correctly awarded by the Court of Appeals. Concomitantly, the award of moral damages
of P100,000.00 was excessive and should be likewise reduced to P50,000.00. Similarly, attorney’s
fees that should be granted on account of the award of exemplary damages and petitioners’ evident
bad faith in refusing to satisfy private respondent’s plainly valid, just and demandable
claims,49 appear to have been excessively granted by the trial court and should therefore be reduced
to P25,000.00.

WHEREFORE, the instant petition for review on certiorari is DENIED. The partnership among
petitioners and private respondent is ordered dissolved, and the parties are ordered to effect the
winding up and liquidation of the partnership pursuant to the pertinent provisions of the Civil Code.
This case is remanded to the Regional Trial Court for proper proceedings relative to said dissolution.
The appealed decisions of the Regional Trial Court and the Court of Appeals are AFFIRMED with
MODIFICATIONS, as follows ---

1. Petitioners are ordered to submit to the Regional Trial Court a formal account of the
partnership affairs for the years 1987 and 1988, pursuant to Article 1809 of the Civil Code, in
order to determine private respondent’s ten percent (10%) share in the net profits of the
partnership;

2. Petitioners are ordered, jointly and severally, to pay private respondent five percent (5%)
overriding commission for the one hundred and fifty (150) cookware sets available for
disposition since the time private respondent was wrongfully excluded from the partnership
by petitioners;

3. Petitioners are ordered, jointly and severally, to pay private respondent overriding
commission on the total production which, for the period covering January 8, 1988 to
February 5, 1988, amounted to P32,000.00;

4. Petitioners are ordered, jointly and severally, to pay private respondent moral damages in
the amount of P50,000.00, exemplary damages in the amount of P50,000.00 and attorney’s
fees in the amount of P25,000.00.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,


vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:

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

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:

WHEREFORE, [there being] no reversible error in the appealed decision, the same
is hereby affirmed. 2

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the
CA, reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to
the modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the


fishing nets covered by the Agreement plus P68,000.00 representing
the unpaid price of the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiff's invoices
and computed on their respective amounts as follows:

i. Accrued interest of P73,221.00 on Invoice No.


14407 for P385,377.80 dated February 9, 1990;

ii. Accrued interest for P27,904.02 on Invoice No.


14413 for P146,868.00 dated February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No.


14426 for P68,000.00 dated February 19, 1990;

c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing


P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage


charges on the nets counted from September 20, 1990 (date of
attachment) to September 12, 1991 (date of auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or
for the unpaid price of nets and floats in the amount of P532,045.00 and
P68,000.00, respectively, or for the total amount P600,045.00, this Court
noted that these items were attached to guarantee any judgment that may be
rendered in favor of the plaintiff but, upon agreement of the parties, and, to
avoid further deterioration of the nets during the pendency of this case, it was
ordered sold at public auction for not less than P900,000.00 for which the
plaintiff was the sole and winning bidder. The proceeds of the sale paid for by
plaintiff was deposited in court. In effect, the amount of P900,000.00 replaced
the attached property as a guaranty for any judgment that plaintiff may be
able to secure in this case with the ownership and possession of the nets and
floats awarded and delivered by the sheriff to plaintiff as the highest bidder in
the public auction sale. It has also been noted that ownership of the nets
[was] retained by the plaintiff until full payment [was] made as stipulated in
the invoices; hence, in effect, the plaintiff attached its own properties. It [was]
for this reason also that this Court earlier ordered the attachment bond filed
by plaintiff to guaranty damages to defendants to be cancelled and for the
P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor
of defendants.

From the foregoing, it would appear therefore that whatever judgment the
plaintiff may be entitled to in this case will have to be satisfied from the
amount of P900,000.00 as this amount replaced the attached nets and floats.
Considering, however, that the total judgment obligation as computed above
would amount to only P840,216.92, it would be inequitable, unfair and unjust
to award the excess to the defendants who are not entitled to damages and
who did not put up a single centavo to raise the amount of P900,000.00 aside
from the fact that they are not the owners of the nets and floats. For this
reason, the defendants are hereby relieved from any and all liabilities arising
from the monetary judgment obligation enumerated above and for plaintiff to
retain possession and ownership of the nets and floats and for the
reimbursement of the P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED. 3

The Facts

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

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents
filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of
preliminary attachment. The suit was brought against the three in their capacities as general
partners, on the allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as
shown by a Certification from the Securities and Exchange Commission. 5 On September 20, 1990,
the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing
nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting
a reasonable time within which to pay. He also turned over to respondent some of the nets which
were in his possession. Peter Yao filed an Answer, after which he was deemed to have waived his
right to cross-examine witnesses and to present evidence on his behalf, because of his failure to
appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim
and Crossclaim and moved for the lifting of the Writ of Attachment.6 The trial court maintained the Writ,
and upon motion of private respondent, ordered the sale of the fishing nets at a public auction. Philippine
Fishing Gear Industries won the bidding and deposited with the said court the sales proceeds of
P900,000. 7

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

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the
three 9 in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon,
Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a
declaration of ownership of fishing boats; (d) an injunction and (e) damages.10 The Compromise
Agreement provided:

a) That the parties plaintiffs & Lim Tong Lim agree to have the four
(4) vessels sold in the amount of P5,750,000.00 including the fishing
net. This P5,750,000.00 shall be applied as full payment for
P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong
Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher
price than P5,750,000.00 whatever will be the excess will be divided
into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than
P5,750,000.00 whatever the deficiency shall be shouldered and paid
to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua;
1/3 Peter Yao. 11

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

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

Ruling of the Court of Appeals

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

The evidence establishes that all the defendants including herein appellant Lim Tong
Lim undertook a partnership for a specific undertaking, that is for commercial fishing .
. . . Oviously, the ultimate undertaking of the defendants was to divide the profits
among themselves which is what a partnership essentially is . . . . By a contract of
partnership, two or more persons bind themselves to contribute money, property or
industry to a common fund with the intention of dividing the profits among themselves
(Article 1767, New Civil Code). 13

Hence, petitioner brought this recourse before this Court. 14

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the
following grounds:

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE


AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A
SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG
THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING


FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS
FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN
IMPUTING LIABILITY TO PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND


ATTACHMENT OF PETITIONER LIM'S GOODS.

In determining whether petitioner may be held liable for the fishing nets and floats from respondent,
the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to
have entered into a partnership.

This Court's Ruling

The Petition is devoid of merit.


First and Second Issues:

Existence of a Partnership

and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner
controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He
asserts that the CA based its finding on the Compromise Agreement alone. Furthermore, he
disclaims any direct participation in the purchase of the nets, alleging that the negotiations were
conducted by Chua and Yao only, and that he has not even met the representatives of the
respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao,
for the "Contract of Lease " dated February 1, 1990, showed that he had merely leased to the two
the main asset of the purported partnership — the fishing boat F/B Lourdes. The lease was for six
months, with a monthly rental of P37,500 plus 25 percent of the gross catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts
clearly showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767
of the Civil Code which provides:

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

Specifically, both lower courts ruled that a partnership among the three existed based on the
following factual findings: 15

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

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

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

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

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

(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to
the partnership in the amount of P1 million secured by a check, because of which,
Yao and Chua entrusted the ownership papers of two other boats, Chua's FB Lady
Anne Mel and Yao's FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua
bought nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest
Fishing Corporation," their purported business name.

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

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

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

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

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

We stress that under Rule 45, a petition for review like the present case should involve only
questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this
Court, absent any cogent proof that the present action is embraced by one of the exceptions to the
rule. 16 In assailing the factual findings of the two lower courts, petitioner effectively goes beyond the
bounds of a petition for review under Rule 45.

Compromise Agreement

Not the Sole Basis of Partnership

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

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

Petitioner Was a Partner,

Not a Lessor

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

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

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

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

Corporation by Estoppel

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

Sec. 21 of the Corporation Code of the Philippines provides:

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

One who assumes an obligation to an ostensible corporation as such, cannot resist


performance thereof on the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. "The reason behind this doctrine is obvious — an
unincorporated association has no personality and would be incompetent to act and appropriate for
itself the power and attributes of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its representatives or
agents do so without authority and at their own risk. And as it is an elementary principle of law that a
person who acts as an agent without authority or without a principal is himself regarded as the
principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such privileges
and obligations and becomes personally liable for contracts entered into or for other acts performed
as such agent. 17

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In
the first instance, an unincorporated association, which represented itself to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility
for a contract it entered into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case, all those who benefited
from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may
be held liable for contracts they impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for
the nets it sold. The only question here is whether petitioner should be held jointly 18 liable with Chua
and Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible
corporation should be held liable. Since his name does not appear on any of the contracts and since he
never directly transacted with the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the partnership. He in fact questions the attachment
of the nets, because the Writ has effectively stopped his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the law
on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having
reaped the benefits of the contract entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is covered by the scope of the doctrine
of corporation by estoppel. We reiterate the ruling of the Court in Alonso v. Villamor: 19

A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position, entraps and destroys the other. It
is, rather, a contest in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that justice be done upon
the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and becomes its great hindrance
and chief enemy, deserves scant consideration from courts. There should be no
vested rights in technicalities.

Third Issue:

Validity of Attachment

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

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.

SO ORDERED.

Melo, Purisima and Gonzaga-Reyes, JJ., concur.

Vitug, J., pls. see concurring opinion.

Separate Opinions

VITUG, J., concurring opinion;

I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice Artemio V.
Panganiban, particularly the finding that Antonio Chua, Peter Yao and petitioner Lim Tong Lim have
incurred the liabilities of general partners. I merely would wish to elucidate a bit, albeit briefly, the
liability of partners in a general partnership.

When a person by his act or deed represents himself as a partner in an existing partnership or with
one or more persons not actual partners, he is deemed an agent of such persons consenting to such
representation and in the same manner, if he were a partner, with respect to persons who rely upon
the representation. 1 The association formed by Chua, Yao and Lim, should be, as it has been deemed,
a de facto partnership with all the consequent obligations for the purpose of enforcing the rights of third
persons. The liability of general partners (in a general partnership as so opposed to a limited partnership)
is laid down in Article 1816 2 which posits that all partners shall be liable pro rata beyond the partnership
assets for all the contracts which may have been entered into in its name, under its signature, and by a
person authorized to act for the partnership. This rule is to be construed along with other provisions of the
Civil Code which postulate that the partners can be held solidarily liable with the partnership specifically in
these instances — (1) where, by any wrongful act or omission of any partner acting in the ordinary course
of the business of the partnership or with the authority of his co-partners, loss or injury is caused to any
person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor
to the same extent as the partner so acting or omitting to act; (2) where one partner acting within the
scope of his apparent authority receives money or property of a third person and misapplies it; and (3)
where the partnership in the course of its business receives money or property of a third person and the
money or property so received is misapplied by any partner while it is in the custody of the
partnership 3 — consistently with the rules on the nature of civil liability in delicts and quasi-delicts.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,


vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,


vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER
MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES
and CONSTANCIO MAGLANA,respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R.
CV No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case
No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants
(respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision
was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim


to pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum
compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees
from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary
damages.

It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74.
Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco,
the Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74 with
interest from the filing of the cross-complaints until the amount is fully paid; plus
moral and exemplary damages in the amount of P184,878.84 with interest from the
filing of the cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses,


and another P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against


defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed.
Instead, plaintiff is required to indemnify the defendants Bormaheco and the
Cervanteses the amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of


P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was filed
in good faith. The fact that the properties of the Bormaheco and the Cervanteses
were attached and that they were required to file a counterbond in order to dissolve
the attachment, is not an act of bad faith. When a man tries to protect his rights, he
should not be saddled with moral or exemplary damages. Furthermore, the rights
exercised were provided for in the Rules of Court, and it was the court that ordered it,
in the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party


defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an
insurance company would be liable for damages in performing an act which is clearly
within its power and which is the reason for its being, then nobody would engage in
the insurance business. No further claim or counter-claim for or against anybody is
declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-
operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and
executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and
one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in
installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while
the other aircraft, arrived in Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197)
as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its
principal, Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and
Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions)
contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were
supposed to be their contributions to a new corporation proposed by Lim to expand his airline
business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of
Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against
any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind
and nature which Pioneer may incur in consequence of having become surety upon the bond/note
and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts
of money which it or its representatives should or may pay or cause to be paid or become liable to
pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of
Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It
was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit
D) was duly registered with the Office of the Register of Deeds of the City of Manila and with the
Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law
(Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from the
surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the
Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that
they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging
that they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for
damages for being exposed to litigation and for recovery of the sums of money they advanced to Lim
for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint
against all the defendants was dismissed. In all other respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT


DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT
PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE
REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN
PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G.
R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:


We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had
reinsured its risk of liability under the surety bond in favor of JDA and subsequently
collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants'
alleged obligation to Pioneer amounts to P295,000.00, hence, plaintiffs instant action
for the recovery of the amount of P298,666.28 from defendants will no longer
prosper. Plaintiff Pioneer is not the real party in interest to institute the instant action
as it does not stand to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the


amount from defendants, hence, it instituted the action is utterly devoid of merit.
Plaintiff did not even present any evidence that it is the attorney-in-fact of the
reinsurance company, authorized to institute an action for and in behalf of the latter.
To qualify a person to be a real party in interest in whose name an action must be
prosecuted, he must appear to be the present real owner of the right sought to be
enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has
been held that the real party in interest is the party who would be benefited or injured
by the judgment or the party entitled to the avails of the suit (Salonga v. Warner
Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present
substantial interest as distinguished from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v.
Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW
2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real
party in interest as it has already been paid by the reinsurer the sum of P295,000.00
— the bulk of defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from
its reinsurer, the former was able to foreclose extra-judicially one of the subject
airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale
of the mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the
reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in
the amount of P33,383.72 considering that the total amount it had paid to JDA totals
to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has
already been paid by the reinsurance company of the amount plaintiff has paid to
JDA as surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled
is the rule that no person should unjustly enrich himself at the expense of another
(Article 22, New Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner
was paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the
parties herein both in their answers in the court below and in their respective briefs with respondent
court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly between the petitioner
and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4)
the principle of unjust enrichment is not applicable considering that whatever amount he would
recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was never
raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any
claim against defendants, considering the amount it has realized from the sale of the
mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had
executed in favor of JDA, collected the proceeds of such reinsurance in the sum of
P295,000, and paid with the said amount the bulk of its alleged liability to JDA under
the said surety bond, it is plain that on this score it no longer has any right to collect
to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the cause
of action pertains to the latter, Pioneer says: The reinsurers opted instead that the
Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer
Insurance & Surety Corporation is representing the reinsurers to recover the amount.'
In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer
is suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most
important of all, Pioneer has no right to institute and maintain in its own name an
action for the benefit of the reinsurers. It is well-settled that an action brought by an
attorney-in-fact in his own name instead of that of the principal will not prosper, and
this is so even where the name of the principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that 'Every


action must be prosecuted in the name of the real party in interest.'
This provision is mandatory. The real party in interest is the party who
would be benefitted or injured by the judgment or is the party entitled
to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a


real party in interest, that there is no law permitting an action to be
brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18
Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12;
Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968,
23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has
collected P295,000.00 from the reinsurers, the uninsured portion of what it paid to
JDA is the difference between the two amounts, or P3,666.28. This is the amount for
which Pioneer may sue defendants, assuming that the indemnity agreement is still
valid and effective. But since the amount realized from the sale of the mortgaged
chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or
a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has
no more claim against defendants. (Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court.
Considering this admitted payment, the only issue that cropped up was the effect of payment made
by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents had no
interest in the reinsurance contract as this is strictly between the petitioner as insured and the
reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has no
basis.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation


as are acquired in similar cases where the original insurer pays a loss (Universal Ins.
Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general


applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania
Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co.
(101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing
Corporation v. Court of Appeals(154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the
insurer, it is provided in said article that the insurer is deemed subrogated to the
rights of the insured against the wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved party is the one entitled to recover
the deficiency. Evidently, under this legal provision, the real party in interest with
regard to the portion of the indemnity paid is the insurer and not the insured.
(Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the
reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's
complaint as against the respondents for the reason that the petitioner was not the real party in
interest in the complaint and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not
have been dismissed on the premise that the evidence on record shows that it is entitled to recover
from the counter indemnitors. It does not, however, cite any grounds except its allegation that
respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its
contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to
substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court
stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid
and effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved,
agreed to issue the bond provided that the same would be mortgaged to it, but this
was not possible because the planes were still in Japan and could not be mortgaged
here in the Philippines. As soon as the aircrafts were brought to the Philippines, they
would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity
agreement would be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have


impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no other
security for the claim sought to be enforced by this action, which necessarily means
that the indemnity agreement had ceased to have any force and effect at the time
this action was instituted. Sec 2, Rule 129, Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on
the planes and spare parts, no longer has any further action against the defendants
as indemnitors to recover any unpaid balance of the price. The indemnity agreement
was ipso jure extinguished upon the foreclosure of the chattel mortgage. These
defendants, as indemnitors, would be entitled to be subrogated to the right of Pioneer
should they make payments to the latter. Articles 2067 and 2080 of the New Civil
Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of


foreclosure precludes any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA
and Pioneer as surety having made of the payments to JDA, the alternative remedies
open to Pioneer were as provided in Article 1484 of the New Civil Code, known as
the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by


extrajudicial foreclosure and the instant suit. Such being the case, as provided by the
aforementioned provisions, Pioneer shall have no further action against the
purchaser to recover any unpaid balance and any agreement to the contrary is void.'
Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23
SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the
contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is
actually exercising the rights of JDA as vendor, having subrogated it in such rights.
Nor may the application of the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et
al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity
dates discharged these defendants from any liability as alleged indemnitors. The
change of the maturity dates of the obligations of Lim, or SAL extinguish the original
obligations thru novations thus discharging the indemnitors.

The principal hereof shall be paid in eight equal successive three


months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding three months and
the last of which shall be due and payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum executed by


SAL or Lim and JDA, modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eight equal successive three


month interval installments the first of which shall be due and payable
4 September 1965, the remainder of which ... shall be due and
payable on the 4th day ... of each succeeding months and the last of
which shall be due and payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes bearing
maturity dates different from that fixed in the aforesaid memorandum; the due date of
the first installment appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of the last installment
being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected
twice, were done without the knowledge, much less, would have it believed that
these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it
believed that these defendants and defendant Maglana knew of and consented to
the modification of the obligations. But if that were so, there would have been the
corresponding documents in the form of a written notice to as well as written
conformity of these defendants, and there are no such document. The consequence
of this was the extinguishment of the obligations and of the surety bond secured by
the indemnity agreement which was thereby also extinguished. Applicable by
analogy are the rulings of the Supreme Court in the case of Kabankalan Sugar Co. v.
Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45
Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without


the consent of the guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension time
referred to herein, (New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co.,
Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the
same. Consequently, Pioneer has no more cause of action to recover from these
defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an
express stipulation in the surety bond, the failure of JDA to present its claim to
Pioneer within ten days from default of Lim or SAL on every installment, released
Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru
the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to


reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from Pioneer
and its surety by reason of the filing of the instant case against them and the
attachment and garnishment of their properties. The instant action is clearly
unfounded insofar as plaintiff drags these defendants and defendant Maglana.'
(Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement was
to do business through the corporate vehicle but who failed to incorporate the entity
in which they had chosen to invest? How are the losses to be treated in situations
where their contributions to the intended 'corporation' were invested not through the
corporate form? This Petition presents these fundamental questions which we
believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de
facto partnership among them was created, and that as a consequence of such relationship all must
share in the losses and/or gains of the venture in proportion to their contribution. The petitioner,
therefore, questions the appellate court's findings ordering him to reimburse certain amounts given
by the respondents to the petitioner as their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims
in the total amount of P184,878.74 as correctly found by the trial court, with interest
from the filing of the cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the Cervanteses and the
other one-half to defendant Maglana. It is established in the records that defendant
Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of the subject
airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter
and the laws of the state relating thereto and not by the rules governing partners
(Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is
ordinarily held that persons who attempt, but fail, to form a corporation and who carry
on business under the corporate name occupy the position of partners inter se
(Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase property to carry
on a business, and their organization is so defective as to come short of creating a
corporation within the statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by the company will be
recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple
v. Parker, 29 Mich. 369). So, where certain persons associated themselves as a
corporation for the development of land for irrigation purposes, and each conveyed
land to the corporation, and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an action between them
for an accounting, and its capital stock was treated as partnership assets, sold, and
the proceeds distributed among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does
not necessarily exist, for ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no partnership shall
exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29
L.Ed. 688), and it should be implied only when necessary to do justice between the
parties; thus, one who takes no part except to subscribe for stock in a proposed
corporation which is never legally formed does not become a partner with other
subscribers who engage in business under the name of the pretended corporation,
so as to be liable as such in an action for settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain
stockholders and other stockholders, who were also directors, will not be implied in
the absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79
Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to
appear during the pretrial despite notification. In his answer, the petitioner denied having received
any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the
appellate court, however, found through Exhibit 58, that the petitioner received the amount of
P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the
ownership of the subject airplanes and spare parts. The record shows that defendant Maglana gave
P75,000.00 to petitioner Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the
respondents despite his representations to them. This gives credence to the cross-claims of the
respondents to the effect that they were induced and lured by the petitioner to make contributions to
a proposed corporation which was never formed because the petitioner reneged on their agreement.
Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and
Maglana to expand his airline business. Lim was to procure two DC-3's from Japan
and secure the necessary certificates of public convenience and necessity as well as
the required permits for the operation thereof. Maglana sometime in May 1965, gave
Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim
acknowledged receipt thereof. Cervantes, likewise, delivered his share of the
undertaking. Lim in an undertaking sometime on or about August 9,1965, promised
to incorporate his airline in accordance with their agreement and proceeded to
acquire the planes on his own account. Since then up to the filing of this answer, Lim
has refused, failed and still refuses to set up the corporation or return the money of
Maglana. (Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-
claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering defendants
to purchase two airplanes and spare parts from Japan which the latter considered as
their lawful contribution and participation in the proposed corporation to be known as
SAL. Arrangements and negotiations were undertaken by defendant Lim. Down
payments were advanced by defendants Bormaheco and the Cervanteses and
Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants,
defendant Lim in connivance with the plaintiff, signed and executed the alleged
chattel mortgage and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first time of this
trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff
chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to
file an adverse claim in the form of third party claim. Notwithstanding repeated oral
demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to
surrender the possession of the two planes and their accessories and or return the
amount advanced by the former amounting to an aggregate sum of P 178,997.14 as
evidenced by a statement of accounts, the latter ignored, omitted and refused to
comply with them. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto
partnership was created among the parties which would entitle the petitioner to a reimbursement of
the supposed losses of the proposed corporation. The record shows that the petitioner was acting on
his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes
and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of
Appeals is AFFIRMED.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21906 December 24, 1968

INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees,


vs.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, defendant-appellant.

Aportadera and Palabrica and Pelaez, Jalandoni and Jamir plaintiffs-appellees.


Ruiz Law Offices for defendant-appellant.

CASTRO, J.:

This is an appeal from the order of May 2, 1956, the decision of May 4, 1956 and the order of May
21, 1956, all of the Court of First Instance of Davao, in civil case 629. The basic action is for specific
performance, and damages resulting from an alleged breach of contract.

In 1940 Nicanor Casteel filed a fishpond application for a big tract of swampy land in the then Sitio of
Malalag (now the Municipality of Malalag), Municipality of Padada, Davao. No action was taken
thereon by the authorities concerned. During the Japanese occupation, he filed another fishpond
application for the same area, but because of the conditions then prevailing, it was not acted upon
either. On December 12, 1945 he filed a third fishpond application for the same area, which, after a
survey, was found to contain 178.76 hectares. Upon investigation conducted by a representative of
the Bureau of Forestry, it was discovered that the area applied for was still needed for firewood
production. Hence on May 13, 1946 this third application was disapproved.

Despite the said rejection, Casteel did not lose interest. He filed a motion for reconsideration. While
this motion was pending resolution, he was advised by the district forester of Davao City that no
further action would be taken on his motion, unless he filed a new application for the area
concerned. So he filed on May 27, 1947 his fishpond application 1717.

Meanwhile, several applications were submitted by other persons for portions of the area covered by
Casteel's application.

On May 20, 1946 Leoncio Aradillos filed his fishpond application 1202 covering 10 hectares of land
found inside the area applied for by Casteel; he was later granted fishpond permit F-289-C covering
9.3 hectares certified as available for fishpond purposes by the Bureau of Forestry.

Victor D. Carpio filed on August 8, 1946 his fishpond application 762 over a portion of the land
applied for by Casteel. Alejandro Cacam's fishpond application 1276, filed on December 26, 1946,
was given due course on December 9, 1947 with the issuance to him of fishpond permit F-539-C to
develop 30 hectares of land comprising a portion of the area applied for by Casteel, upon
certification of the Bureau of Forestry that the area was likewise available for fishpond purposes. On
November 17, 1948 Felipe Deluao filed his own fishpond application for the area covered by
Casteel's application.
Because of the threat poised upon his position by the above applicants who entered upon and
spread themselves within the area, Casteel realized the urgent necessity of expanding his
occupation thereof by constructing dikes and cultivating marketable fishes, in order to prevent old
and new squatters from usurping the land. But lacking financial resources at that time, he sought
financial aid from his uncle Felipe Deluao who then extended loans totalling more or less P27,000
with which to finance the needed improvements on the fishpond. Hence, a wide productive fishpond
was built.

Moreover, upon learning that portions of the area applied for by him were already occupied by rival
applicants, Casteel immediately filed the corresponding protests. Consequently, two administrative
cases ensued involving the area in question, to wit: DANR Case 353, entitled "Fp. Ap. No. 661 (now
Fp. A. No. 1717), Nicanor Casteel, applicant-appellant versus Fp. A. No. 763, Victorio D. Carpio,
applicant-appellant"; and DANR Case 353-B, entitled "Fp. A. No. 661 (now Fp. A. No. 1717), Nicanor
Casteel, applicant-protestant versus Fp. Permit No. 289-C, Leoncio Aradillos, Fp. Permit No. 539-C,
Alejandro Cacam, Permittees-Respondents."

However, despite the finding made in the investigation of the above administrative cases that
Casteel had already introduced improvements on portions of the area applied for by him in the form
of dikes, fishpond gates, clearings, etc., the Director of Fisheries nevertheless rejected Casteel's
application on October 25, 1949, required him to remove all the improvements which he had
introduced on the land, and ordered that the land be leased through public auction. Failing to secure
a favorable resolution of his motion for reconsideration of the Director's order, Casteel appealed to
the Secretary of Agriculture and Natural Resources.

In the interregnum, some more incidents occurred. To avoid repetition, they will be taken up in our
discussion of the appellant's third assignment of error.

On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as party of the first part, and
Nicanor Casteel as party of the second part, executed a contract — denominated a "contract of
service" — the salient provisions of which are as follows:

That the Party of the First Part in consideration of the mutual covenants and agreements
made herein to the Party of the Second Part, hereby enter into a contract of service, whereby
the Party of the First Part hires and employs the Party of the Second Part on the following
terms and conditions, to wit:

That the Party of the First Part will finance as she has hereby financed the sum of TWENTY
SEVEN THOUSAND PESOS (P27,000.00), Philippine Currency, to the Party of the Second
Part who renders only his services for the construction and improvements of a fishpond at
Barrio Malalag, Municipality of Padada, Province of Davao, Philippines;

That the Party of the Second Part will be the Manager and sole buyer of all the produce of
the fish that will be produced from said fishpond;

That the Party of the First Part will be the administrator of the same she having financed the
construction and improvement of said fishpond;

That this contract was the result of a verbal agreement entered into between the Parties
sometime in the month of November, 1947, with all the above-mentioned conditions
enumerated; ...
On the same date the above contract was entered into, Inocencia Deluao executed a special power
of attorney in favor of Jesus Donesa, extending to the latter the authority "To represent me in the
administration of the fishpond at Malalag, Municipality of Padada, Province of Davao, Philippines,
which has been applied for fishpond permit by Nicanor Casteel, but rejected by the Bureau of
Fisheries, and to supervise, demand, receive, and collect the value of the fish that is being
periodically realized from it...."

On November 29, 1949 the Director of Fisheries rejected the application filed by Felipe Deluao on
November 17, 1948. Unfazed by this rejection, Deluao reiterated his claim over the same area in the
two administrative cases (DANR Cases 353 and 353-B) and asked for reinvestigation of the
application of Nicanor Casteel over the subject fishpond. However, by letter dated March 15, 1950
sent to the Secretary of Commerce and Agriculture and Natural Resources (now Secretary of
Agriculture and Natural Resources), Deluao withdrew his petition for reinvestigation.

On September 15, 1950 the Secretary of Agriculture and Natural Resources issued a decision in
DANR Case 353, the dispositive portion of which reads as follows:

In view of all the foregoing considerations, Fp. A. No. 661 (now Fp. A. No. 1717) of Nicanor
Casteel should be, as hereby it is, reinstated and given due course for the area indicated in
the sketch drawn at the back of the last page hereof; and Fp. A. No. 762 of Victorio D. Carpio
shall remain rejected.

On the same date, the same official issued a decision in DANR Case 353-B, the dispositive portion
stating as follows:

WHEREFORE, Fishpond Permit No. F-289-C of Leoncio Aradillos and Fishpond Permit No.
F-539-C of Alejandro Cacam, should be, as they are hereby cancelled and revoked; Nicanor
Casteel is required to pay the improvements introduced thereon by said permittees in
accordance with the terms and dispositions contained elsewhere in this decision....

Sometime in January 1951 Nicanor Casteel forbade Inocencia Deluao from further administering the
fishpond, and ejected the latter's representative (encargado), Jesus Donesa, from the premises.

Alleging violation of the contract of service (exhibit A) entered into between Inocencia Deluao and
Nicanor Casteel, Felipe Deluao and Inocencia Deluao on April 3, 1951 filed an action in the Court of
First Instance of Davao for specific performance and damages against Nicanor Casteel and Juan
Depra (who, they alleged, instigated Casteel to violate his contract), praying inter alia, (a) that
Casteel be ordered to respect and abide by the terms and conditions of said contract and that
Inocencia Deluao be allowed to continue administering the said fishpond and collecting the proceeds
from the sale of the fishes caught from time to time; and (b) that the defendants be ordered to pay
jointly and severally to plaintiffs the sum of P20,000 in damages.

On April 18, 1951 the plaintiffs filed an ex parte motion for the issuance of a preliminary injunction,
praying among other things, that during the pendency of the case and upon their filling the requisite
bond as may be fixed by the court, a preliminary injunction be issued to restrain Casteel from doing
the acts complained of, and that after trial the said injunction be made permanent. The lower court
on April 26, 1951 granted the motion, and, two days later, it issued a preliminary mandatory
injunction addressed to Casteel, the dispositive portion of which reads as follows:

POR EL PRESENTE, queda usted ordenado que, hasta nueva orden, usted, el demandado
y todos usu abogados, agentes, mandatarios y demas personas que obren en su ayuda,
desista de impedir a la demandante Inocencia R. Deluao que continue administrando
personalmente la pesqueria objeto de esta causa y que la misma continue recibiendo los
productos de la venta de los pescados provenientes de dicha pesqueria, y que, asimismo,
se prohibe a dicho demandado Nicanor Casteel a desahuciar mediante fuerza al encargado
de los demandantes llamado Jesus Donesa de la pesqueria objeto de la demanda de autos.

On May 10, 1951 Casteel filed a motion to dissolve the injunction, alleging among others, that he
was the owner, lawful applicant and occupant of the fishpond in question. This motion, opposed by
the plaintiffs on June 15, 1951, was denied by the lower court in its order of June 26, 1961.

The defendants on May 14, 1951 filed their answer with counterclaim, amended on January 8, 1952,
denying the material averments of the plaintiffs' complaint. A reply to the defendants' amended
answer was filed by the plaintiffs on January 31, 1952.

The defendant Juan Depra moved on May 22, 1951 to dismiss the complaint as to him. On June 4,
1951 the plaintiffs opposed his motion.

The defendants filed on October 3, 1951 a joint motion to dismiss on the ground that the plaintiffs'
complaint failed to state a claim upon which relief may be granted. The motion, opposed by the
plaintiffs on October 12, 1951, was denied for lack of merit by the lower court in its order of October
22, 1951. The defendants' motion for reconsideration filed on October 31, 1951 suffered the same
fate when it was likewise denied by the lower court in its order of November 12, 1951.

After the issues were joined, the case was set for trial. Then came a series of postponements. The
lower court (Branch I, presided by Judge Enrique A. Fernandez) finally issued on March 21, 1956 an
order in open court, reading as follows: .

Upon petition of plaintiffs, without any objection on the part of defendants, the hearing of this
case is hereby transferred to May 2 and 3, 1956 at 8:30 o'clock in the morning.

This case was filed on April 3, 1951 and under any circumstance this Court will not entertain
any other transfer of hearing of this case and if the parties will not be ready on that day set
for hearing, the court will take the necessary steps for the final determination of this case.
(emphasis supplied)

On April 25, 1956 the defendants' counsel received a notice of hearing dated April 21, 1956, issued
by the office of the Clerk of Court (thru the special deputy Clerk of Court) of the Court of First
Instance of Davao, setting the hearing of the case for May 2 and 3, 1956 before Judge Amador
Gomez of Branch II. The defendants, thru counsel, on April 26, 1956 filed a motion for
postponement. Acting on this motion, the lower court (Branch II, presided by Judge Gomez) issued
an order dated April 27, 1956, quoted as follows:

This is a motion for postponement of the hearing of this case set for May 2 and 3, 1956. The
motion is filed by the counsel for the defendants and has the conformity of the counsel for
the plaintiffs.

An examination of the records of this case shows that this case was initiated as early as April
1951 and that the same has been under advisement of the Honorable Enrique A. Fernandez,
Presiding Judge of Branch No. I, since September 24, 1953, and that various incidents have
already been considered and resolved by Judge Fernandez on various occasions. The last
order issued by Judge Fernandez on this case was issued on March 21, 1956, wherein he
definitely states that the Court will not entertain any further postponement of the hearing of
this case.
CONSIDERING ALL THE FOREGOING, the Court believes that the consideration and
termination of any incident referring to this case should be referred back to Branch I, so that
the same may be disposed of therein. (emphasis supplied)

A copy of the abovequoted order was served on the defendants' counsel on May 4, 1956.

On the scheduled date of hearing, that is, on May 2, 1956, the lower court (Branch I, with Judge
Fernandez presiding), when informed about the defendants' motion for postponement filed on April
26, 1956, issued an order reiterating its previous order handed down in open court on March 21,
1956 and directing the plaintiffs to introduce their evidence ex parte, there being no appearance on
the part of the defendants or their counsel. On the basis of the plaintiffs' evidence, a decision was
rendered on May 4, 1956 the dispositive portion of which reads as follows:

EN SU VIRTUD, el Juzgado dicta de decision a favor de los demandantes y en contra del


demandado Nicanor Casteel:

(a) Declara permanente el interdicto prohibitorio expedido contra el demandado;

(b) Ordena al demandado entregue la demandante la posesion y administracion de la mitad


(½) del "fishpond" en cuestion con todas las mejoras existentes dentro de la misma;

(c) Condena al demandado a pagar a la demandante la suma de P200.00 mensualmente en


concepto de danos a contar de la fecha de la expiracion de los 30 dias de la promulgacion
de esta decision hasta que entregue la posesion y administracion de la porcion del
"fishpond" en conflicto;

(d) Condena al demandado a pagar a la demandante la suma de P2,000.00 valor de los


pescado beneficiados, mas los intereses legales de la fecha de la incoacion de la demanda
de autos hasta el completo pago de la obligacion principal;

(e) Condena al demandado a pagar a la demandante la suma de P2,000.00, por gastos


incurridos por aquella durante la pendencia de esta causa;

(f) Condena al demandado a pagar a la demandante, en concepto de honorarios, la suma de


P2,000.00;

(g) Ordena el sobreseimiento de esta demanda, por insuficiencia de pruebas, en tanto en


cuanto se refiere al demandado Juan Depra;

(h) Ordena el sobreseimiento de la reconvencion de los demandados por falta de pruebas;

(i) Con las costas contra del demandado, Casteel.

The defendant Casteel filed a petition for relief from the foregoing decision, alleging, inter alia, lack
of knowledge of the order of the court a quo setting the case for trial. The petition, however, was
denied by the lower court in its order of May 21, 1956, the pertinent portion of which reads as
follows:

The duty of Atty. Ruiz, was not to inquire from the Clerk of Court whether the trial of this case
has been transferred or not, but to inquire from the presiding Judge, particularly because his
motion asking the transfer of this case was not set for hearing and was not also acted upon.
Atty. Ruiz knows the nature of the order of this Court dated March 21, 1956, which reads as
follows:

Upon petition of the plaintiff without any objection on the part of the defendants, the
hearing of this case is hereby transferred to May 2 and 3, 1956, at 8:30 o'clock in the
morning.

This case was filed on April 3, 1951, and under any circumstance this Court will not
entertain any other transfer of the hearing of this case, and if the parties will not be
ready on the day set for hearing, the Court will take necessary steps for the final
disposition of this case.

In view of the order above-quoted, the Court will not accede to any transfer of this case and
the duty of Atty. Ruiz is no other than to be present in the Sala of this Court and to call the
attention of the same to the existence of his motion for transfer.

Petition for relief from judgment filed by Atty. Ruiz in behalf of the defendant, not well taken,
the same is hereby denied.

Dissatisfied with the said ruling, Casteel appealed to the Court of Appeals which certified the case to
us for final determination on the ground that it involves only questions of law.

Casteel raises the following issues:

(1) Whether the lower court committed gross abuse of discretion when it ordered reception of
the appellees' evidence in the absence of the appellant at the trial on May 2, 1956, thus
depriving the appellant of his day in court and of his property without due process of law;

(2) Whether the lower court committed grave abuse of discretion when it denied the verified
petition for relief from judgment filed by the appellant on May 11, 1956 in accordance with
Rule 38, Rules of Court; and

(3) Whether the lower court erred in ordering the issuance ex parte of a writ of preliminary
injunction against defendant-appellant, and in not dismissing appellees' complaint.

1. The first and second issues must be resolved against the appellant.

The record indisputably shows that in the order given in open court on March 21, 1956, the lower
court set the case for hearing on May 2 and 3, 1956 at 8:30 o'clock in the morning and empathically
stated that, since the case had been pending since April 3, 1951, it would not entertain any further
motion for transfer of the scheduled hearing.

An order given in open court is presumed received by the parties on the very date and time of
promulgation,1 and amounts to a legal notification for all legal purposes.2 The order of March 21,
1956, given in open court, was a valid notice to the parties, and the notice of hearing dated April 21,
1956 or one month thereafter, was a superfluity. Moreover, as between the order of March 21, 1956,
duly promulgated by the lower court, thru Judge Fernandez, and the notice of hearing signed by a
"special deputy clerk of court" setting the hearing in another branch of the same court, the former's
order was the one legally binding. This is because the incidents of postponements and adjournments
are controlled by the court and not by the clerk of court, pursuant to section 4, Rule 31 (now sec. 3,
Rule 22) of the Rules of Court.
Much less had the clerk of court the authority to interfere with the order of the court or to transfer the
cage from one sala to another without authority or order from the court where the case originated
and was being tried. He had neither the duty nor prerogative to re-assign the trial of the case to a
different branch of the same court. His duty as such clerk of court, in so far as the incident in
question was concerned, was simply to prepare the trial calendar. And this duty devolved upon the
clerk of court and not upon the "special deputy clerk of court" who purportedly signed the notice of
hearing.

It is of no moment that the motion for postponement had the conformity of the appellees' counsel.
The postponement of hearings does not depend upon agreement of the parties, but upon the court's
discretion.3

The record further discloses that Casteel was represented by a total of 12 lawyers, none of whom
had ever withdrawn as counsel. Notice to Atty. Ruiz of the order dated March 21, 1956 intransferably
setting the case for hearing for May 2 and 3, 1956, was sufficient notice to all the appellant's eleven
other counsel of record. This is a well-settled rule in our jurisdiction.4

It was the duty of Atty. Ruiz, or of the other lawyers of record, not excluding the appellant himself, to
appear before Judge Fernandez on the scheduled dates of hearing Parties and their lawyers have
no right to presume that their motions for postponement will be granted.5 For indeed, the appellant
and his 12 lawyers cannot pretend ignorance of the recorded fact that since September 24, 1953
until the trial held on May 2, 1956, the case was under the advisement of Judge Fernandez who
presided over Branch I. There was, therefore, no necessity to "re-assign" the same to Branch II
because Judge Fernandez had exclusive control of said case, unless he was legally inhibited to try
the case — and he was not.

There is truth in the appellant's contention that it is the duty of the clerk of court — not of the Court
— to prepare the trial calendar. But the assignment or reassignment of cases already pending in one
sala to another sala, and the setting of the date of trial after the trial calendar has been prepared, fall
within the exclusive control of the presiding judge.

The appellant does not deny the appellees' claim that on May 2 and 3, 1956, the office of the clerk of
court of the Court of First Instance of Davao was located directly below Branch I. If the appellant and
his counsel had exercised due diligence, there was no impediment to their going upstairs to the
second storey of the Court of First Instance building in Davao on May 2, 1956 and checking if the
case was scheduled for hearing in the said sala. The appellant after all admits that on May 2, 1956
his counsel went to the office of the clerk of court.

The appellant's statement that parties as a matter of right are entitled to notice of trial, is correct. But
he was properly accorded this right. He was notified in open court on March 21, 1956 that the case
was definitely and intransferably set for hearing on May 2 and 3, 1956 before Branch I. He cannot
argue that, pursuant to the doctrine in Siochi vs. Tirona,6 his counsel was entitled to a timely notice
of the denial of his motion for postponement. In the cited case the motion for postponement was the
first one filed by the defendant; in the case at bar, there had already been a series of
postponements. Unlike the case at bar, the Siochi case was not intransferably set for hearing.
Finally, whereas the cited case did not spend for a long time, the case at bar was only finally and
intransferably set for hearing on March 21, 1956 — after almost five years had elapsed from the
filing of the complaint on April 3, 1951.

The pretension of the appellant and his 12 counsel of record that they lacked ample time to prepare
for trial is unacceptable because between March 21, 1956 and May 2, 1956, they had one month
and ten days to do so. In effect, the appellant had waived his right to appear at the trial and therefore
he cannot be heard to complain that he has been deprived of his property without due process of
law.7 Verily, the constitutional requirements of due process have been fulfilled in this case: the lower
court is a competent court; it lawfully acquired jurisdiction over the person of the defendant
(appellant) and the subject matter of the action; the defendant (appellant) was given an opportunity
to be heard; and judgment was rendered upon lawful hearing.8

2. Finally, the appellant contends that the lower court incurred an error in ordering the issuance ex
parte of a writ of preliminary injunction against him, and in not dismissing the appellee's complaint.
We find this contention meritorious.

Apparently, the court a quo relied on exhibit A — the so-called "contract of service" — and the
appellees' contention that it created a contract of co-ownership and partnership between Inocencia
Deluao and the appellant over the fishpond in question.

Too well-settled to require any citation of authority is the rule that everyone is conclusively presumed
to know the law. It must be assumed, conformably to such rule, that the parties entered into the so-
called "contract of service" cognizant of the mandatory and prohibitory laws governing the filing of
applications for fishpond permits. And since they were aware of the said laws, it must likewise be
assumed — in fairness to the parties — that they did not intend to violate them. This view must
perforce negate the appellees' allegation that exhibit A created a contract of co-ownership between
the parties over the disputed fishpond. Were we to admit the establishment of a co-ownership
violative of the prohibitory laws which will hereafter be discussed, we shall be compelled to declare
altogether the nullity of the contract. This would certainly not serve the cause of equity and justice,
considering that rights and obligations have already arisen between the parties. We shall therefore
construe the contract as one of partnership, divided into two parts — namely, a contract of
partnership to exploit the fishpond pending its award to either Felipe Deluao or Nicanor Casteel, and
a contract of partnership to divide the fishpond between them after such award. The first is valid, the
second illegal.

It is well to note that when the appellee Inocencia Deluao and the appellant entered into the so-
called "contract of service" on November 25, 1949, there were two pending applications over the
fishpond. One was Casteel's which was appealed by him to the Secretary of Agriculture and Natural
Resources after it was disallowed by the Director of Fisheries on October 25, 1949. The other was
Felipe Deluao's application over the same area which was likewise rejected by the Director of
Fisheries on November 29, 1949, refiled by Deluao and later on withdrawn by him by letter dated
March 15, 1950 to the Secretary of Agriculture and Natural Resources. Clearly, although the
fishpond was then in the possession of Casteel, neither he nor, Felipe Deluao was the holder of a
fishpond permit over the area. But be that as it may, they were not however precluded from
exploiting the fishpond pending resolution of Casteel's appeal or the approval of Deluao's application
over the same area — whichever event happened first. No law, rule or regulation prohibited them
from doing so. Thus, rather than let the fishpond remain idle they cultivated it.

The evidence preponderates in favor of the view that the initial intention of the parties was not to
form a co-ownership but to establish a partnership — Inocencia Deluao as capitalist partner and
Casteel as industrial partner — the ultimate undertaking of which was to divide into two equal parts
such portion of the fishpond as might have been developed by the amount extended by the plaintiffs-
appellees, with the further provision that Casteel should reimburse the expenses incurred by the
appellees over one-half of the fishpond that would pertain to him. This can be gleaned, among
others, from the letter of Casteel to Felipe Deluao on November 15, 1949, which states, inter alia:

... [W]ith respect to your allowing me to use your money, same will redound to your benefit
because you are the ones interested in half of the work we have done so far, besides I did
not insist on our being partners in my fishpond permit, but it was you "Tatay" Eping the one
who wanted that we be partners and it so happened that we became partners because I am
poor, but in the midst of my poverty it never occurred to me to be unfair to you. Therefore so
that each of us may be secured, let us have a document prepared to the effect that we are
partners in the fishpond that we caused to be made here in Balasinon, but it does not mean
that you will treat me as one of your "Bantay" (caretaker) on wage basis but not earning
wages at all, while the truth is that we are partners. In the event that you are not amenable to
my proposition and consider me as "Bantay" (caretaker) instead, do not blame me if I
withdraw all my cases and be left without even a little and you likewise.
(emphasis supplied)9

Pursuant to the foregoing suggestion of the appellant that a document be drawn evidencing their
partnership, the appellee Inocencia Deluao and the appellant executed exhibit A which, although
denominated a "contract of service," was actually the memorandum of their partnership agreement.
That it was not a contract of the services of the appellant, was admitted by the appellees themselves
in their letter10 to Casteel dated December 19, 1949 wherein they stated that they did not employ him
in his (Casteel's) claim but because he used their money in developing and improving the fishpond,
his right must be divided between them. Of course, although exhibit A did not specify any wage or
share appertaining to the appellant as industrial partner, he was so entitled — this being one of the
conditions he specified for the execution of the document of partnership.11

Further exchanges of letters between the parties reveal the continuing intent to divide the fishpond.
In a letter,12dated March 24, 1950, the appellant suggested that they divide the fishpond and the
remaining capital, and offered to pay the Deluaos a yearly installment of P3,000 — presumably as
reimbursement for the expenses of the appellees for the development and improvement of the one-
half that would pertain to the appellant. Two days later, the appellee Felipe Deluao
replied,13expressing his concurrence in the appellant's suggestion and advising the latter to ask for a
reconsideration of the order of the Director of Fisheries disapproving his (appellant's) application, so
that if a favorable decision was secured, then they would divide the area.

Apparently relying on the partnership agreement, the appellee Felipe Deluao saw no further need to
maintain his petition for the reinvestigation of Casteel's application. Thus by letter14 dated March 15,
1950 addressed to the Secretary of Agriculture and Natural Resources, he withdrew his petition on
the alleged ground that he was no longer interested in the area, but stated however that he wanted
his interest to be protected and his capital to be reimbursed by the highest bidder.

The arrangement under the so-called "contract of service" continued until the decisions both dated
September 15, 1950 were issued by the Secretary of Agriculture and Natural Resources in DANR
Cases 353 and 353-B. This development, by itself, brought about the dissolution of the partnership.
Moreover, subsequent events likewise reveal the intent of both parties to terminate the partnership
because each refused to share the fishpond with the other.

Art. 1830(3) of the Civil Code enumerates, as one of the causes for the dissolution of a partnership,
"... any event which makes it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership." The approval of the appellant's fishpond application by the
decisions in DANR Cases 353 and 353-B brought to the fore several provisions of law which made
the continuation of the partnership unlawful and therefore caused its ipso facto dissolution.

Act 4003, known as the Fisheries Act, prohibits the holder of a fishpond permit (the permittee) from
transferring or subletting the fishpond granted to him, without the previous consent or approval of the
Secretary of Agriculture and Natural Resources.15 To the same effect is Condition No. 3 of the
fishpond permit which states that "The permittee shall not transfer or sublet all or any area herein
granted or any rights acquired therein without the previous consent and approval of this Office."
Parenthetically, we must observe that in DANR Case 353-B, the permit granted to one of the parties
therein, Leoncio Aradillos, was cancelled not solely for the reason that his permit covered a portion
of the area included in the appellant's prior fishpond application, but also because, upon
investigation, it was ascertained thru the admission of Aradillos himself that due to lack of capital, he
allowed one Lino Estepa to develop with the latter's capital the area covered by his fishpond permit
F-289-C with the understanding that he (Aradillos) would be given a share in the produce thereof.16

Sec. 40 of Commonwealth Act 141, otherwise known as the Public Land Act, likewise provides that

The lessee shall not assign, encumber, or sublet his rights without the consent of the
Secretary of Agriculture and Commerce, and the violation of this condition shall avoid the
contract; Provided, That assignment, encumbrance, or subletting for purposes of speculation
shall not be permitted in any case:Provided, further, That nothing contained in this section
shall be understood or construed to permit the assignment, encumbrance, or subletting of
lands leased under this Act, or under any previous Act, to persons, corporations, or
associations which under this Act, are not authorized to lease public lands.

Finally, section 37 of Administrative Order No. 14 of the Secretary of Agriculture and Natural
Resources issued in August 1937, prohibits a transfer or sublease unless first approved by the
Director of Lands and under such terms and conditions as he may prescribe. Thus, it states:

When a transfer or sub-lease of area and improvement may be allowed. — If the permittee
or lessee had, unless otherwise specifically provided, held the permit or lease and actually
operated and made improvements on the area for at least one year, he/she may request
permission to sub-lease or transfer the area and improvements under certain conditions.

(a) Transfer subject to approval. — A sub-lease or transfer shall only be valid when first
approved by the Director under such terms and conditions as may be prescribed, otherwise it
shall be null and void. A transfer not previously approved or reported shall be considered
sufficient cause for the cancellation of the permit or lease and forfeiture of the bond and for
granting the area to a qualified applicant or bidder, as provided in subsection (r) of Sec. 33 of
this Order.

Since the partnership had for its object the division into two equal parts of the fishpond between the
appellees and the appellant after it shall have been awarded to the latter, and therefore it envisaged
the unauthorized transfer of one-half thereof to parties other than the applicant Casteel, it was
dissolved by the approval of his application and the award to him of the fishpond. The approval was
an event which made it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership.

The appellees, however, argue that in approving the appellant's application, the Secretary of
Agriculture and Natural Resources likewise recognized and/or confirmed their property right to one-
half of the fishpond by virtue of the contract of service, exhibit A. But the untenability of this
argument would readily surface if one were to consider that the Secretary of Agriculture and Natural
Resources did not do so for the simple reason that he does not possess the authority to violate the
aforementioned prohibitory laws nor to exempt anyone from their operation.

However, assuming in gratia argumenti that the approval of Casteel's application, coupled with the
foregoing prohibitory laws, was not enough to cause the dissolution ipso facto of their partnership,
succeeding events reveal the intent of both parties to terminate the partnership by refusing to share
the fishpond with the other.
On December 27, 1950 Casteel wrote17 the appellee Inocencia Deluao, expressing his desire to
divide the fishpond so that he could administer his own share, such division to be subject to the
approval of the Secretary of Agriculture and Natural Resources. By letter dated December 29,
1950,18 the appellee Felipe Deluao demurred to Casteel's proposition because there were allegedly
no appropriate grounds to support the same and, moreover, the conflict over the fishpond had not
been finally resolved.

The appellant wrote on January 4, 1951 a last letter19 to the appellee Felipe Deluao wherein the
former expressed his determination to administer the fishpond himself because the decision of the
Government was in his favor and the only reason why administration had been granted to the
Deluaos was because he was indebted to them. In the same letter, the appellant forbade Felipe
Deluao from sending the couple's encargado, Jesus Donesa, to the fishpond. In reply thereto, Felipe
Deluao wrote a letter20 dated January 5, 1951 in which he reiterated his refusal to grant the
administration of the fishpond to the appellant, stating as a ground his belief "that only the competent
agencies of the government are in a better position to render any equitable arrangement relative to
the present case; hence, any action we may privately take may not meet the procedure of legal
order."

Inasmuch as the erstwhile partners articulated in the aforecited letters their respective resolutions
not to share the fishpond with each other — in direct violation of the undertaking for which they have
established their partnership — each must be deemed to have expressly withdrawn from the
partnership, thereby causing its dissolution pursuant to art. 1830(2) of the Civil Code which
provides, inter alia, that dissolution is caused "by the express will of any partner at any time."

In this jurisdiction, the Secretary of Agriculture and Natural Resources possesses executive and
administrative powers with regard to the survey, classification, lease, sale or any other form of
concession or disposition and management of the lands of the public domain, and, more specifically,
with regard to the grant or withholding of licenses, permits, leases and contracts over portions of the
public domain to be utilized as fishponds.21, Thus, we held in Pajo, et al. vs. Ago, et al. (L-15414,
June 30, 1960), and reiterated in Ganitano vs. Secretary of Agriculture and Natural Resources, et
al.
(L-21167, March 31, 1966), that

... [T]he powers granted to the Secretary of Agriculture and Commerce (Natural Resources)
by law regarding the disposition of public lands such as granting of licenses, permits, leases,
and contracts, or approving, rejecting, reinstating, or cancelling applications, or deciding
conflicting applications, are all executive and administrative in nature. It is a well-recognized
principle that purely administrative and discretionary functions may not be interfered with by
the courts (Coloso v. Board of Accountancy, G.R. No. L-5750, April 20, 1953). In general,
courts have no supervising power over the proceedings and action of the administrative
departments of the government. This is generally true with respect to acts involving the
exercise of judgment or discretion, and findings of fact. (54 Am. Jur. 558-559) Findings of
fact by an administrative board or official, following a hearing, are binding upon the courts
and will not be disturbed except where the board or official has gone beyond his statutory
authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to
his duty or with grave abuse of discretion... (emphasis supplied)

In the case at bar, the Secretary of Agriculture and Natural Resources gave due course to the
appellant's fishpond application 1717 and awarded to him the possession of the area in question. In
view of the finality of the Secretary's decision in DANR Cases 353 and 353-B, and considering the
absence of any proof that the said official exceeded his statutory authority, exercised
unconstitutional powers, or acted with arbitrariness and in disregard of his duty, or with grave abuse
of discretion, we can do no less than respect and maintain unfettered his official acts in the
premises. It is a salutary rule that the judicial department should not dictate to the executive
department what to do with regard to the administration and disposition of the public domain which
the law has entrusted to its care and administration. Indeed, courts cannot superimpose their
discretion on that of the land department and compel the latter to do an act which involves the
exercise of judgment and discretion.22

Therefore, with the view that we take of this case, and even assuming that the injunction was
properly issued because present all the requisite grounds for its issuance, its continuation, and,
worse, its declaration as permanent, was improper in the face of the knowledge later acquired by the
lower court that it was the appellant's application over the fishpond which was given due course.
After the Secretary of Agriculture and Natural Resources approved the appellant's application, he
became to all intents and purposes the legal permittee of the area with the corresponding right to
possess, occupy and enjoy the same. Consequently, the lower court erred in issuing the preliminary
mandatory injunction. We cannot overemphasize that an injunction should not be granted to take
property out of the possession and control of one party and place it in the hands of another whose
title has not been clearly established by law.23

However, pursuant to our holding that there was a partnership between the parties for the
exploitation of the fishpond before it was awarded to Casteel, this case should be remanded to the
lower court for the reception of evidence relative to an accounting from November 25, 1949 to
September 15, 1950, in order for the court to determine (a) the profits realized by the partnership, (b)
the share (in the profits) of Casteel as industrial partner, (e) the share (in the profits) of Deluao as
capitalist partner, and (d) whether the amounts totalling about P27,000 advanced by Deluao to
Casteel for the development and improvement of the fishpond have already been liquidated.
Besides, since the appellee Inocencia Deluao continued in possession and enjoyment of the
fishpond even after it was awarded to Casteel, she did so no longer in the concept of a capitalist
partner but merely as creditor of the appellant, and therefore, she must likewise submit in the lower
court an accounting of the proceeds of the sales of all the fishes harvested from the fishpond from
September 16, 1950 until Casteel shall have been finally given the possession and enjoyment of the
same. In the event that the appellee Deluao has received more than her lawful credit of P27,000 (or
whatever amounts have been advanced to Casteel), plus 6% interest thereon per annum, then she
should reimburse the excess to the appellant.

ACCORDINGLY, the judgment of the lower court is set aside. Another judgment is hereby rendered:
(1) dissolving the injunction issued against the appellant, (2) placing the latter back in possession of
the fishpond in litigation, and (3) remanding this case to the court of origin for the reception of
evidence relative to the accounting that the parties must perforce render in the premises, at the
termination of which the court shall render judgment accordingly. The appellant's counterclaim is
dismissed. No pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Fernando and Capistrano,
JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-24193 June 28, 1968

MAURICIO AGAD, plaintiff-appellant,


vs.
SEVERINO MABATO and MABATO and AGAD COMPANY, defendants-appellees.

Angeles, Maskarino and Associates for plaintiff-appellant.


Victorio S. Advincula for defendants-appellees.

CONCEPCION, C.J.:

In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of the Court of First
Instance of Davao, we are called upon to determine the applicability of Article 1773 of our Civil Code
to the contract of partnership on which the complaint herein is based.

Alleging that he and defendant Severino Mabato are — pursuant to a public instrument dated August
29, 1952, copy of which is attached to the complaint as Annex "A" — partners in a fishpond
business, to the capital of which Agad contributed P1,000, with the right to receive 50% of the
profits; that from 1952 up to and including 1956, Mabato who handled the partnership funds, had
yearly rendered accounts of the operations of the partnership; and that, despite repeated demands,
Mabato had failed and refused to render accounts for the years 1957 to 1963, Agad prayed in his
complaint against Mabato and Mabato & Agad Company, filed on June 9, 1964, that judgment be
rendered sentencing Mabato to pay him (Agad) the sum of P14,000, as his share in the profits of the
partnership for the period from 1957 to 1963, in addition to P1,000 as attorney's fees, and ordering
the dissolution of the partnership, as well as the winding up of its affairs by a receiver to be
appointed therefor.

In his answer, Mabato admitted the formal allegations of the complaint and denied the existence of
said partnership, upon the ground that the contract therefor had not been perfected, despite the
execution of Annex "A", because Agad had allegedly failed to give his P1,000 contribution to the
partnership capital. Mabato prayed, therefore, that the complaint be dismissed; that Annex "A" be
declared void ab initio; and that Agad be sentenced to pay actual, moral and exemplary damages,
as well as attorney's fees.

Subsequently, Mabato filed a motion to dismiss, upon the ground that the complaint states no cause
of action and that the lower court had no jurisdiction over the subject matter of the case, because it
involves principally the determination of rights over public lands. After due hearing, the court issued
the order appealed from, granting the motion to dismiss the complaint for failure to state a cause of
action. This conclusion was predicated upon the theory that the contract of partnership, Annex "A", is
null and void, pursuant to Art. 1773 of our Civil Code, because an inventory of the fishpond referred
in said instrument had not been attached thereto. A reconsideration of this order having been
denied, Agad brought the matter to us for review by record on appeal.

Articles 1771 and 1773 of said Code provide:


Art. 1771. A partnership may be constituted in any form, except where immovable property
or real rights are contributed thereto, in which case a public instrument shall be necessary.

Art. 1773. A contract of partnership is void, whenever immovable property is contributed


thereto, if inventory of said property is not made, signed by the parties; and attached to the
public instrument.

The issue before us hinges on whether or not "immovable property or real rights" have
been contributed to the partnership under consideration. Mabato alleged and the lower court held
that the answer should be in the affirmative, because "it is really inconceivable how a partnership
engaged in the fishpond business could exist without said fishpond property (being) contributed to
the partnership." It should be noted, however, that, as stated in Annex "A" the partnership was
established "to operate a fishpond", not to "engage in a fishpond business". Moreover, none of the
partners contributed either a fishpond or a real right to any fishpond. Their contributions were limited
to the sum of P1,000 each. Indeed, Paragraph 4 of Annex "A" provides:

That the capital of the said partnership is Two Thousand (P2,000.00) Pesos Philippine
Currency, of which One Thousand (P1,000.00) pesos has been contributed by Severino
Mabato and One Thousand (P1,000.00) Pesos has been contributed by Mauricio Agad.

xxx xxx xxx

The operation of the fishpond mentioned in Annex "A" was the purpose of the partnership. Neither
said fishpond nor a real right thereto was contributed to the partnership or became part of the capital
thereof, even if a fishpond or a real right thereto could become part of its assets.

WHEREFORE, we find that said Article 1773 of the Civil Code is not in point and that, the order
appealed from should be, as it is hereby set aside and the case remanded to the lower court for
further proceedings, with the costs of this instance against defendant-appellee, Severino Mabato. It
is so ordered.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 134559 December 9, 1999

ANTONIA TORRES assisted by her husband, ANGELO TORRES; and EMETERIA


BARING, petitioners,
vs.
COURT OF APPEALS and MANUEL TORRES, respondents.

PANGANIBAN, J.:

Courts may not extricate parties from the necessary consequences of their acts. That the terms of a
contract turn out to be financially disadvantageous to them will not relieve them of their obligations
therein. The lack of an inventory of real property will not ipso facto release the contracting partners
from their respective obligations to each other arising from acts executed in accordance with their
agreement.

The Case

The Petition for Review on Certiorari before us assails the March 5, 1998 Decision 1 of the Court of
Appeals 2 (CA) in CA-GR CV No. 42378 and its June 25, 1998 Resolution denying reconsideration. The
assailed Decision affirmed the ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-
21208, which disposed as follows:

WHEREFORE, for all the foregoing considerations, the Court, finding for the
defendant and against the plaintiffs, orders the dismissal of the plaintiffs complaint.
The counterclaims of the defendant are likewise ordered dismissed. No
pronouncement as to costs. 3

The Facts

Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture
agreement" with Respondent Manuel Torres for the development of a parcel of land into a
subdivision. Pursuant to the contract, they executed a Deed of Sale covering the said parcel of land
in favor of respondent, who then had it registered in his name. By mortgaging the property,
respondent obtained from Equitable Bank a loan of P40,000 which, under the Joint Venture
Agreement, was to be used for the development of the subdivision. 4 All three of them also agreed to
share the proceeds from the sale of the subdivided lots.

The project did not push through, and the land was subsequently foreclosed by the bank.
According to petitioners, the project failed because of "respondent's lack of funds or means and
skills." They add that respondent used the loan not for the development of the subdivision, but in
furtherance of his own company, Universal Umbrella Company.

On the other hand, respondent alleged that he used the loan to implement the Agreement. With the
said amount, he was able to effect the survey and the subdivision of the lots. He secured the Lapu
Lapu City Council's approval of the subdivision project which he advertised in a local newspaper. He
also caused the construction of roads, curbs and gutters. Likewise, he entered into a contract with
an engineering firm for the building of sixty low-cost housing units and actually even set up a model
house on one of the subdivision lots. He did all of these for a total expense of P85,000.

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

Subsequently, petitioners filed a criminal case for estafa against respondent and his wife, who were
however acquitted. Thereafter, they filed the present civil case which, upon respondent's motion,
was later dismissed by the trial court in an Order dated September 6, 1982. On appeal, however, the
appellate court remanded the case for further proceedings. Thereafter, the RTC issued its assailed
Decision, which, as earlier stated, was affirmed by the CA.

Hence, this Petition. 6

Ruling of the Court of Appeals

In affirming the trial court, the Court of Appeals held that petitioners and respondent had formed a
partnership for the development of the subdivision. Thus, they must bear the loss suffered by the
partnership in the same proportion as their share in the profits stipulated in the contract. Disagreeing
with the trial court's pronouncement that losses as well as profits in a joint venture should be
distributed equally, 7 the CA invoked Article 1797 of the Civil Code which provides:

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

The CA elucidated further:

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

The Issue

Petitioners impute to the Court of Appeals the following error:

. . . [The] Court of Appeals erred in concluding that the transaction


. . . between the petitioners and respondent was that of a joint venture/partnership,
ignoring outright the provision of Article 1769, and other related provisions of the Civil
Code of the Philippines. 8

The Court's Ruling

The Petition is bereft of merit.

Main Issue:

Existence of a Partnership

Petitioners deny having formed a partnership with respondent. They contend that the Joint Venture
Agreement and the earlier Deed of Sale, both of which were the bases of the appellate court's
finding of a partnership, were void.

In the same breath, however, they assert that under those very same contracts, respondent is liable
for his failure to implement the project. Because the agreement entitled them to receive 60 percent
of the proceeds from the sale of the subdivision lots, they pray that respondent pay them damages
equivalent to 60 percent of the value of the property. 9

The pertinent portions of the Joint Venture Agreement read as follows:

KNOW ALL MEN BY THESE PRESENTS:

This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day
of March, 1969, by and between MR. MANUEL R. TORRES, . . . the FIRST PARTY,
likewise, MRS. ANTONIA B. TORRES, and MISS EMETERIA BARING, . . . the
SECOND PARTY:

WITNESSETH:

That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this
property located at Lapu-Lapu City, Island of Mactan, under Lot No. 1368 covering
TCT No. T-0184 with a total area of 17,009 square meters, to be sub-divided by the
FIRST PARTY;

Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY
THOUSAND (P20,000.00) Pesos, Philippine Currency upon the execution of this
contract for the property entrusted by the SECOND PARTY, for sub-division projects
and development purposes;

NOW THEREFORE, for and in consideration of the above covenants and promises
herein contained the respective parties hereto do hereby stipulate and agree as
follows:

ONE: That the SECOND PARTY signed an absolute Deed of Sale . . . dated March
5, 1969, in the amount of TWENTY FIVE THOUSAND FIVE HUNDRED THIRTEEN
& FIFTY CTVS. (P25,513.50) Philippine Currency, for 1,700 square meters at ONE
[PESO] & FIFTY CTVS. (P1.50) Philippine Currency, in favor of the FIRST PARTY,
but the SECOND PARTY did not actually receive the payment.
SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the
necessary amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine
currency, for their personal obligations and this particular amount will serve as an
advance payment from the FIRST PARTY for the property mentioned to be sub-
divided and to be deducted from the sales.

THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY, the
interest and the principal amount involving the amount of TWENTY THOUSAND
(P20,000.00) Pesos, Philippine Currency, until the sub-division project is terminated
and ready for sale to any interested parties, and the amount of TWENTY
THOUSAND (P20,000.00) pesos, Philippine currency, will be deducted accordingly.

FOURTH: That all general expense[s] and all cost[s] involved in the sub-division
project should be paid by the FIRST PARTY, exclusively and all the expenses will
not be deducted from the sales after the development of the sub-division project.

FIFTH: That the sales of the sub-divided lots will be divided into SIXTY
PERCENTUM 60% for the SECOND PARTY and FORTY PERCENTUM 40% for the
FIRST PARTY, and additional profits or whatever income deriving from the sales will
be divided equally according to the . . . percentage [agreed upon] by both parties.

SIXTH: That the intended sub-division project of the property involved will start the
work and all improvements upon the adjacent lots will be negotiated in both parties[']
favor and all sales shall [be] decided by both parties.

SEVENTH: That the SECOND PARTIES, should be given an option to get back the
property mentioned provided the amount of TWENTY THOUSAND (P20,000.00)
Pesos, Philippine Currency, borrowed by the SECOND PARTY, will be paid in full to
the FIRST PARTY, including all necessary improvements spent by the FIRST
PARTY, and-the FIRST PARTY will be given a grace period to turnover the property
mentioned above.

That this AGREEMENT shall be binding and obligatory to the parties who executed
same freely and voluntarily for the uses and purposes therein stated. 10

A reading of the terms embodied in the Agreement indubitably shows the existence of a partnership
pursuant to Article 1767 of the Civil Code, which provides:

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

Under the above-quoted Agreement, petitioners would contribute property to the partnership in the
form of land which was to be developed into a subdivision; while respondent would give, in addition
to his industry, the amount needed for general expenses and other costs. Furthermore, the income
from the said project would be divided according to the stipulated percentage. Clearly, the contract
manifested the intention of the parties to form a partnership. 11

It should be stressed that the parties implemented the contract. Thus, petitioners transferred the title
to the land to facilitate its use in the name of the respondent. On the other hand, respondent caused
the subject land to be mortgaged, the proceeds of which were used for the survey and the
subdivision of the land. As noted earlier, he developed the roads, the curbs and the gutters of the
subdivision and entered into a contract to construct low-cost housing units on the property.

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

Petitioners Bound by

Terms of Contract

Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been expressly
stipulated, but also to all necessary consequences thereof, as follows:

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

It is undisputed that petitioners are educated and are thus presumed to have understood the terms
of the contract they voluntarily signed. If it was not in consonance with their expectations, they
should have objected to it and insisted on the provisions they wanted.

Courts are not authorized to extricate parties from the necessary consequences of their acts, and
the fact that the contractual stipulations may turn out to be financially disadvantageous will not
relieve parties thereto of their obligations. They cannot now disavow the relationship formed from
such agreement due to their supposed misunderstanding of its terms.

Alleged Nullity of the

Partnership Agreement

Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code,
which provides:

Art. 1773. A contract of partnership is void, whenever immovable property is


contributed thereto, if an inventory of said property is not made, signed by the
parties, and attached to the public instrument.

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

We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the eminent
Arturo M. Tolentino states that under the aforecited provision which is a complement of Article
1771, 12 "The execution of a public instrument would be useless if there is no inventory of the property
contributed, because without its designation and description, they cannot be subject to inscription in the
Registry of Property, and their contribution cannot prejudice third persons. This will result in fraud to those
who contract with the partnership in the belief [in] the efficacy of the guaranty in which the immovables
may consist. Thus, the contract is declared void by the law when no such inventory is made." The case at
bar does not involve third parties who may be prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis for their claim that
respondent should pay them 60 percent of the value of the property. 13 They cannot in one breath
deny the contract and in another recognize it, depending on what momentarily suits their purpose. Parties
cannot adopt inconsistent positions in regard to a contract and courts will not tolerate, much less approve,
such practice.

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

Partnership Agreement Not the Result

of an Earlier Illegal Contract

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

This argument is puerile. The Joint Venture Agreement clearly states that the consideration for the
sale was the expectation of profits from the subdivision project. Its first stipulation states that
petitioners did not actually receive payment for the parcel of land sold to respondent. Consideration,
more properly denominated as cause, can take different forms, such as the prestation or promise of
a thing or service by another. 15

In this case, the cause of the contract of sale consisted not in the stated peso value of the land, but
in the expectation of profits from the subdivision project, for which the land was intended to be used.
As explained by the trial court, "the land was in effect given to the partnership as [petitioner's]
participation therein. . . . There was therefore a consideration for the sale, the [petitioners] acting in
the expectation that, should the venture come into fruition, they [would] get sixty percent of the net
profits."

Liability of the Parties

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

We are not persuaded. True, the Court of Appeals held that petitioners' acts were not the cause of
the failure of the project. 16 But it also ruled that neither was respondent responsible therefor. 17 In
imputing the blame solely to him, petitioners failed to give any reason why we should disregard the factual
findings of the appellate court relieving him of fault. Verily, factual issues cannot be resolved in a petition
for review under Rule 45, as in this case. Petitioners have not alleged, not to say shown, that their
Petition constitutes one of the exceptions to this doctrine. 18 Accordingly, we find no reversible error in the
CA's ruling that petitioners are not entitled to damages.

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

SO ORDERED