G.R. No. 172690 March 3, 2010
When Norberto was ambushed and
HEIRS OF JOSE LIM, represented by ELENITO LIM, Petitioners,
vs.
JULIET VILLA LIM, Respondent.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45
of the Rules of Civil Procedure, assailing the Court of Appeals (CA)
Decision2 dated June 29, 2005, which reversed and set aside the
decision3 of the Regional Trial Court (RTC) of Lucena City, dated April
12, 2004.
The facts of the case are as follows:
Petitioners are the heirs of the late Jose Lim (Jose), namely: Jose's
widow Cresencia Palad (Cresencia); and their children Elenito, Evelia,
Imelda, Edelyna and Edison, all surnamed Lim (petitioners),
represented by Elenito Lim (Elenito). They filed a Complaint4 for
Partition, Accounting and Damages against respondent Juliet Villa Lim
(respondent), widow of the late Elfledo Lim (Elfledo), who was the
eldest son of Jose and Cresencia.
Petitioners alleged that Jose was the liaison officer of Interwood
Sawmill in Cagsiay, Mauban, Quezon. Sometime in 1980, Jose,
together with his friends Jimmy Yu (Jimmy) and Norberto Uy
(Norberto), formed a partnership to engage in the trucking business.
Initially, with a contribution of P50,000.00 each, they purchased a truck
to be used in the hauling and transport of lumber of the sawmill. Jose
managed the operations of this trucking business until his death on
August 15, 1981. Thereafter, Jose's heirs, including Elfledo, and
partners agreed to continue the business under the management of
Elfledo. The shares in the partnership profits and income that formed
part of the estate of Jose were held in trust by Elfledo, with petitioners'
authority for Elfledo to use, purchase or acquire properties using said
funds.
Petitioners also alleged that, at that time, Elfledo was a fresh
commerce graduate serving as his father’s driver in the trucking
business. He was never a partner or an investor in the business and
merely supervised the purchase of additional trucks using the income
from the trucking business of the partners. By the time the partnership
ceased, it had nine trucks, which were all registered in Elfledo's name.
Petitioners asseverated that it was also through Elfledo’s management
of the partnership that he was able to purchase numerous real
properties by using the profits derived therefrom, all of which were
registered in his name and that of respondent. In addition to the nine
trucks, Elfledo also acquired five other motor vehicles.
On May 18, 1995, Elfledo died, leaving respondent as his sole
surviving heir. Petitioners claimed that respondent took over the
administration of the aforementioned properties, which belonged to the
estate of Jose, without their consent and approval. Claiming that they
are co-owners of the properties, petitioners required respondent to
submit an accounting of all income, profits and rentals received from
the estate of Elfledo, and to surrender the administration thereof.
Respondent refused; thus, the filing of this case.
Respondent traversed petitioners' allegations and claimed that Elfledo
was himself a partner of Norberto and Jimmy. Respondent also
claimed that per testimony of Cresencia, sometime in 1980, Jose gave
Elfledo P50,000.00 as the latter's capital in an informal partnership with
Jimmy and Norberto. When Elfledo and respondent got married in
1981, the partnership only had one truck; but through the efforts of
Elfledo, the business flourished. Other than this trucking business,
Elfledo, together with respondent, engaged in other business ventures.
Thus, they were able to buy real properties and to put up their own car
assembly and repair business.
killed on July 16, 1993, the trucking business started to falter. When
Elfledo died on May 18, 1995 due to a heart attack, respondent talked
to Jimmy and to the heirs of Norberto, as she could no longer run the
business. Jimmy suggested that three out of the nine trucks be given
to him as his share, while the other three trucks be given to the heirs of
Norberto. However, Norberto's wife, Paquita Uy, was not interested in
the vehicles. Thus, she sold the same to respondent, who paid for
them in installments.
Respondent also alleged that when Jose died in 1981, he left no
known assets, and the partnership with Jimmy and Norberto ceased
upon his demise. Respondent also stressed that Jose left no properties
that Elfledo could have held in trust. Respondent maintained that all
the properties involved in this case were purchased and acquired
through her and her husband’s joint efforts and hard work, and without
any participation or contribution from petitioners or from Jose.
Respondent submitted that these are conjugal partnership properties;
and thus, she had the right to refuse to render an accounting for the
income or profits of their own business.
Trial on the merits ensued. On April 12, 2004, the RTC rendered its
decision in favor of petitioners, thus:
WHEREFORE, premises considered, judgment is hereby rendered:
1) Ordering the partition of the above-mentioned properties
equally between the plaintiffs and heirs of Jose Lim and the
defendant Juliet Villa-Lim; and
2) Ordering the defendant to submit an accounting of all
incomes, profits and rentals received by her from said
properties.
SO ORDERED.
Aggrieved, respondent appealed to the CA.
On June 29, 2005, the CA reversed and set aside the RTC's decision,
dismissing petitioners' complaint for lack of merit. Undaunted,
petitioners filed their Motion for Reconsideration,5 which the CA,
however, denied in its Resolution6 dated May 8, 2006.
Hence, this Petition, raising the sole question, viz.:
IN THE APPRECIATION BY THE COURT OF THE EVIDENCE
SUBMITTED BY THE PARTIES, CAN THE TESTIMONY OF ONE OF
THE PETITIONERS BE GIVEN GREATER WEIGHT THAN THAT BY
A FORMER PARTNER ON THE ISSUE OF THE IDENTITY OF THE
OTHER PARTNERS IN THE PARTNERSHIP?7
In essence, petitioners argue that according to the testimony of Jimmy,
the sole surviving partner, Elfledo was not a partner; and that he and
Norberto entered into a partnership with Jose. Thus, the CA erred in
not giving that testimony greater weight than that of Cresencia, who
was merely the spouse of Jose and not a party to the partnership. 8
Respondent counters that the issue raised by petitioners is not proper
in a petition for review on certiorari under Rule 45 of the Rules of Civil
Procedure, as it would entail the review, evaluation, calibration, and re-
weighing of the factual findings of the CA. Moreover, respondent
invokes the rationale of the CA decision that, in light of the admissions
of Cresencia and Edison and the testimony of respondent, the
testimony of Jimmy was effectively refuted; accordingly, the CA's
reversal of the RTC's findings was fully justified.9
We resolve first the procedural matter regarding the propriety of the
instant Petition.
1
Verily, the evaluation and calibration of the evidence necessarily
involves consideration of factual issues — an exercise that is not
appropriate for a petition for review on certiorari under Rule 45. This
rule provides that the parties may raise only questions of law, because
the Supreme Court is not a trier of facts. Generally, we are not duty-
bound to analyze again and weigh the evidence introduced in and
considered by the tribunals below.10 When supported by substantial
evidence, the findings of fact of the CA are conclusive and binding on
the parties and are not reviewable by this Court, unless the case falls
under any of the following recognized exceptions:
(1) When the conclusion is a finding grounded entirely on
speculation, surmises and conjectures;
(2) When the inference made is manifestly mistaken, absurd
or impossible;
(3) Where there is a grave abuse of discretion;
(4) When the judgment is based on a misapprehension of
facts;
(5) When the findings of fact are conflicting;
(6) When the Court of Appeals, in making its findings, went
beyond the issues of the case and the same is contrary to
the admissions of both appellant and appellee;
(7) When the findings are contrary to those of the trial court;
(8) When the findings of fact are conclusions without citation
of specific evidence on which they are based;
(9) When the facts set forth in the petition as well as in the
petitioners' main and reply briefs are not disputed by the
respondents; and
(10) When the findings of fact of the Court of Appeals are
premised on the supposed absence of evidence and
contradicted by the evidence on record.11
We note, however, that the findings of fact of the RTC are contrary to
those of the CA. Thus, our review of such findings is warranted.
On the merits of the case, we find that the instant Petition is bereft of
merit.
A partnership exists when two or more persons agree to place their
money, effects, labor, and skill in lawful commerce or business, with
the understanding that there shall be a proportionate sharing of the
profits and losses among them. A contract of partnership is defined by
the Civil Code 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.12
Undoubtedly, the best evidence would have been the contract of
partnership or the articles of partnership. Unfortunately, there is none
in this case, because the alleged partnership was never formally
organized. Nonetheless, we are asked to determine who between Jose
and Elfledo was the "partner" in the trucking business.
A careful review of the records persuades us to affirm the CA decision.
The evidence presented by petitioners falls short of the quantum of
proof required to establish that: (1) Jose was the partner and not
Elfledo; and (2) all the properties acquired by Elfledo and respondent
form part of the estate of Jose, having been derived from the alleged
partnership.
Petitioners heavily rely on Jimmy's testimony. But that testimony is just
one piece of evidence against respondent. It must be considered and
weighed along with petitioners' other evidence vis-à-vis respondent's
contrary evidence. In civil cases, the party having the burden of proof
must establish his case by a preponderance of evidence.
"Preponderance of evidence" is the weight, credit, and value of the
aggregate evidence on either side and is usually considered
synonymous with the term "greater weight of the evidence" or "greater
weight of the credible evidence." "Preponderance of evidence" is a
phrase that, in the last analysis, means probability of the truth. It is
evidence that is more convincing to the court as worthy of belief than
that which is offered in opposition thereto.13 Rule 133, Section 1 of the
Rules of Court provides the guidelines in determining preponderance
of evidence, thus:
SECTION I. Preponderance of evidence, how determined. In civil
cases, the party having burden of proof must establish his case by a
preponderance of evidence. In determining where the preponderance
or superior weight of evidence on the issues involved lies, the court
may consider all the facts and circumstances of the case, the
witnesses' manner of testifying, their intelligence, their means and
opportunity of knowing the facts to which they are testifying, the nature
of the facts to which they testify, the probability or improbability of their
testimony, their interest or want of interest, and also their personal
credibility so far as the same may legitimately appear upon the trial.
The court may also consider the number of witnesses, though the
preponderance is not necessarily with the greater number.
At this juncture, our ruling in Heirs of Tan Eng Kee v. Court of
Appeals14 is enlightening. Therein, we cited Article 1769 of the Civil
Code, which provides:
Art. 1769. 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 from 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 installments 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.
2
Applying the legal provision to the facts of this case, the following
circumstances tend to prove that Elfledo was himself the partner of
Jimmy and Norberto: 1) Cresencia testified that Jose gave
Elfledo P50,000.00, as share in the partnership, on a date that Business Organization – Partnership, Agency, Trust – Partner –
coincided with the payment of the initial capital in the partnership; 15 (2)
Elfledo ran the affairs of the partnership, wielding absolute control, Periodic Accounting – Profit Sharing
power and authority, without any intervention or opposition whatsoever
from any of petitioners herein;16 (3) all of the properties, particularly the
nine trucks of the partnership, were registered in the name of Elfledo; In 1980, the heirs of Jose Lim alleged that Jose Lim entered into a
(4) Jimmy testified that Elfledo did not receive wages or salaries from
the partnership, indicating that what he actually received were shares partnership agreement with Jimmy Yu and Norberto Uy. The three
of the profits of the business;17 and (5) none of the petitioners, as heirs
of Jose, the alleged partner, demanded periodic accounting from contributed P50,000.00 each and used the funds to purchase a truck to
Elfledo during his lifetime. As repeatedly stressed in Heirs of Tan Eng
Kee,18 a demand for periodic accounting is evidence of a partnership. start their trucking business. A year later however, Jose Lim died. The

eldest son of Jose Lim, Elfledo Lim, took over the trucking business
Furthermore, petitioners failed to adduce any evidence to show that
the real and personal properties acquired and registered in the names
and under his management, the trucking business prospered. Elfledo
of Elfledo and respondent formed part of the estate of Jose, having
been derived from Jose's alleged partnership with Jimmy and
was able to but real properties in his name. From one truck, he
Norberto. They failed to refute respondent's claim that Elfledo and
respondent engaged in other businesses. Edison even admitted that
increased it to 9 trucks, all trucks were in his name however. He also
Elfledo also sold Interwood lumber as a sideline.19 Petitioners could not
offer any credible evidence other than their bare assertions. Thus, we
acquired other motor vehicles in his name.
apply the basic rule of evidence that between documentary and oral
evidence, the former carries more weight.20
In 1993, Norberto Uy was killed. In 1995, Elfledo Lim died of a heart
Finally, we agree with the judicious findings of the CA, to wit:
attack. Elfledo’s wife, Juliet Lim, took over the properties but she
The above testimonies prove that Elfledo was not just a hired help but intimated to Jimmy and the heirs of Norberto that she could not go on
one of the partners in the trucking business, active and visible in the
running of its affairs from day one until this ceased operations upon his with the business. So the properties in the partnership were divided
demise. The extent of his control, administration and management of
the partnership and its business, the fact that its properties were among them.
placed in his name, and that he was not paid salary or other
compensation by the partners, are indicative of the fact that Elfledo
was a partner and a controlling one at that. It is apparent that the other Now the other heirs of Jose Lim, represented by Elenito Lim, required
partners only contributed in the initial capital but had no say thereafter
on how the business was ran. Evidently it was through Elfredo’s efforts Juliet to do an accounting of all income, profits, and properties from the
and hard work that the partnership was able to acquire more trucks
and otherwise prosper. Even the appellant participated in the affairs of estate of Elfledo Lim as they claimed that they are co-owners thereof.
the partnership by acting as the bookkeeper sans salary.1avvphi1
Juliet refused hence they sued her.
It is notable too that Jose Lim died when the partnership was barely a
year old, and the partnership and its business not only continued but The heirs of Jose Lim argued that Elfledo Lim acquired his properties
also flourished. If it were true that it was Jose Lim and not Elfledo who
was the partner, then upon his death the partnership should have from the partnership that Jose Lim formed with Norberto and Jimmy. In

been dissolved and its assets liquidated. On the contrary, these were court, Jimmy Yu testified that Jose Lim was the partner and not Elfledo
not done but instead its operation continued under the helm of Elfledo
and without any participation from the heirs of Jose Lim. Lim. The heirs testified that Elfledo was merely the driver of Jose Lim.

Whatever properties appellant and her husband had acquired, this was ISSUE: Who is the “partner” between Jose Lim and Elfledo Lim?
through their own concerted efforts and hard work. Elfledo did not limit
himself to the business of their partnership but engaged in other lines
of businesses as well. HELD: It is Elfledo Lim based on the evidence presented regardless of

Jimmy Yu’s testimony in court that Jose Lim was the partner. If Jose
In sum, we find no cogent reason to disturb the findings and the ruling
of the CA as they are amply supported by the law and by the evidence Lim was the partner, then the partnership would have been dissolved
on record.
upon his death (in fact, though the SC did not say so, I believe it
WHEREFORE, the instant Petition is DENIED. The assailed Court of
Appeals Decision dated June 29, 2005 is AFFIRMED. Costs against should have been dissolved upon Norberto’s death in 1993). A
petitioners.
partnership is dissolved upon the death of the partner. Further, no

SO ORDERED. evidence was presented as to the articles of partnership or contract of

Digest: partnership between Jose, Norberto and Jimmy. Unfortunately, there is

3
none in this case, because the alleged partnership was never formally
organized.
But at any rate, the Supreme Court noted that based on the functions
performed by Elfledo, he is the actual partner.
The following circumstances tend to prove that Elfledo was himself the
partner of Jimmy and Norberto:
1.) Cresencia testified that Jose gave Elfledo P50,000.00, as share in
the partnership, on a date that coincided with the payment of the initial
capital in the partnership;
2.) Elfledo ran the affairs of the partnership, wielding absolute control,
power and authority, without any intervention or opposition whatsoever
from any of petitioners herein;
3.) all of the properties, particularly the nine trucks of the partnership,
were registered in the name of Elfledo;
4.) Jimmy testified that Elfledo did not receive wages or salaries from
the partnership, indicating that what he actually received were shares
of the profits of the business; and
5.) none of the heirs of Jose, the alleged partner, demanded periodic
accounting from Elfledo during his lifetime. As repeatedly stressed in
the case of Heirs of Tan Eng Kee, a demand for periodic accounting is
evidence of a partnership.
Furthermore, petitioners failed to adduce any evidence to show that
the real and personal properties acquired and registered in the names
of Elfledo and Juliet formed part of the estate of Jose, having been
derived from Jose’s alleged partnership with Jimmy and Norberto.
Elfledo was not just a hired help but one of the partners in the trucking
business, active and visible in the running of its affairs from day one
until this ceased operations upon his demise. The extent of his control,
administration and management of the partnership and its business,
the fact that its properties were placed in his name, and that he was
not paid salary or other compensation by the partners, are indicative of
the fact that Elfledo was a partner and a controlling one at that. It is
apparent that the other partners only contributed in the initial capital
but had no say thereafter on how the business was ran. Evidently it
was through Elfredo’s efforts and hard work that the partnership was
able to acquire more trucks and otherwise prosper. Even the appellant
participated in the affairs of the partnership by acting as the
bookkeeper sans salary.
G.R. No. 148187 April 16, 2008
PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the June 30, 2000
Decision1 of the Court of Appeals in CA-G.R. SP No. 49385, which
affirmed the Decision2 of the Court of Tax Appeals in C.T.A. Case No.
5200. Also assailed is the April 3, 2001 Resolution3 denying the motion
for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining),
entered into an agreement4 with Baguio Gold Mining Company
("Baguio Gold") for the former to manage and operate the latter’s
mining claim, known as the Sto. Nino mine, located in Atok and Tublay,
Benguet Province. The parties’ agreement was denominated as
"Power of Attorney" and provided for the following terms:
4. Within three (3) years from date thereof, the PRINCIPAL
(Baguio Gold) shall make available to the MANAGERS
(Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may
be required by the MANAGERS within the said 3-year
period, for use in the MANAGEMENT of the STO. NINO
MINE. The said ELEVEN MILLION PESOS
(P11,000,000.00) shall be deemed, for internal audit
purposes, as the owner’s account in the Sto. Nino
PROJECT. Any part of any income of the PRINCIPAL from
the STO. NINO MINE, which is left with the Sto. Nino
PROJECT, shall be added to such owner’s account.
5. Whenever the MANAGERS shall deem it necessary and
convenient in connection with the MANAGEMENT of the
STO. NINO MINE, they may transfer their own funds or
property to the Sto. Nino PROJECT, in accordance with the
following arrangements:
(a) The properties shall be appraised and,
together with the cash, shall be carried by the Sto.
Nino PROJECT as a special fund to be known as
the MANAGERS’ account.
(b) The total of the MANAGERS’ account shall not
exceed P11,000,000.00, except with prior
4
 approval of the PRINCIPAL; provided, however,
that if the compensation of the MANAGERS as
herein provided cannot be paid in cash from the
Sto. Nino PROJECT, the amount not so paid in
cash shall be added to the MANAGERS’ account.
(c) The cash and property shall not thereafter be
withdrawn from the Sto. Nino PROJECT until
termination of this Agency.
(d) The MANAGERS’ account shall not accrue
interest. Since it is the desire of the PRINCIPAL to
extend to the MANAGERS the benefit of
subsequent appreciation of property, upon a
projected termination of this Agency, the ratio
which the MANAGERS’ account has to the
owner’s account will be determined, and the
corresponding proportion of the entire assets of
the STO. NINO MINE, excluding the claims, shall
be transferred to the MANAGERS, except that
such transferred assets shall not include mine
development, roads, buildings, and similar
property which will be valueless, or of slight value,
to the MANAGERS. The MANAGERS can, on the
other hand, require at their option that property
originally transferred by them to the Sto. Nino
PROJECT be re-transferred to them. Until such
assets are transferred to the MANAGERS, this
Agency shall remain subsisting.
xxxx
12. The compensation of the MANAGER shall be fifty per
cent (50%) of the net profit of the Sto. Nino PROJECT
before income tax. It is understood that the MANAGERS
shall pay income tax on their compensation, while the
PRINCIPAL shall pay income tax on the net profit of the Sto.
Nino PROJECT after deduction therefrom of the
MANAGERS’ compensation.
xxxx
16. The PRINCIPAL has current pecuniary obligation in favor
of the MANAGERS and, in the future, may incur other
obligations in favor of the MANAGERS. This Power of
Attorney has been executed as security for the payment and
satisfaction of all such obligations of the PRINCIPAL in favor
of the MANAGERS and as a means to fulfill the same.
Therefore, this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS’ account. After all
obligations of the PRINCIPAL in favor of the MANAGERS
have been paid and satisfied in full, this Agency shall be
revocable by the PRINCIPAL upon 36-month notice to the
MANAGERS.
17. Notwithstanding any agreement or understanding
between the PRINCIPAL and the MANAGERS to the
contrary, the MANAGERS may withdraw from this Agency
by giving 6-month notice to the PRINCIPAL. The
MANAGERS shall not in any manner be held liable to the
PRINCIPAL by reason alone of such withdrawal. Paragraph
5(d) hereof shall be operative in case of the MANAGERS’
withdrawal.
x x x x5
In the course of managing and operating the project, Philex Mining
made advances of cash and property in accordance with paragraph 5
of the agreement. However, the mine suffered continuing losses over
the years which resulted to petitioner’s withdrawal as manager of the
mine on January 28, 1982 and in the eventual cessation of mine
operations on February 20, 1982.6
Thereafter, on September 27, 1982, the parties executed a
"Compromise with Dation in Payment"7 wherein Baguio Gold admitted
an indebtedness to petitioner in the amount of P179,394,000.00 and
agreed to pay the same in three segments by first assigning Baguio
Gold’s tangible assets to petitioner, transferring to the latter Baguio
Gold’s equitable title in its Philodrill assets and finally settling the
remaining liability through properties that Baguio Gold may acquire in
the future.
On December 31, 1982, the parties executed an "Amendment to
Compromise with Dation in Payment"8 where the parties determined
that Baguio Gold’s indebtedness to petitioner actually amounted to
P259,137,245.00, which sum included liabilities of Baguio Gold to
other creditors that petitioner had assumed as guarantor. These
liabilities pertained to long-term loans amounting to US$11,000,000.00
contracted by Baguio Gold from the Bank of America NT & SA and
Citibank N.A. This time, Baguio Gold undertook to pay petitioner in two
segments by first assigning its tangible assets for P127,838,051.00
and then transferring its equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained that Baguio Gold had a
remaining outstanding indebtedness to petitioner in the amount of
P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the
remaining outstanding indebtedness of Baguio Gold by charging
P112,136,000.00 to allowances and reserves that were set up in 1981
and P2,860,768.00 to the 1982 operations.
In its 1982 annual income tax return, petitioner deducted from its gross
income the amount of P112,136,000.00 as "loss on settlement of
receivables from Baguio Gold against reserves and
allowances."9 However, the Bureau of Internal Revenue (BIR)
disallowed the amount as deduction for bad debt and assessed
petitioner a deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be
allowed since all requisites for a bad debt deduction were satisfied, to
wit: (a) there was a valid and existing debt; (b) the debt was
ascertained to be worthless; and (c) it was charged off within the
taxable year when it was determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management
contract it entered into with Baguio Gold. The bad debt deduction
represented advances made by petitioner which, pursuant to the
management contract, formed part of Baguio Gold’s "pecuniary
obligations" to petitioner. It also included payments made by petitioner
as guarantor of Baguio Gold’s long-term loans which legally entitled
petitioner to be subrogated to the rights of the original creditor.
Petitioner also asserted that due to Baguio Gold’s irreversible losses, it
became evident that it would not be able to recover the advances and
payments it had made in behalf of Baguio Gold. For a debt to be
considered worthless, petitioner claimed that it was neither required to
institute a judicial action for collection against the debtor nor to sell or
dispose of collateral assets in satisfaction of the debt. It is enough that
a taxpayer exerted diligent efforts to enforce collection and exhausted
all reasonable means to collect.
On October 28, 1994, the BIR denied petitioner’s protest for lack of
legal and factual basis. It held that the alleged debt was not
ascertained to be worthless since Baguio Gold remained existing and
had not filed a petition for bankruptcy; and that the deduction did not
consist of a valid and subsisting debt considering that, under the
management contract, petitioner was to be paid fifty percent (50%) of
the project’s net profit.10
5
Petitioner appealed before the Court of Tax Appeals (CTA) which
rendered judgment, as follows:
WHEREFORE, in view of the foregoing, the instant Petition
for Review is hereby DENIED for lack of merit. The
assessment in question, viz: FAS-1-82-88-003067 for
deficiency income tax in the amount of P62,811,161.39 is
hereby AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is
hereby ORDERED to PAY respondent Commissioner of
Internal Revenue the amount of P62,811,161.39, plus, 20%
delinquency interest due computed from February 10, 1995,
which is the date after the 20-day grace period given by the
respondent within which petitioner has to pay the deficiency
amount x x x up to actual date of payment.
SO ORDERED.11
The CTA rejected petitioner’s assertion that the advances it made for
the Sto. Nino mine were in the nature of a loan. It instead
characterized the advances as petitioner’s investment in a partnership
with Baguio Gold for the development and exploitation of the Sto. Nino
mine. The CTA held that the "Power of Attorney" executed by
petitioner and Baguio Gold was actually a partnership agreement.
Since the advanced amount partook of the nature of an investment, it
could not be deducted as a bad debt from petitioner’s gross income.
The CTA likewise held that the amount paid by petitioner for the long-
term loan obligations of Baguio Gold could not be allowed as a bad
debt deduction. At the time the payments were made, Baguio Gold
was not in default since its loans were not yet due and demandable.
What petitioner did was to pre-pay the loans as evidenced by the
notice sent by Bank of America showing that it was merely demanding
payment of the installment and interests due. Moreover, Citibank
imposed and collected a "pre-termination penalty" for the pre-payment.
The Court of Appeals affirmed the decision of the CTA.12 Hence, upon
denial of its motion for reconsideration,13petitioner took this recourse
under Rule 45 of the Rules of Court, alleging that:
I.
The Court of Appeals erred in construing that the advances
made by Philex in the management of the Sto. Nino Mine
pursuant to the Power of Attorney partook of the nature of an
investment rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50%
sharing in the net profits of the Sto. Nino Mine indicates that
Philex is a partner of Baguio Gold in the development of the
Sto. Nino Mine notwithstanding the clear absence of any
intent on the part of Philex and Baguio Gold to form a
partnership.
III.
The Court of Appeals erred in relying only on the Power of
Attorney and in completely disregarding the Compromise
Agreement and the Amended Compromise Agreement when
it construed the nature of the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the
issue of the propriety of the bad debts write-off.14
Petitioner insists that in determining the nature of its business
relationship with Baguio Gold, we should not only rely on the "Power of
Attorney", but also on the subsequent "Compromise with Dation in
Payment" and "Amended Compromise with Dation in Payment" that
the parties executed in 1982. These documents, allegedly evinced the
parties’ intent to treat the advances and payments as a loan and
establish a creditor-debtor relationship between them.
The petition lacks merit.
The lower courts correctly held that the "Power of Attorney" is the
instrument that is material in determining the true nature of the
business relationship between petitioner and Baguio Gold. Before
resort may be had to the two compromise agreements, the parties’
contractual intent must first be discovered from the expressed
language of the primary contract under which the parties’ business
relations were founded. It should be noted that the compromise
agreements were mere collateral documents executed by the parties
pursuant to the termination of their business relationship created under
the "Power of Attorney". On the other hand, it is the latter which
established the juridical relation of the parties and defined the
parameters of their dealings with one another.
The execution of the two compromise agreements can hardly be
considered as a subsequent or contemporaneous act that is reflective
of the parties’ true intent. The compromise agreements were executed
eleven years after the "Power of Attorney" and merely laid out a plan or
procedure by which petitioner could recover the advances and
payments it made under the "Power of Attorney". The parties entered
into the compromise agreements as a consequence of the dissolution
of their business relationship. It did not define that relationship or
indicate its real character.
An examination of the "Power of Attorney" reveals that a partnership or
joint venture was indeed intended by the parties. Under a contract of
partnership, two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.15 While a corporation, like
petitioner, cannot generally enter into a contract of partnership unless
authorized by law or its charter, it has been held that it may enter into a
joint venture which is akin to a particular partnership:
The legal concept of a joint venture is of common law origin.
It has no precise legal definition, but it has been generally
understood to mean an organization formed for some
temporary purpose. x x x It is in fact hardly distinguishable
from the partnership, since their elements are similar –
community of interest in the business, sharing of profits and
losses, and a mutual right of control. x x x The main
distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a general
business with some degree of continuity, while the joint
venture is formed for the execution of a single transaction,
and is thus of a temporary nature. x x x This observation is
not entirely accurate in this jurisdiction, since under the Civil
Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific
undertaking. x x x It would seem therefore that under
Philippine law, a joint venture is a form of partnership and
should be governed by the law of partnerships. The
Supreme Court has however recognized a distinction
between these two business forms, and has held that
although a corporation cannot enter into a partnership
contract, it may however engage in a joint venture with
others. x x x (Citations omitted) 16
Perusal of the agreement denominated as the "Power of Attorney"
indicates that the parties had intended to create a partnership and
establish a common fund for the purpose. They also had a joint interest
in the profits of the business as shown by a 50-50 sharing in the
income of the mine.
6
Under the "Power of Attorney", petitioner and Baguio Gold undertook necessarily be a contract of agency, but some other agreement
to contribute money, property and industry to the common fund known depending on the ultimate undertaking of the parties.21
as the Sto. Niño mine.17 In this regard, we note that there is a
substantive equivalence in the respective contributions of the parties to
In this case, the totality of the circumstances and the stipulations in the
the development and operation of the mine. Pursuant to paragraphs 4
parties’ agreement indubitably lead to the conclusion that a partnership
and 5 of the agreement, petitioner and Baguio Gold were to contribute
was formed between petitioner and Baguio Gold.
equally to the joint venture assets under their respective accounts.
Baguio Gold would contribute P11M under its owner’s account plus
any of its income that is left in the project, in addition to its actual First, it does not appear that Baguio Gold was unconditionally
mining claim. Meanwhile, petitioner’s contribution would consist of obligated to return the advances made by petitioner under the
itsexpertise in the management and operation of mines, as well as the agreement. Paragraph 5 (d) thereof provides that upon termination of
manager’s account which is comprised ofP11M in funds and property the parties’ business relations, "the ratio which the MANAGER’S
and petitioner’s "compensation" as manager that cannot be paid in account has to the owner’s account will be determined, and the
cash. corresponding proportion of the entire assets of the STO. NINO MINE,
excluding the claims" shall be transferred to petitioner.22 As pointed out
by the Court of Tax Appeals, petitioner was merely entitled to a
However, petitioner asserts that it could not have entered into a
proportionate return of the mine’s assets upon dissolution of the
partnership agreement with Baguio Gold because it did not "bind" itself
parties’ business relations. There was nothing in the agreement that
to contribute money or property to the project; that under paragraph 5
would require Baguio Gold to make payments of the advances to
of the agreement, it was only optional for petitioner to transfer funds or
petitioner as would be recognized as an item of obligation or "accounts
property to the Sto. Niño project "(w)henever the MANAGERS shall
payable" for Baguio Gold.
deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NIÑO MINE."18
Thus, the tax court correctly concluded that the agreement provided for
a distribution of assets of the Sto. Niño mine upon termination, a
The wording of the parties’ agreement as to petitioner’s contribution to
provision that is more consistent with a partnership than a creditor-
the common fund does not detract from the fact that petitioner
debtor relationship. It should be pointed out that in a contract of loan, a
transferred its funds and property to the project as specified in
person who receives a loan or money or any fungible thing acquires
paragraph 5, thus rendering effective the other stipulations of the
ownership thereof and is bound to pay the creditor an equal amount of
contract, particularly paragraph 5(c) which prohibits petitioner from
the same kind and quality.23 In this case, however, there was no
withdrawing the advances until termination of the parties’ business
stipulation for Baguio Gold to actually repay petitioner the cash and
relations. As can be seen, petitioner became bound by its contributions
property that it had advanced, but only the return of an amount pegged
once the transfers were made. The contributions acquired an
at a ratio which the manager’s account had to the owner’s account.
obligatory nature as soon as petitioner had chosen to exercise its
option under paragraph 5.
In this connection, we find no contractual basis for the execution of the
two compromise agreements in which Baguio Gold recognized a debt
There is no merit to petitioner’s claim that the prohibition in paragraph
in favor of petitioner, which supposedly arose from the termination of
5(c) against withdrawal of advances should not be taken as an
their business relations over the Sto. Nino mine. The "Power of
indication that it had entered into a partnership with Baguio Gold; that
Attorney" clearly provides that petitioner would only be entitled to the
the stipulation only showed that what the parties entered into was
return of a proportionate share of the mine assets to be computed at a
actually a contract of agency coupled with an interest which is not
ratio that the manager’s account had to the owner’s account. Except to
revocable at will and not a partnership.
provide a basis for claiming the advances as a bad debt deduction,
there is no reason for Baguio Gold to hold itself liable to petitioner
In an agency coupled with interest, it is the agency that cannot be under the compromise agreements, for any amount over and above
revoked or withdrawn by the principal due to an interest of a third the proportion agreed upon in the "Power of Attorney".
party that depends upon it, or the mutual interest of both principal and
agent.19 In this case, the non-revocation or non-withdrawal under
Next, the tax court correctly observed that it was unlikely for a business
paragraph 5(c) applies to the advances made by petitioner who is
corporation to lend hundreds of millions of pesos to another
supposedly the agent and not the principal under the contract. Thus, it
corporation with neither security, or collateral, nor a specific deed
cannot be inferred from the stipulation that the parties’ relation under
evidencing the terms and conditions of such loans. The parties also did
the agreement is one of agency coupled with an interest and not a
not provide a specific maturity date for the advances to become due
partnership.
and demandable, and the manner of payment was unclear. All these
point to the inevitable conclusion that the advances were not loans but
Neither can paragraph 16 of the agreement be taken as an indication capital contributions to a partnership.
that the relationship of the parties was one of agency and not a
partnership. Although the said provision states that "this Agency shall
The strongest indication that petitioner was a partner in the Sto Niño
be irrevocable while any obligation of the PRINCIPAL in favor of the
mine is the fact that it would receive 50% of the net profits as
MANAGERS is outstanding, inclusive of the MANAGERS’ account," it
"compensation" under paragraph 12 of the agreement. The entirety of
does not necessarily follow that the parties entered into an agency
the parties’ contractual stipulations simply leads to no other conclusion
contract coupled with an interest that cannot be withdrawn by Baguio
than that petitioner’s "compensation" is actually its share in the income
Gold.
of the joint venture.

It should be stressed that the main object of the "Power of Attorney"

was not to confer a power in favor of petitioner to contract with third
persons on behalf of Baguio Gold but to create a business relationship
between petitioner and Baguio Gold, in which the former was to
manage and operate the latter’s mine through the parties’ mutual
contribution of material resources and industry. The essence of an
agency, even one that is coupled with interest, is the agent’s ability to
represent his principal and bring about business relations between the
latter and third persons.20 Where representation for and in behalf of the
principal is merely incidental or necessary for the proper discharge of
one’s paramount undertaking under a contract, the latter may not
Article 1769 (4) of the Civil Code explicitly provides that the "receipt by
a person of a share in the profits of a business is prima facie evidence
that he is a partner in the business." Petitioner asserts, however, that
no such inference can be drawn against it since its share in the profits
of the Sto Niño project was in the nature of compensation or "wages of
an employee", under the exception provided in Article 1769 (4) (b).24
On this score, the tax court correctly noted that petitioner was not an
employee of Baguio Gold who will be paid "wages" pursuant to an
employer-employee relationship. To begin with, petitioner was the
manager of the project and had put substantial sums into the venture
7
in order to ensure its viability and profitability. By pegging its
compensation to profits, petitioner also stood not to be remunerated in
case the mine had no income. It is hard to believe that petitioner would
take the risk of not being paid at all for its services, if it were truly just
an ordinary employee.
Consequently, we find that petitioner’s "compensation" under
paragraph 12 of the agreement actually constitutes its share in the net
profits of the partnership. Indeed, petitioner would not be entitled to an
equal share in the income of the mine if it were just an employee of
Baguio Gold.25 It is not surprising that petitioner was to receive a 50%
share in the net profits, considering that the "Power of Attorney" also
provided for an almost equal contribution of the parties to the St. Nino
mine. The "compensation" agreed upon only serves to reinforce the
notion that the parties’ relations were indeed of partners and not
employer-employee.
All told, the lower courts did not err in treating petitioner’s advances as
investments in a partnership known as the Sto. Nino mine. The
advances were not "debts" of Baguio Gold to petitioner inasmuch as
the latter was under no unconditional obligation to return the same to
the former under the "Power of Attorney". As for the amounts that
petitioner paid as guarantor to Baguio Gold’s creditors, we find no
reason to depart from the tax court’s factual finding that Baguio Gold’s
debts were not yet due and demandable at the time that petitioner paid
the same. Verily, petitioner pre-paid Baguio Gold’s outstanding loans
to its bank creditors and this conclusion is supported by the evidence
on record.26
In sum, petitioner cannot claim the advances as a bad debt deduction
from its gross income. Deductions for income tax purposes partake of
the nature of tax exemptions and are strictly construed against the
taxpayer, who must prove by convincing evidence that he is entitled to
the deduction claimed.27 In this case, petitioner failed to substantiate its
assertion that the advances were subsisting debts of Baguio Gold that
could be deducted from its gross income. Consequently, it could not
claim the advances as a valid bad debt deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of
Appeals in CA-G.R. SP No. 49385 dated June 30, 2000, which
affirmed the decision of the Court of Tax Appeals in C.T.A. Case No.
5200 is AFFIRMED. Petitioner Philex Mining Corporation is ORDERED
to PAY the deficiency tax on its 1982 income in the amount of
P62,811,161.31, with 20% delinquency interest computed from
February 10, 1995, which is the due date given for the payment of the
deficiency income tax, up to the actual date of payment.
Digest:
PHILEX MINING CORPORATION
vs.
COMMISSIONER OF INTERNAL REVENUE,FACTS:
On August 5, 1992, the BIR sent a letter to Philex asking it to settle its
excise taxliabilities amounting to P123,821,982.52. Philex protested
the demand for payment of the tax liabilities stating that it has pending
claims for VAT input credit/refund for thetaxes it paid for the years
1989 to 1991 in the amount of P119,977,037.02 plus
interest.Therefore, these claims for tax credit/refund should be applied
against the tax liabilities.In reply, the BIR held that since these pending
claims have not yet been established or determined with certainty, it
follows that no legal compensation can take place. Hence,the BIR
reiterated its demand that Philex settle the amount plus interest within
30 daysfrom the receipt of the letter.
Philex raised the issue to the Court of Tax Appeals and in the course
of theproceedings, the BIR issued a Tax Credit Certificate SN 001795
in the amount of P13,144,313.88 which, applied to the total tax
liabilities of Philex of P123,821,982.52;effectively lowered the latter’s
tax obligation of P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex
to pay theremaining balance of P110,677,688.52 plus interest,
elucidating its reason that “taxescannot be subject to set-off on
compensation since claim for taxes is not a debt or contract.Philex
appealed the case before the Court of Appeals. Nonetheless, the Court
of Appeals affirmed the Court of Tax Appeals observation.
Philex filed a motion for reconsideration which was again denied.
However, a few days after the denial of itsmotion for reconsideration,
Philex was able to obtain its VAT input credit/refund not onlyfor the
taxable year 1989 to 1991 but also for 1992 and 1994, computed
amounting to205,595,289.20.
In view of the grant of its VAT input credit/refund, Philex now contends
that the sameshould,ipso jure, off-set its excise tax liabilities since both
had already become “dueand demandable, as well as fully liquidated;”
hence, legal compensation can properlytake place.
ISSUE:
Whether or not the petitioner is correct in its contention that tax liability
and VATinput credit/refund can be subjected to legal compensation.
HELD:
The Supreme Court has already made the pronouncement that taxes
cannot be subjectto compensation for the simple reason that the
government and the taxpayer are notcreditors and debtors of each
other. There is a material distinction between a tax anddebt. Debts are
due to the Government in its corporate capacity, while taxes are due
tothe Government in its sovereign capacity.
Philex’s
claim is an outright disregard of the basic principle in tax law that taxes
are thelifeblood of the government and so should be collected without
unnecessary hindrance.
Evidently, to countenance Philex’s whimsical reason would render
ineffective our tax
collection system.Philex is not allowed to refuse the payment of its tax
liabilities on the ground that it has apending tax claim for refund or
credit against the government which has not yet beengranted. It must
be noted that a distinguishing feature of a tax is that it is
compulsoryrather than a matter of bargain. Hence, a tax does not
depend upon the consent of thetaxpayer.If any payer can defer the
payment of taxes by raising the defense that it stillhas a pending claim
for refund or credit, this would adversely affect the governmentrevenue
system. A taxpayer cannot refuse to pay his taxes when they fall due
simplybecause he has a claim against the government or that the
collection of the tax iscontingent on the result of the lawsuit it filed
against the government. Moreover, Philex'stheory that would
automatically apply its VAT input credit/refund against its tax
liabilitiescan easily give rise to confusion and abuse, depriving the
government of authority over the manner by which taxpayers credit
and offset their tax liabilities.
8
"The power of taxation is sometimes called also the power to destroy.
Therefore itshould be exercised with caution to minimize injury to the
proprietary rights of ataxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the'hen that lays the golden egg.'
And, in the order to maintain the general public's trustand confidence in
the Government this power must be used justly and nottreacherously."
The petition is hereby dismissed
G.R. No. 175885 February 13, 2009
ZENAIDA G. MENDOZA, Petitioner,
vs.
ENGR. EDUARDO PAULE, ENGR. ALEXANDER COLOMA and
NATIONAL IRRIGATION ADMINISTRATION (NIA MUÑOZ, NUEVA
ECIJA), Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 176271 February 13, 2009
MANUEL DELA CRUZ Petitioner,
vs.
ENGR. EDUARDO M. PAULE, ENGR. ALEXANDER COLOMA and
NATIONAL IRRIGATION ADMINISTRATION (NIA MUÑOZ, NUEVA
ECIJA), Respondents.
DECISION
YNARES-SANTIAGO, J.:
These consolidated petitions assail the August 28, 2006 Decision1 of
the Court of Appeals in CA-G.R. CV No. 80819 dismissing the
complaint in Civil Case No. 18-SD (2000),2 and its December 11, 2006
Resolution3 denying the herein petitioners’ motion for reconsideration.
Engineer Eduardo M. Paule (PAULE) is the proprietor of E.M. Paule
Construction and Trading (EMPCT). On May 24, 1999, PAULE
executed a special power of attorney (SPA) authorizing Zenaida G.
Mendoza (MENDOZA) to participate in the pre-qualification and
bidding of a National Irrigation Administration (NIA) project and to
represent him in all transactions related thereto, to wit:
1. To represent E.M. PAULE CONSTRUCTION & TRADING
of which I (PAULE) am the General Manager in all my
business transactions with National Irrigation Authority,
Muñoz, Nueva Ecija.
2. To participate in the bidding, to secure bid bonds and
other documents pre-requisite in the bidding of Casicnan
Multi-Purpose Irrigation and Power Plant (CMIPPL 04-99),
National Irrigation Authority, Muñoz, Nueva Ecija.
3. To receive and collect payment in check in behalf of E.M.
PAULE CONSTRUCTION & TRADING.
4. To do and perform such acts and things that may be
necessary and/or required to make the herein authority
effective.4
On September 29, 1999, EMPCT, through MENDOZA, participated in
the bidding of the NIA-Casecnan Multi-Purpose Irrigation and Power
Project (NIA-CMIPP) and was awarded Packages A-10 and B-11 of
the NIA-CMIPP Schedule A. On November 16, 1999, MENDOZA
received the Notice of Award which was signed by Engineer Alexander
M. Coloma (COLOMA), then Acting Project Manager for the NIA-
CMIPP. Packages A-10 and B-11 involved the construction of a road
system, canal structures and drainage box culverts with a project cost
of P5,613,591.69.
When Manuel de la Cruz (CRUZ) learned that MENDOZA is in need of
heavy equipment for use in the NIA project, he met up with MENDOZA
in Bayuga, Muñoz, Nueva Ecija, in an apartment where the latter was
holding office under an EMPCT signboard. A series of meetings
followed in said EMPCT office among CRUZ, MENDOZA and PAULE.
On December 2 and 20, 1999, MENDOZA and CRUZ signed two Job
Orders/Agreements5 for the lease of the latter’s heavy equipment
(dump trucks for hauling purposes) to EMPCT.
On April 27, 2000, PAULE revoked6 the SPA he previously issued in
favor of MENDOZA; consequently, NIA refused to make payment to
MENDOZA on her billings. CRUZ, therefore, could not be paid for the
rent of the equipment. Upon advice of MENDOZA, CRUZ addressed
his demands for payment of lease rentals directly to NIA but the latter
refused to acknowledge the same and informed CRUZ that it would be
remitting payment only to EMPCT as the winning contractor for the
project.
In a letter dated April 5, 2000, CRUZ demanded from MENDOZA
and/or EMPCT payment of the outstanding rentals which amounted to
P726,000.00 as of March 31, 2000.
On June 30, 2000, CRUZ filed Civil Case No. 18-SD (2000) with
Branch 37 of the Regional Trial Court of Nueva Ecija, for collection of
sum of money with damages and a prayer for the issuance of a writ of
preliminary injunction against PAULE, COLOMA and the NIA. PAULE
in turn filed a third-party complaint against MENDOZA, who filed her
answer thereto, with a cross-claim against PAULE.
MENDOZA alleged in her cross-claim that because of PAULE’s
"whimsical revocation" of the SPA, she was barred from collecting
payments from NIA, thus resulting in her inability to fund her checks
which she had issued to suppliers of materials, equipment and labor
for the project. She claimed that estafa and B.P. Blg. 22 cases were
filed against her; that she could no longer finance her children’s
education; that she was evicted from her home; that her vehicle was
foreclosed upon; and that her reputation was destroyed, thus entitling
her to actual and moral damages in the respective amounts of P3
million and P1 million.
Meanwhile, on August 23, 2000, PAULE again constituted MENDOZA
as his attorney-in-fact –
1. To represent me (PAULE), in my capacity as General
Manager of the E.M. PAULE CONSTRUCTION AND
TRADING, in all meetings, conferences and transactions
exclusively for the construction of the projects known as
Package A-10 of Schedule A and Package No. B-11
Schedule B, which are 38.61% and 63.18% finished as of
June 21, 2000, per attached Accomplishment Reports x x x;
2. To implement, execute, administer and supervise the said
projects in whatever stage they are in as of to date, to collect
checks and other payments due on said projects and act as
9
 the Project Manager for E.M. PAULE CONSTRUCTION
AND TRADING;
3. To do and perform such acts and things that may be
necessary and required to make the herein power and
authority effective.7
At the pre-trial conference, the other parties were declared as in
default and CRUZ was allowed to present his evidence ex parte.
Among the witnesses he presented was MENDOZA, who was
impleaded as defendant in PAULE’s third-party complaint.
On March 6, 2003, MENDOZA filed a motion to declare third-party
plaintiff PAULE non-suited with prayer that she be allowed to present
her evidence ex parte.
However, without resolving MENDOZA’s motion to declare PAULE
non-suited, and without granting her the opportunity to present her
evidence ex parte, the trial court rendered its decision dated August 7,
2003, the dispositive portion of which states, as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff as
follows:
1. Ordering defendant Paule to pay the plaintiff the sum of
P726,000.00 by way of actual damages or compensation for
the services rendered by him;
2. Ordering defendant Paule to pay plaintiff the sum of
P500,000.00 by way of moral damages;
3. Ordering defendant Paule to pay plaintiff the sum of
P50,000.00 by way of reasonable attorney’s fees;
4. Ordering defendant Paule to pay the costs of suit; and
5. Ordering defendant National Irrigation Administration
(NIA) to withhold the balance still due from it to defendant
Paule/E.M. Paule Construction and Trading under NIA-
CMIPP Contract Package A-10 and to pay plaintiff therefrom
to the extent of defendant Paule’s liability herein adjudged.
SO ORDERED.8
In holding PAULE liable, the trial court found that MENDOZA was duly
constituted as EMPCT’s agent for purposes of the NIA project and that
MENDOZA validly contracted with CRUZ for the rental of heavy
equipment that was to be used therefor. It found unavailing PAULE’s
assertion that MENDOZA merely borrowed and used his contractor’s
license in exchange for a consideration of 3% of the aggregate amount
of the project. The trial court held that through the SPAs he executed,
PAULE clothed MENDOZA with apparent authority and held her out to
the public as his agent; as principal, PAULE must comply with the
obligations which MENDOZA contracted within the scope of her
authority and for his benefit. Furthermore, PAULE knew of the
transactions which MENDOZA entered into since at various times
when she and CRUZ met at the EMPCT office, PAULE was present
and offered no objections. The trial court declared that it would be
unfair to allow PAULE to enrich himself and disown his acts at the
expense of CRUZ.
PAULE and MENDOZA both appealed the trial court’s decision to the
Court of Appeals.
PAULE claimed that he did not receive a copy of the order of default;
that it was improper for MENDOZA, as third-party defendant, to have
taken the stand as plaintiff CRUZ’s witness; and that the trial court
erred in finding that an agency was created between him and
MENDOZA, and that he was liable as principal thereunder.
On the other hand, MENDOZA argued that the trial court erred in
deciding the case without affording her the opportunity to present
evidence on her cross-claim against PAULE; that, as a result, her
cross-claim against PAULE was not resolved, leaving her unable to
collect the amounts of P3,018,864.04, P500,000.00, and P839,450.88
which allegedly represent the unpaid costs of the project and the
amount PAULE received in excess of payments made by NIA.
On August 28, 2006, the Court of Appeals rendered the assailed
Decision which dismissed CRUZ’s complaint, as well as MENDOZA’s
appeal. The appellate court held that the SPAs issued in MENDOZA’s
favor did not grant the latter the authority to enter into contract with
CRUZ for hauling services; the SPAs limit MENDOZA’s authority to
only represent EMPCT in its business transactions with NIA, to
participate in the bidding of the project, to receive and collect payment
in behalf of EMPCT, and to perform such acts as may be necessary
and/or required to make the said authority effective. Thus, the
engagement of CRUZ’s hauling services was done beyond the scope
of MENDOZA’s authority.
As for CRUZ, the Court of Appeals held that he knew the limits of
MENDOZA’s authority under the SPAs yet he still transacted with her.
Citing Manila Memorial Park Cemetery, Inc. v. Linsangan,9 the
appellate court declared that the principal (PAULE) may not be bound
by the acts of the agent (MENDOZA) where the third person (CRUZ)
transacting with the agent knew that the latter was acting beyond the
scope of her power or authority under the agency.
With respect to MENDOZA’s appeal, the Court of Appeals held that
when the trial court rendered judgment, not only did it rule on the
plaintiff’s complaint; in effect, it resolved the third-party complaint as
well;10 that the trial court correctly dismissed the cross-claim and did
not unduly ignore or disregard it; that MENDOZA may not claim, on
appeal, the amounts of P3,018,864.04, P500,000.00, and P839,450.88
which allegedly represent the unpaid costs of the project and the
amount PAULE received in excess of payments made by NIA, as
these are not covered by her cross-claim in the court a quo, which
seeks reimbursement only of the amounts of P3 million and P1 million,
respectively, for actual damages (debts to suppliers, laborers, lessors
of heavy equipment, lost personal property) and moral damages she
claims she suffered as a result of PAULE’s revocation of the SPAs;
and that the revocation of the SPAs is a prerogative that is allowed to
PAULE under Article 192011 of the Civil Code.
CRUZ and MENDOZA’s motions for reconsideration were denied;
hence, these consolidated petitions:
G.R. No. 175885 (MENDOZA PETITION)
a) The Court of Appeals erred in sustaining the trial court’s
failure to resolve her motion praying that PAULE be declared
non-suited on his third-party complaint, as well as her motion
seeking that she be allowed to present evidence ex parte on
her cross-claim;
b) The Court of Appeals erred when it sanctioned the trial
court’s failure to resolve her cross-claim against PAULE;
and,
c) The Court of Appeals erred in its application of Article
1920 of the Civil Code, and in adjudging that MENDOZA had
no right to claim actual damages from PAULE for debts
incurred on account of the SPAs issued to her.
G.R. No. 176271 (CRUZ PETITION)
10
 CRUZ argues that the decision of the Court of Appeals is contrary to
the provisions of law on agency, and conflicts with the Resolution of
the Court in G.R. No. 173275, which affirmed the Court of Appeals’
decision in CA-G.R. CV No. 81175, finding the existence of an agency
relation and where PAULE was declared as MENDOZA’s principal
under the subject SPAs and, thus, liable for obligations (unpaid
construction materials, fuel and heavy equipment rentals) incurred by
the latter for the purpose of implementing and carrying out the NIA
project awarded to EMPCT.
CRUZ argues that MENDOZA was acting within the scope of her
authority when she hired his services as hauler of debris because the
NIA project (both Packages A-10 and B-11 of the NIA-CMIPP)
consisted of construction of canal structures, which involved the
clearing and disposal of waste, acts that are necessary and incidental
to PAULE’s obligation under the NIA project; and that the decision in a
civil case involving the same SPAs, where PAULE was found liable as
MENDOZA’s principal already became final and executory; that in Civil
Case No. 90-SD filed by MENDOZA against PAULE,12 the latter was
adjudged liable to the former for unpaid rentals of heavy equipment
and for construction materials which MENDOZA obtained for use in the
subject NIA project. On September 15, 2003, judgment was rendered
in said civil case against PAULE, to wit:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff
(MENDOZA) and against the defendant (PAULE) as follows:
1. Ordering defendant Paule to pay plaintiff the sum of
P138,304.00 representing the obligation incurred by the
plaintiff with LGH Construction;
2. Ordering defendant Paule to pay plaintiff the sum of
P200,000.00 representing the balance of the obligation
incurred by the plaintiff with Artemio Alejandrino;
3. Ordering defendant Paule to pay plaintiff the sum of
P520,000.00 by way of moral damages, and further sum of
P100,000.00 by way of exemplary damages;
4. Ordering defendant Paule to pay plaintiff the sum of
P25,000.00 as for attorney’s fees; and
5. To pay the cost of suit.13
PAULE appealed14 the above decision, but it was dismissed by the
Court of Appeals in a Decision15 which reads, in part:
As to the finding of the trial court that the principle of agency is
applicable in this case, this Court agrees therewith. It must be
emphasized that appellant (PAULE) authorized appellee (MENDOZA)
to perform any and all acts necessary to make the business
transaction of EMPCT with NIA effective. Needless to state, said
business transaction pertained to the construction of canal structures
which necessitated the utilization of construction materials and
equipments.1avvphi1 Having given said authority, appellant cannot be
allowed to turn its back on the transactions entered into by appellee in
behalf of EMPCT.
The amount of moral damages and attorney’s fees awarded by the trial
court being justifiable and commensurate to the damage suffered by
appellee, this Court shall not disturb the same. It is well-settled that the
award of damages as well as attorney’s fees lies upon the discretion of
the court in the context of the facts and circumstances of each case.
WHEREFORE, the appeal is DISMISSED and the appealed Decision
is AFFIRMED.
SO ORDERED.16
PAULE filed a petition to this Court docketed as G.R. No. 173275 but it
was denied with finality on September 13, 2006.
MENDOZA, for her part, claims that she has a right to be heard on her
cause of action as stated in her cross-claim against PAULE; that the
trial court’s failure to resolve the cross-claim was a violation of her
constitutional right to be apprised of the facts or the law on which the
trial court’s decision is based; that PAULE may not revoke her
appointment as attorney-in-fact for and in behalf of EMPCT because,
as manager of their partnership in the NIA project, she was obligated
to collect from NIA the funds to be used for the payment of suppliers
and contractors with whom she had earlier contracted for labor,
materials and equipment.
PAULE, on the other hand, argues in his Comment that MENDOZA’s
authority under the SPAs was for the limited purpose of securing the
NIA project; that MENDOZA was not authorized to contract with other
parties with regard to the works and services required for the project,
such as CRUZ’s hauling services; that MENDOZA acted beyond her
authority in contracting with CRUZ, and PAULE, as principal, should
not be made civilly liable to CRUZ under the SPAs; and that
MENDOZA has no cause of action against him for actual and moral
damages since the latter exceeded her authority under the agency.
We grant the consolidated petitions.
Records show that PAULE (or, more appropriately, EMPCT) and
MENDOZA had entered into a partnership in regard to the NIA project.
PAULE‘s contribution thereto is his contractor’s license and expertise,
while MENDOZA would provide and secure the needed funds for labor,
materials and services; deal with the suppliers and sub-contractors;
and in general and together with PAULE, oversee the effective
implementation of the project. For this, PAULE would receive as his
share three per cent (3%) of the project cost while the rest of the profits
shall go to MENDOZA. PAULE admits to this arrangement in all his
pleadings.17
Although the SPAs limit MENDOZA’s authority to such acts as
representing EMPCT in its business transactions with NIA,
participating in the bidding of the project, receiving and collecting
payment in behalf of EMPCT, and performing other acts in furtherance
thereof, the evidence shows that when MENDOZA and CRUZ met and
discussed (at the EMPCT office in Bayuga, Muñoz, Nueva Ecija) the
lease of the latter’s heavy equipment for use in the project, PAULE
was present and interposed no objection to MENDOZA’s actuations. In
his pleadings, PAULE does not even deny this. Quite the contrary,
MENDOZA’s actions were in accord with what she and PAULE
originally agreed upon, as to division of labor and delineation of
functions within their partnership. Under the Civil Code, every partner
is an agent of the partnership for the purpose of its business;18 each
one may separately execute all acts of administration, unless a
specification of their respective duties has been agreed upon, or else it
is stipulated that any one of them shall not act without the consent of
all the others.19 At any rate, PAULE does not have any valid cause for
opposition because his only role in the partnership is to provide his
contractor’s license and expertise, while the sourcing of funds,
materials, labor and equipment has been relegated to MENDOZA.
Moreover, it does not speak well for PAULE that he reinstated
MENDOZA as his attorney-in-fact, this time with broader powers to
implement, execute, administer and supervise the NIA project, to
collect checks and other payments due on said project, and act as the
Project Manager for EMPCT, even after CRUZ has already filed his
complaint. Despite knowledge that he was already being sued on the
SPAs, he proceeded to execute another in MENDOZA’s favor, and
even granted her broader powers of administration than in those being
sued upon. If he truly believed that MENDOZA exceeded her authority
with respect to the initial SPA, then he would not have issued another
SPA. If he thought that his trust had been violated, then he should not
have executed another SPA in favor of MENDOZA, much less grant
her broader authority.
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Given the present factual milieu, CRUZ has a cause of action against justification that PAULE’s revocation of the SPAs was within the
PAULE and MENDOZA. Thus, the Court of Appeals erred in bounds of his discretion under Article 1920 of the Civil Code.
dismissing CRUZ’s complaint on a finding of exceeded agency.
Besides, that PAULE could be held liable under the SPAs for
Where the defendant has interposed a counterclaim (whether
transactions entered into by MENDOZA with laborers, suppliers of
compulsory or permissive) or is seeking affirmative relief by a cross-
materials and services for use in the NIA project, has been settled with
complaint, the plaintiff cannot dismiss the action so as to affect the
finality in G.R. No. 173275. What has been adjudged in said case as
right of the defendant in his counterclaim or prayer for affirmative relief.
regards the SPAs should be made to apply to the instant case.
The reason for that exception is clear. When the answer sets up an
Although the said case involves different parties and transactions, it
independent action against the plaintiff, it then becomes an action by
finally disposed of the matter regarding the SPAs – specifically their
the defendant against the plaintiff, and, of course, the plaintiff has no
effect as among PAULE, MENDOZA and third parties with whom
right to ask for a dismissal of the defendant’s action. The present rule
MENDOZA had contracted with by virtue of the SPAs – a disposition
embodied in Sections 2 and 3 of Rule 17 of the 1997 Rules of Civil
that should apply to CRUZ as well. If a particular point or question is in
Procedure ordains a more equitable disposition of the counterclaims by
issue in the second action, and the judgment will depend on the
ensuring that any judgment thereon is based on the merit of the
determination of that particular point or question, a former judgment
counterclaim itself and not on the survival of the main complaint.
between the same parties or their privies will be final and conclusive in
Certainly, if the counterclaim is palpably without merit or suffers
the second if that same point or question was in issue and adjudicated
jurisdictional flaws which stand independent of the complaint, the trial
in the first suit. Identity of cause of action is not required but merely
court is not precluded from dismissing it under the amended rules,
identity of issues.20
provided that the judgment or order dismissing the counterclaim is
premised on those defects. At the same time, if the counterclaim is
There was no valid reason for PAULE to revoke MENDOZA’s SPAs. justified, the amended rules now unequivocally protect such
Since MENDOZA took care of the funding and sourcing of labor, counterclaim from peremptory dismissal by reason of the dismissal of
materials and equipment for the project, it is only logical that she the complaint.23
controls the finances, which means that the SPAs issued to her were
necessary for the proper performance of her role in the partnership,
Notwithstanding the immutable character of PAULE’s liability to
and to discharge the obligations she had already contracted prior to
MENDOZA, however, the exact amount thereof is yet to be determined
revocation. Without the SPAs, she could not collect from NIA, because
by the trial court, after receiving evidence for and in behalf of
as far as it is concerned, EMPCT – and not the PAULE-MENDOZA
MENDOZA on her counterclaim, which must be considered pending
partnership – is the entity it had contracted with. Without these
and unresolved.
payments from NIA, there would be no source of funds to complete the
project and to pay off obligations incurred. As MENDOZA correctly
argues, an agency cannot be revoked if a bilateral contract depends WHEREFORE, the petitions are GRANTED. The August 28, 2006
upon it, or if it is the means of fulfilling an obligation already contracted, Decision of the Court of Appeals in CA-G.R. CV No. 80819 dismissing
or if a partner is appointed manager of a partnership in the contract of the complaint in Civil Case No. 18-SD (2000) and its December 11,
partnership and his removal from the management is unjustifiable.21 2006 Resolution denying the motion for reconsideration are
REVERSED and SET ASIDE. The August 7, 2003 Decision of the
Regional Trial Court of Nueva Ecija, Branch 37 in Civil Case No. 18-
PAULE’s revocation of the SPAs was done in evident bad faith.
SD (2000) finding PAULE liable is REINSTATED, with the
Admitting all throughout that his only entitlement in the partnership with
MODIFICATION that the trial court is ORDERED to receive evidence
MENDOZA is his 3% royalty for the use of his contractor’s license, he
on the counterclaim of petitioner Zenaida G. Mendoza.
knew that the rest of the amounts collected from NIA was owing to
MENDOZA and suppliers of materials and services, as well as the
laborers. Yet, he deliberately revoked MENDOZA’s authority such that SO ORDERED.
the latter could no longer collect from NIA the amounts necessary to
proceed with the project and settle outstanding obligations.lawphil.net
Digest:

From the way he conducted himself, PAULE committed a willful and

deliberate breach of his contractual duty to his partner and those with
whom the partnership had contracted. Thus, PAULE should be made
liable for moral damages. 2. Revocation of special power of attorney by partner. A partner can
be held civilly liable to his partner for revoking, in bad faith, the Special
Power of Attorney given to the latter and for abandoning the
Bad faith does not simply connote bad judgment or negligence; it
imputes a dishonest purpose or some moral obliquity and conscious partnership. Zenaida G. Mendoza Vs. Engr. Eduardo Paule, et
doing of a wrong; a breach of a sworn duty through some motive or al./Manuel Dela Cruz Vs. Engr. Eduardo Paule, et al., G.R. No.
intent or ill-will; it partakes of the nature of fraud (Spiegel v. Beacon 175885/G.R. No. 176271. February 13, 2009.
Participation, 8 NE 2nd Series, 895, 1007). It contemplates a state of
mind affirmatively operating with furtive design or some motive of self-
interest or ill will for ulterior purposes (Air France v. Carrascoso, 18
SCRA 155, 166-167). Evident bad faith connotes a manifest deliberate
intent on the part of the accused to do wrong or cause damage. 22

Moreover, PAULE should be made civilly liable for abandoning the

partnership, leaving MENDOZA to fend for her own, and for unduly
revoking her authority to collect payments from NIA, payments which
were necessary for the settlement of obligations contracted for and
already owing to laborers and suppliers of materials and equipment
like CRUZ, not to mention the agreed profits to be derived from the
venture that are owing to MENDOZA by reason of their partnership
agreement. Thus, the trial court erred in disregarding and dismissing
MENDOZA’s cross-claim – which is properly a counterclaim, since it is
a claim made by her as defendant in a third-party complaint – against
PAULE, just as the appellate court erred in sustaining it on the

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