G.R. No.

L-21906

December 24, 1968

INOCENCIA
DELUAO
and
vs.
NICANOR
CASTEEL
and
NICANOR CASTEEL, defendant-appellant.

FELIPE

Aportadera
and
Palabrica
and
Pelaez,
Ruiz Law Offices for defendant-appellant.

Jalandoni

DELUAO plaintiffs-appellees,

JUAN

and

DEPRA, defendants,

Jamir

plaintiffs-appellees.

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.

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, applicantappellant"; 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.

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.

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:

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

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:

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.

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. F539-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)

(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.

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:

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.

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

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

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.

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 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.

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.

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.

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.

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.

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

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

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 letter 14 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

succeeding events reveal the intent of both parties to terminate the partnership by refusing to share the
fishpond with the other.

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

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 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,

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.

[G.R. No. 143340. August 15, 2001]

LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners, vs. LAMBERTO T. CHUA, respondent.
DECISION
GONZAGA-REYES, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the
Decision[1] of the Court of Appeals dated January 31, 2000 in the case entitled Lamberto T. Chua vs.
Lilibeth Sunga Chan and Cecilia Sunga and of the Resolution dated May 23, 2000 denying the
motion for reconsideration of herein petitioners Lilibeth Sunga Chan and Cecilia Sunga (hereafter
collectively referred to as petitioners).
The pertinent facts of this case are as follows:

On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth
Sunga Chan (hereafter petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia), daughter and
wife, respectively of the deceased Jacinto L. Sunga (hereafter Jacinto), for Winding Up of Partnership
Affairs, Accounting, Appraisal and Recovery of Shares and Damages with Writ of Preliminary
Attachment with the Regional Trial Court, Branch 11, Sindangan, Zamboanga del Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the
distribution of Shellane Liquefied Petroleum Gas (LPG) in Manila. For business convenience,
respondent and Jacinto allegedly agreed to register the business name of their partnership, SHELLITE
GAS APPLIANCE CENTER (hereafter Shellite), under the name of Jacinto as a sole
proprietorship. Respondent allegedly delivered his initial capital contribution of P100,000.00 to Jacinto
while the latter in turn produced P100,000.00 as his counterpart contribution, with the intention that the
profits would be equally divided between them. The partnership allegedly had Jacinto as manager,
assisted by Josephine Sy (hereafter Josephine), a sister of the wife of respondent, Erlinda Sy. As
compensation, Jacinto would receive a managers fee or remuneration of 10% of the gross profit and
Josephine would receive 10% of the net profits, in addition to her wages and other remuneration from
the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation
went quite well and was profitable. Respondent claimed that he could attest to the success of their
business because of the volume of orders and deliveries of filled Shellane cylinder tanks supplied by
Pilipinas Shell Petroleum Corporation. While Jacinto furnished respondent with the merchandise
inventories, balance sheets and net worth of Shellite from 1977 to 1989, respondent however suspected
that the amount indicated in these documents were understated and undervalued by Jacinto and
Josephine for their own selfish reasons and for tax avoidance.
Upon Jacintos death in the later part of 1989, his surviving wife, petitioner Cecilia and particularly
his daughter, petitioner Lilibeth, took over the operations, control, custody, disposition and management
of Shellite without respondents consent.
Despite respondents repeated demands upon petitioners for accounting, inventory, appraisal,
winding up and restitution of his net shares in the partnership, petitioners failed to comply. Petitioner
Lilibeth allegedly continued the operations of Shellite, converting to her own use and advantage its
properties.

account, and continued to benefit from the assets and income of Shellite to the damage and prejudice
of respondent.
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities and
Exchange Commission (SEC) in Manila, not the Regional Trial Court in Zambaonga del Norte had
jurisdiction over the action. Respondent opposed the motion to dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in form and substance denied
the motion to dismiss.
On January 30, 1993, petitioners filed their Answer with Compulsory Counterclaims, contending
that they are not liable for partnership shares, unreceived income/profits, interests, damages and
attorneys fees, that respondent does not have a cause of action against them, and that the trial court
has no jurisdiction over the nature of the action, the SEC being the agency that has original and
exclusive jurisdiction over the case. As counterclaim, petitioner sought attorneys fees and expenses of
litigation.
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the
claim for winding up of partnership affairs, accounting and recovery of shares in partnership affairs,
accounting and recovery of shares in partnership assets /properties should be dismissed and
prosecuted against the estate of deceased Jacinto in a probate or intestate proceeding.
On August 16, 1993, the trial court denied the second motion to dismiss for lack of merit.
On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and Mandamus
with the Court of Appeals docketed as CA-G.R. SP No. 32499 questioning the denial of the motion to
dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial
Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of merit.

On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out of alibis and reasons
to evade respondents demands, she disbursed out of the partnership funds the amount of P200,000.00
and partially paid the same to respondent. Petitioner Lilibeth allegedly informed respondent that the
P200,000.00 represented partial payment of the latters share in the partnership, with a promise that the
former would make the complete inventory and winding up of the properties of the business
establishment. Despite such commitment, petitioners allegedly failed to comply with their duty to

On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner, as
petitioners failed to show that a reversible error was committed by the appellate court."[2]
On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was
remanded to the trial court on April 26, 1995.

On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of
the case on January 17, 1996. Respondent presented his evidence while petitioners were considered to
have waived their right to present evidence for their failure to attend the scheduled date for reception of
evidence despite notice.

SO ORDERED.[3]

On October 7, 1997, the trial court rendered its Decision ruling for respondent. The dispositive
portion of the Decision reads:

On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the
Decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as
follows:

WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all respects.[4]

(1) DIRECTING them to render an accounting in acceptable form under accounting procedures and
standards of the properties, assets, income and profits of the Shellite Gas Appliance Center since the
time of death of Jacinto L. Sunga, from whom they continued the business operations including all
businesses derived from the Shellite Gas Appliance Center; submit an inventory, and appraisal of all
these properties, assets, income, profits, etc. to the Court and to plaintiff for approval or disapproval;
(2) ORDERING them to return and restitute to the partnership any and all properties, assets, income
and profits they misapplied and converted to their own use and advantage that legally pertain to the
plaintiff and account for the properties mentioned in pars. A and B on pages 4-5 of this petition as basis;
(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the plaintiff in the
partnership of the listed properties, assets and good will (sic) in schedules A, B and C, on pages 4-5 of
the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the partnership
from 1988 to may 30, 1992, when the plaintiff learned of the closure of the store the sum of P35,000.00
per month, with legal rate of interest until fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities
pursuant to law, after delivering to the plaintiff all the interest, shares, participation and equity in the
partnership, or the value thereof in money or moneys worth, if the properties are not physically divisible;
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and hold
them liable to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorneys (sic) and P25,00.00 as
litigation expenses.
NO special pronouncements as to COSTS.

On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case to
the Court of Appeals.

On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner.
Hence, this petition wherein petitioner relies upon the following grounds:
1. The Court of Appeals erred in making a legal conclusion that there existed a partnership
between respondent Lamberto T. Chua and the late Jacinto L. Sunga upon the latters
invitation and offer and that upon his death the partnership assets and business were
taken over by petitioners.
2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription
did not apply in the instant case.
3. The Court of Appeals erred in making the legal conclusion that there was competent and
credible evidence to warrant the finding of a partnership, and assuming arguendo that
indeed there was a partnership, the finding of highly exaggerated amounts or values in
the partnership assets and profits.[5]
Petitioners question the correctness of the finding of the trial court and the Court of Appeals that a
partnership existed between respondent and Jacinto from 1977 until Jacintos death. In the absence of
any written document to show such partnership between respondent and Jacinto, petitioners argue that
these courts were proscribed from hearing the testimonies of respondent and his witness, Josephine, to
prove the alleged partnership three years after Jacintos death. To support this argument, petitioners
invoke the Dead Mans Statute or Survivorship Rule under Section 23, Rule 130 of the Rules of Court
that provides:
SEC. 23. Disqualification by reason of death or insanity of adverse party.-- Parties or assignors of
parties to a case, or persons in whose behalf a case is prosecuted, against an executor or administrator
or other representative of a deceased person, or against a person of unsound mind, upon a claim or
demand against the estate of such deceased person, or against such person of unsound mind, cannot
testify as to any matter of fact occurring before the death of such deceased person or before such
person became of unsound mind.

Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego,
Josephine, should not have been admitted to prove certain claims against a deceased person (Jacinto),
now represented by petitioners.
We are not persuaded.
A partnership may be constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary.[6] Hence, based on the
intention of the parties, as gathered from the facts and ascertained from their language and conduct, a
verbal contract of partnership may arise.[7] The essential points that must be proven to show that a
partnership was agreed upon are (1) mutual contribution to a common stock, and (2) a joint interest in
the profits.[8] Understandably so, in view of the absence of a written contract of partnership between
respondent and Jacinto, respondent resorted to the introduction of documentary and testimonial
evidence to prove said partnership. The crucial issue to settle then is whether or not the Dead Mans
Statute applies to this case so as to render inadmissible respondents testimony and that of his witness,
Josephine.
The Dead Mans Statute provides that if one party to the alleged transaction is precluded from
testifying by death, insanity, or other mental disabilities, the surviving party is not entitled to the undue
advantage of giving his own uncontradicted and unexplained account of the transaction. [9] But before
this rule can be successfully invoked to bar the introduction of testimonial evidence, it is necessary that:
1. The witness is a party or assignor of a party to a case or persons in whose behalf a case
is prosecuted.
2. The action is against an executor or administrator or other representative of a deceased
person or a person of unsound mind;
3. The subject-matter of the action is a claim or demand against the estate of such deceased
person or against person of unsound mind;
4. His testimony refers to any matter of fact which occurred before the death of such
deceased person or before such person became of unsound mind.[10]
Two reasons forestall the application of the Dead Mans Statute to this case.
First, petitioners filed a compulsory counterclaim[11] against respondent in their answer before the
trial court, and with the filing of their counterclaim, petitioners themselves effectively removed this case
from the ambit of the Dead Mans Statute.[12] Well entrenched is the rule that when it is the executor or
administrator or representatives of the estate that sets up the counterclaim, the plaintiff, herein
respondent, may testify to occurrences before the death of the deceased to defeat the counterclaim.

10

[13]

Moreover, as defendant in the counterclaim, respondent is not disqualified from testifying as to

matters of fact occurring before the death of the deceased, said action not having been brought against
but by the estate or representatives of the deceased.[14]
Second, the testimony of Josephine is not covered by the Dead Mans Statute for the simple
reason that she is not a party or assignor of a party to a case or persons in whose behalf a case is
prosecuted.Records show that respondent offered the testimony of Josephine to establish the existence
of the partnership between respondent and Jacinto. Petitioners insistence that Josephine is the alter
ego of respondent does not make her an assignor because the term assignor of a party means assignor
of a cause of action which has arisen, and not the assignor of a right assigned before any cause of
action has arisen.[15] Plainly then, Josephine is merely a witness of respondent, the latter being the party
plaintiff.
We are not convinced by petitioners allegation that Josephines testimony lacks probative value
because she was allegedly coerced by respondent, her brother-in-law, to testify in his favor. Josephine
merely declared in court that she was requested by respondent to testify and that if she were not
requested to do so she would not have testified. We fail to see how we can conclude from this candid
admission that Josephines testimony is involuntary when she did not in any way categorically say that
she was forced to be a witness of respondent. Also, the fact that Josephine is the sister of the wife of
respondent does not diminish the value of her testimony since relationship per se, without more, does
not affect the credibility of witnesses.[16]
Petitioners reliance alone on the Dead Mans Statute to defeat respondents claim cannot prevail
over the factual findings of the trial court and the Court of Appeals that a partnership was established
between respondent and Jacinto. Based not only on the testimonial evidence, but the documentary
evidence as well, the trial court and the Court of Appeals considered the evidence for respondent as
sufficient to prove the formation of a partnership, albeit an informal one.
Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial
precedents, a factual matter like the finding of the existence of a partnership between respondent and
Jacinto cannot be inquired into by this Court on review.[17] This Court can no longer be tasked to go over
the proofs presented by the parties and analyze, assess and weigh them to ascertain if the trial court
and the appellate court were correct in according superior credit to this or that piece of evidence of one
party or the other.[18] It must be also pointed out that petitioners failed to attend the presentation of
evidence of respondent. Petitioners cannot now turn to this Court to question the admissibility and
authenticity of the documentary evidence of respondent when petitioners failed to object to the
admissibility of the evidence at the time that such evidence was offered.[19]
With regard to petitioners insistence that laches and/or prescription should have extinguished
respondents claim, we agree with the trial court and the Court of Appeals that the action for accounting
filed by respondent three (3) years after Jacintos death was well within the prescribed period. The Civil
Code provides that an action to enforce an oral contract prescribes in six (6) years [20] while the right to

demand an accounting for a partners interest as against the person continuing the business accrues at
the date of dissolution, in the absence of any contrary agreement. [21] Considering that the death of a
partner results in the dissolution of the partnership[22], in this case, it was after Jacintos death that
respondent as the surviving partner had the right to an account of his interest as against petitioners. It
bears stressing that while Jacintos death dissolved the partnership, the dissolution did not immediately
terminate the partnership. The Civil Code[23] expressly provides that upon dissolution, the partnership
continues and its legal personality is retained until the complete winding up of its business, culminating
in its termination.[24]
In a desperate bid to cast doubt on the validity of the oral partnership between respondent and
Jacinto, petitioners maintain that said partnership that had an initial capital of P200,000.00 should have
been registered with the Securities and Exchange Commission (SEC) since registration is mandated by
the Civil Code. True, Article 1772 of the Civil Code requires that partnerships with a capital of P3,000.00
or more must register with the SEC, however, this registration requirement is not mandatory. Article
1768 of the Civil Code[25] explicitly provides that the partnership retains its juridical personality even if it
fails to register. The failure to register the contract of partnership does not invalidate the same as
among the partners, so long as the contract has the essential requisites, because the main purpose of
registration is to give notice to third parties, and it can be assumed that the members themselves knew
of the contents of their contract.[26] In the case at bar, non-compliance with this directory provision of the
law will not invalidate the partnership considering that the totality of the evidence proves that
respondent and Jacinto indeed forged the partnership in question.
WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is
AFFIRMED.
SO ORDERED.

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:

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
Victorio S. Advincula for defendants-appellees.

11

Associates

for

plaintiff-appellant.

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.

SCAR ANGELES and EMERITA ANGELES, petitioners, vs. THE HON. SECRETARY OF JUSTICE
and FELINO MERCADO, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari[1] to annul the letter-resolution[2] dated 1 February 2000 of the
Secretary of Justice in Resolution No. 155.[3] The Secretary of Justice affirmed the resolution [4] in I.S.
No. 96-939 dated 28 February 1997 rendered by the Provincial Prosecution Office of the Department of
Justice in Santa Cruz, Laguna (Provincial Prosecution Office). The Provincial Prosecution Office
resolved to dismiss the complaint for estafa filed by petitioners Oscar and Emerita Angeles (Angeles
spouses) against respondent Felino Mercado (Mercado).
Antecedent Facts
On 19 November 1996, the Angeles spouses filed a criminal complaint for estafa under Article 315
of the Revised Penal Code against Mercado before the Provincial Prosecution Office. Mercado is the
brother-in-law of the Angeles spouses, being married to Emerita Angeles sister Laura.
In their affidavits, the Angeles spouses claimed that in November 1992, Mercado convinced them
to enter into a contract of antichresis,[5] colloquially known as sanglaang-perde, covering eight parcels of
land (subject land) planted with fruit-bearing lanzones trees located in Nagcarlan, Laguna and owned by
Juana Suazo. The contract of antichresis was to last for five years with P210,000 as consideration. As
the Angeles spouses stay in Manila during weekdays and go to Laguna only on weekends, the parties
agreed that Mercado would administer the lands and complete the necessary paperwork.[6]
After three years, the Angeles spouses asked for an accounting from Mercado. Mercado explained
that the subject land earned P46,210 in 1993, which he used to buy more lanzones trees. Mercado also
reported that the trees bore no fruit in 1994. Mercado gave no accounting for 1995. The Angeles
spouses claim that only after this demand for an accounting did they discover that Mercado had put the
contract of sanglaang-perde over the subject land under Mercado and his spouses names. [7] The
relevant portions of the contract of sanglaang-perde, signed by Juana Suazo alone, read:
xxx

12

Na alang-alang sa halagang DALAWANG DAAN AT SAMPUNG LIBONG PISO (P210,000), salaping

gastahin, na aking tinanggap sa mag[-]asawa nila G. AT GNG. FELINO MERCADO, mga nasa hustong
gulang, Filipino, tumitira at may pahatirang sulat sa Bgy. Maravilla, bayan ng Nagcarlan, lalawigan ng
Laguna, ay aking ipinagbili, iniliwat at isinalin sa naulit na halaga, sa nabanggit na mag[-] asawa nila G.
AT GNG. FELINO MERCADO[,] sa kanila ay magmamana, kahalili at ibang dapat pagliwatan ng
kanilang karapatan, ang lahat na ibubunga ng lahat na puno ng lanzones, hindi kasama ang ibang
halaman na napapalooban nito, ng nabanggit na WALONG (8) Lagay na Lupang Cocal-Lanzonal, sa
takdang LIMA (5) NA [sic] TAON, magpapasimula sa taong 1993, at magtatapos sa taong 1997, kayat
pagkatapos ng lansonesan sa taong 1997, ang pamomosision at pakikinabang sa lahat na puno ng
lanzones sa nabanggit na WALONG (8) Lagay na Lupang Cocal-Lanzonal ay manunumbalik sa akin,
sa akin ay magmamana, kahalili at ibang dapat pagliwatan ng aking karapatan na ako ay walang
ibabalik na ano pa mang halaga, sa mag[-] asawa nila G. AT GNG. FELINO MERCADO.
Na ako at ang mag[-]asawa nila G. AT GNG. FELINO MERCADO ay nagkasundo na ako ay bibigyan
nila ng LIMA (5) na [sic] kaing na lanzones taon-taon sa loob ng LIMA (5) na [sic] taon ng aming
kasunduang ito.
Na ako at ang mag[-]asawa nila G. AT GNG. FELINO MERCADO ay nagkasundo na silang
mag[-]asawa nila G. AT GNG. FELINO MERCADO ang magpapaalis ng dapo sa puno ng lansones
taon-taon [sic] sa loob ng LIMA (5) [sic] taonng [sic] aming kasunduang ito.[8]
In his counter-affidavit, Mercado denied the Angeles spouses allegations. Mercado claimed that
there exists an industrial partnership, colloquially known as sosyo industrial, between him and his
spouse as industrial partners and the Angeles spouses as the financiers. This industrial partnership had
existed since 1991, before the contract of antichresis over the subject land. As the years passed,
Mercado used his and his spouses earnings as part of the capital in the business transactions which he
entered into in behalf of the Angeles spouses. It was their practice to enter into business transactions
with other people under the name of Mercado because the Angeles spouses did not want to be
identified as the financiers.

Meanwhile, Mercado filed his counter-affidavit on 2 January 1997. On receiving the 3 January
1997 resolution, Mercado moved for its reconsideration. Hence, on 26 February 1997, the Provincial
Prosecution Office issued an amended resolution dismissing the Angeles spouses complaint for estafa
against Mercado.
The Provincial Prosecution Office stated thus:
The subject of the complaint hinges on a partnership gone sour. The partnership was initially unsaddled
[with] problems. Management became the source of misunderstanding including the accounting of
profits, which led to further misunderstanding until it was revealed that the contract with the orchard
owner was only with the name of the respondent, without the names of the complainants.
The accusation of estafa here lacks enough credible evidentiary support to sustain a prima facie finding.
Premises considered, it is respectfully recommended that the complaint for estafa be dismissed.
RESPECTFULLY SUBMITTED.[10]
The Angeles spouses filed a motion for reconsideration, which the Provincial Prosecution Office
denied in a resolution dated 4 August 1997.
The Ruling of the Secretary of Justice
On appeal to the Secretary of Justice, the Angeles spouses emphasized that the document
evidencing the contract of sanglaang-perde with Juana Suazo was executed in the name of the
Mercado spouses, instead of the Angeles spouses. The Angeles spouses allege that this document
alone proves Mercados misappropriation of their P210,000.
The Secretary of Justice found otherwise. Thus:

Mercado attached bank receipts showing deposits in behalf of Emerita Angeles and contracts
under his name for the Angeles spouses. Mercado also attached the minutes of the barangay
conciliation proceedings held on 7 September 1996. During the barangay conciliation proceedings,
Oscar Angeles stated that there was a written sosyo industrial agreement: capital would come from the
Angeles spouses while the profit would be divided evenly between Mercado and the Angeles spouses.[9]
The Ruling of the Provincial Prosecution Office
On 3 January 1997, the Provincial Prosecution Office issued a resolution recommending the filing
of criminal information for estafa against Mercado. This resolution, however, was issued without
Mercados counter-affidavit.

13

Reviewing the records of the case, we are of the opinion that the indictment of [Mercado] for the crime
of estafa cannot be sustained. [The Angeles spouses] failed to show sufficient proof that [Mercado]
deliberately deceived them in the sanglaang perde transaction. The document alone, which was in the
name of [Mercado and his spouse], failed to convince us that there was deceit or false representation
on the part of [Mercado] that induced the [Angeles spouses] to part with their money. [Mercado]
satisfactorily explained that the [Angeles spouses] do not want to be revealed as the financiers. Indeed,
it is difficult to believe that the [Angeles spouses] would readily part with their money without holding on
to some document to evidence the receipt of money, or at least to inspect the document involved in the
said transaction. Under the circumstances, we are inclined to believe that [the Angeles spouses] knew
from the very start that the questioned document was not really in their names.

In addition, we are convinced that a partnership truly existed between the [Angeles spouses] and
[Mercado]. The formation of a partnership was clear from the fact that they contributed money to a
common fund and divided the profits among themselves. Records would show that [Mercado] was able
to make deposits for the account of the [Angeles spouses]. These deposits represented their share in
the profits of their business venture. Although the [Angeles spouses] deny the existence of a
partnership, they, however, never disputed that the deposits made by [Mercado] were indeed for their
account.
The transcript of notes on the dialogue between the [Angeles spouses] and [Mercado] during the
hearing of their barangay conciliation case reveals that the [Angeles spouses] acknowledged their joint
business ventures with [Mercado] although they assailed the manner by which [Mercado] conducted the
business and handled and distributed the funds. The veracity of this transcript was not raised in issued
[sic] by [the Angeles spouses]. Although the legal formalities for the formation of a partnership were not
adhered to, the partnership relationship of the [Angeles spouses] and [Mercado] is evident in this case.
Consequently, there is no estafa where money is delivered by a partner to his co-partner on the latters
representation that the amount shall be applied to the business of their partnership. In case of
misapplication or conversion of the money received, the co-partners liability is civil in nature (People v.
Clarin, 7 Phil. 504)
WHEREFORE, the appeal is hereby DISMISSED.[11]
Hence, this petition.
Issues

The petition has no merit.

Whether the Secretary of Justice Committed
Grave Abuse of Discretion
An act of a court or tribunal may constitute grave abuse of discretion when the same is performed
in a capricious or whimsical exercise of judgment amounting to lack of jurisdiction. The abuse of
discretion must be so patent and gross as to amount to an evasion of positive duty, or to a virtual refusal
to perform a duty enjoined by law, as where the power is exercised in an arbitrary and despotic manner
because of passion or personal hostility.[13]
The Angeles spouses fail to convince us that the Secretary of Justice committed grave abuse of
discretion when he dismissed their appeal. Moreover, the Angeles spouses committed an error in
procedure when they failed to file a motion for reconsideration of the Secretary of Justices resolution. A
previous motion for reconsideration before the filing of a petition forcertiorari is necessary unless: (1) the
issue raised is one purely of law; (2) public interest is involved; (3) there is urgency; (4) a question of
jurisdiction is squarely raised before and decided by the lower court; and (5) the order is a patent nullity.
[14]
The Angeles spouses failed to show that their case falls under any of the exceptions. In fact, this
present petition for certiorari is dismissible for this reason alone.
Whether a Partnership Existed

The Angeles spouses ask us to consider the following issues:

Between Mercado and the Angeles Spouses

1. Whether the Secretary of Justice committed grave abuse of discretion amounting to lack
of jurisdiction in dismissing the appeal of the Angeles spouses;

The Angeles spouses allege that they had no partnership with Mercado. The Angeles spouses rely
on Articles 1771 to 1773 of the Civil Code, which state that:

2. Whether a partnership existed between the Angeles spouses and Mercado even without
any documentary proof to sustain its existence;

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.

3. Assuming that there was a partnership, whether there was misappropriation by Mercado of
the proceeds of the lanzones after the Angeles spouses demanded an accounting from
him of the income at the office of the barangay authorities on 7 September 1996, and
Mercado failed to do so and also failed to deliver the proceeds to the Angeles spouses;

Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which must be recorded in the Office of the Securities and
Exchange Commission.

4. Whether the Secretary of Justice should order the filing of the information for estafa
against Mercado.[12]

14

The Ruling of the Court

Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the
partnership and the members thereof to third persons.

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.

WHEREFORE, we AFFIRM the decision of the Secretary of Justice. The present petition
for certiorari is DISMISSED.

The Angeles spouses position that there is no partnership because of the lack of a public
instrument indicating the same and a lack of registration with the Securities and Exchange Commission
(SEC) holds no water. First, the Angeles spouses contributed money to the partnership and not
immovable property. Second, mere failure to register the contract of partnership with the SEC does not
invalidate a contract that has the essential requisites of a partnership. The purpose of registration of the
contract of partnership is to give notice to third parties. Failure to register the contract of partnership
does not affect the liability of the partnership and of the partners to third persons. Neither does such
failure to register affect the partnerships juridical personality. A partnership may exist even if the
partners do not use the words partner or partnership.
Indeed, the Angeles spouses admit to facts that prove the existence of a partnership: a contract
showing a sosyo industrial or industrial partnership, contribution of money and industry to a common
fund, and division of profits between the Angeles spouses and Mercado.

[G.R. No. 134559. December 9, 1999]

Whether there was

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

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

Misappropriation by Mercado

DECISION

The Secretary of Justice adequately explained the alleged misappropriation by Mercado: The
document alone, which was in the name of [Mercado and his spouse], failed to convince us that there
was deceit or false representation on the part of [Mercado] that induced the [Angeles spouses] to part
with their money. [Mercado] satisfactorily explained that the [Angeles spouses] do not want to be
revealed as the financiers.[15]

PANGANIBAN, J.:

Even Branch 26 of the Regional Trial Court of Santa Cruz, Laguna which decided the civil case for
damages, injunction and restraining order filed by the Angeles spouses against Mercado and Leo
Cerayban, stated:
xxx [I]t was the practice to have all the contracts of antichresis of their partnership secured in
[Mercados] name as [the Angeles spouses] are apprehensive that, if they come out into the open as
financiers of said contracts, they might be kidnapped by the New Peoples Army or their business deals
be questioned by the Bureau of Internal Revenue or worse, their assets and unexplained income be
sequestered, as xxx Oscar Angeles was then working with the government.[16]

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] Second
Division 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:

Furthermore, accounting of the proceeds is not a proper subject for the present case.

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]

For these reasons, we hold that the Secretary of Justice did not abuse his discretion in dismissing
the appeal of the Angeles spouses.

The Facts

15

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 respondents 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 Councils 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.

Article 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:

x x x [The] Court of Appeals erred in concluding that the transaction x x x 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 Courts Ruling

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]

The Petition is bereft of merit.

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.

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 courts finding of
a partnership, were void.

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 courts 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:

16

Main Issue: Existence of a Partnership

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, x x x the FIRST PARTY, likewise, MRS. ANTONIA B.
TORRES, and MISS EMETERIA BARING, x x x the SECOND PARTY:

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.

W I T N E S S E T H:

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, 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 x x x 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.

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.
Respondents 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

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 x x x percentage
[agreed upon] by both parties.

17

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.

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.

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.

Partnership Agreement Not the Result of an Earlier Illegal Contract

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.

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 [petitioners]
participation therein. x x x 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 respondent 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 Petition is hereby DENIED and the challenged Decision AFFIRMED. Costs
against petitioners.
SO ORDERED.

18

G.R. No. L-25532

19

February 28, 1969

COMMISSIONER
OF
INTERNAL
vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.

REVENUE, petitioner,

(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent William
J. Suter and Julia Spirig Suter and the subsequent sale to them by the remaining partner, Gustav
Carlson, of his participation of P2,000.00 in the partnership for a nominal amount of P1.00.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and
Special
Attorneys
B.
Gatdula,
Jr.
and
T.
Temprosa
Jr.
for
petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.

The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig
and their subsequent acquisition of the interests of remaining partner Carlson in the partnership
dissolved the limited partnership, and if they did not, the fiction of juridical personality of the partnership
should be disregarded for income tax purposes because the spouses have exclusive ownership and
control of the business; consequently the income tax return of respondent Suter for the years in
question should have included his and his wife's individual incomes and that of the limited partnership,
in accordance with Section 45 (d) of the National Internal Revenue Code, which provides as follows:

REYES, J.B.L., J.:

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

20

(d) Husband and wife. In the case of married persons, whether citizens, residents or nonresidents, only one consolidated return for the taxable year shall be filed by either spouse to
cover the income of both spouses; ....
In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his
marriage with limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948
is not a ground for dissolution of the partnership, either in the Code of Commerce or in the New Civil
Code, and that since its juridical personality had not been affected and since, as a limited partnership,
as contra distinguished from a duly registered general partnership, it is taxable on its income similarly
with corporations, Suter was not bound to include in his individual return the income of the limited
partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by
operation of law because of the marriage of the only general partner, William J. Suter to the originally
limited partner, Julia Spirig one year after the partnership was organized is rested by the appellant upon
the opinion of now Senator Tolentino in Commentaries and Jurisprudence on Commercial Laws of the
Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:
A husband and a wife may not enter into a contract of general copartnership, because under
the Civil Code, which applies in the absence of express provision in the Code of Commerce,
persons prohibited from making donations to each other are prohibited from entering
into universal partnerships. (2 Echaverri 196) It follows that the marriage of partners
necessarily brings about the dissolution of a pre-existing partnership. (1 Guy de Montella 58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd.
was not a universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the
Spanish Civil Code, of 1889 (which was the law in force when the subject firm was organized in 1947),
a universal partnership requires either that the object of the association be all the present property of

the partners, as contributed by them to the common fund, or else "all that the partners may acquire by
their industry or work during the existence of the partnership". William J. Suter "Morcoin" Co., Ltd. was
not such a universal partnership, since the contributions of the partners were fixed sums of money,
P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of them was an industrial
partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses were
forbidden to enter by Article 1677 of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th
Edition, 1952, Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the
aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero
o podran constituir sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos
a la tesis permisiva de los contratos de sociedad particular entre esposos, ya que ningun
precepto de nuestro Codigo los prohibe, y hay que estar a la norma general segun la que toda
persona es capaz para contratar mientras no sea declarado incapaz por la ley. La
jurisprudencia de la Direccion de los Registros fue favorable a esta misma tesis en su
resolution de 3 de febrero de 1936, mas parece cambiar de rumbo en la de 9 de marzo de
1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one
of the causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce.
The appellant's view, that by the marriage of both partners the company became a single proprietorship,
is equally erroneous. The capital contributions of partners William J. Suter and Julia Spirig were
separately owned and contributed by them before their marriage; and after they were joined in wedlock,
such contributions remained their respective separate property under the Spanish Civil Code (Article
1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become
common property of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of
its own, distinct and separate from that of its partners (unlike American and English law that does not
recognize such separate juridical personality), the bypassing of the existence of the limited partnership
as a taxpayer can only be done by ignoring or disregarding clear statutory mandates and basic
principles of our law. The limited partnership's separate individuality makes it impossible to equate its

21

income with that of the component members. True, section 24 of the Internal Revenue Code merges
registered general co-partnerships (compaias colectivas) with the personality of the individual partners
for income tax purposes. But this rule is exceptional in its disregard of a cardinal tenet of our partnership
laws, and can not be extended by mere implication to limited partnerships.
The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-13554,
Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for
disregarding the fiction of legal personality of the corporations involved therein are not applicable to the
present case. In the cited cases, the corporations were already subject to tax when the fiction of their
corporate personality was pierced; in the present case, to do so would exempt the limited partnership
from income taxation but would throw the tax burden upon the partners-spouses in their individual
capacities. The corporations, in the cases cited, merely served as business conduits or alter egos of the
stockholders, a factor that justified a disregard of their corporate personalities for tax purposes. This is
not true in the present case. Here, the limited partnership is not a mere business conduit of the partnerspouses; it was organized for legitimate business purposes; it conducted its own dealings with its
customers prior to appellee's marriage, and had been filing its own income tax returns as such
independent entity. The change in its membership, brought about by the marriage of the partners and
their subsequent acquisition of all interest therein, is no ground for withdrawing the partnership from the
coverage of Section 24 of the tax code, requiring it to pay income tax. As far as the records show, the
partners did not enter into matrimony and thereafter buy the interests of the remaining partner with the
premeditated scheme or design to use the partnership as a business conduit to dodge the tax laws.
Regularity, not otherwise, is presumed.
As the limited partnership under consideration is taxable on its income, to require that income to be
included in the individual tax return of respondent Suter is to overstretch the letter and intent of the law.
In fact, it would even conflict with what it specifically provides in its Section 24: for the appellant
Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compaia
colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code taxes
the latter on its income, but not the former, because it is in the case of compaias colectivas that the
members, and not the firm, are taxable in their individual capacities for any dividend or share of the
profit derived from the duly registered general partnership (Section 26, N.I.R.C.; Araas, Anno. & Juris.
on the N.I.R.C., As Amended, Vol. 1, pp. 88-89).lawphi1.nt
But it is argued that the income of the limited partnership is actually or constructively the income of the
spouses and forms part of the conjugal partnership of gains. This is not wholly correct. As pointed out in
Agapito vs. Molo 50 Phil. 779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the
fruits of the wife's parapherna become conjugal only when no longer needed to defray the expenses for
the administration and preservation of the paraphernal capital of the wife. Then again, the appellant's
argument erroneously confines itself to the question of the legal personality of the limited partnership,
which is not essential to the income taxability of the partnership since the law taxes the income of even
joint accounts that have no personality of their own. 1Appellant is, likewise, mistaken in that it assumes
that the conjugal partnership of gains is a taxable unit, which it is not. What is taxable is the "income of

both spouses" (Section 45 [d] in their individual capacities. Though the amount of income (income of the
conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given
taxable year, their consequences would be different, as their contributions in the business partnership
are not the same.
The difference in tax rates between the income of the limited partnership being consolidated with, and
when split from the income of the spouses, is not a justification for requiring consolidation; the revenue
code, as it presently stands, does not authorize it, and even bars it by requiring the limited partnership
to pay tax on its own income.
FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.

G.R. No. L-35469

March 17, 1932

E.
S.
LYONS, plaintiff-appellant,
vs.
C. W. ROSENSTOCK, Executor of the Estate of Henry W. Elser, deceased, defendant-appellee.
Harvey
&
DeWitt, Perkins & Brandy for appellee.

O'Brien

for

appellant.

STREET, J.:
This action was institute in the Court of First Instance of the City of Manila, by E. S. Lyons against C. W.
Rosenstock, as executor of the estate of H. W. Elser, deceased, consequent upon the taking of an
appeal by the executor from the allowance of the claim sued upon by the committee on claims in said
estate. The purpose of the action is to recover four hundred forty-six and two thirds shares of the stock
of J. K. Pickering & Co., Ltd., together with the sum of about P125,000, representing the dividends
which accrued on said stock prior to October 21, 1926, with lawful interest. Upon hearing the cause the
trial court absolved the defendant executor from the complaint, and the plaintiff appealed.
Prior to his death on June 18, 1923, Henry W. Elser had been a resident of the City of Manila where he
was engaged during the years with which we are here concerned in buying, selling, and administering
real estate. In several ventures which he had made in buying and selling property of this kind the
plaintiff, E. S. Lyons, had joined with him, the profits being shared by the two in equal parts. In April,
1919, Lyons, whose regular vocation was that of a missionary, or missionary agent, of the Methodist
Episcopal Church, went on leave to the United States and was gone for nearly a year and a half,
returning on September 21, 1920. On the eve of his departure Elser made a written statements showing
that Lyons was, at that time, half owner with Elser of three particular pieces of real property.

22

Concurrently with this act Lyons execute in favor of Elser a general power of attorney empowering him
to manage and dispose of said properties at will and to represent Lyons fully and amply, to the mutual
advantage of both. During the absence of Lyons two of the pieces of property above referred to were
sold by Elser, leaving in his hands a single piece of property located at 616-618 Carried Street, in the
City of Manila, containing about 282 square meters of land, with the improvements thereon.
In the spring of 1920 the attention of Elser was drawn to a piece of land, containing about 1,500,000
square meters, near the City of Manila, and he discerned therein a fine opportunity for the promotion
and development of a suburban improvement. This property, which will be herein referred to as the San
Juan Estate, was offered by its owners for P570,000. To afford a little time for maturing his plans, Elser
purchased an option on this property for P5,000, and when this option was about to expire without his
having been able to raise the necessary funds, he paid P15,000 more for an extension of the option,
with the understanding in both cases that, in case the option should be exercised, the amounts thus
paid should be credited as part of the first payment. The amounts paid for this option and its extension
were supplied by Elser entirely from his own funds. In the end he was able from his own means, and
with the assistance which he obtained from others, to acquire said estate. The amount required for the
first payment was P150,000, and as Elser had available only about P120,000, including the P20,000
advanced upon the option, it was necessary to raise the remainder by obtaining a loan for P50,000.
This amount was finally obtained from a Chinese merchant of the city named Uy Siuliong. This loan was
secured through Uy Cho Yee, a son of the lender; and in order to get the money it was necessary for
Elser not only to give a personal note signed by himself and his two associates in the projected
enterprise, but also by the Fidelity & Surety Company. The money thus raised was delivered to Elser by
Uy Siuliong on June 24, 1920. With this money and what he already had in bank Elser purchased the
San Juan Estate on or about June 28, 1920. For the purpose of the further development of the property
a limited partnership had, about this time, been organized by Elser and three associates, under the
name of J. K. Pickering & Company; and when the transfer of the property was effected the deed was
made directly to this company. As Elser was the principal capitalist in the enterprise he received by far
the greater number of the shares issued, his portion amount in the beginning to 3,290 shares.
While these negotiations were coming to a head, Elser contemplated and hoped that Lyons might be
induced to come in with him and supply part of the means necessary to carry the enterprise through. In
this connection it appears that on May 20, 1920, Elser wrote Lyons a letter, informing him that he had
made an offer for a big subdivision and that, if it should be acquired and Lyons would come in, the two
would be well fixed. (Exhibit M-5.) On June 3, 1920, eight days before the first option expired, Elser
cabled Lyons that he had bought the San Juan Estate and thought it advisable for Lyons to resign
(Exhibit M-13), meaning that he should resign his position with the mission board in New York. On the
same date he wrote Lyons a letter explaining some details of the purchase, and added "have advised in
my cable that you resign and I hope you can do so immediately and will come and join me on the lines
we have so often spoken about. . . . There is plenty of business for us all now and I believe we have
started something that will keep us going for some time." In one or more communications prior to this,
Elser had sought to impress Lyons with the idea that he should raise all the money he could for the
purpose of giving the necessary assistance in future deals in real estate.

The enthusiasm of Elser did not communicate itself in any marked degree to Lyons, and found him
averse from joining in the purchase of the San Juan Estate. In fact upon this visit of Lyons to the United
States a grave doubt had arisen as to whether he would ever return to Manila, and it was only in the
summer of 1920 that the board of missions of his church prevailed upon him to return to Manila and
resume his position as managing treasurer and one of its trustees. Accordingly, on June 21, 1920,
Lyons wrote a letter from New York thanking Elser for his offer to take Lyons into his new project and
adding that from the standpoint of making money, he had passed up a good thing.
One source of embarrassment which had operated on Lyson to bring him to the resolution to stay out of
this venture, was that the board of mission was averse to his engaging in business activities other than
those in which the church was concerned; and some of Lyons' missionary associates had apparently
been criticizing his independent commercial activities. This fact was dwelt upon in the letter abovementioned. Upon receipt of this letter Elser was of course informed that it would be out of the question
to expect assistance from Lyons in carrying out the San Juan project. No further efforts to this end were
therefore made by Elser.
When Elser was concluding the transaction for the purchase of the San Juan Estate, his book showed
that he was indebted to Lyons to the extent of, possibly, P11,669.72, which had accrued to Lyons from
profits and earnings derived from other properties; and when the J. K. Pickering & Company was
organized and stock issued, Elser indorsed to Lyons 200 of the shares allocated to himself, as he then
believed that Lyons would be one of his associates in the deal. It will be noted that the par value of
these 200 shares was more than P8,000 in excess of the amount which Elser in fact owed to Lyons;
and when the latter returned to the Philippine Islands, he accepted these shares and sold them for his
own benefit. It seems to be supposed in the appellant's brief that the transfer of these shares to Lyons
by Elser supplies some sort of basis for the present action, or at least strengthens the considerations
involved in a feature of the case to be presently explained. This view is manifestly untenable, since the
ratification of the transaction by Lyons and the appropriation by him of the shares which were issued to
him leaves no ground whatever for treating the transaction as a source of further equitable rights in
Lyons. We should perhaps add that after Lyons' return to the Philippine Islands he acted for a time as
one of the members of the board of directors of the J. K. Pickering & Company, his qualification for this
office being derived precisely from the ownership of these shares.
We now turn to the incident which supplies the main basis of this action. It will be remembered that,
when Elser obtained the loan of P50,000 to complete the amount needed for the first payment on the
San Juan Estate, the lender, Uy Siuliong, insisted that he should procure the signature of the Fidelity &
Surety Co. on the note to be given for said loan. But before signing the note with Elser and his
associates, the Fidelity & Surety Co. insisted upon having security for the liability thus assumed by it. To
meet this requirements Elser mortgaged to the Fidelity & Surety Co. the equity of redemption in the
property owned by himself and Lyons on Carriedo Street. This mortgage was executed on June 30,
1920, at which time Elser expected that Lyons would come in on the purchase of the San Juan Estate.
But when he learned from the letter from Lyons of July 21, 1920, that the latter had determined not to
come into this deal, Elser began to cast around for means to relieve the Carriedo property of the

23

encumbrance which he had placed upon it. For this purpose, on September 9, 1920, he addressed a
letter to the Fidelity & Surety Co., asking it to permit him to substitute a property owned by himself at
644 M. H. del Pilar Street, Manila, and 1,000 shares of the J. K. Pickering & Company, in lieu of the
Carriedo property, as security. The Fidelity & Surety Co. agreed to the proposition; and on September
15, 1920, Elser executed in favor of the Fidelity & Surety Co. a new mortgage on the M. H. del Pillar
property and delivered the same, with 1,000 shares of J. K. Pickering & Company, to said company. The
latter thereupon in turn executed a cancellation of the mortgage on the Carriedo property and delivered
it to Elser. But notwithstanding the fact that these documents were executed and delivered, the new
mortgage and the release of the old were never registered; and on September 25, 1920, thereafter,
Elser returned the cancellation of the mortgage on the Carriedo property and took back from the Fidelity
& Surety Co. the new mortgage on the M. H. del Pilar property, together with the 1,000 shares of the J.
K. Pickering & Company which he had delivered to it.
The explanation of this change of purpose is undoubtedly to be found in the fact that Lyons had arrived
in Manila on September 21, 1920, and shortly thereafter, in the course of a conversation with Elser told
him to let the Carriedo mortgage remain on the property ("Let the Carriedo mortgage ride"). Mrs. Elser
testified to the conversation in which Lyons used the words above quoted, and as that conversation
supplies the most reasonable explanation of Elser's recession from his purpose of relieving the Carriedo
property, the trial court was, in our opinion, well justified in accepting as a proven fact the consent of
Lyons for the mortgage to remain on the Carriedo property. This concession was not only reasonable
under the circumstances, in view of the abundant solvency of Elser, but in view of the further fact that
Elser had given to Lyons 200 shares of the stock of the J. K. Pickering & Co., having a value of nearly
P8,000 in excess of the indebtedness which Elser had owed to Lyons upon statement of account. The
trial court found in effect that the excess value of these shares over Elser's actual indebtedness was
conceded by Elser to Lyons in consideration of the assistance that had been derived from the mortgage
placed upon Lyon's interest in the Carriedo property. Whether the agreement was reached exactly upon
this precise line of thought is of little moment, but the relations of the parties had been such that it was
to be expected that Elser would be generous; and he could scarcely have failed to take account of the
use he had made of the joint property of the two.
As the development of the San Juan Estate was a success from the start, Elser paid the note of
P50,000 to Uy Siuliong on January 18, 1921, although it was not due until more than five months later. It
will thus be seen that the mortgaging of the Carriedo property never resulted in damage to Lyons to the
extent of a single cent; and although the court refused to allow the defendant to prove the Elser was
solvent at this time in an amount much greater than the entire encumbrance placed upon the property, it
is evident that the risk imposed upon Lyons was negligible. It is also plain that no money actually
deriving from this mortgage was ever applied to the purchase of the San Juan Estate. What really
happened was the Elser merely subjected the property to a contingent liability, and no actual liability
ever resulted therefrom. The financing of the purchase of the San Juan Estate, apart from the modest
financial participation of his three associates in the San Juan deal, was the work of Elser accomplished
entirely upon his own account.

The case for the plaintiff supposes that, when Elser placed a mortgage for P50,000 upon the equity of
redemption in the Carriedo property, Lyons, as half owner of said property, became, as it were,
involuntarily the owner of an undivided interest in the property acquired partly by that money; and it is
insisted for him that, in consideration of this fact, he is entitled to the four hundred forty-six and twothirds shares of J. K. Pickering & Company, with the earnings thereon, as claimed in his complaint.
Lyons tells us that he did not know until after Elser's death that the money obtained from Uy Siuliong in
the manner already explained had been used to held finance the purchase of the San Juan Estate. He
seems to have supposed that the Carried property had been mortgaged to aid in putting through
another deal, namely, the purchase of a property referred to in the correspondence as the "Ronquillo
property"; and in this connection a letter of Elser of the latter part of May, 1920, can be quoted in which
he uses this language:
As stated in cablegram I have arranged for P50,000 loan on Carriedo property. Will use part of
the money for Ronquillo buy (P60,000) if the owner comes through.
Other correspondence shows that Elser had apparently been trying to buy the Ronquillo property, and
Lyons leads us to infer that he thought that the money obtained by mortgaging the Carriedo property
had been used in the purchase of this property. It doubtedless appeared so to him in the retrospect, but
certain consideration show that he was inattentive to the contents of the quotation from the letter above
given. He had already been informed that, although Elser was angling for the Ronquillo property, its
price had gone up, thus introducing a doubt as to whether he could get it; and the quotation above given
shows that the intended use of the money obtained by mortgaging the Carriedo property was that only
part of the P50,000 thus obtained would be used in this way, if the deal went through. Naturally, upon
the arrival of Lyons in September, 1920, one of his first inquiries would have been, if he did not know
before, what was the status of the proposed trade for the Ronquillo property.
Elser's widow and one of his clerks testified that about June 15, 1920, Elser cabled Lyons something to
this effect;: "I have mortgaged the property on Carriedo Street, secured by my personal note. You are
amply protected. I wish you to join me in the San Juan Subdivision. Borrow all money you can." Lyons
says that no such cablegram was received by him, and we consider this point of fact of little moment,
since the proof shows that Lyons knew that the Carriedo mortgage had been executed, and after his
arrival in Manila he consented for the mortgage to remain on the property until it was paid off, as shortly
occurred. It may well be that Lyons did not at first clearly understand all the ramifications of the

24

situation, but he knew enough, we think, to apprise him of the material factors in the situation, and we
concur in the conclusion of the trial court that Elser did not act in bad faith and was guilty of no fraud.
In the purely legal aspect of the case, the position of the appellant is, in our opinion, untenable. If Elser
had used any money actually belonging to Lyons in this deal, he would under article 1724 of the Civil
Code and article 264 of the Code of Commerce, be obligated to pay interest upon the money so applied
to his own use. Under the law prevailing in this jurisdiction a trust does not ordinarily attach with respect
to property acquired by a person who uses money belonging to another (Martinez vs. Martinez, 1 Phil.,
647; Enriquez vs. Olaguer, 25 Phil., 641.). Of course, if an actual relation of partnership had existed in
the money used, the case might be difference; and much emphasis is laid in the appellant's brief upon
the relation of partnership which, it is claimed, existed. But there was clearly no general relation of
partnership, under article 1678 of the Civil Code. It is clear that Elser, in buying the San Juan Estate,
was not acting for any partnership composed of himself and Lyons, and the law cannot be distorted into
a proposition which would make Lyons a participant in this deal contrary to his express determination.
It seems to be supposed that the doctrines of equity worked out in the jurisprudence of England and the
United States with reference to trust supply a basis for this action. The doctrines referred to operate,
however, only where money belonging to one person is used by another for the acquisition of property
which should belong to both; and it takes but little discernment to see that the situation here involved is
not one for the application of that doctrine, for no money belonging to Lyons or any partnership
composed of Elser and Lyons was in fact used by Elser in the purchase of the San Juan Estate. Of
course, if any damage had been caused to Lyons by the placing of the mortgage upon the equity of
redemption in the Carriedo property, Elser's estate would be liable for such damage. But it is evident
that Lyons was not prejudice by that act.
The appellee insist that the trial court committed error in admitting the testimony of Lyons upon matters
that passed between him and Elser while the latter was still alive. While the admission of this testimony
was of questionable propriety, any error made by the trial court on this point was error without injury,
and the determination of the question is not necessary to this decision. We therefore pass the point
without further discussion.
The judgment appealed from will be affirmed, and it is so ordered, with costs against the appellant.