G.R. No.

127405

Republic of the Philippines

SUPREME COURT
Manila

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

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

FIRST DIVISION

- You mean Peter Lo is the financier?

- Yes, he is the financier.

September 20, 2001

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,

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

- What do you mean by guarantor?

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

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

- Peter Lo is based in Singapore.

Q - And the defendant William Belo is merely the guarantor of Geminesse

Enterprise, am I correct?
A

- Yes, sir2

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

WHEREFORE, based on the foregoing, the Motion for Reconsideration of petitioners is

PARTIALLY GRANTED. The Regional Trial Court of Makati is hereby ordered to DISMISS the
complaint, docketed as Civil Case No. 88-509, as against petitioner William T. Belo only. The
sum of P208,250.00 shall be deducted from whatever amount petitioner Marjorie Tocao shall be
held liable to pay respondent after the normal accounting of the partnership affairs.
SO ORDERED.
Davide, Jr., Kapunan, and Pardo; JJ., concur.
Puno, J., on official leave.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 134559 December 9, 1999

ANTONIA TORRES assisted by her husband, ANGELO TORRES; and EMETERIA
BARING, petitioners,
vs.
COURT OF APPEALS and MANUEL TORRES, respondents.

According to petitioners, the project failed because of "respondent's lack of funds or means and
skills." They add that respondent used the loan not for the development of the subdivision, but in
furtherance of his own company, Universal Umbrella Company.
On the other hand, respondent alleged that he used the loan to implement the Agreement. With
the said amount, he was able to effect the survey and the subdivision of the lots. He secured the
Lapu Lapu City Council's approval of the subdivision project which he advertised in a local
newspaper. He also caused the construction of roads, curbs and gutters. Likewise, he entered
into a contract with an engineering firm for the building of sixty low-cost housing units and
actually even set up a model house on one of the subdivision lots. He did all of these for a total
expense of P85,000.
Respondent claimed that the subdivision project failed, however, because petitioners and their
relatives had separately caused the annotations of adverse claims on the title to the land, which
eventually scared away prospective buyers. Despite his requests, petitioners refused to cause the
clearing of the claims, thereby forcing him to give up on the project. 5

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

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

The Case
Ruling of the Court of Appeals
The Petition for Review on Certiorari before us assails the March 5, 1998 Decision 1 of the Court
of Appeals 2 (CA) in CA-GR CV No. 42378 and its June 25, 1998 Resolution denying
reconsideration. The assailed Decision affirmed the ruling of the Regional Trial Court (RTC) of
Cebu City in Civil Case No. R-21208, which disposed as follows:
WHEREFORE, for all the foregoing considerations, the Court, finding for
the defendant and against the plaintiffs, orders the dismissal of the plaintiffs
complaint. The counterclaims of the defendant are likewise ordered
dismissed. No pronouncement as to costs. 3
The Facts
Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture
agreement" with Respondent Manuel Torres for the development of a parcel of land into a
subdivision. Pursuant to the contract, they executed a Deed of Sale covering the said parcel of
land in favor of respondent, who then had it registered in his name. By mortgaging the property,
respondent obtained from Equitable Bank a loan of P40,000 which, under the Joint Venture
Agreement, was to be used for the development of the subdivision. 4 All three of them also agreed
to share the proceeds from the sale of the subdivided lots.

In affirming the trial court, the Court of Appeals held that petitioners and respondent had
formed a partnership for the development of the subdivision. Thus, they must bear the loss
suffered by the partnership in the same proportion as their share in the profits stipulated in the
contract. Disagreeing with the trial court's pronouncement that losses as well as profits in a joint
venture should be distributed equally, 7 the CA invoked Article 1797 of the Civil Code which
provides:
Art. 1797 The losses and profits shall be distributed in conformity with the
agreement. If only the share of each partner in the profits has been agreed
upon, the share of each in the losses shall be in the same proportion.
The CA elucidated further:
In the absence of stipulation, the share of each partner in the profits and
losses shall be in proportion to what he may have contributed, but the
industrial partner shall not be liable for the losses. As for the profits, the
industrial partner shall receive such share as may be just and equitable
under the circumstances. If besides his services he has contributed capital,
he shall also receive a share in the profits in proportion to his capital.

The project did not push through, and the land was subsequently foreclosed by the bank.
The Issue

Petitioners impute to the Court of Appeals the following error:

. . . [The] Court of Appeals erred in concluding that the transaction
. . . between the petitioners and respondent was that of a joint
venture/partnership, ignoring outright the provision of Article 1769, and
other related provisions of the Civil Code of the Philippines. 8
The Court's Ruling
The Petition is bereft of merit.
Main Issue:
Existence of a Partnership
Petitioners deny having formed a partnership with respondent. They contend that the Joint
Venture Agreement and the earlier Deed of Sale, both of which were the bases of the appellate
court's finding of a partnership, were void.
In the same breath, however, they assert that under those very same contracts, respondent is
liable for his failure to implement the project. Because the agreement entitled them to receive 60
percent of the proceeds from the sale of the subdivision lots, they pray that respondent pay them
damages equivalent to 60 percent of the value of the property. 9
The pertinent portions of the Joint Venture Agreement read as follows:
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT, is made and entered into at Cebu City, Philippines, this
5th day of March, 1969, by and between MR. MANUEL R. TORRES, . . . the
FIRST PARTY, likewise, MRS. ANTONIA B. TORRES, and MISS
EMETERIA BARING, . . . the SECOND PARTY:
WITNESSETH:
That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY,
this property located at Lapu-Lapu City, Island of Mactan, under Lot No.
1368 covering TCT No. T-0184 with a total area of 17,009 square meters, to
be sub-divided by the FIRST PARTY;
Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of:
TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency upon the
execution of this contract for the property entrusted by the SECOND
PARTY, for sub-division projects and development purposes;

NOW THEREFORE, for and in consideration of the above covenants and

promises herein contained the respective parties hereto do hereby stipulate
and agree as follows:
ONE: That the SECOND PARTY signed an absolute Deed of Sale . . . dated
March 5, 1969, in the amount of TWENTY FIVE THOUSAND FIVE
HUNDRED THIRTEEN & FIFTY CTVS. (P25,513.50) Philippine Currency,
for 1,700 square meters at ONE [PESO] & FIFTY CTVS. (P1.50) Philippine
Currency, in favor of the FIRST PARTY, but the SECOND PARTY did not
actually receive the payment.
SECOND: That the SECOND PARTY, had received from the FIRST PARTY,
the necessary amount of TWENTY THOUSAND (P20,000.00) pesos,
Philippine currency, for their personal obligations and this particular
amount will serve as an advance payment from the FIRST PARTY for the
property mentioned to be sub-divided and to be deducted from the sales.
THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY,
the interest and the principal amount involving the amount of TWENTY
THOUSAND (P20,000.00) Pesos, Philippine Currency, until the subdivision 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 subdivision project should be paid by the FIRST PARTY, exclusively and all the
expenses will not be deducted from the sales after the development of the
sub-division project.
FIFTH: That the sales of the sub-divided lots will be divided into SIXTY
PERCENTUM 60% for the SECOND PARTY and FORTY PERCENTUM
40% for the FIRST PARTY, and additional profits or whatever income
deriving from the sales will be divided equally according to the . . .
percentage [agreed upon] by both parties.
SIXTH: That the intended sub-division project of the property involved will
start the work and all improvements upon the adjacent lots will be
negotiated in both parties['] favor and all sales shall [be] decided by both
parties.
SEVENTH: That the SECOND PARTIES, should be given an option to get
back the property mentioned provided the amount of TWENTY
THOUSAND (P20,000.00) Pesos, Philippine Currency, borrowed by the
SECOND PARTY, will be paid in full to the FIRST PARTY, including all
necessary improvements spent by the FIRST PARTY, and-the FIRST PARTY
will be given a grace period to turnover the property mentioned above.

That this AGREEMENT shall be binding and obligatory to the parties who
executed same freely and voluntarily for the uses and purposes therein
stated. 10
A reading of the terms embodied in the Agreement indubitably shows the existence of a
partnership pursuant to Article 1767 of the Civil Code, which provides:
Art. 1767. By the contract of partnership two or more persons bind
themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.
Under the above-quoted Agreement, petitioners would contribute property to the partnership in
the form of land which was to be developed into a subdivision; while respondent would give, in
addition to his industry, the amount needed for general expenses and other costs. Furthermore,
the income from the said project would be divided according to the stipulated percentage.
Clearly, the contract manifested the intention of the parties to form a partnership. 11
It should be stressed that the parties implemented the contract. Thus, petitioners transferred the
title to the land to facilitate its use in the name of the respondent. On the other hand, respondent
caused the subject land to be mortgaged, the proceeds of which were used for the survey and the
subdivision of the land. As noted earlier, he developed the roads, the curbs and the gutters of the
subdivision and entered into a contract to construct low-cost housing units on the property.
Respondent's actions clearly belie petitioners' contention that he made no contribution to the
partnership. Under Article 1767 of the Civil Code, a partner may contribute not only money or
property, but also industry.
Petitioners Bound by

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.

Terms of Contract
Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been
expressly stipulated, but also to all necessary consequences thereof, as follows:
Art. 1315. Contracts are perfected by mere consent, and from that moment
the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their nature,
may be in keeping with good faith, usage and law.
It is undisputed that petitioners are educated and are thus presumed to have understood the
terms of the contract they voluntarily signed. If it was not in consonance with their expectations,
they should have objected to it and insisted on the provisions they wanted.
Courts are not authorized to extricate parties from the necessary consequences of their acts, and
the fact that the contractual stipulations may turn out to be financially disadvantageous will not
relieve parties thereto of their obligations. They cannot now disavow the relationship formed
from such agreement due to their supposed misunderstanding of its terms.

In short, the alleged nullity of the partnership will not prevent courts from considering the Joint
Venture Agreement an ordinary contract from which the parties' rights and obligations to each
other may be inferred and enforced.
Partnership Agreement Not the Result
of an Earlier Illegal Contract
Petitioners also contend that the Joint Venture Agreement is void under Article 1422 14 of the
Civil Code, because it is the direct result of an earlier illegal contract, which was for the sale of
the land without valid consideration.
This argument is puerile. The Joint Venture Agreement clearly states that the consideration for
the sale was the expectation of profits from the subdivision project. Its first stipulation states
that petitioners did not actually receive payment for the parcel of land sold to respondent.
Consideration, more properly denominated as cause, can take different forms, such as the
prestation or promise of a thing or service by another. 15

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

liable for debts incurred by or on behalf of the partnership. The liability for a contract entered
into on behalf of an unincorporated association or ostensible corporation may lie in a person
who may not have directly transacted on its behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:

Liability of the Parties

Claiming that rerpondent was solely responsible for the failure of the subdivision project,
petitioners maintain that he should be made to pay damages equivalent to 60 percent of the
value of the property, which was their share in the profits under the Joint Venture Agreement.
We are not persuaded. True, the Court of Appeals held that petitioners' acts were not the cause of
the failure of the project. 16 But it also ruled that neither was respondent responsible
therefor. 17 In imputing the blame solely to him, petitioners failed to give any reason why we
should disregard the factual findings of the appellate court relieving him of fault. Verily, factual
issues cannot be resolved in a petition for review under Rule 45, as in this case. Petitioners have
not alleged, not to say shown, that their Petition constitutes one of the exceptions to this
doctrine. 18 Accordingly, we find no reversible error in the CA's ruling that petitioners are not
entitled to damages.
WHEREFORE, the Perition is hereby DENIED and the challenged Decision AFFIRMED. Costs
against petitioners.
SO ORDERED
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to borrow money to pursue a
business and to divide the profits or losses that may arise therefrom, even if it is shown that they
have not contributed any capital of their own to a "common fund." Their contribution may be in
the form of credit or industry, not necessarily cash or fixed assets. Being partner, they are all

WHEREFORE, [there being] no reversible error in the appealed decision,

the same is hereby affirmed. 2
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed
by the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by
this Court on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts,
subject to the modifications as hereinafter made by reason of the special and
unique facts and circumstances and the proceedings that transpired during
the trial of this case;
a. P532,045.00 representing [the] unpaid purchase
price of the fishing nets covered by the Agreement plus
P68,000.00 representing the unpaid price of the floats
not covered by said Agreement;
b. 12% interest per annum counted from date of
plaintiff's invoices and computed on their respective
amounts as follows:
i. Accrued interest of P73,221.00 on
Invoice No. 14407 for P385,377.80
dated February 9, 1990;
ii. Accrued interest for P27,904.02
on Invoice No. 14413 for
P146,868.00 dated February 13,
1990;
iii. Accrued interest of P12,920.00
on Invoice No. 14426 for

P68,000.00 dated February 19,

1990;
c. P50,000.00 as and for attorney's fees, plus
P8,500.00 representing P500.00 per appearance in
court;

to retain possession and ownership of the nets and floats and for
the reimbursement of the P900,000.00 deposited by it with the
Clerk of Court.
SO ORDERED. 3
The Facts

d. P65,000.00 representing P5,000.00 monthly rental

for storage charges on the nets counted from September
20, 1990 (date of attachment) to September 12, 1991
(date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal
obligation or for the unpaid price of nets and floats in the amount
of P532,045.00 and P68,000.00, respectively, or for the total
amount P600,045.00, this Court noted that these items were
attached to guarantee any judgment that may be rendered in favor
of the plaintiff but, upon agreement of the parties, and, to avoid
further deterioration of the nets during the pendency of this case,
it was ordered sold at public auction for not less than
P900,000.00 for which the plaintiff was the sole and winning
bidder. The proceeds of the sale paid for by plaintiff was deposited
in court. In effect, the amount of P900,000.00 replaced the
attached property as a guaranty for any judgment that plaintiff
may be able to secure in this case with the ownership and
possession of the nets and floats awarded and delivered by the
sheriff to plaintiff as the highest bidder in the public auction sale.
It has also been noted that ownership of the nets [was] retained
by the plaintiff until full payment [was] made as stipulated in the
invoices; hence, in effect, the plaintiff attached its own properties.
It [was] for this reason also that this Court earlier ordered the
attachment bond filed by plaintiff to guaranty damages to
defendants to be cancelled and for the P900,000.00 cash bidded
and paid for by plaintiff to serve as its bond in favor of
defendants.
From the foregoing, it would appear therefore that whatever
judgment the plaintiff may be entitled to in this case will have to
be satisfied from the amount of P900,000.00 as this amount
replaced the attached nets and floats. Considering, however, that
the total judgment obligation as computed above would amount
to only P840,216.92, it would be inequitable, unfair and unjust to
award the excess to the defendants who are not entitled to
damages and who did not put up a single centavo to raise the
amount of P900,000.00 aside from the fact that they are not the
owners of the nets and floats. For this reason, the defendants are
hereby relieved from any and all liabilities arising from the
monetary judgment obligation enumerated above and for plaintiff

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a
Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the
Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were
engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory
to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of
floats worth P68,000 were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents
filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of
preliminary attachment. The suit was brought against the three in their capacities as general
partners, on the allegation that "Ocean Quest Fishing Corporation" was a nonexistent
corporation as shown by a Certification from the Securities and Exchange Commission. 5 On
September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff
enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the
Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and
requesting a reasonable time within which to pay. He also turned over to respondent some of the
nets which were in his possession. Peter Yao filed an Answer, after which he was deemed to have
waived his right to cross-examine witnesses and to present evidence on his behalf, because of his
failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment. 6 The trial
court maintained the Writ, and upon motion of private respondent, ordered the sale of the
fishing nets at a public auction. Philippine Fishing Gear Industries won the bidding and
deposited with the said court the sales proceeds of P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear
Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general
partners, were jointly liable to pay respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the
three 9 in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation
of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e)
damages.10 The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to
have the four (4) vessels sold in the amount of
P5,750,000.00 including the fishing net. This
P5,750,000.00 shall be applied as full payment for

P3,250,000.00 in favor of JL Holdings Corporation

and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be
sold at a higher price than P5,750,000.00 whatever will
be the excess will be divided into 3: 1/3 Lim Tong Lim;
1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than
P5,750,000.00 whatever the deficiency shall be
shouldered and paid to JL Holding Corporation by 1/3
Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. 11
The trial court noted that the Compromise Agreement was silent as to the nature of their
obligations, but that joint liability could be presumed from the equal distribution of the profit
and loss. 21
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS

ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE
BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF
APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND
ATTACHMENT OF PETITIONER LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats from
respondent, the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao
could be deemed to have entered into a partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:

Ruling of the Court of Appeals

Existence of a Partnership

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

and Petitioner's Liability

The evidence establishes that all the defendants including herein appellant
Lim Tong Lim undertook a partnership for a specific undertaking, that is for
commercial fishing . . . . Oviously, the ultimate undertaking of the
defendants was to divide the profits among themselves which is what a
partnership essentially is . . . . By a contract of partnership, two or more
persons bind themselves to contribute money, property or industry to a
common fund with the intention of dividing the profits among themselves
(Article 1767, New Civil Code). 13
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the
following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A
COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER LIM
ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP
AGREEMENT EXISTED AMONG THEM.

In arguing that he should not be held liable for the equipment purchased from respondent,
petitioner controverts the CA finding that a partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its finding on the Compromise Agreement alone.
Furthermore, he disclaims any direct participation in the purchase of the nets, alleging that the
negotiations were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he was a lessor, not a
partner, of Chua and Yao, for the "Contract of Lease " dated February 1, 1990, showed that he
had merely leased to the two the main asset of the purported partnership the fishing boat F/B
Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the
gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts
clearly showed that there existed a partnership among Chua, Yao and him, pursuant to Article
1767 of the Civil Code which provides:
Art. 1767 By the contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the
following factual findings: 15

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yao's
partner;
(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed
to acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum
of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner
Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which
executed a Deed of Sale over these two (2) boats in favor of Petitioner Lim
Tong Lim only to serve as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping,
repairing, dry docking and other expenses for the boats would be shouldered
by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again extended a
loan to the partnership in the amount of P1 million secured by a check,
because of which, Yao and Chua entrusted the ownership papers of two
other boats, Chua's FB Lady Anne Mel and Yao's FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio
Chua bought nets from Respondent Philippine Fishing Gear, in behalf of
"Ocean Quest Fishing Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon
RTC, Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for
(a) declaration of nullity of commercial documents; (b) reformation of
contracts; (c) declaration of ownership of fishing boats; (4) injunction; and
(e) damages.
(9) That the case was amicably settled through a Compromise Agreement
executed between the parties-litigants the terms of which are already
enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to
engage in a fishing business, which they started by buying boats worth P3.35 million, financed by
a loan secured from Jesus Lim who was petitioner's brother. In their Compromise Agreement,
they subsequently revealed their intention to pay the loan with the proceeds of the sale of the
boats, and to divide equally among them the excess or loss. These boats, the purchase and the
repair of which were financed with borrowed money, fell under the term "common fund" under
Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an
intangible like credit or industry. That the parties agreed that any loss or profit from the sale and
operation of the boats would be divided equally among them also shows that they had indeed
formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also
to that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were
obviously acquired in furtherance of their business. It would have been inconceivable for Lim to
involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment,
without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They purchased the boats, which constituted the
main assets of the partnership, and they agreed that the proceeds from the sales and operations
thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only
questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this
Court, absent any cogent proof that the present action is embraced by one of the exceptions to
the rule. 16 In assailing the factual findings of the two lower courts, petitioner effectively goes
beyond the bounds of a petition for review under Rule 45.
Compromise Agreement
Not the Sole Basis of Partnership
Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership
was the Compromise Agreement. He also claims that the settlement was entered into only to end
the dispute among them, but not to adjudicate their preexisting rights and obligations. His
arguments are baseless. The Agreement was but an embodiment of the relationship extant
among the parties prior to its execution.
A proper adjudication of claimants' rights mandates that courts must review and thoroughly
appraise all relevant facts. Both lower courts have done so and have found, correctly, a
preexisting partnership among the parties. In implying that the lower courts have decided on the
basis of one piece of document alone, petitioner fails to appreciate that the CA and the RTC
delved into the history of the document and explored all the possible consequential
combinations in harmony with law, logic and fairness. Verily, the two lower courts' factual
findings mentioned above nullified petitioner's argument that the existence of a partnership was
based only on the Compromise Agreement.
Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua
and Yao, not a partner in the fishing venture. His argument allegedly finds support in the
Contract of Lease and the registration papers showing that he was the owner of the boats,
including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to the
sale of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided

among the three of them. No lessor would do what petitioner did. Indeed, his consent to the sale
proved that there was a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and
Yao, in which debts were undertaken in order to finance the acquisition and the upgrading of the
vessels which would be used in their fishing business. The sale of the boats, as well as the
division among the three of the balance remaining after the payment of their loans, proves
beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an
asset of the partnership. It is not uncommon to register the properties acquired from a loan in
the name of the person the lender trusts, who in this case is the petitioner himself. After all, he is
the brother of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd for petitioner to sell his property to pay
a debt he did not incur, if the relationship among the three of them was merely that of lessorlessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed
only to Chua and Yao, and not to him. Again, we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as
a result thereof: Provided however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on
any tort committed by it as such, it shall not be allowed to use as a defense
its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot
resist performance thereof on the ground that there was in fact no
corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. "The reason behind this doctrine is obvious an
unincorporated association has no personality and would be incompetent to act and appropriate
for itself the power and attributes of a corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an agent without authority or without a
principal is himself regarded as the principal, possessed of all the right and subject to all the
liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent. 17

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third
party. In the first instance, an unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a suit against it by a third
person who relied in good faith on such representation. It cannot allege lack of personality to be
sued to evade its responsibility for a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its
corporate existence in a suit brought against the alleged corporation. In such case, all those who
benefited from the transaction made by the ostensible corporation, despite knowledge of its legal
defects, may be held liable for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid
for the nets it sold. The only question here is whether petitioner should be held jointly 18 liable
with Chua and Yao. Petitioner contests such liability, insisting that only those who dealt in the
name of the ostensible corporation should be held liable. Since his name does not appear on any
of the contracts and since he never directly transacted with the respondent corporation, ergo, he
cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the partnership. He in fact questions the
attachment of the nets, because the Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in representation of it. Clearly, under
the law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it
to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However,
having reaped the benefits of the contract entered into by persons with whom he previously had
an existing relationship, he is deemed to be part of said association and is covered by the scope
of the doctrine of corporation by estoppel. We reiterate the ruling of the Court in Alonso
v. Villamor: 19
A litigation is not a game of technicalities in which one, more deeply
schooled and skilled in the subtle art of movement and position, entraps and
destroys the other. It is, rather, a contest in which each contending party
fully and fairly lays before the court the facts in issue and then, brushing
aside as wholly trivial and indecisive all imperfections of form and
technicalities of procedure, asks that justice be done upon the merits.
Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and becomes its great
hindrance and chief enemy, deserves scant consideration from courts. There
should be no vested rights in technicalities.
Third Issue:

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

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 154486

On April 29, 1957, the spouses Buenaventura and Conchita Remotigue executed a document
wherein they acknowledged that while registered only in Buenaventura Remotigues name, they
were not the only owners of the capital of the businesses Manila Athletic Supply (712 Raon
Street, Manila), Remotigue Trading (Calle Real, Iloilo City) and Remotigue Trading (Cotabato
City). In this same "Acknowledgement of Participating Capital," they stated the participating
capital of their co-owners as of the year 1952, with Antonieta Jarantillas stated as eight
thousand pesos (P8,000.00) and Federico Jarantilla, Jr.s as five thousand pesos (P5,000.00).12

December 1, 2010

FEDERICO JARANTILLA, JR., Petitioner,

vs.
ANTONIETA JARANTILLA, BUENAVENTURA REMOTIGUE, substituted by
CYNTHIA REMOTIGUE, DOROTEO JARANTILLA and TOMAS
JARANTILLA, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:
This petition for review on certiorari1 seeks to modify the Decision2 of the Court of Appeals
dated July 30, 2002 in CA-G.R. CV No. 40887, which set aside the Decision 3 dated December 18,
1992 of the Regional Trial Court (RTC) of Quezon City, Branch 98 in Civil Case No. Q-50464.
The pertinent facts are as follows:
The spouses Andres Jarantilla and Felisa Jaleco were survived by eight children: Federico,
Delfin, Benjamin, Conchita, Rosita, Pacita, Rafael and Antonieta. 4 Petitioner Federico Jarantilla,
Jr. is the grandchild of the late Jarantilla spouses by their son Federico Jarantilla, Sr. and his
wife Leda Jamili.5 Petitioner also has two other brothers: Doroteo and Tomas Jarantilla.
Petitioner was one of the defendants in the complaint before the RTC while Antonieta Jarantilla,
his aunt, was the plaintiff therein. His co-respondents before he joined his aunt Antonieta in her
complaint, were his late aunt Conchita Jarantillas husband Buenaventura Remotigue, who died
during the pendency of the case, his cousin Cynthia Remotigue, the adopted daughter of
Conchita Jarantilla and Buenaventura Remotigue, and his brothers Doroteo and Tomas
Jarantilla.6
In 1948, the Jarantilla heirs extrajudicially partitioned amongst themselves the real properties of
their deceased parents.7 With the exception of the real property adjudicated to Pacita Jarantilla,
the heirs also agreed to allot the produce of the said real properties for the years 1947-1949 for
the studies of Rafael and Antonieta Jarantilla.8
In the same year, the spouses Rosita Jarantilla and Vivencio Deocampo entered into an
agreement with the spouses Buenaventura Remotigue and Conchita Jarantilla to provide mutual
assistance to each other by way of financial support to any commercial and agricultural activity
on a joint business arrangement. This business relationship proved to be successful as they were
able to establish a manufacturing and trading business, acquire real properties, and construct
buildings, among other things.9 This partnership ended in 1973 when the parties, in an
"Agreement,"10 voluntarily agreed to completely dissolve their "joint business
relationship/arrangement."11

The present case stems from the amended complaint13 dated April 22, 1987 filed by Antonieta
Jarantilla against Buenaventura Remotigue, Cynthia Remotigue, Federico Jarantilla, Jr.,
Doroteo Jarantilla and Tomas Jarantilla, for the accounting of the assets and income of the coownership, for its partition and the delivery of her share corresponding to eight percent (8%),
and for damages. Antonieta claimed that in 1946, she had entered into an agreement with
Conchita and Buenaventura Remotigue, Rafael Jarantilla, and Rosita and Vivencio Deocampo to
engage in business. Antonieta alleged that the initial contribution of property and money came
from the heirs inheritance, and her subsequent annual investment of seven thousand five
hundred pesos (P7,500.00) as additional capital came from the proceeds of her farm. Antonieta
also alleged that from 1946-1969, she had helped in the management of the business they coowned without receiving any salary. Her salary was supposedly rolled back into the business as
additional investments in her behalf. Antonieta further claimed co-ownership of certain
properties14 (the subject real properties) in the name of the defendants since the only way the
defendants could have purchased these properties were through the partnership as they had no
other source of income.
The respondents, including petitioner herein, in their Answer, 15 denied having formed a
partnership with Antonieta in 1946. They claimed that she was in no position to do so as she was
still in school at that time. In fact, the proceeds of the lands they partitioned were devoted to her
studies. They also averred that while she may have helped in the businesses that her older sister
Conchita had formed with Buenaventura Remotigue, she was paid her due salary. They did not
deny the existence and validity of the "Acknowledgement of Participating Capital" and in fact
used this as evidence to support their claim that Antonietas 8% share was limited to the
businesses enumerated therein. With regard to Antonietas claim in their other corporations and
businesses, the respondents said these should also be limited to the number of her shares as
specified in the respective articles of incorporation. The respondents denied using the
partnerships income to purchase the subject real properties and said that the certificates of title
should be binding on her.16
During the course of the trial at the RTC, petitioner Federico Jarantilla, Jr., who was one of the
original defendants, entered into a compromise agreement 17 with Antonieta Jarantilla wherein
he supported Antonietas claims and asserted that he too was entitled to six percent (6%) of the
supposed partnership in the same manner as Antonieta was. He prayed for a favorable judgment
in this wise:
Defendant Federico Jarantilla, Jr., hereby joins in plaintiffs prayer for an accounting from the
other defendants, and the partition of the properties of the co-ownership and the delivery to the
plaintiff and to defendant Federico Jarantilla, Jr. of their rightful share of the assets and
properties in the co-ownership.181avvphi1
The RTC, in an Order19 dated March 25, 1992, approved the Joint Motion to Approve
Compromise Agreement20and on December 18, 1992, decided in favor of Antonieta, to wit:
WHEREFORE, premises above-considered, the Court renders judgment in favor of the plaintiff
Antonieta Jarantilla and against defendants Cynthia Remotigue, Doroteo Jarantilla and Tomas
Jarantilla ordering the latter:

1. to deliver to the plaintiff her 8% share or its equivalent amount on the real
properties covered by TCT Nos. 35655, 338398, 338399 & 335395, all of the Registry
of Deeds of Quezon City; TCT Nos. (18303)23341, 142882 & 490007(4615), all of the
Registry of Deeds of Rizal; and TCT No. T-6309 of the Registry of Deeds of Cotabato
based on their present market value;
2. to deliver to the plaintiff her 8% share or its equivalent amount on the Remotigue
Agro-Industrial Corporation, Manila Athletic Supply, Inc., MAS Rubber Products, Inc.
and Buendia Recapping Corporation based on the shares of stocks present book value;
3. to account for the assets and income of the co-ownership and deliver to plaintiff her
rightful share thereof equivalent to 8%;
4. to pay plaintiff, jointly and severally, the sum of P50,000.00 as moral damages;
5. to pay, jointly and severally, the sum of P50,000.00 as attorneys fees; and
6. to pay, jointly and severally, the costs of the suit. 21
Both the petitioner and the respondents appealed this decision to the Court of Appeals. The
petitioner claimed that the RTC "erred in not rendering a complete judgment and ordering the
partition of the co-ownership and giving to [him] six per centum (6%) of the properties." 22
While the Court of Appeals agreed to some of the RTCs factual findings, it also established that
Antonieta Jarantilla was not part of the partnership formed in 1946, and that her 8% share was
limited to the businesses enumerated in the Acknowledgement of Participating Capital. On July
30, 2002, the Court of Appeals rendered the herein challenged decision setting aside the RTCs
decision, as follows:
WHEREFORE, the decision of the trial court, dated 18 December 1992 is SET ASIDE and a new
one is hereby entered ordering that:
(1) after accounting, plaintiff Antonieta Jarantilla be given her share of 8% in the
assets and profits of Manila Athletic Supply, Remotigue Trading in Iloilo City and
Remotigue Trading in Cotabato City;
(2) after accounting, defendant Federico Jarantilla, Jr. be given his share of 6% of the
assets and profits of the above-mentioned enterprises; and, holding that
(3) plaintiff Antonieta Jarantilla is a stockholder in the following corporations to the
extent stated in their Articles of Incorporation:
(a) Rural Bank of Barotac Nuevo, Inc.;
(b) MAS Rubber Products, Inc.;
(c) Manila Athletic Supply, Inc.; and
(d) B. Remotigue Agro-Industrial Development Corp.

(4) No costs.23
The respondents, on August 20, 2002, filed a Motion for Partial Reconsideration but the Court of
Appeals denied this in a Resolution24 dated March 21, 2003.
Antonieta Jarantilla filed before this Court her own petition for review on certiorari25 dated
September 16, 2002, assailing the Court of Appeals decision on "similar grounds and similar
assignments of errors as this present case"26 but it was dismissed on November 20, 2002 for
failure to file the appeal within the reglementary period of fifteen (15) days in accordance with
Section 2, Rule 45 of the Rules of Court.27
Petitioner filed before us this petition for review on the sole ground that:
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN NOT RULING THAT
PETITIONER FEDERICO JARANTILLA, JR. IS ENTITLED TO A SIX PER CENTUM (6%)
SHARE OF THE OWNERSHIP OF THE REAL PROPERTIES ACQUIRED BY THE OTHER
DEFENDANTS USING COMMON FUNDS FROM THE BUSINESSES WHERE HE HAD
OWNED SUCH SHARE.28
Petitioner asserts that he was in a partnership with the Remotigue spouses, the Deocampo
spouses, Rosita Jarantilla, Rafael Jarantilla, Antonieta Jarantilla and Quintin Vismanos, as
evidenced by the Acknowledgement of Participating Capital the Remotigue spouses executed in
1957. He contends that from this partnership, several other corporations and businesses were
established and several real properties were acquired. In this petition, he is essentially asking for
his 6% share in the subject real properties. He is relying on the Acknowledgement of
Participating Capital, on his own testimony, and Antonieta Jarantillas testimony to support this
contention.
The core issue is whether or not the partnership subject of the Acknowledgement of Participating
Capital funded the subject real properties. In other words, what is the petitioners right over
these real properties?
It is a settled rule that in a petition for review on certiorari under Rule 45 of the Rules of Civil
Procedure, only questions of law may be raised by the parties and passed upon by this Court. 29
A question of law arises when there is doubt as to what the law is on a certain state of facts, while
there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts. For
a question to be one of law, the same must not involve an examination of the probative value of
the evidence presented by the litigants or any of them. The resolution of the issue must rest
solely on what the law provides on the given set of circumstances. Once it is clear that the issue
invites a review of the evidence presented, the question posed is one of fact. Thus, the test of
whether a question is one of law or of fact is not the appellation given to such question by the
party raising the same; rather, it is whether the appellate court can determine the issue raised
without reviewing or evaluating the evidence, in which case, it is a question of law; otherwise it is
a question of fact.30
Since the Court of Appeals did not fully adopt the factual findings of the RTC, this Court, in
resolving the questions of law that are now in issue, shall look into the facts only in so far as the
two courts a quo differed in their appreciation thereof.
The RTC found that an unregistered partnership existed since 1946 which was affirmed in the
1957 document, the "Acknowledgement of Participating Capital." The RTC used this as its basis
for giving Antonieta Jarantilla an 8% share in the three businesses listed therein and in the other

businesses and real properties of the respondents as they had supposedly acquired these through
funds from the partnership.31
The Court of Appeals, on the other hand, agreed with the RTC as to Antonietas 8% share in the
business enumerated in the Acknowledgement of Participating Capital, but not as to her share in
the other corporations and real properties. The Court of Appeals ruled that Antonietas claim of
8% is based on the "Acknowledgement of Participating Capital," a duly notarized document
which was specific as to the subject of its coverage. Hence, there was no reason to pattern her
share in the other corporations from her share in the partnerships businesses. The Court of
Appeals also said that her claim in the respondents real properties was more "precarious" as
these were all covered by certificates of title which served as the best evidence as to all the
matters contained therein.32 Since petitioners claim was essentially the same as Antonietas, the
Court of Appeals also ruled that petitioner be given his 6% share in the same businesses listed in
the Acknowledgement of Participating Capital.
Factual findings of the trial court, when confirmed by the Court of Appeals, are final and
conclusive except in the following cases: (1) when the inference made is manifestly mistaken,
absurd or impossible; (2) when there is a grave abuse of discretion; (3) when the finding is
grounded entirely on speculations, surmises or conjectures; (4) when the judgment of the Court
of Appeals is based on misapprehension of facts; (5) when the findings of fact are conflicting; (6)
when the Court of Appeals, in making its findings, went beyond the issues of the case and the
same is contrary to the admissions of both appellant and appellee; (7) when the findings of the
Court of Appeals are contrary to those of the trial court; (8) when the findings of fact are
conclusions without citation of specific evidence on which they are based; (9) when the Court of
Appeals manifestly overlooked certain relevant facts not disputed by the parties and which, if
properly considered, would justify a different conclusion; and (10) when the findings of fact of
the Court of Appeals are premised on the absence of evidence and are contradicted by the
evidence on record.33

From the above it appears that the fact that those who agree to form a co- ownership share or
do not share any profits made by the use of the property held in common does not convert their
venture into a partnership. Or the sharing of the gross returns does not of itself establish a
partnership whether or not the persons sharing therein have a joint or common right or
interest in the property. This only means that, aside from the circumstance of profit, the
presence of other elements constituting partnership is necessary, such as the clear intent to
form a partnership, the existence of a juridical personality different from that of the individual
partners, and the freedom to transfer or assign any interest in the property by one with the
consent of the others.
It is evident that an isolated transaction whereby two or more persons contribute funds to buy
certain real estate for profit in the absence of other circumstances showing a contrary
intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to
their respective contribution, are not thereby rendered partners. They have no common stock or
capital, and no community of interest as principal proprietors in the business itself which the
proceeds derived.
A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does
an agreement to share the profits and losses on the sale of land create a partnership; the parties
are only tenants in common.
Where plaintiff, his brother, and another agreed to become owners of a single tract of realty,
holding as tenants in common, and to divide the profits of disposing of it, the brother and the
other not being entitled to share in plaintiffs commission, no partnership existed as between the
three parties, whatever their relation may have been as to third parties.

In this case, we find no error in the ruling of the Court of Appeals.

Both the petitioner and Antonieta Jarantilla characterize their relationship with the respondents
as a co-ownership, but in the same breath, assert that a verbal partnership was formed in 1946
and was affirmed in the 1957 Acknowledgement of Participating Capital.
There is a co-ownership when an undivided thing or right belongs to different persons. 34 It is a
partnership when 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. 35 The
Court, in Pascual v. The Commissioner of Internal Revenue, 36 quoted the concurring opinion of
Mr. Justice Angelo Bautista in Evangelista v. The Collector of Internal Revenue 37 to further
elucidate on the distinctions between a co-ownership and a partnership, to wit:
I wish however to make the following observation: Article 1769 of the new Civil Code lays down
the rule for determining when a transaction should be deemed a partnership or a co-ownership.
Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether
such co-owners or co-possessors do or do not share any profits made by the use of the
property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived;

In order to constitute a partnership inter sese there must be: (a) An intent to form the same;
(b) generally participating in both profits and losses; (c) and such a community of interest, as
far as third persons are concerned as enables each party to make contract, manage the
business, and dispose of the whole property. x x x.
The common ownership of property does not itself create a partnership between the owners,
though they may use it for the purpose of making gains; and they may, without becoming
partners, agree among themselves as to the management, and use of such property and the
application of the proceeds therefrom.38 (Citations omitted.)
Under Article 1767 of the Civil Code, there are two essential elements in a contract of
partnership: (a) an agreement to contribute money, property or industry to a common fund;
and (b) intent to divide the profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly, all the parties in this case have agreed to,
and did, contribute money and property to a common fund. Hence, the issue narrows down to
their intent in acting as they did.39 It is not denied that all the parties in this case have agreed to
contribute capital to a common fund to be able to later on share its profits. They have admitted
this fact, agreed to its veracity, and even submitted one common documentary evidence to prove
such partnership - the Acknowledgement of Participating Capital.
As this case revolves around the legal effects of the Acknowledgement of Participating Capital, it
would be instructive to examine the pertinent portions of this document:
ACKNOWLEDGEMENT OF
PARTICIPATING CAPITAL

KNOW ALL MEN BY THESE PRESENTS:

That we, the spouses Buenaventura Remotigue and Conchita Jarantilla de Remotigue, both of
legal age, Filipinos and residents of Loyola Heights, Quezon City, P.I. hereby state:
That the Manila Athletic Supply at 712 Raon, Manila, the Remotigue Trading of Calle Real, Iloilo
City and the Remotigue Trading, Cotabato Branch, Cotabato, P.I., all dealing in athletic goods
and equipments, and general merchandise are recorded in their respective books with
Buenaventura Remotigue as the registered owner and are being operated by them as such:
That they are not the only owners of the capital of the three establishments and their
participation in the capital of the three establishments together with the other co-owners as of
the year 1952 are stated as follows:
1. Buenaventura Remotigue (TWENTY-FIVE THOUSAND)P25,000.00
2. Conchita Jarantilla de Remotigue (TWENTY-FIVE THOUSAND) 25,000.00
3. Vicencio Deocampo (FIFTEEN THOUSAND) 15,000.00
4. Rosita J. Deocampo (FIFTEEN THOUSAND).... 15,000.00
5. Antonieta Jarantilla (EIGHT THOUSAND).. 8,000.00
6. Rafael Jarantilla (SIX THOUSAND).. ... 6,000.00

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. (Emphases supplied.)
It is clear from the foregoing that a partner is entitled only to his share as agreed upon, or in the
absence of any such stipulations, then to his share in proportion to his contribution to the
partnership. The petitioner himself claims his share to be 6%, as stated in the Acknowledgement
of Participating Capital. However, petitioner fails to realize that this document specifically
enumerated the businesses covered by the partnership: Manila Athletic Supply, Remotigue
Trading in Iloilo City and Remotigue Trading in Cotabato City. Since there was a clear agreement
that the capital the partners contributed went to the three businesses, then there is no reason to
deviate from such agreement and go beyond the stipulations in the document. Therefore, the
Court of Appeals did not err in limiting petitioners share to the assets of the businesses
enumerated in the Acknowledgement of Participating Capital.
In Villareal v. Ramirez,41 the Court held that since a partnership is a separate juridical entity, the
shares to be paid out to the partners is necessarily limited only to its total resources, to wit:
Since it is the partnership, as a separate and distinct entity, that must refund the shares of the
partners, the amount to be refunded is necessarily limited to its total resources. In other words,
it can only pay out what it has in its coffers, which consists of all its assets. However, before the
partners can be paid their shares, the creditors of the partnership must first be compensated.
After all the creditors have been paid, whatever is left of the partnership assets becomes available
for the payment of the partners shares.42
There is no evidence that the subject real properties were assets of the partnership referred to in
the Acknowledgement of Participating Capital.

7. Federico Jarantilla, Jr. (FIVE THOUSAND).. 5,000.00

8. Quintin Vismanos (TWO THOUSAND)... 2,000.00
That aside from the persons mentioned in the next preceding paragraph, no other person has
any interest in the above-mentioned three establishments.
IN WITNESS WHEREOF, they sign this instrument in the City of Manila, P.I., this 29th day of
April, 1957.
[Sgd.]
BUENAVENTURA REMOTIGUE
[Sgd.]
CONCHITA JARANTILLA DE REMOTIGUE40
The Acknowledgement of Participating Capital is a duly notarized document voluntarily executed
by Conchita Jarantilla-Remotigue and Buenaventura Remotigue in 1957. Petitioner does not
dispute its contents and is actually relying on it to prove his participation in the partnership.
Article 1797 of the Civil Code provides:
Art. 1797. The losses and profits shall be distributed in conformity with the agreement. If only
the share of each partner in the profits has been agreed upon, the share of each in the losses shall
be in the same proportion.

The petitioner further asserts that he is entitled to respondents properties based on the concept
of trust. He claims that since the subject real properties were purchased using funds of the
partnership, wherein he has a 6% share, then "law and equity mandates that he should be
considered as a co-owner of those properties in such proportion." 43 In Pigao v. Rabanillo,44 this
Court explained the concept of trusts, to wit:
Express trusts are created by the intention of the trustor or of the parties, while implied trusts
come into being by operation of law, either through implication of an intention to create a trust
as a matter of law or through the imposition of the trust irrespective of, and even contrary to, any
such intention. In turn, implied trusts are either resulting or constructive trusts. Resulting trusts
are based on the equitable doctrine that valuable consideration and not legal title determines the
equitable title or interest and are presumed always to have been contemplated by the parties.
They arise from the nature or circumstances of the consideration involved in a transaction
whereby one person thereby becomes invested with legal title but is obligated in equity to hold
his legal title for the benefit of another.45
On proving the existence of a trust, this Court held that:
Respondent has presented only bare assertions that a trust was created. Noting the need to prove
the existence of a trust, this Court has held thus:
"As a rule, the burden of proving the existence of a trust is on the party asserting its existence,
and such proof must be clear and satisfactorily show the existence of the trust and its elements.
While implied trusts may be proved by oral evidence, the evidence must be trustworthy and

received by the courts with extreme caution, and should not be made to rest on loose, equivocal
or indefinite declarations. Trustworthy evidence is required because oral evidence can easily be
fabricated." 46

SEC. 48. Certificate not subject to collateral attack. A certificate of title shall not be subject to
collateral attack. It cannot be altered, modified, or cancelled except in a direct proceeding in
accordance with law.

The petitioner has failed to prove that there exists a trust over the subject real properties. Aside
from his bare allegations, he has failed to show that the respondents used the partnerships
money to purchase the said properties. Even assuming arguendo that some partnership income
was used to acquire these properties, the petitioner should have successfully shown that these
funds came from his share in the partnership profits. After all, by his own admission, and as
stated in the Acknowledgement of Participating Capital, he owned a mere 6% equity in the
partnership.

This Court has deemed an action or proceeding to be "an attack on a title when its objective is to
nullify the title, thereby challenging the judgment pursuant to which the title was decreed." 56 In
Aguilar v. Alfaro,57 this Court further distinguished between a direct and an indirect or collateral
attack, as follows:

In essence, the petitioner is claiming his 6% share in the subject real properties, by relying on his
own self-serving testimony and the equally biased testimony of Antonieta Jarantilla. Petitioner
has not presented evidence, other than these unsubstantiated testimonies, to prove that the
respondents did not have the means to fund their other businesses and real properties without
the partnerships income. On the other hand, the respondents have not only, by testimonial
evidence, proven their case against the petitioner, but have also presented sufficient
documentary evidence to substantiate their claims, allegations and defenses. They presented
preponderant proof on how they acquired and funded such properties in addition to tax receipts
and tax declarations.47 It has been held that "while tax declarations and realty tax receipts do not
conclusively prove ownership, they may constitute strong evidence of ownership when
accompanied by possession for a period sufficient for prescription." 48Moreover, it is a rule in this
jurisdiction that testimonial evidence cannot prevail over documentary evidence. 49This Court
had on several occasions, expressed our disapproval on using mere self-serving testimonies to
support ones claim. In Ocampo v. Ocampo,50 a case on partition of a co-ownership, we held that:
Petitioners assert that their claim of co-ownership of the property was sufficiently proved by
their witnesses -- Luisa Ocampo-Llorin and Melita Ocampo. We disagree. Their testimonies
cannot prevail over the array of documents presented by Belen. A claim of ownership cannot be
based simply on the testimonies of witnesses; much less on those of interested parties, selfserving as they are.51
It is true that a certificate of title is merely an evidence of ownership or title over the particular
property described therein. Registration in the Torrens system does not create or vest title as
registration is not a mode of acquiring ownership; hence, this cannot deprive an aggrieved party
of a remedy in law.52 However, petitioner asserts ownership over portions of the subject real
properties on the strength of his own admissions and on the testimony of Antonieta
Jarantilla.1avvphi1 As held by this Court in Republic of the Philippines v. Orfinada, Sr. 53:
Indeed, a Torrens title is generally conclusive evidence of ownership of the land referred to
therein, and a strong presumption exists that a Torrens title was regularly issued and valid. A
Torrens title is incontrovertible against any informacion possessoria, of other title existing prior
to the issuance thereof not annotated on the Torrens title. Moreover, persons dealing with
property covered by a Torrens certificate of title are not required to go beyond what appears on
its face.54
As we have settled that this action never really was for partition of a co-ownership, to permit
petitioners claim on these properties is to allow a collateral, indirect attack on respondents
admitted titles. In the words of the Court of Appeals, "such evidence cannot overpower the
conclusiveness of these certificates of title, more so since plaintiffs [petitioners] claims amount
to a collateral attack, which is prohibited under Section 48 of Presidential Decree No. 1529, the
Property Registration Decree."55

A collateral attack transpires when, in another action to obtain a different relief and as an
incident to the present action, an attack is made against the judgment granting the title. This
manner of attack is to be distinguished from a direct attack against a judgment granting the title,
through an action whose main objective is to annul, set aside, or enjoin the enforcement of such
judgment if not yet implemented, or to seek recovery if the property titled under the judgment
had been disposed of. x x x.
Petitioners only piece of documentary evidence is the Acknowledgement of Participating
Capital, which as discussed above, failed to prove that the real properties he is claiming coownership of were acquired out of the proceeds of the businesses covered by such document.
Therefore, petitioners theory has no factual or legal leg to stand on.
WHEREFORE, the Petition is hereby DENIED and the Decision of the Court of Appeals in CAG.R. CV No. 40887, dated July 30, 2002 is AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 172690

March 3, 2010

HEIRS OF JOSE LIM, represented by ELENITO LIM, Petitioners,

vs.
JULIET VILLA LIM, Respondent.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil
Procedure, assailing the Court of Appeals (CA) Decision 2 dated June 29, 2005, which reversed
and set aside the decision3 of the Regional Trial Court (RTC) of Lucena City, dated April 12,
2004.
The facts of the case are as follows:
Petitioners are the heirs of the late Jose Lim (Jose), namely: Jose's widow Cresencia Palad
(Cresencia); and their children Elenito, Evelia, Imelda, Edelyna and Edison, all surnamed Lim
(petitioners), represented by Elenito Lim (Elenito). They filed a Complaint 4 for Partition,
Accounting and Damages against respondent Juliet Villa Lim (respondent), widow of the late
Elfledo Lim (Elfledo), who was the eldest son of Jose and Cresencia.
Petitioners alleged that Jose was the liaison officer of Interwood Sawmill in Cagsiay, Mauban,
Quezon. Sometime in 1980, Jose, together with his friends Jimmy Yu (Jimmy) and Norberto Uy
(Norberto), formed a partnership to engage in the trucking business. Initially, with a
contribution of P50,000.00 each, they purchased a truck to be used in the hauling and transport
of lumber of the sawmill. Jose managed the operations of this trucking business until his death
on August 15, 1981. Thereafter, Jose's heirs, including Elfledo, and partners agreed to continue
the business under the management of Elfledo. The shares in the partnership profits and income
that formed part of the estate of Jose were held in trust by Elfledo, with petitioners' authority for
Elfledo to use, purchase or acquire properties using said funds.

properties, petitioners required respondent to submit an accounting of all income, profits and
rentals received from the estate of Elfledo, and to surrender the administration thereof.
Respondent refused; thus, the filing of this case.
Respondent traversed petitioners' allegations and claimed that Elfledo was himself a partner of
Norberto and Jimmy. Respondent also claimed that per testimony of Cresencia, sometime in
1980, Jose gave ElfledoP50,000.00 as the latter's capital in an informal partnership with Jimmy
and Norberto. When Elfledo and respondent got married in 1981, the partnership only had one
truck; but through the efforts of Elfledo, the business flourished. Other than this trucking
business, Elfledo, together with respondent, engaged in other business ventures. Thus, they were
able to buy real properties and to put up their own car assembly and repair business. When
Norberto was ambushed and killed on July 16, 1993, the trucking business started to falter.
When Elfledo died on May 18, 1995 due to a heart attack, respondent talked to Jimmy and to the
heirs of Norberto, as she could no longer run the business. Jimmy suggested that three out of the
nine trucks be given to him as his share, while the other three trucks be given to the heirs of
Norberto. However, Norberto's wife, Paquita Uy, was not interested in the vehicles. Thus, she
sold the same to respondent, who paid for them in installments.
Respondent also alleged that when Jose died in 1981, he left no known assets, and the
partnership with Jimmy and Norberto ceased upon his demise. Respondent also stressed that
Jose left no properties that Elfledo could have held in trust. Respondent maintained that all the
properties involved in this case were purchased and acquired through her and her husbands
joint efforts and hard work, and without any participation or contribution from petitioners or
from Jose. Respondent submitted that these are conjugal partnership properties; and thus, she
had the right to refuse to render an accounting for the income or profits of their own business.
Trial on the merits ensued. On April 12, 2004, the RTC rendered its decision in favor of
petitioners, thus:
WHEREFORE, premises considered, judgment is hereby rendered:
1) Ordering the partition of the above-mentioned properties equally between the
plaintiffs and heirs of Jose Lim and the defendant Juliet Villa-Lim; and
2) Ordering the defendant to submit an accounting of all incomes, profits and rentals
received by her from said properties.
SO ORDERED.
Aggrieved, respondent appealed to the CA.

Petitioners also alleged that, at that time, Elfledo was a fresh commerce graduate serving as his
fathers driver in the trucking business. He was never a partner or an investor in the business
and merely supervised the purchase of additional trucks using the income from the trucking
business of the partners. By the time the partnership ceased, it had nine trucks, which were all
registered in Elfledo's name. Petitioners asseverated that it was also through Elfledos
management of the partnership that he was able to purchase numerous real properties by using
the profits derived therefrom, all of which were registered in his name and that of respondent. In
addition to the nine trucks, Elfledo also acquired five other motor vehicles.
On May 18, 1995, Elfledo died, leaving respondent as his sole surviving heir. Petitioners claimed
that respondent took over the administration of the aforementioned properties, which belonged
to the estate of Jose, without their consent and approval. Claiming that they are co-owners of the

On June 29, 2005, the CA reversed and set aside the RTC's decision, dismissing petitioners'
complaint for lack of merit. Undaunted, petitioners filed their Motion for
Reconsideration,5 which the CA, however, denied in its Resolution 6 dated May 8, 2006.
Hence, this Petition, raising the sole question, viz.:
IN THE APPRECIATION BY THE COURT OF THE EVIDENCE SUBMITTED BY THE
PARTIES, CAN THE TESTIMONY OF ONE OF THE PETITIONERS BE GIVEN GREATER
WEIGHT THAN THAT BY A FORMER PARTNER ON THE ISSUE OF THE IDENTITY OF THE
OTHER PARTNERS IN THE PARTNERSHIP?7

In essence, petitioners argue that according to the testimony of Jimmy, the sole surviving
partner, Elfledo was not a partner; and that he and Norberto entered into a partnership with
Jose. Thus, the CA erred in not giving that testimony greater weight than that of Cresencia, who
was merely the spouse of Jose and not a party to the partnership. 8
Respondent counters that the issue raised by petitioners is not proper in a petition for review on
certiorari under Rule 45 of the Rules of Civil Procedure, as it would entail the review, evaluation,
calibration, and re-weighing of the factual findings of the CA. Moreover, respondent invokes the
rationale of the CA decision that, in light of the admissions of Cresencia and Edison and the
testimony of respondent, the testimony of Jimmy was effectively refuted; accordingly, the CA's
reversal of the RTC's findings was fully justified. 9
We resolve first the procedural matter regarding the propriety of the instant Petition.
Verily, the evaluation and calibration of the evidence necessarily involves consideration of
factual issues an exercise that is not appropriate for a petition for review on certiorari under
Rule 45. This rule provides that the parties may raise only questions of law, because the Supreme
Court is not a trier of facts. Generally, we are not duty-bound to analyze again and weigh the
evidence introduced in and considered by the tribunals below. 10When supported by substantial
evidence, the findings of fact of the CA are conclusive and binding on the parties and are not
reviewable by this Court, unless the case falls under any of the following recognized exceptions:
(1) When the conclusion is a finding grounded entirely on speculation, surmises and
conjectures;

A partnership exists when two or more persons agree to place their money, effects, labor, and
skill in lawful commerce or business, with the understanding that there shall be a proportionate
sharing of the profits and losses among them. A contract of partnership is defined by the Civil
Code as one where two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves. 12
Undoubtedly, the best evidence would have been the contract of partnership or the articles of
partnership. Unfortunately, there is none in this case, because the alleged partnership was never
formally organized. Nonetheless, we are asked to determine who between Jose and Elfledo was
the "partner" in the trucking business.
A careful review of the records persuades us to affirm the CA decision. The evidence presented
by petitioners falls short of the quantum of proof required to establish that: (1) Jose was the
partner and not Elfledo; and (2) all the properties acquired by Elfledo and respondent form part
of the estate of Jose, having been derived from the alleged partnership.
Petitioners heavily rely on Jimmy's testimony. But that testimony is just one piece of evidence
against respondent. It must be considered and weighed along with petitioners' other evidence
vis--vis respondent's contrary evidence. In civil cases, the party having the burden of proof
must establish his case by a preponderance of evidence. "Preponderance of evidence" is the
weight, credit, and value of the aggregate evidence on either side and is usually considered
synonymous with the term "greater weight of the evidence" or "greater weight of the credible
evidence." "Preponderance of evidence" is a phrase that, in the last analysis, means probability of
the truth. It is evidence that is more convincing to the court as worthy of belief than that which is
offered in opposition thereto.13 Rule 133, Section 1 of the Rules of Court provides the guidelines
in determining preponderance of evidence, thus:

(2) When the inference made is manifestly mistaken, absurd or impossible;

(3) Where there is a grave abuse of discretion;
(4) When the judgment is based on a misapprehension of facts;
(5) When the findings of fact are conflicting;
(6) When the Court of Appeals, in making its findings, went beyond the issues of the
case and the same is contrary to the admissions of both appellant and appellee;
(7) When the findings are contrary to those of the trial court;
(8) When the findings of fact are conclusions without citation of specific evidence on
which they are based;
(9) When the facts set forth in the petition as well as in the petitioners' main and reply
briefs are not disputed by the respondents; and
(10) When the findings of fact of the Court of Appeals are premised on the supposed
absence of evidence and contradicted by the evidence on record. 11
We note, however, that the findings of fact of the RTC are contrary to those of the CA. Thus, our
review of such findings is warranted.
On the merits of the case, we find that the instant Petition is bereft of merit.

SECTION I. Preponderance of evidence, how determined. In civil cases, the party having burden
of proof must establish his case by a preponderance of evidence. In determining where the
preponderance or superior weight of evidence on the issues involved lies, the court may consider
all the facts and circumstances of the case, the witnesses' manner of testifying, their intelligence,
their means and opportunity of knowing the facts to which they are testifying, the nature of the
facts to which they testify, the probability or improbability of their testimony, their interest or
want of interest, and also their personal credibility so far as the same may legitimately appear
upon the trial. The court may also consider the number of witnesses, though the preponderance
is not necessarily with the greater number.
At this juncture, our ruling in Heirs of Tan Eng Kee v. Court of Appeals 14 is enlightening.
Therein, we cited Article 1769 of the Civil Code, which provides:
Art. 1769. In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other
are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether
such co-owners or co-possessors do or do not share any profits made by the use of the
property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived;

(4) The receipt by a person of a share of the profits of a business is a prima facie
evidence that he is a partner in the business, but no such inference shall be drawn if
such profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the
profits of the business;
(e) As the consideration for the sale of a goodwill of a business or other
property by installments or otherwise.
Applying the legal provision to the facts of this case, the following circumstances tend to prove
that Elfledo was himself the partner of Jimmy and Norberto: 1) Cresencia testified that Jose gave
Elfledo P50,000.00, as share in the partnership, on a date that coincided with the payment of
the initial capital in the partnership;15 (2) Elfledo ran the affairs of the partnership, wielding
absolute control, power and authority, without any intervention or opposition whatsoever from
any of petitioners herein;16 (3) all of the properties, particularly the nine trucks of the
partnership, were registered in the name of Elfledo; (4) Jimmy testified that Elfledo did not
receive wages or salaries from the partnership, indicating that what he actually received were
shares of the profits of the business;17 and (5) none of the petitioners, as heirs of Jose, the alleged
partner, demanded periodic accounting from Elfledo during his lifetime. As repeatedly stressed
in Heirs of Tan Eng Kee,18 a demand for periodic accounting is evidence of a partnership.
Furthermore, petitioners failed to adduce any evidence to show that the real and personal
properties acquired and registered in the names of Elfledo and respondent formed part of the
estate of Jose, having been derived from Jose's alleged partnership with Jimmy and Norberto.
They failed to refute respondent's claim that Elfledo and respondent engaged in other
businesses. Edison even admitted that Elfledo also sold Interwood lumber as a
sideline.19 Petitioners could not offer any credible evidence other than their bare assertions.
Thus, we apply the basic rule of evidence that between documentary and oral evidence, the
former carries more weight.20
Finally, we agree with the judicious findings of the CA, to wit:
The above testimonies prove that Elfledo was not just a hired help but one of the partners in the
trucking business, active and visible in the running of its affairs from day one until this ceased
operations upon his demise. The extent of his control, administration and management of the
partnership and its business, the fact that its properties were placed in his name, and that he was
not paid salary or other compensation by the partners, are indicative of the fact that Elfledo was
a partner and a controlling one at that. It is apparent that the other partners only contributed in
the initial capital but had no say thereafter on how the business was ran. Evidently it was
through Elfredos efforts and hard work that the partnership was able to acquire more trucks and
otherwise prosper. Even the appellant participated in the affairs of the partnership by acting as
the bookkeeper sans salary.1avvphi1
It is notable too that Jose Lim died when the partnership was barely a year old, and the
partnership and its business not only continued but also flourished. If it were true that it was
Jose Lim and not Elfledo who was the partner, then upon his death the partnership should have

been dissolved and its assets liquidated. On the contrary, these were not done but instead its
operation continued under the helm of Elfledo and without any participation from the heirs of
Jose Lim.
Whatever properties appellant and her husband had acquired, this was through their own
concerted efforts and hard work. Elfledo did not limit himself to the business of their
partnership but engaged in other lines of businesses as well.
In sum, we find no cogent reason to disturb the findings and the ruling of the CA as they are
amply supported by the law and by the evidence on record.
WHEREFORE, the instant Petition is DENIED. The assailed Court of Appeals Decision dated
June 29, 2005 is AFFIRMED. Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

(b) The total of the MANAGERS account shall not exceed P11,000,000.00,
except with prior approval of the PRINCIPAL; provided, however, that if the
compensation of the MANAGERS as herein provided cannot be paid in cash
from the Sto. Nino PROJECT, the amount not so paid in cash shall be added
to the MANAGERS account.

THIRD DIVISION
G.R. No. 148187

(c) The cash and property shall not thereafter be withdrawn from the Sto.
Nino PROJECT until termination of this Agency.

April 16, 2008

PHILEX MINING CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

This is a petition for review on certiorari of the June 30, 2000 Decision 1 of the Court of Appeals
in CA-G.R. SP No. 49385, which affirmed the Decision 2 of the Court of Tax Appeals in C.T.A.
Case No. 5200. Also assailed is the April 3, 2001 Resolution 3 denying the motion for
reconsideration.

(d) The MANAGERS account shall not accrue interest. Since it is the desire
of the PRINCIPAL to extend to the MANAGERS the benefit of subsequent
appreciation of property, upon a projected termination of this Agency, the
ratio which the MANAGERS account has to the owners account will be
determined, and the corresponding proportion of the entire assets of the
STO. NINO MINE, excluding the claims, shall be transferred to the
MANAGERS, except that such transferred assets shall not include mine
development, roads, buildings, and similar property which will be valueless,
or of slight value, to the MANAGERS. The MANAGERS can, on the other
hand, require at their option that property originally transferred by them to
the Sto. Nino PROJECT be re-transferred to them. Until such assets are
transferred to the MANAGERS, this Agency shall remain subsisting.

The facts of the case are as follows:

xxxx

DECISION
YNARES-SANTIAGO, J.:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an
agreement4 with Baguio Gold Mining Company ("Baguio Gold") for the former to manage and
operate the latters mining claim, known as the Sto. Nino mine, located in Atok and Tublay,
Benguet Province. The parties agreement was denominated as "Power of Attorney" and provided
for the following terms:
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make
available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may be required by the
MANAGERS within the said 3-year period, for use in the MANAGEMENT of the STO.
NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed,
for internal audit purposes, as the owners account in the Sto. Nino PROJECT. Any
part of any income of the PRINCIPAL from the STO. NINO MINE, which is left with
the Sto. Nino PROJECT, shall be added to such owners account.
5. Whenever the MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NINO MINE, they may transfer their own funds
or property to the Sto. Nino PROJECT, in accordance with the following
arrangements:
(a) The properties shall be appraised and, together with the cash, shall be
carried by the Sto. Nino PROJECT as a special fund to be known as the
MANAGERS account.

12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit
of the Sto. Nino PROJECT before income tax. It is understood that the MANAGERS
shall pay income tax on their compensation, while the PRINCIPAL shall pay income
tax on the net profit of the Sto. Nino PROJECT after deduction therefrom of the
MANAGERS compensation.
xxxx
16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and,
in the future, may incur other obligations in favor of the MANAGERS. This Power of
Attorney has been executed as security for the payment and satisfaction of all such
obligations of the PRINCIPAL in favor of the MANAGERS and as a means to fulfill the
same. Therefore, this Agency shall be irrevocable while any obligation of the
PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS
account. After all obligations of the PRINCIPAL in favor of the MANAGERS have been
paid and satisfied in full, this Agency shall be revocable by the PRINCIPAL upon 36month notice to the MANAGERS.
17. Notwithstanding any agreement or understanding between the PRINCIPAL and
the MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by
giving 6-month notice to the PRINCIPAL. The MANAGERS shall not in any manner
be held liable to the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d)
hereof shall be operative in case of the MANAGERS withdrawal.
x x x x5

In the course of managing and operating the project, Philex Mining made advances of cash and
property in accordance with paragraph 5 of the agreement. However, the mine suffered
continuing losses over the years which resulted to petitioners withdrawal as manager of the
mine on January 28, 1982 and in the eventual cessation of mine operations on February 20,
1982.6

On October 28, 1994, the BIR denied petitioners protest for lack of legal and factual basis. It
held that the alleged debt was not ascertained to be worthless since Baguio Gold remained
existing and had not filed a petition for bankruptcy; and that the deduction did not consist of a
valid and subsisting debt considering that, under the management contract, petitioner was to be
paid fifty percent (50%) of the projects net profit. 10

Thereafter, on September 27, 1982, the parties executed a "Compromise with Dation in
Payment"7 wherein Baguio Gold admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three segments by first assigning Baguio Golds
tangible assets to petitioner, transferring to the latter Baguio Golds equitable title in its
Philodrill assets and finally settling the remaining liability through properties that Baguio Gold
may acquire in the future.

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as follows:

On December 31, 1982, the parties executed an "Amendment to Compromise with Dation in
Payment"8 where the parties determined that Baguio Golds indebtedness to petitioner actually
amounted to P259,137,245.00, which sum included liabilities of Baguio Gold to other creditors
that petitioner had assumed as guarantor. These liabilities pertained to long-term loans
amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA
and Citibank N.A. This time, Baguio Gold undertook to pay petitioner in two segments by first
assigning its tangible assets for P127,838,051.00 and then transferring its equitable title in its
Philodrill assets for P16,302,426.00. The parties then ascertained that Baguio Gold had a
remaining outstanding indebtedness to petitioner in the amount of P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding
indebtedness of Baguio Gold by charging P112,136,000.00 to allowances and reserves that were
set up in 1981 and P2,860,768.00 to the 1982 operations.
In its 1982 annual income tax return, petitioner deducted from its gross income the amount of
P112,136,000.00 as "loss on settlement of receivables from Baguio Gold against reserves and
allowances."9 However, the Bureau of Internal Revenue (BIR) disallowed the amount as
deduction for bad debt and assessed petitioner a deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be allowed since all
requisites for a bad debt deduction were satisfied, to wit: (a) there was a valid and existing debt;
(b) the debt was ascertained to be worthless; and (c) it was charged off within the taxable year
when it was determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management contract it entered into
with Baguio Gold. The bad debt deduction represented advances made by petitioner which,
pursuant to the management contract, formed part of Baguio Golds "pecuniary obligations" to
petitioner. It also included payments made by petitioner as guarantor of Baguio Golds long-term
loans which legally entitled petitioner to be subrogated to the rights of the original creditor.
Petitioner also asserted that due to Baguio Golds irreversible losses, it became evident that it
would not be able to recover the advances and payments it had made in behalf of Baguio Gold.
For a debt to be considered worthless, petitioner claimed that it was neither required to institute
a judicial action for collection against the debtor nor to sell or dispose of collateral assets in
satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to enforce collection
and exhausted all reasonable means to collect.

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby
DENIED for lack of merit. The assessment in question, viz: FAS-1-82-88-003067 for
deficiency income tax in the amount of P62,811,161.39 is hereby AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY
respondent Commissioner of Internal Revenue the amount of P62,811,161.39, plus,
20% delinquency interest due computed from February 10, 1995, which is the date
after the 20-day grace period given by the respondent within which petitioner has to
pay the deficiency amount x x x up to actual date of payment.
SO ORDERED.11
The CTA rejected petitioners assertion that the advances it made for the Sto. Nino mine were in
the nature of a loan. It instead characterized the advances as petitioners investment in a
partnership with Baguio Gold for the development and exploitation of the Sto. Nino mine. The
CTA held that the "Power of Attorney" executed by petitioner and Baguio Gold was actually a
partnership agreement. Since the advanced amount partook of the nature of an investment, it
could not be deducted as a bad debt from petitioners gross income.
The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of
Baguio Gold could not be allowed as a bad debt deduction. At the time the payments were made,
Baguio Gold was not in default since its loans were not yet due and demandable. What petitioner
did was to pre-pay the loans as evidenced by the notice sent by Bank of America showing that it
was merely demanding payment of the installment and interests due. Moreover, Citibank
imposed and collected a "pre-termination penalty" for the pre-payment.
The Court of Appeals affirmed the decision of the CTA. 12 Hence, upon denial of its motion for
reconsideration,13petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:
I.
The Court of Appeals erred in construing that the advances made by Philex in the
management of the Sto. Nino Mine pursuant to the Power of Attorney partook of the
nature of an investment rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the
Sto. Nino Mine indicates that Philex is a partner of Baguio Gold in the development of

the Sto. Nino Mine notwithstanding the clear absence of any intent on the part of
Philex and Baguio Gold to form a partnership.
III.
The Court of Appeals erred in relying only on the Power of Attorney and in completely
disregarding the Compromise Agreement and the Amended Compromise Agreement
when it construed the nature of the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the issue of the propriety of the
bad debts write-off.14
Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we
should not only rely on the "Power of Attorney", but also on the subsequent "Compromise with
Dation in Payment" and "Amended Compromise with Dation in Payment" that the parties
executed in 1982. These documents, allegedly evinced the parties intent to treat the advances
and payments as a loan and establish a creditor-debtor relationship between them.
The petition lacks merit.
The lower courts correctly held that the "Power of Attorney" is the instrument that is material in
determining the true nature of the business relationship between petitioner and Baguio Gold.
Before resort may be had to the two compromise agreements, the parties contractual intent
must first be discovered from the expressed language of the primary contract under which the
parties business relations were founded. It should be noted that the compromise agreements
were mere collateral documents executed by the parties pursuant to the termination of their
business relationship created under the "Power of Attorney". On the other hand, it is the latter
which established the juridical relation of the parties and defined the parameters of their
dealings with one another.
The execution of the two compromise agreements can hardly be considered as a subsequent or
contemporaneous act that is reflective of the parties true intent. The compromise agreements
were executed eleven years after the "Power of Attorney" and merely laid out a plan or procedure
by which petitioner could recover the advances and payments it made under the "Power of
Attorney". The parties entered into the compromise agreements as a consequence of the
dissolution of their business relationship. It did not define that relationship or indicate its real
character.
An examination of the "Power of Attorney" reveals that a partnership or joint venture was indeed
intended by the parties. Under a contract of partnership, two or more persons bind themselves
to contribute money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.15 While a corporation, like petitioner, cannot generally enter into a
contract of partnership unless authorized by law or its charter, it has been held that it may enter
into a joint venture which is akin to a particular partnership:

The legal concept of a joint venture is of common law origin. It has no precise legal
definition, but it has been generally understood to mean an organization formed for
some temporary purpose. x x x It is in fact hardly distinguishable from the
partnership, since their elements are similar community of interest in the business,
sharing of profits and losses, and a mutual right of control. x x x The main distinction
cited by most opinions in common law jurisdictions is that the partnership
contemplates a general business with some degree of continuity, while the joint
venture is formed for the execution of a single transaction, and is thus of a temporary
nature. x x x This observation is not entirely accurate in this jurisdiction, since under
the Civil Code, a partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking. x x x It would seem
therefore that under Philippine law, a joint venture is a form of partnership and
should be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that although
a corporation cannot enter into a partnership contract, it may however engage in a
joint venture with others. x x x (Citations omitted) 16
Perusal of the agreement denominated as the "Power of Attorney" indicates that the parties had
intended to create a partnership and establish a common fund for the purpose. They also had a
joint interest in the profits of the business as shown by a 50-50 sharing in the income of the
mine.
Under the "Power of Attorney", petitioner and Baguio Gold undertook to contribute money,
property and industry to the common fund known as the Sto. Nio mine. 17 In this regard, we
note that there is a substantive equivalence in the respective contributions of the parties to the
development and operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement,
petitioner and Baguio Gold were to contribute equally to the joint venture assets under their
respective accounts. Baguio Gold would contribute P11M under its owners account plus any of
its income that is left in the project, in addition to its actual mining claim. Meanwhile,
petitioners contribution would consist of its expertise in the management and operation of
mines, as well as the managers account which is comprised of P11M in funds and property and
petitioners "compensation" as manager that cannot be paid in cash.
However, petitioner asserts that it could not have entered into a partnership agreement with
Baguio Gold because it did not "bind" itself to contribute money or property to the project; that
under paragraph 5 of the agreement, it was only optional for petitioner to transfer funds or
property to the Sto. Nio project "(w)henever the MANAGERS shall deem it necessary and
convenient in connection with the MANAGEMENT of the STO. NIO MINE." 18
The wording of the parties agreement as to petitioners contribution to the common fund does
not detract from the fact that petitioner transferred its funds and property to the project as
specified in paragraph 5, thus rendering effective the other stipulations of the contract,
particularly paragraph 5(c) which prohibits petitioner from withdrawing the advances until
termination of the parties business relations. As can be seen, petitioner became bound by its
contributions once the transfers were made. The contributions acquired an obligatory nature as
soon as petitioner had chosen to exercise its option under paragraph 5.
There is no merit to petitioners claim that the prohibition in paragraph 5(c) against withdrawal
of advances should not be taken as an indication that it had entered into a partnership with

Baguio Gold; that the stipulation only showed that what the parties entered into was actually a
contract of agency coupled with an interest which is not revocable at will and not a partnership.

advanced, but only the return of an amount pegged at a ratio which the managers account had to
the owners account.

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the
principal due to an interest of a third party that depends upon it, or the mutual interest of both
principal and agent.19 In this case, the non-revocation or non-withdrawal under paragraph 5(c)
applies to the advances made by petitioner who is supposedly the agent and not the principal
under the contract. Thus, it cannot be inferred from the stipulation that the parties relation
under the agreement is one of agency coupled with an interest and not a partnership.

In this connection, we find no contractual basis for the execution of the two compromise
agreements in which Baguio Gold recognized a debt in favor of petitioner, which supposedly
arose from the termination of their business relations over the Sto. Nino mine. The "Power of
Attorney" clearly provides that petitioner would only be entitled to the return of a proportionate
share of the mine assets to be computed at a ratio that the managers account had to the owners
account. Except to provide a basis for claiming the advances as a bad debt deduction, there is no
reason for Baguio Gold to hold itself liable to petitioner under the compromise agreements, for
any amount over and above the proportion agreed upon in the "Power of Attorney".

Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the
parties was one of agency and not a partnership. Although the said provision states that "this
Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS
is outstanding, inclusive of the MANAGERS account," it does not necessarily follow that the
parties entered into an agency contract coupled with an interest that cannot be withdrawn by
Baguio Gold.
It should be stressed that the main object of the "Power of Attorney" was not to confer a power in
favor of petitioner to contract with third persons on behalf of Baguio Gold but to create a
business relationship between petitioner and Baguio Gold, in which the former was to manage
and operate the latters mine through the parties mutual contribution of material resources and
industry. The essence of an agency, even one that is coupled with interest, is the agents ability to
represent his principal and bring about business relations between the latter and third
persons.20 Where representation for and in behalf of the principal is merely incidental or
necessary for the proper discharge of ones paramount undertaking under a contract, the latter
may not necessarily be a contract of agency, but some other agreement depending on the
ultimate undertaking of the parties.21
In this case, the totality of the circumstances and the stipulations in the parties agreement
indubitably lead to the conclusion that a partnership was formed between petitioner and Baguio
Gold.
First, it does not appear that Baguio Gold was unconditionally obligated to return the advances
made by petitioner under the agreement. Paragraph 5 (d) thereof provides that upon termination
of the parties business relations, "the ratio which the MANAGERS account has to the owners
account will be determined, and the corresponding proportion of the entire assets of the STO.
NINO MINE, excluding the claims" shall be transferred to petitioner. 22As pointed out by the
Court of Tax Appeals, petitioner was merely entitled to a proportionate return of the mines
assets upon dissolution of the parties business relations. There was nothing in the agreement
that would require Baguio Gold to make payments of the advances to petitioner as would be
recognized as an item of obligation or "accounts payable" for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a distribution of assets
of the Sto. Nio mine upon termination, a provision that is more consistent with a partnership
than a creditor-debtor relationship. It should be pointed out that in a contract of loan, a person
who receives a loan or money or any fungible thing acquires ownership thereof and is bound to
pay the creditor an equal amount of the same kind and quality. 23 In this case, however, there was
no stipulation for Baguio Gold to actually repay petitioner the cash and property that it had

Next, the tax court correctly observed that it was unlikely for a business corporation to lend
hundreds of millions of pesos to another corporation with neither security, or collateral, nor a
specific deed evidencing the terms and conditions of such loans. The parties also did not provide
a specific maturity date for the advances to become due and demandable, and the manner of
payment was unclear. All these point to the inevitable conclusion that the advances were not
loans but capital contributions to a partnership.
The strongest indication that petitioner was a partner in the Sto Nio mine is the fact that it
would receive 50% of the net profits as "compensation" under paragraph 12 of the agreement.
The entirety of the parties contractual stipulations simply leads to no other conclusion than that
petitioners "compensation" is actually its share in the income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a share in the
profits of a business is prima facie evidence that he is a partner in the business." Petitioner
asserts, however, that no such inference can be drawn against it since its share in the profits of
the Sto Nio project was in the nature of compensation or "wages of an employee", under the
exception provided in Article 1769 (4) (b).24
On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold
who will be paid "wages" pursuant to an employer-employee relationship. To begin with,
petitioner was the manager of the project and had put substantial sums into the venture in order
to ensure its viability and profitability. By pegging its compensation to profits, petitioner also
stood not to be remunerated in case the mine had no income. It is hard to believe that petitioner
would take the risk of not being paid at all for its services, if it were truly just an ordinary
employee.
Consequently, we find that petitioners "compensation" under paragraph 12 of the agreement
actually constitutes its share in the net profits of the partnership. Indeed, petitioner would not be
entitled to an equal share in the income of the mine if it were just an employee of Baguio
Gold.25 It is not surprising that petitioner was to receive a 50% share in the net profits,
considering that the "Power of Attorney" also provided for an almost equal contribution of the
parties to the St. Nino mine. The "compensation" agreed upon only serves to reinforce the notion
that the parties relations were indeed of partners and not employer-employee.
All told, the lower courts did not err in treating petitioners advances as investments in a
partnership known as the Sto. Nino mine. The advances were not "debts" of Baguio Gold to
petitioner inasmuch as the latter was under no unconditional obligation to return the same to

the former under the "Power of Attorney". As for the amounts that petitioner paid as guarantor
to Baguio Golds creditors, we find no reason to depart from the tax courts factual finding that
Baguio Golds debts were not yet due and demandable at the time that petitioner paid the same.
Verily, petitioner pre-paid Baguio Golds outstanding loans to its bank creditors and this
conclusion is supported by the evidence on record. 26
In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income.
Deductions for income tax purposes partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by convincing evidence that he is entitled to the
deduction claimed.27 In this case, petitioner failed to substantiate its assertion that the advances
were subsisting debts of Baguio Gold that could be deducted from its gross income.
Consequently, it could not claim the advances as a valid bad debt deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP
No. 49385 dated June 30, 2000, which affirmed the decision of the Court of Tax Appeals in
C.T.A. Case No. 5200 is AFFIRMED. Petitioner Philex Mining Corporation is ORDERED to
PAY the deficiency tax on its 1982 income in the amount of P62,811,161.31, with 20%
delinquency interest computed from February 10, 1995, which is the due date given for the
payment of the deficiency income tax, up to the actual date of payment.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 135813

October 25, 2001

FERNANDO SANTOS, petitioner,

vs.
SPOUSES ARSENIO and NIEVES REYES, respondents.

"In July, 1986, x x x Nieves introduced Cesar Gragera to [petitioner]. Gragera, as

chairman of the Monte Maria Development Corporation 6 (Monte Maria, for brevity),
sought short-term loans for members of the corporation. [Petitioner] and Gragera
executed an agreement providing funds for Monte Maria's members. Under the
agreement, Monte Maria, represented by Gragera, was entitled to P1.31 commission
per thousand paid daily to [petitioner] (Exh. 'A')x x x . Nieves kept the books as
representative of [petitioner] while [Respondent] Arsenio, husband of Nieves, acted as
credit investigator.
"On August 6, 1986, [petitioner], x x x [Nieves] and Zabat executed the 'Article of
Agreement' which formalized their earlier verbal arrangement.
"[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in the
same lending business in competition with their partnership[.] Zabat was thereby
expelled from the partnership. The operations with Monte Maria continued.

PANGANIBAN, J.:
As a general rule, the factual findings of the Court of Appeals affirming those of the trial court
are binding on the Supreme Court. However, there are several exceptions to this principle. In the
present case, we find occasion to apply both the rule and one of the exceptions.
The Case
Before us is a Petition for Review on Certiorari assailing the November 28, 1997 Decision, 1 as
well as the August 17, 1998 and the October 9, 1998 Resolutions, 2 issued by the Court of Appeals
(CA) in CA-GR CV No. 34742. The Assailed Decision disposed as follows:
"WHEREFORE, the decision appealed from is AFFIRMED save as for the
counterclaim which is hereby DISMISSED. Costs against [petitioner]." 3
Resolving respondent's Motion for Reconsideration, the August 17, 1998 Resolution
ruled as follows:
"WHEREFORE, [respondents'] motion for reconsideration is GRANTED. Accordingly,
the court's decision dated November 28, 1997 is hereby MODIFIED in that the
decision appealed from is AFFIRMED in toto, with costs against [petitioner]."4
The October 9, 1998 Resolution denied "for lack of merit" petitioner's Motion for
Reconsideration of the August 17, 1998 Resolution. 5
The Facts
The events that led to this case are summarized by the CA as follows:
"Sometime in June, 1986, [Petitioner] Fernando Santos and [Respondent] Nieves
Reyes were introduced to each other by one Meliton Zabat regarding a lending
business venture proposed by Nieves. It was verbally agreed that [petitioner would]
act as financier while [Nieves] and Zabat [would] take charge of solicitation of
members and collection of loan payments. The venture was launched on June 13,
1986, with the understanding that [petitioner] would receive 70% of the profits while x
x x Nieves and Zabat would earn 15% each.

"On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money and
damages. [Petitioner] charged [respondents], allegedly in their capacities as
employees of [petitioner], with having misappropriated funds intended for Gragera for
the period July 8, 1986 up to March 31, 1987. Upon Gragera's complaint that his
commissions were inadequately remitted, [petitioner] entrusted P200,000.00 to x x x
Nieves to be given to Gragerax x x . Nieves allegedly failed to account for the amount.
[Petitioner] asserted that after examination of the records, he found that of the total
amount of P4,623,201.90 entrusted to [respondents], only P3,068,133.20 was
remitted to Gragera, thereby leaving the balance of P1,555,065.70 unaccounted for.
"In their answer, [respondents] asserted that they were partners and not mere
employees of [petitioner]. The complaint, they alleged, was filed to preempt and
prevent them from claiming their rightful share to the profits of the partnership.
"x x x Arsenio alleged that he was enticed by [petitioner] to take the place of Zabat
after [petitioner] learned of Zabat's activities. Arsenio resigned from his job at the
Asian Development Bank to join the partnership.
"For her part, x x x Nieves claimed that she participated in the business as a partner,
as the lending activity with Monte Maria originated from her initiative. Except for the
limited period of July 8, 1986 through August 20, 1986, she did not handle sums
intended for Gragera. Collections were turned over to Gragera because he guaranteed
100% payment of all sums loaned by Monte Maria. Entries she made on worksheets
were based on this assumptive 100% collection of all loans. The loan releases were
made less Gragera's agreed commission. Because of this arrangement, she neither
received payments from borrowers nor remitted any amount to Gragera. Her job was
merely to make worksheets (Exhs. '15' to '15-DDDDDDDDDD') to convey to
[petitioner] how much he would earn if all the sums guaranteed by Gragera were
collected.
"[Petitioner] on the other hand insisted that [respondents] were his mere employees
and not partners with respect to the agreement with Gragera. He claimed that after he
discovered Zabat's activities, he ceased infusing funds, thereby causing the
extinguishment of the partnership. The agreement with Gragera was a distinct
partnership [from] that of [respondent] and Zabat. [Petitioner] asserted that
[respondents] were hired as salaried employees with respect to the partnership
between [petitioner] and Gragera.

"[Petitioner] further asserted that in Nieves' capacity as bookkeeper, she received all
payments from which Nieves deducted Gragera's commission. The commission would
then be remitted to Gragera. She likewise determined loan releases.

REYES, the following:

"During the pre-trial, the parties narrowed the issues to the following points: whether
[respondents] were employees or partners of [petitioner], whether [petitioner]
entrusted money to [respondents] for delivery to Gragera, whether the P1,555,068.70
claimed under the complaint was actually remitted to Gragera and whether
[respondents] were entitled to their counterclaim for share in the profits." 7
Ruling of the Trial Court
In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere
employees, of petitioner. It further ruled that Gragera was only a commission agent of petitioner,
not his partner. Petitioner moreover failed to prove that he had entrusted any money to Nieves.
Thus, respondents' counterclaim for their share in the partnership and for damages was granted.
The trial court disposed as follows:

39.3.1.

P2,899,739.50

- The balance of the 15 percent share of the [respondent] ARSE

REYES in the profits of his joint venture with the [petitioner].

39.3.2.

Six(6) percent of
P2,899,739.50

- As damages from August 3, 1987 until the P2,899,739.50 is fu

paid.

39.3.3.

P25,000.00

- As moral damages

P10,000.00

- As exemplary damages

"39.

WHEREFORE, the Court hereby renders judgment as follows:

39.3.4.

39.1.

THE SECOND AMENDED COMPLAINT dated July 26, 1989 is DISMISSED.

39.4.

39.2.

The [Petitioner] FERNANDO J. SANTOS is ordered to pay the [Respondent] NIEVES S.

REYES, the following:

39.4.1.

P50,000.00

39.2.1.

P3,064,428.00

39.4.2.

The cost of the suit."8

39.2.2.

Six(6) percent of
P3,064,428.00

- The 15 percent share of the [respondent] NIEVES S. REYES in the

profits of her joint venture with the [petitioner].

The [petitioner] FERNANDO J. SANTOS is ordered to pay the

[respondents]:

- As attorney's fees; and

Ruling of the Court of Appeals

- As damages from August 3, 1987 until the P3,064,428.00 is fully
paid.
On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents was
dismissed. Upon the latter's Motion for Reconsideration, however, the trial court's Decision was
reinstated in toto. Subsequently, petitioner's own Motion for Reconsideration was denied in the
CA Resolution of October 9, 1998.

39.2.3.

39.2.4.

39.3.

P50,000.00

- As moral damages

The CA ruled that the following circumstances indicated the existence of a partnership among
the parties: (1) it was Nieves who broached to petitioner the idea of starting a money-lending
business and introduced him to Gragera; (2) Arsenio received "dividends" or "profit-shares"
covering the period July 15 to August 7, 1986 (Exh. "6"); and (3) the partnership contract was
P10,000.00
- As exemplary damages
executed after the Agreement with Gragera and petitioner and thus showed the parties' intention
to consider it as a transaction of the partnership. In their common venture, petitioner invested
capital while respondents contributed industry or services, with the intention of sharing in the
profits of the business.
The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondent] ARSENIO

The CA disbelieved petitioner's claim that Nieves had misappropriated a total of P200,000
which was supposed to be delivered to Gragera to cover unpaid commissions. It was his task to
collect the amounts due, while hers was merely to prepare the daily cash flow reports (Exhs. "1515DDDDDDDDDD") to keep track of his collections.

Agreement between the two. Separate from the partnership between petitioner and Gragera was
that which existed among petitioner, Nieves and Zabat, a partnership that was dissolved when
Zabat was expelled.
On the other hand, both the CA and the trial court rejected petitioner's contentions and ruled
that the business relationship was one of partnership. We quote from the CA Decision, as
follows:

Hence, this Petition.9

Issue
Petitioner asks this Court to rule on the following issues:

10

"Whether or not Respondent Court of Appeals acted with grave abuse of discretion
tantamount to excess or lack of jurisdiction in:
1. Holding that private respondents were partners/joint venturers and not employees
of Santos in connection with the agreement between Santos and Monte
Maria/Gragera;
2. Affirming the findings of the trial court that the phrase 'Received by' on documents
signed by Nieves Reyes signified receipt of copies of the documents and not of the
sums shown thereon;
3. Affirming that the signature of Nieves Reyes on Exhibit 'E' was a forgery;
4. Finding that Exhibit 'H' [did] not establish receipt by Nieves Reyes of P200,000.00
for delivery to Gragera;
5 Affirming the dismissal of Santos' [Second] Amended Complaint;
6. Affirming the decision of the trial court, upholding private respondents'
counterclaim;

"[Respondents] were industrial partners of [petitioner]x x x . Nieves herself provided

the initiative in the lending activities with Monte Maria. In consonance with the
agreement between appellant, Nieves and Zabat (later replaced by Arsenio),
[respondents] contributed industry to the common fund with the intention of sharing
in the profits of the partnership. [Respondents] provided services without which the
partnership would not have [had] the wherewithal to carry on the purpose for which it
was organized and as such [were] considered industrial partners (Evangelista v. Abad
Santos, 51 SCRA 416 [1973]).
"While concededly, the partnership between [petitioner,] Nieves and Zabat was
technically dissolved by the expulsion of Zabat therefrom, the remaining partners
simply continued the business of the partnership without undergoing the procedure
relative to dissolution. Instead, they invited Arsenio to participate as a partner in their
operations. There was therefore, no intent to dissolve the earlier partnership. The
partnership between [petitioner,] Nieves and Arsenio simply took over and continued
the business of the former partnership with Zabat, one of the incidents of which was
the lending operations with Monte Maria.
xxx

xxx

xxx

"Gragera and [petitioner] were not partners. The money-lending activities undertaken
with Monte Maria was done in pursuit of the business for which the partnership
between [petitioner], Nieves and Zabat (later Arsenio) was organized. Gragera who
represented Monte Maria was merely paid commissions in exchange for the collection
of loans. The commissions were fixed on gross returns, regardless of the expenses
incurred in the operation of the business. The sharing of gross returns does not in
itself establish a partnership."11

7. Denying Santos' motion for reconsideration dated September 11, 1998."

Succinctly put, the following were the issues raised by petitioner: (1) whether the parties'
relationship was one of partnership or of employer employee; (2) whether Nieves
misappropriated the sums of money allegedly entrusted to her for delivery to Gragera as his
commissions; and (3) whether respondents were entitled to the partnership profits as
determined by the trial court.
The Court's Ruling
The Petition is partly meritorious.
First Issue:
Business Relationship
Petitioner maintains that he employed the services of respondent spouses in the money-lending
venture with Gragera, with Nieves as bookkeeper and Arsenio as credit investigator. That Nieves
introduced Gragera to Santos did not make her a partner. She was only a witness to the

We agree with both courts on this point. 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.12 The "Articles of Agreement" stipulated that the
signatories shall share the profits of the business in a 70-15-15 manner, with petitioner getting
the lion's share.13 This stipulation clearly proved the establishment of a partnership.
We find no cogent reason to disagree with the lower courts that the partnership continued
lending money to the members of the Monte Maria Community Development Group, Inc., which
later on changed its business name to Private Association for Community Development, Inc.
(PACDI). Nieves was not merely petitioner's employee. She discharged her bookkeeping duties
in accordance with paragraphs 2 and 3 of the Agreement, which states as follows:
"2. That the SECOND PARTY and THIRD PARTY shall handle the solicitation and
screening of prospective borrowers, and shall x x x each be responsible in handling the
collection of the loan payments of the borrowers that they each solicited.
"3. That the bookkeeping and daily balancing of account of the business operation
shall be handled by the SECOND PARTY."14

The "Second Party" named in the Agreement was none other than Nieves Reyes. On the other
hand, Arsenio's duties as credit investigator are subsumed under the phrase "screening of
prospective borrowers." Because of this Agreement and the disbursement of monthly
"allowances" and "profit shares" or "dividends" (Exh. "6") to Arsenio, we uphold the factual
finding of both courts that he replaced Zabat in the partnership.
Indeed, the partnership was established to engage in a money-lending business, despite the fact
that it was formalized only after the Memorandum of Agreement had been signed by petitioner
and Gragera. Contrary to petitioner's contention, there is no evidence to show that a different
business venture is referred to in this Agreement, which was executed on August 6, 1986, or
about a month after the Memorandum had been signed by petitioner and Gragera on July 14,
1986. The Agreement itself attests to this fact:
"WHEREAS, the parties have decided to formalize the terms of their business
relationship in order that their respective interests may be properly defined and
established for their mutual benefit and understanding."15
Second Issue:
No Proof of Misappropriation of Gragera's Unpaid Commission
Petitioner faults the CA finding that Nieves did not misappropriate money intended for Gragera's
commission. According to him, Gragera remitted his daily collection to Nieves. This is shown by
Exhibit "B." (the "Schedule of Daily Payments"), which bears her signature under the words
"received by." For the period July 1986 to March 1987, Gragera should have earned a total
commission of P4,282,429.30. However, only P3,068,133.20 was received by him. Thus,
petitioner infers that she misappropriated the difference of P1,214,296.10, which represented the
unpaid commissions. Exhibit "H." is an untitled tabulation which, according to him, shows that
Gragera was also entitled to a commission of P200,000, an amount that was never delivered by
Nieves.16
On this point, the CA ruled that Exhibits "B," "F," "E" and "H" did not show that Nieves received
for delivery to Gragera any amount from which the P1,214,296.10 unpaid commission was
supposed to come, and that such exhibits were insufficient proof that she had embezzled
P200,000. Said the CA:
"The presentation of Exhibit "D" vaguely denominated as 'members ledger' does not
clearly establish that Nieves received amounts from Monte Maria's members. The
document does not clearly state what amounts the entries thereon represent. More
importantly, Nieves made the entries for the limited period of January 11, 1987 to
February 17, 1987 only while the rest were made by Gragera's own staff.
"Neither can we give probative value to Exhibit 'E' which allegedly shows
acknowledgment of the remittance of commissions to Verona Gonzales. The document
is a private one and its due execution and authenticity have not been duly proved as
required in [S]ection 20, Rule 132 of the Rules of Court which states:
'SECTION 20. Proof of Private Document Before any private document
offered as authentic is received in evidence, its due execution and
authenticity must be proved either:
(a) By anyone who saw the document executed or written; or

(b) By evidence of the genuineness of the signature or

handwriting of the maker.
'Any other private document need only be identified as that which it is
claimed to be.'
"The court a quo even ruled that the signature thereon was a forgery, as it found that:
'x x x . But NIEVES denied that Exh. E-1 is her signature; she claimed that it
is a forgery. The initial stroke of Exh. E-1 starts from up and goes
downward. The initial stroke of the genuine signatures of NIEVES (Exhs. A3, B-1, F-1, among others) starts from below and goes upward. This
difference in the start of the initial stroke of the signatures Exhs. E-1 and of
the genuine signatures lends credence to Nieves' claim that the signature
Exh. E-1 is a forgery.'
xxx

xxx

xxx

"Nieves' testimony that the schedules of daily payment (Exhs. 'B' and 'F') were based
on the predetermined 100% collection as guaranteed by Gragera is credible and clearly
in accord with the evidence. A perusal of Exhs. "B" and "F" as well as Exhs. '15' to 15DDDDDDDDDD' reveal that the entries were indeed based on the 100% assumptive
collection guaranteed by Gragera. Thus, the total amount recorded on Exh. 'B' is
exactly the number of borrowers multiplied by the projected collection of P150.00 per
borrower. This holds true for Exh. 'F.'
"Corollarily, Nieves' explanation that the documents were pro forma and that she
signed them not to signify that she collected the amounts but that she received the
documents themselves is more believable than [petitioner's] assertion that she actually
handled the amounts.
"Contrary to [petitioner's] assertion, Exhibit 'H' does not unequivocally establish that
x x x Nieves received P200,000.00 as commission for Gragera. As correctly stated by
the court a quo, the document showed a liquidation of P240.000 00 and not
P200,000.00.
"Accordingly, we find Nieves' testimony that after August 20, 1986, all collections were
made by Gragera believable and worthy of credence. Since Gragera guaranteed a daily
100% payment of the loans, he took charge of the collections. As [petitioner's]
representative,
Nieves merely prepared the daily cash flow reports (Exh. '15' to '15 DDDDDDDDDD')
to enable [petitioner] to keep track of Gragera's operations. Gragera on the other hand
devised the schedule of daily payment (Exhs. 'B' and 'F') to record the projected gross
daily collections.
"As aptly observed by the court a quo:
'26.1. As between the versions of SANTOS and NIEVES on how the
commissions of GRAGERA [were] paid to him[,] that of NIEVES is more
logical and practical and therefore, more believable. SANTOS' version would
have given rise to this improbable situation: GRAGERA would collect the
daily amortizations and then give them to NIEVES; NIEVES would get

GRAGERA's commissions from the amortizations and then give such

commission to GRAGERA."'17

The CA originally held that respondents' counterclaim was premature, pending an accounting of
the partnership. However, in its assailed Resolution of August 17, 1998, it turned volte face.
Affirming the trial court's ruling on the counterclaim, it held as follows:

These findings are in harmony with the trial court's ruling, which we quote below:
"21. Exh. H does not prove that SANTOS gave to NIEVES and the latter received
P200,000.00 for delivery to GRAGERA. Exh. H shows under its sixth column
'ADDITIONAL CASH' that the additional cash was P240,000.00. If Exh. H were the
liquidation of the P200,000.00 as alleged by SANTOS, then his claim is not true. This
is so because it is a liquidation of the sum of P240,000.00.
"21.1. SANTOS claimed that he learned of NIEVES' failure to give the P200,000.00 to
GRAGERA when he received the latter's letter complaining of its delayed release.
Assuming as true SANTOS' claim that he gave P200,000.00 to GRAGERA, there is no
competent evidence that NIEVES did not give it to GRAGERA. The only proof that
NIEVES did not give it is the letter. But SANTOS did not even present the letter in
evidence. He did not explain why he did not.
"21.2. The evidence shows that all money transactions of the money-lending business
of SANTOS were covered by petty cash vouchers. It is therefore strange why SANTOS
did not present any voucher or receipt covering the P200,000.00." 18
In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70 from
the partnership. She did not remit P1,214,296.10 to Gragera, because he had deducted his
commissions before remitting his collections. Exhibits "B" and "F" are merely computations of
what Gragera should collect for the day; they do not show that Nieves received the amounts
stated therein. Neither is there sufficient proof that she misappropriated P200,000, because
Exhibit "H." does not indicate that such amount was received by her; in fact, it shows a different
figure.
Petitioner has utterly failed to demonstrate why a review of these factual findings is warranted.
Well-entrenched is the basic rule that factual findings of the Court of Appeals affirming those of
the trial court are binding and conclusive on the Supreme Court. 19 Although there are exceptions
to this rule, petitioner has not satisfactorily shown that any of them is applicable to this issue.
Third Issue:
Accounting of Partnership
Petitioner refuses any liability for respondents' claims on the profits of the partnership. He
maintains that "both business propositions were flops," as his investments were "consumed and
eaten up by the commissions orchestrated to be due Gragera" a situation that "could not have
been rendered possible without complicity between Nieves and Gragera."
Respondent spouses, on the other hand, postulate that petitioner instituted the action below to
avoid payment of the demands of Nieves, because sometime in March 1987, she "signified to
petitioner that it was about time to get her share of the profits which had already accumulated to
some P3 million." Respondents add that while the partnership has not declared dividends or
liquidated its earnings, the profits are already reflected on paper. To prove the counterclaim of
Nieves, the spouses show that from June 13, 1986 up to April 19, 1987, the profit totaled
P20,429,520 (Exhs. "10" et seq. and "15" et seq.). Based on that income, her 15 percent share
under the joint venture amounts to P3,064,428 (Exh. "10-I-3"); and Arsenio's, P2,026,000
minus the P30,000 which was already advanced to him (Petty Cash Vouchers, Exhs. "6, 6-A to 6B").

"We earlier ruled that there is still need for an accounting of the profits and losses of
the partnership before we can rule with certainty as to the respective shares of the
partners. Upon a further review of the records of this case, however, there appears to
be sufficient basis to determine the amount of shares of the parties and damages
incurred by [respondents]. The fact is that the court a quo already made such a
determination [in its] decision dated August 13, 1991 on the basis of the facts on
record."20
The trial court's ruling alluded to above is quoted below:
"27. The defendants' counterclaim for the payment of their share in the profits of their
joint venture with SANTOS is supported by the evidence.
"27.1. NIEVES testified that: Her claim to a share in the profits is based on the
agreement (Exhs. 5, 5-A and 5-B). The profits are shown in the working papers (Exhs.
10 to 10-I, inclusive) which she prepared. Exhs. 10 to 10-I (inclusive) were based on
the daily cash flow reports of which Exh. 3 is a sample. The originals of the daily cash
flow reports (Exhs. 3 and 15 to 15-D(10) were given to SANTOS. The joint venture had
a net profit of P20,429,520.00 (Exh. 10-I-1), from its operations from June 13, 1986 to
April 19, 1987 (Exh. 1-I-4). She had a share of P3,064,428.00 (Exh. 10-I-3) and
ARSENIO, about P2,926,000.00, in the profits.
"27.1.1 SANTOS never denied NIEVES' testimony that the money-lending business he
was engaged in netted a profit and that the originals of the daily case flow reports were
furnished to him. SANTOS however alleged that the money-lending operation of his
joint venture with NIEVES and ZABAT resulted in a loss of about half a million pesos
to him. But such loss, even if true, does not negate NIEVES' claim that overall, the
joint venture among them SANTOS, NIEVES and ARSENIO netted a profit.
There is no reason for the Court to doubt the veracity of [the testimony of] NIEVES.
"27.2 The P26,260.50 which ARSENIO received as part of his share in the profits
(Exhs. 6, 6-A and 6-B) should be deducted from his total share." 21
After a close examination of respondents' exhibits, we find reason to disagree with the CA.
Exhibit "10-I"22 shows that the partnership earned a "total income" of P20,429,520 for the
period June 13, 1986 until April 19, 1987. This entry is derived from the sum of the amounts
under the following column headings: "2-Day Advance Collection," "Service Fee," "Notarial Fee,"
"Application Fee," "Net Interest Income" and "Interest Income on Investment." Such entries
represent the collections of the money-lending business or its gross income.
The "total income" shown on Exhibit "10-I" did not consider the expenses sustained by the
partnership. For instance, it did not factor in the "gross loan releases" representing the money
loaned to clients. Since the business is money-lending, such releases are comparable with the
inventory or supplies in other business enterprises.
Noticeably missing from the computation of the "total income" is the deduction of the weekly
allowance disbursed to respondents. Exhibits "I" et seq. and "J" et seq. 23 show that Arsenio
received allowances from July 19, 1986 to March 27, 1987 in the aggregate amount of P25,500;
and Nieves, from July 12, 1986 to March 27, 1987, in the total amount of P25,600. These
allowances are different from the profit already received by Arsenio. They represent expenses

that should have been deducted from the business profits. The point is that all expenses incurred
by the money-lending enterprise of the parties must first be deducted from the "total income" in
order to arrive at the "net profit" of the partnership. The share of each one of them should be
based on this "net profit" and not from the "gross income" or "total income" reflected in Exhibit
"10-I," which the two courts invariably referred to as "cash flow" sheets.
Similarly, Exhibits "15" et seq.,24 which are the "Daily Cashflow Reports," do not reflect the
business expenses incurred by the parties, because they show only the daily cash collections.
Contrary to the rulings of both the trial and the appellate courts, respondents' exhibits do not
reflect the complete financial condition of the money-lending business. The lower courts
obviously labored over a mistaken notion that Exhibit " 10-I-1" represented the "net profits"
earned by the partnership.
For the purpose of determining the profit that should go to an industrial partner (who shares in
the profits but is not liable for the losses), the gross income from all the transactions carried on
by the firm must be added together, and from this sum must be subtracted the expenses or the
losses sustained in the business. Only in the difference representing the net profits does the
industrial partner share. But if, on the contrary, the losses exceed the income, the industrial
partner does not share in the losses.25
When the judgment of the CA is premised on a misapprehension of facts or a failure to notice
certain relevant facts that would otherwise justify a different conclusion, as in this particular
issue, a review of its factual findings may be conducted, as an exception to the general rule
applied to the first two issues.26
The trial court has the advantage of observing the witnesses while they are testifying, an
opportunity not available to appellate courts. Thus, its assessment of the credibility of witnesses
and their testimonies are accorded great weight, even finality, when supported by substantial
evidence; more so when such assessment is affirmed by the CA. But when the issue involves the
evaluation of exhibits or documents that are attached to the case records, as in the third issue,
the rule may be relaxed. Under that situation, this Court has a similar opportunity to inspect,
examine and evaluate those records, independently of the lower courts. Hence, we deem the
award of the partnership share, as computed by the trial court and adopted by the CA, to be
incomplete and not binding on this Court.
WHEREFORE, the Petition is partly GRANTED. The assailed November 28, 1997 Decision is
AFFIRMED, but the challenged Resolutions dated August 17, 1998 and October 9, 1998 are
REVERSED and SET ASIDE. No costs.
SO ORDERED.
Melo, and Sandoval-Gutierrez, JJ., concur.
Vitug, J., on official leave.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 127405

October 4, 2000

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,

vs.
COURT OF APPEALS and NENITA A. ANAY, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review of the Decision of the Court of Appeals in CA-G.R. CV No.
41616,1 affirming the Decision of the Regional Trial Court of Makati, Branch 140, in Civil Case
No. 88-509.2
Fresh from her stint as marketing adviser of Technolux in Bangkok, Thailand, private
respondent Nenita A. Anay met petitioner William T. Belo, then the vice-president for operations
of Ultra Clean Water Purifier, through her former employer in Bangkok. Belo introduced Anay to
petitioner Marjorie Tocao, who conveyed her desire to enter into a joint venture with her for the
importation and local distribution of kitchen cookwares. Belo volunteered to finance the joint
venture and assigned to Anay the job of marketing the product considering her experience and
established relationship with West Bend Company, a manufacturer of kitchen wares in
Wisconsin, U.S.A. Under the joint venture, Belo acted as capitalist, Tocao as president and
general manager, and Anay as head of the marketing department and later, vice-president for
sales. Anay organized the administrative staff and sales force while Tocao hired and fired
employees, determined commissions and/or salaries of the employees, and assigned them to
different branches. The parties agreed that Belos name should not appear in any documents
relating to their transactions with West Bend Company. Instead, they agreed to use Anays name
in securing distributorship of cookware from that company. The parties agreed further that Anay
would be entitled to: (1) ten percent (10%) of the annual net profits of the business; (2)
overriding commission of six percent (6%) of the overall weekly production; (3) thirty percent
(30%) of the sales she would make; and (4) two percent (2%) for her demonstration services. The
agreement was not reduced to writing on the strength of Belos assurances that he was sincere,
dependable and honest when it came to financial commitments.
Anay having secured the distributorship of cookware products from the West Bend Company
and organized the administrative staff and the sales force, the cookware business took off
successfully. They operated under the name of Geminesse Enterprise, a sole proprietorship
registered in Marjorie Tocaos name, with office at 712 Rufino Building, Ayala Avenue, Makati
City. Belo made good his monetary commitments to Anay. Thereafter, Roger Muencheberg of
West Bend Company invited Anay to the distributor/dealer meeting in West Bend, Wisconsin,
U.S.A., from July 19 to 21, 1987 and to the southwestern regional convention in Pismo Beach,
California, U.S.A., from July 25-26, 1987. Anay accepted the invitation with the consent of
Marjorie Tocao who, as president and general manager of Geminesse Enterprise, even wrote a

letter to the Visa Section of the U.S. Embassy in Manila on July 13, 1987. A portion of the letter
reads:
"Ms. Nenita D. Anay (sic), who has been patronizing and supporting West Bend Co. for twenty
(20) years now, acquired the distributorship of Royal Queen cookware for Geminesse Enterprise,
is the Vice President Sales Marketing and a business partner of our company, will attend in
response to the invitation." (Italics supplied.)3
Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook the task of saving
the business on account of the unsatisfactory sales record in the Makati and Cubao offices. On
August 31, 1987, she received a plaque of appreciation from the administrative and sales people
through Marjorie Tocao4 for her excellent job performance. On October 7, 1987, in the presence
of Anay, Belo signed a memo5 entitling her to a thirty-seven percent (37%) commission for her
personal sales "up Dec 31/87." Belo explained to her that said commission was apart from her
ten percent (10%) share in the profits. On October 9, 1987, Anay learned that Marjorie Tocao had
signed a letter6 addressed to the Cubao sales office to the effect that she was no longer the vicepresident of Geminesse Enterprise. The following day, October 10, she received a note from Lina
T. Cruz, marketing manager, that Marjorie Tocao had barred her from holding office and
conducting demonstrations in both Makati and Cubao offices. 7 Anay attempted to contact Belo.
She wrote him twice to demand her overriding commission for the period of January 8, 1988 to
February 5, 1988 and the audit of the company to determine her share in the net profits. When
her letters were not answered, Anay consulted her lawyer, who, in turn, wrote Belo a letter. Still,
that letter was not answered.
Anay still received her five percent (5%) overriding commission up to December 1987. The
following year, 1988, she did not receive the same commission although the company netted a
gross sales of P13,300,360.00.
On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum of money with
damages8against Marjorie D. Tocao and William Belo before the Regional Trial Court of Makati,
Branch 140.
In her complaint, Anay prayed that defendants be ordered to pay her, jointly and severally, the
following: (1) P32,00.00 as unpaid overriding commission from January 8, 1988 to February 5,
1988; (2) P100,000.00 as moral damages, and (3) P100,000.00 as exemplary damages. The
plaintiff also prayed for an audit of the finances of Geminesse Enterprise from the inception of
its business operation until she was "illegally dismissed" to determine her ten percent (10%)
share in the net profits. She further prayed that she be paid the five percent (5%) "overriding
commission" on the remaining 150 West Bend cookware sets before her "dismissal."
In their answer,9 Marjorie Tocao and Belo asserted that the "alleged agreement" with Anay that
was "neither reduced in writing, nor ratified," was "either unenforceable or void or inexistent."
As far as Belo was concerned, his only role was to introduce Anay to Marjorie Tocao. There could
not have been a partnership because, as Anay herself admitted, Geminesse Enterprise was the
sole proprietorship of Marjorie Tocao. Because Anay merely acted as marketing demonstrator of
Geminesse Enterprise for an agreed remuneration, and her complaint referred to either her
compensation or dismissal, such complaint should have been lodged with the Department of
Labor and not with the regular court.

Petitioners (defendants therein) further alleged that Anay filed the complaint on account of "illwill and resentment" because Marjorie Tocao did not allow her to "lord it over in the Geminesse
Enterprise." Anay had acted like she owned the enterprise because of her experience and
expertise. Hence, petitioners were the ones who suffered actual damages "including unreturned
and unaccounted stocks of Geminesse Enterprise," and "serious anxiety, besmirched reputation
in the business world, and various damages not less than P500,000.00." They also alleged that,
to "vindicate their names," they had to hire counsel for a fee of P23,000.00.

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

damages, and

At the pre-trial conference, the issues were limited to: (a) whether or not the plaintiff was an
employee or partner of Marjorie Tocao and Belo, and (b) whether or not the parties are entitled
to damages.10

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

In their defense, Belo denied that Anay was supposed to receive a share in the profit of the
business. He, however, admitted that the two had agreed that Anay would receive a three to four
percent (3-4%) share in the gross sales of the cookware. He denied contributing capital to the
business or receiving a share in its profits as he merely served as a guarantor of Marjorie Tocao,
who was new in the business. He attended and/or presided over business meetings of the
venture in his capacity as a guarantor but he never participated in decision-making. He claimed
that he wrote the memo granting the plaintiff thirty-seven percent (37%) commission upon her
dismissal from the business venture at the request of Tocao, because Anay had no other income.
For her part, Marjorie Tocao denied having entered into an oral partnership agreement with
Anay. However, she admitted that Anay was an expert in the cookware business and hence, they
agreed to grant her the following commissions: thirty-seven percent (37%) on personal sales; five
percent (5%) on gross sales; two percent (2%) on product demonstrations, and two percent (2%)
for recruitment of personnel. Marjorie denied that they agreed on a ten percent (10%)
commission on the net profits. Marjorie claimed that she got the capital for the business out of
the sale of the sewing machines used in her garments business and from Peter Lo, a Singaporean
friend-financier who loaned her the funds with interest. Because she treated Anay as her "coequal," Marjorie received the same amounts of commissions as her. However, Anay failed to
account for stocks valued at P200,000.00.
On April 22, 1993, the trial court rendered a decision the dispositive part of which is as follows:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. Ordering defendants to submit to the Court a formal account as to the partnership affairs for
the years 1987 and 1988 pursuant to Art. 1809 of the Civil Code in order to determine the ten
percent (10%) share of plaintiff in the net profits of the cookware business;
2. Ordering defendants to pay five percent (5%) overriding commission for the one hundred and
fifty (150) cookware sets available for disposition when plaintiff was wrongfully excluded from
the partnership by defendants;
3. Ordering defendants to pay plaintiff overriding commission on the total production which for
the period covering January 8, 1988 to February 5, 1988 amounted to P32,000.00;

5. Ordering defendants to pay P50,000.00 as attorneys fees and P20,000.00 as costs of suit.
SO ORDERED."

The trial court further held that the payment of commissions did not preclude the existence of
the partnership inasmuch as such practice is often resorted to in business circles as an impetus
to bigger sales volume. It did not matter that the agreement was not in writing because Article
1771 of the Civil Code provides that a partnership may be "constituted in any form." The fact that
Geminesse Enterprise was registered in Marjorie Tocaos name is not determinative of whether
or not the business was managed and operated by a sole proprietor or a partnership. What was
registered with the Bureau of Domestic Trade was merely the business name or style of
Geminesse Enterprise.
The trial court finally held that a partner who is excluded wrongfully from a partnership is an
innocent partner. Hence, the guilty partner must give him his due upon the dissolution of the
partnership as well as damages or share in the profits "realized from the appropriation of the
partnership business and goodwill." An innocent partner thus possesses "pecuniary interest in
every existing contract that was incomplete and in the trade name of the co-partnership and
assets at the time he was wrongfully expelled."
Petitioners appeal to the Court of Appeals11 was dismissed, but the amount of damages awarded
by the trial court were reduced to P50,000.00 for moral damages and P50,000.00 as exemplary
damages. Their Motion for Reconsideration was denied by the Court of Appeals for lack of
merit.12 Petitioners Belo and Marjorie Tocao are now before this Court on a petition for review
on certiorari, asserting that there was no business partnership between them and herein private
respondent Nenita A. Anay who is, therefore, not entitled to the damages awarded to her by the
Court of Appeals.
Petitioners Tocao and Belo contend that the Court of Appeals erroneously held that a
partnership existed between them and private respondent Anay because Geminesse Enterprise
"came into being" exactly a year before the "alleged partnership" was formed, and that it was

very unlikely that petitioner Belo would invest the sum of P2,500,000.00 with petitioner Tocao
contributing nothing, without any "memorandum whatsoever regarding the alleged
partnership."13
The issue of whether or not a partnership exists is a factual matter which are within the exclusive
domain of both the trial and appellate courts. This Court cannot set aside factual findings of such
courts absent any showing that there is no evidence to support the conclusion drawn by the
court a quo.14 In this case, both the trial court and the Court of Appeals are one in ruling that
petitioners and private respondent established a business partnership. This Court finds no
reason to rule otherwise.
To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or
more persons bind themselves to contribute money, property or industry to a common fund; and
(2) intention on the part of the partners to divide the profits among themselves. 15 It may be
constituted in any form; a public instrument is necessary only where immovable property or real
rights are contributed thereto.16 This implies that since a contract of partnership is consensual,
an oral contract of partnership is as good as a written one. Where no immovable property or real
rights are involved, what matters is that the parties have complied with the requisites of a
partnership. The fact that there appears to be no record in the Securities and Exchange
Commission of a public instrument embodying the partnership agreement pursuant to Article
1772 of the Civil Code17 did not cause the nullification of the partnership. The pertinent provision
of the Civil Code on the matter states:
Art. 1768. The partnership has a juridical personality separate and distinct from that of each of
the partners, even in case of failure to comply with the requirements of article 1772, first
paragraph.
Petitioners admit that private respondent had the expertise to engage in the business of
distributorship of cookware. Private respondent contributed such expertise to the partnership
and hence, under the law, she was the industrial or managing partner. It was through her
reputation with the West Bend Company that the partnership was able to open the business of
distributorship of that companys cookware products; it was through the same efforts that the
business was propelled to financial success. Petitioner Tocao herself admitted private
respondents indispensable role in putting up the business when, upon being asked if private
respondent held the positions of marketing manager and vice-president for sales, she testified
thus:
"A: No, sir at the start she was the marketing manager because there were no one to sell yet, its
only me there then her and then two (2) people, so about four (4). Now, after that when she
recruited already Oscar Abella and Lina Torda-Cruz these two (2) people were given the
designation of marketing managers of which definitely Nita as superior to them would be the
Vice President."18
By the set-up of the business, third persons were made to believe that a partnership had indeed
been forged between petitioners and private respondents. Thus, the communication dated June
4, 1986 of Missy Jagler of West Bend Company to Roger Muencheberg of the same company
states:

"Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the operations.
Marge does not have cookware experience. Nita Anay has started to gather former managers,
Lina Torda and Dory Vista. She has also gathered former demonstrators, Betty Bantilan, Eloisa
Lamela, Menchu Javier. They will continue to gather other key people and build up the
organization. All they need is the finance and the products to sell." 19
On the other hand, petitioner Belos denial that he financed the partnership rings hollow in the
face of the established fact that he presided over meetings regarding matters affecting the
operation of the business. Moreover, his having authorized in writing on October 7, 1987, on a
stationery of his own business firm, Wilcon Builders Supply, that private respondent should
receive thirty-seven (37%) of the proceeds of her personal sales, could not be interpreted
otherwise than that he had a proprietary interest in the business. His claim that he was merely a
guarantor is belied by that personal act of proprietorship in the business. Moreover, if he was
indeed a guarantor of future debts of petitioner Tocao under Article 2053 of the Civil Code, 20 he
should have presented documentary evidence therefor. While Article 2055 of the Civil Code
simply provides that guaranty must be "express," Article 1403, the Statute of Frauds, requires
that "a special promise to answer for the debt, default or miscarriage of another" be in writing. 21
Petitioner Tocao, a former ramp model,22 was also a capitalist in the partnership. She claimed
that she herself financed the business. Her and petitioner Belos roles as both capitalists to the
partnership with private respondent are buttressed by petitioner Tocaos admissions that
petitioner Belo was her boyfriend and that the partnership was not their only business venture
together. They also established a firm that they called "Wiji," the combination of petitioner Belos
first name, William, and her nickname, Jiji.23 The special relationship between them dovetails
with petitioner Belos claim that he was acting in behalf of petitioner Tocao. Significantly, in the
early stage of the business operation, petitioners requested West Bend Company to allow them
to "utilize their banking and trading facilities in Singapore" in the matter of importation and
payment of the cookware products.24The inevitable conclusion, therefore, was that petitioners
merged their respective capital and infused the amount into the partnership of distributing
cookware with private respondent as the managing partner.
The business venture operated under Geminesse Enterprise did not result in an employeremployee relationship between petitioners and private respondent. While it is true that the
receipt of a percentage of net profits constitutes only prima facie evidence that the recipient is a
partner in the business,25 the evidence in the case at bar controverts an employer-employee
relationship between the parties. In the first place, private respondent had a voice in the
management of the affairs of the cookware distributorship, 26 including selection of people who
would constitute the administrative staff and the sales force. Secondly, petitioner Tocaos
admissions militate against an employer-employee relationship. She admitted that, like her who
owned Geminesse Enterprise,27private respondent received only commissions and
transportation and representation allowances28 and not a fixed salary.29 Petitioner Tocao
testified:
"Q: Of course. Now, I am showing to you certain documents already marked as Exhs. X and Y.
Please go over this. Exh. Y is denominated `Cubao overrides 8-21-87 with ending August 21,
1987, will you please go over this and tell the Honorable Court whether you ever came across this
document and know of your own knowledge the amount --A: Yes, sir this is what I am talking about earlier. Thats the one I am telling you earlier a certain
percentage for promotions, advertising, incentive.

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

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

A: Oh yes, sir.
Q: And, as in your previous statement it is not by coincidence that these two (2) are the same?
Q: I see. And, by way of amplification this is what you are saying as one representing
commission, representation, advertising and promotion?

A: No, sir.

A: Yes, sir.

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

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

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

A: Thats her overriding commission.

Q: Overriding commission, I see. Of course, you are telling this Honorable Court that there being
the same P21,410.50 is merely by coincidence?
A: No, sir, I made it a point that we were equal because the way I look at her kasi, you know in
a sense because of her expertise in the business she is vital to my business. So, as part of the
incentive I offer her the same thing.
Q: So, in short you are saying that this you have shared together, I mean having gotten from the
company P21,140.50 is your way of indicating that you were treating her as an equal?
A: As an equal.

If indeed petitioner Tocao was private respondents employer, it is difficult to believe that they
shall receive the same income in the business. In a partnership, each partner must share in the
profits and losses of the venture, except that the industrial partner shall not be liable for the
losses.31 As an industrial partner, private respondent had the right to demand for a formal
accounting of the business and to receive her share in the net profit. 32
The fact that the cookware distributorship was operated under the name of Geminesse
Enterprise, a sole proprietorship, is of no moment. What was registered with the Bureau of
Domestic Trade on August 19, 1987 was merely the name of that enterprise. 33 While it is true that
in her undated application for renewal of registration of that firm name, petitioner Tocao
indicated that it would be engaged in retail of "kitchenwares, cookwares, utensils, skillet," 34 she
also admitted that the enterprise was only "60% to 70% for the cookware business," while 20% to
30% of its business activity was devoted to the sale of water sterilizer or purifier. 35 Indubitably
then, the business name Geminesse Enterprise was used only for practical reasons - it was
utilized as the common name for petitioner Tocaos various business activities, which included
the distributorship of cookware.

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

A: Yes, sir.
Q: I am calling again your attention to Exh. Y Overrides Makati the other one is --A: That is the same thing, sir.
Q: With ending August 21, words and figure Overrides Marjorie Ann Tocao P15,314.25 the
amount there you will acknowledge you have received that?
A: Yes, sir.

Petitioners underscore the fact that the Court of Appeals did not return the "unaccounted and
unremitted stocks of Geminesse Enterprise amounting to P208,250.00." 36 Obviously a ploy to
offset the damages awarded to private respondent, that claim, more than anything else, proves
the existence of a partnership between them. In Idos v. Court of Appeals, this Court said:
"The best evidence of the existence of the partnership, which was not yet terminated (though in
the winding up stage), were the unsold goods and uncollected receivables, which were presented
to the trial court. Since the partnership has not been terminated, the petitioner and private
complainant remained as co-partners. x x x."37
It is not surprising then that, even after private respondent had been unceremoniously booted
out of the partnership in October 1987, she still received her overriding commission until
December 1987.

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

A: Yes, sir.

Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the partnership to
reap for herself and/or for petitioner Belo financial gains resulting from private respondents
efforts to make the business venture a success. Thus, as petitioner Tocao became adept in the
business operation, she started to assert herself to the extent that she would even shout at

private respondent in front of other people. 38 Her instruction to Lina Torda Cruz, marketing
manager, not to allow private respondent to hold office in both the Makati and Cubao sales
offices concretely spoke of her perception that private respondent was no longer necessary in the
business operation,39 and resulted in a falling out between the two. However, a mere falling out
or misunderstanding between partners does not convert the partnership into a sham
organization.40 The partnership exists until dissolved under the law. Since the partnership
created by petitioners and private respondent has no fixed term and is therefore a partnership at
will predicated on their mutual desire and consent, it may be dissolved by the will of a partner.
Thus:
"x x x. The right to choose with whom a person wishes to associate himself is the very foundation
and essence of that partnership. Its continued existence is, in turn, dependent on the constancy
of that mutual resolve, along with each partners capability to give it, and the absence of cause
for dissolution provided by the law itself. Verily, any one of the partners may, at his sole
pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not
that the attendance of bad faith can prevent the dissolution of the partnership but that it can
result in a liability for damages."41
An unjustified dissolution by a partner can subject him to action for damages because by the
mutual agency that arises in a partnership, the doctrine of delectus personae allows the partners
to have the power, although not necessarily the right to dissolve the partnership.42
In this case, petitioner Tocaos unilateral exclusion of private respondent from the partnership is
shown by her memo to the Cubao office plainly stating that private respondent was, as of
October 9, 1987, no longer the vice-president for sales of Geminesse Enterprise. 43 By that memo,
petitioner Tocao effected her own withdrawal from the partnership and considered herself as
having ceased to be associated with the partnership in the carrying on of the business.
Nevertheless, the partnership was not terminated thereby; it continues until the winding up of
the business.44
The winding up of partnership affairs has not yet been undertaken by the
partnership.1wphi1 This is manifest in petitioners claim for stocks that had been entrusted to
private respondent in the pursuit of the partnership business.
The determination of the amount of damages commensurate with the factual findings upon
which it is based is primarily the task of the trial court. 45 The Court of Appeals may modify that
amount only when its factual findings are diametrically opposed to that of the lower court, 46 or
the award is palpably or scandalously and unreasonably excessive. 47 However, exemplary
damages that are awarded "by way of example or correction for the public good," 48 should be
reduced to P50,000.00, the amount correctly awarded by the Court of Appeals. Concomitantly,
the award of moral damages of P100,000.00 was excessive and should be likewise reduced to
P50,000.00. Similarly, attorneys fees that should be granted on account of the award of
exemplary damages and petitioners evident bad faith in refusing to satisfy private respondents
plainly valid, just and demandable claims,49 appear to have been excessively granted by the trial
court and should therefore be reduced to P25,000.00.
WHEREFORE, the instant petition for review on certiorari is DENIED. The partnership
among petitioners and private respondent is ordered dissolved, and the parties are ordered to
effect the winding up and liquidation of the partnership pursuant to the pertinent provisions of

the Civil Code. This case is remanded to the Regional Trial Court for proper proceedings relative
to said dissolution. The appealed decisions of the Regional Trial Court and the Court of Appeals
are AFFIRMED with MODIFICATIONS, as follows --1. Petitioners are ordered to submit to the Regional Trial Court a formal account of the
partnership affairs for the years 1987 and 1988, pursuant to Article 1809 of the Civil
Code, in order to determine private respondents ten percent (10%) share in the net
profits of the partnership;
2. Petitioners are ordered, jointly and severally, to pay private respondent five percent
(5%) overriding commission for the one hundred and fifty (150) cookware sets
available for disposition since the time private respondent was wrongfully excluded
from the partnership by petitioners;
3. Petitioners are ordered, jointly and severally, to pay private respondent overriding
commission on the total production which, for the period covering January 8, 1988 to
February 5, 1988, amounted to P32,000.00;
4. Petitioners are ordered, jointly and severally, to pay private respondent moral
damages in the amount of P50,000.00, exemplary damages in the amount of
P50,000.00 and attorneys fees in the amount of P25,000.00.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

foreign firm be taxable as dividends? Under the facts of this case, has the goverment's right to
assess and collect said tax prescribed?
The Case

THIRD DIVISION

G.R. No. 112675 January 25, 1999

AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION;
CHARTER INSURANCE CO., INC.; CIBELES INSURANCE CORPORATION;
COMMONWEALTH INSURANCE COMPANY; CONSOLIDATED INSURANCE CO.,
INC.; DEVELOPMENT INSURANCE & SURETY CORPORATION DOMESTIC
INSURANCE COMPANY OF THE PHILIPPINE; EASTERN ASSURANCE COMPANY
& SURETY CORP; EMPIRE INSURANCE COMPANY; EQUITABLE INSURANCE
CORPORATION; FEDERAL INSURANCE CORPORATION INC.; FGU INSURANCE
CORPORATION; FIDELITY & SURETY COMPANY OF THE PHILS., INC.; FILIPINO
MERCHANTS' INSURANCE CO., INC.; GOVERNMENT SERVICE INSURANCE
SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH INSURANCE CO.;
INC.; MERCANTILE INSURANCE CO., INC.; METROPOLITAN INSURANCE
COMPANY; METRO-TAISHO INSURANCE CORPORATION; NEW ZEALAND
INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE CORPORATION;
PARAMOUNT INSURANCE CORPORATION; PEOPLE'S TRANS-EAST ASIA
INSURANCE CORPORATION; PERLA COMPANIA DE SEGUROS, INC.;
PHILIPPINE BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST INSURANCE
CO., INC.; PIONEER INSURANCE & SURETY CORP.; PIONEER
INTERCONTINENTAL INSURANCE CORPORATION; PROVIDENT INSURANCE
COMPANY OF THE PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE
SURETY & INSURANCE COMPANY; RIZAL SURETY & INSURANCE COMPANY;
SANPIRO INSURANCE CORPORATION; SEABOARD-EASTERN INSURANCE CO.,
INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY & INSURANCE CO., INC.;
STATE BONDING & INSURANCE CO., INC.; SUMMA INSURANCE CORPORATION;
TABACALERA INSURANCE CO., INC. all assessed as "POOL OF MACHINERY
INSURERS, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMISSIONER OF
INTERNAL REVENUE, respondent.

PANGANIBAN, J.:
Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into a
"pool" in order to facilitate the handling of business contracted with a nonresident foreign
insurance company. May the "clearing house" or "insurance pool" so formed be deemed a
partnership or an association that is taxable as a corporation under the National Internal
Revenue Code (NIRC)? Should the pool's remittances to the member companies and to the said

These are the main questions raised in the Petition for Review on Certiorari before us, assailing
the October 11, 1993 Decision 1 of the Court of Appeals 2 in CA-GR SP 25902, which dismissed
petitioners' appeal of the October 19, 1992 Decision 3 of the Court of Tax Appeals 4 (CTA) which
had previously sustained petitioners' liability for deficiency income tax, interest and withholding
tax. The Court of Appeals ruled:
WHEREFORE, the petition is DISMISSED, with costs against petitioner

The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution 6 denying
reconsideration.
The Facts
The antecedent facts, 7 as found by the Court of Appeals, are as follows:
The petitioners are 41 non-life insurance corporations, organized and
existing under the laws of the Philippines. Upon issuance by them of
Erection, Machinery Breakdown, Boiler Explosion and Contractors' All Risk
insurance policies, the petitioners on August 1, 1965 entered into a Quota
Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a
non-resident foreign insurance corporation. The reinsurance treaties
required petitioners to form a [p]ool. Accordingly, a pool composed of the
petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial
statement and filed an "Information Return of Organization Exempt from
Income Tax" for the year ending in 1975, on the basis of which it was
assessed by the Commissioner of Internal Revenue deficiency corporate
taxes in the amount of P1,843,273.60, and withholding taxes in the amount
of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the
petitioners, respectively. These assessments were protested by the
petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the
protest and ordered the petitioners, assessed as "Pool of Machinery
Insurers," to pay deficiency income tax, interest, and with [h]olding tax,
itemized as follows:
Net income per information return P3,737,370.00
===========

Income tax due thereon P1,298,080.00

10% withholding tax at

Add: 14% Int. fr. 4/15/76

source due thereon P65,563.60

to 4/15/79 545,193.60

Add: 25% surcharge 16,390.90

14% interest from

TOTAL AMOUNT DUE & P1,843,273.60

1/25/76 to 1/25/79 6,884.18

COLLECTIBLE

Compromise penalty-

Dividend paid to Munich

non-filing of return 300.00

Reinsurance Company P3,728,412.00

late payment 300.00

35% withholding tax at

TOTAL AMOUNT DUE & P89,438.68

source due thereon P1,304,944.20

COLLECTIBLE =========== 8

Add: 25% surcharge 326,236.05

14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penaltynon-filing of return 300.00
late payment 300.00

TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
===========

The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latter's collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due, because "the taxpayer cannot be located at the
address given in the information return filed." Hence, this Petition for Review before us. 9
The Issues
Before this Court, petitioners raise the following issues:
1. Whether or not the Clearing House, acting as a mere agent and
performing strictly administrative functions, and which did not insure or
assume any risk in its own name, was a partnership or association subject to
tax as a corporation;
2. Whether or not the remittances to petitioners and MUNICHRE of their
respective shares of reinsurance premiums, pertaining to their individual
and separate contracts of reinsurance, were "dividends" subject to tax; and
3. Whether or not the respondent Commissioner's right to assess the
Clearing House had already prescribed. 10
The Court's Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is
taxable as a corporation, and that the government's right to assess and collect the taxes had not
prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the pool of clearing house was
an informal partnership, which was taxable as a corporation under the NIRC. They point out that
the reinsurance policies were written by them "individually and separately," and that their
liability was limited to the extent of their allocated share in the original risk thus
reinsured. 11 Hence, the pool did not act or earn income as a reinsurer. 12 Its role was limited to
its principal function of "allocating and distributing the risk(s) arising from the original
insurance among the signatories to the treaty or the members of the pool based on their ability to
absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as records,
maintenance, collection and custody of funds, etc." 13
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did
not share the same risk or solidary liability, 14 (2) there was no common fund; 15 (3) the executive
board of the pool did not exercise control and management of its funds, unlike the board of
directors of a corporation; 16 and (4) the pool or clearing house "was not and could not possibly
have engaged in the business of reinsurance from which it could have derived income for
itself." 17
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the
agency tasked with the enforcement of tax law, is accorded much weight and even finality, when
there is no showing. that it is patently wrong, 18 particularly in this case where the findings and
conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a
specialized body created for the exclusive purpose of reviewing tax cases, and the Court of
Appeals. 19Indeed,
[I]t has been the long standing policy and practice of this Court to respect
the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals
which, by the nature of its functions, is dedicated exclusively to the study
and consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident
exercise of its authority. 20
This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained
the internal revenue commissioner, committed no reversible error. Section 24 of the NIRC, as
worded in the year ending 1975, provides:
Sec. 24. Rate of tax on corporations. (a) Tax on domestic
corporations. A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how
created or organized, but not including duly registered general co-

partnership (compaias colectivas), general professional partnerships,

private educational institutions, and building and loan associations . . . .
Ineludibly, the Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Parenthetically, the NIRC's
inclusion of such entities in the tax on corporations was made even clearer by the tax Reform Act
of 1997, 21 which amended the Tax Code. Pertinent provisions of the new law read as follows:
Sec. 27. Rates of Income Tax on Domestic Corporations.
(A) In General. Except as otherwise provided in this Code, an income tax
of thirty-five percent (35%) is hereby imposed upon the taxable income
derived during each taxable year from all sources within and without the
Philippines by every corporation, as defined in Section 22 (B) of this Code,
and taxable under this Title as a corporation . . . .
Sec. 22. Definition. When used in this Title:
xxx xxx xxx
(B) The term "corporation" shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does not include
general professional partnerships [or] a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract without the
Government. "General professional partnerships" are partnerships formed
by persons for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade or
business.
xxx xxx xxx
Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held that Section 24 covered
these unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members. 23 The Court of Appeals astutely
applied Evangelista. 24
. . . Accordingly, a pool of individual real property owners dealing in real
estate business was considered a corporation for purposes of the tax in sec.
24 of the Tax Code in Evangelista v. Collector of Internal Revenue, supra.
The Supreme Court said:
The term "partnership" includes a syndicate, group,
pool, joint venture or other unincorporated
organization, through or by means of which any
business, financial operation, or venture is carried

on. *** (8 Merten's Law of Federal Income Taxation, p.

562 Note 63)
Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when "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." 25 Its requisites are: "(1) mutual
contribution to a common stock, and (2) a joint interest in the profits." 26 In other words, a
partnership is formed when persons contract "to devote to a common purpose either money,
property, or labor with the intention of dividing the profits between
themselves." 27 Meanwhile, an association implies associates who enter into a "joint
enterprise . . . for the transaction of business." 28
In the case before us, the ceding companies entered into a Pool Agreement 29 or an
association 30 that would handle all the insurance businesses covered under their quota-share
reinsurance treaty 31 and surplus reinsurance treaty 32 with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in
the name and credit of the pool. 33 This common fund pays for the administration and operation
expenses of the pool. 24
(2) The pool functions through an executive board, which resembles the board of directors of a
corporation, composed of one representative for each of the ceding companies. 35
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its
work is indispensable, beneficial and economically useful to the business of the ceding
companies and Munich, because without it they would not have received their premiums. The
ceding companies share "in the business ceded to the pool" and in the "expenses" according to a
"Rules of Distribution" annexed to the Pool Agreement. 36 Profit motive or business is, therefore,
the primordial reason for the pool's formation. As aptly found by the CTA:

Pool's Remittances are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich
are not dividends subject to tax. They insist that such remittances contravene Sections 24 (b) (I)
and 263 of the 1977 NIRC and "would be tantamount to an illegal double taxation as it would
result in taxing the same taxpayer" 40 Moreover, petitioners argue that since Munich was not a
signatory to the Pool Agreement, the remittances it received from the pool cannot be deemed
dividends. 41They add that even if such remittances were treated as dividends, they would have
been exempt under the previously mentioned sections of the 1977 NIRC, 42 as well as Article 7 of
paragraph 1 43 and Article 5 of paragraph 5 44 of the RP-West German Tax Treaty. 45
Petitioners are clutching at straws. Double taxation means taxing the same property twice when
it should be taxed only once. That is, ". . . taxing the same person twice by the same jurisdiction
for the same thing" 46 In the instant case, the pool is a taxable entity distinct from the individual
corporate entities of the ceding companies. The tax on its income is obviously different from the
tax on thedividends received by the said companies. Clearly, there is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, "exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right." 47 Petitioners have failed to
discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable,
because these were not yet in effect when the income was earned and when the subject
information return for the year ending 1975 was filed.
Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still cannot
justify the exemptions claimed. Section 255 provides that no tax shall ". . . be paid upon
reinsurance by any company that has already paid the tax . . ." This cannot be applied to the
present case because, as previously discussed, the pool is a taxable entity distinct from the ceding
companies; therefore, the latter cannot individually claim the income tax paid by the former as
their own.

. . . The fact that the pool does not retain any profit or income does not
obliterate an antecedent fact, that of the pool being used in the transaction
of business for profit. It is apparent, and petitioners admit, that their
association or coaction was indispensable [to] the transaction of the
business, . . . If together they have conducted business, profit must have
been the object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of consequence, as it
implies that profit actually resulted. 37

On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign corporations; hence, it cannot
be claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign
corporation, be granted exemption based solely on this provision of the Tax Code, because the
same subsection specifically taxes dividends, the type of remittances forwarded to it by the pool.
Although not a signatory to the Pool Agreement, Munich is patently an associate of the ceding
companies in the entity formed, pursuant to their reinsurance treaties which required the
creation of said pool.

The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced, because the facts

obtaining therein are not on all fours with the present case. In Pascual, there was no
unregistered partnership, but merely a co-ownership which took up only two isolated
transactions. 39 The Court of Appeals did not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions spanning more than ten years, as in the case
before us.

Under its pool arrangement with the ceding companies; Munich shared in their income and loss.
This is manifest from a reading of Article 3 49 and 10 50 of the Quota-Share Reinsurance treaty
and Articles 3 51 and 10 52 of the Surplus Reinsurance Treaty. The foregoing interpretation of
Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed strictissimi
juris, and the statutory exemption claimed must be expressed in a language too plain to be
mistaken. 53

Second Issue:

Finally the petitioners' claim that Munich is tax-exempt based on the RP- West German Tax
Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for

corporate taxes on the basis of the information return it had submitted for the year ending 1975,
a taxable year when said treaty was not yet in effect. 54 Although petitioners omitted in their
pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect
only later, on December 14, 1984. 55
Third Issue:
Prescription
Petitioners also argue that the government's right to assess and collect the subject tax had
prescribed. They claim that the subject information return was filed by the pool on April 14,
1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give
them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that
the five-year statute of limitations then provided in the NIRC had already lapsed, and that the
internal revenue commissioner was already barred by prescription from making an
assessment. 56
We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive
period was tolled under then Section 333 of the NIRC, 57 because "the taxpayer cannot be located
at the address given in the information return filed and for which reason there was delay in
sending the assessment." 58 Indeed, whether the government's right to collect and assess the tax
has prescribed involves facts which have been ruled upon by the lower courts. It is axiomatic that
in the absence of a clear showing of palpable error or grave abuse of discretion, as in this case,
this Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of
Appeals that the pool changed its address, for they stated that the pool's information return filed
in 1980 indicated therein its "present address." The Court finds that this falls short of the
requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law
clearly states that the said period will be suspended only "if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address."
WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals dated October
11, 1993 and November 15, 1993 are hereby AFFIRMED. Cost against petitioners.1wphi1.nt
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-9996

October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA,

petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali
and Solicitor Felicisimo R. Rosete for Respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista,
for review of a decision of the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax,
real estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in
accordance with the respondent's assessment for the same in the total amount of
P6,878.34, which is hereby affirmed and the petition for review filed by petitioner is
hereby dismissed with costs against petitioners.

6. That in a document dated August 16, 1945, they appointed their brother Simeon
Evangelista to 'manage their properties with full power to lease; to collect and receive
rents; to issue receipts therefor; in default of such payment, to bring suits against the
defaulting tenants; to sign all letters, contracts, etc., for and in their behalf, and to
endorse and deposit all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners had
the same rented or leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total
amount collected as rents on their real properties was P9,599.00 while the expenses
amounted to P3,650.00 thereby leaving them a net rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of
which amount was deducted in the sum of P16,288.27 for expenses thereby leaving
them a net rental income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which
amount was deducted the sum of P4,837.65 as expenses, thereby leaving them a net
rental income of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue
demanded the payment of income tax on corporations, real estate dealer's fixed tax and
corporation residence tax for the years 1945-1949, computed, according to assessment made by
said officer, as follows:

INCOME TAXES

It appears from the stipulation submitted by the parties:

1. That the petitioners borrowed from their father the sum of P59,1400.00 which
amount together with their personal monies was used by them for the purpose of
buying real properties,.

1945

14.84

2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an
area of 3,713.40 sq. m. including improvements thereon from the sum of
P100,000.00; this property has an assessed value of P57,517.00 as of 1948;

1946

1,144.71

1947

10.34

1948

1,912.30

3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land
with an aggregate area of 3,718.40 sq. m. including improvements thereon for
P130,000.00; this property has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of
4,353 sq. m. including improvements thereon for P108,825.00. This property has an
assessed value of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m.
including improvements thereon for P237,234.34. This property has an assessed value
of P59,140.00 as of 1948;

1949

1,575.90

1947

38.75

Total including surcharge and compromise

P6,157.09

1948

38.75

1949

38.75

REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

Total including surcharge

P193.75

1947

150.00

TOTAL TAXES DUE

P6,878.34.

1948

150.00

1949

150.00

Total including penalty

P527.00

Said letter of demand and corresponding assessments were delivered to petitioners on December
3, 1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer
that "the decision of the respondent contained in his letter of demand dated September 24, 1954"
be reversed, and that they be absolved from the payment of the taxes in question, with costs
against the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the
respondent, and a petition for reconsideration and new trial having been subsequently denied,
the case is now before Us for review at the instance of the petitioners.
The issue in this case whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue
Code, as well as to the residence tax for corporations and the real estate dealers fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the terms "corporation"
and "partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:

RESIDENCE TAXES OF CORPORATION

1945

P38.75

1946

38.75

SEC. 24. Rate of tax on corporations.There shall be levied, assessed, collected, and
paid annually upon the total net income received in the preceding taxable year from all
sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including duly registered
general co-partnerships (compaias colectivas), a tax upon such income equal to the
sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations or insurance companies, but does not include duly registered general
copartnerships. (compaias colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute
money, properly, or industry to a common fund, with the intention of dividing the
profits among themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement
to contribute money, property or industry to a common fund; and (b) intent to divide the profits
among the contracting parties. The first element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and property to a common
fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of
all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was
to engage in real estate transactions for monetary gain and then divide the same among
themselves, because:
1. Said common fund was not something they found already in existence. It was not
property inherited by them pro indiviso. They created it purposely. What is more
they jointly borrowed a substantial portion thereof in order to establish said common
fund.
2. They invested the same, not merely not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3,
1944, they purchased 21 lots for P18,000.00. This was soon followed on April 23,
1944, by the acquisition of another real estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24)
acquired and transactions undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioners in
February, 1943. In other words, one cannot but perceive a character of habitually
peculiar to business transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal
uses, of petitioners herein. The properties were leased separately to several persons,
who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals.
Seemingly, the lots are still being so let, for petitioners do not even suggest that there
has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one person,
namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts,
to bring suits, to sign letters and contracts, and to indorse and deposit notes and
checks. Thus, the affairs relative to said properties have been handled as if the same
belonged to a corporation or business and enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact,
over fifteen (15) years, since the first property was acquired, and over twelve (12)
years, since Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence.
They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on

the existence of said intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and, hence, those cases are
not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of
the acts performed by them, a legal entity, with a personality independent of that of its members,
did not come into existence, and some of the characteristics of partnerships are lacking in the
case at bar. This pretense was correctly rejected by the Court of Tax Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking,
are distinct and different from "partnerships". When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on "corporations", said Code must allude,
therefore, to organizations which are not necessarily "partnerships", in the technical sense of the
term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or organized." This qualifying
expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporations. Again, pursuant to said
section 84(b), the term "corporation" includes, among other, joint accounts, (cuentas en
participation)" and "associations," none of which has a legal personality of its own,
independent of that of its members. Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the partnerships therein referred to. In
fact, as above stated, "duly registered general copartnerships" which are possessed of the
aforementioned personality have been expressly excluded by law (sections 24 and 84 [b] from
the connotation of the term "corporation" It may not be amiss to add that petitioners' allegation
to the effect that their liability in connection with the leasing of the lots above referred to, under
the management of one person even if true, on which we express no opinion tends
to increase the similarity between the nature of their venture and that corporations, and is,
therefore, an additional argument in favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provisions of said laws, such "corporations" include "associations,
joint-stock companies and insurance companies." However, the term "association" is not used in
the aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the
transaction of designed affairs, or the attainment of some object, which like a
corporation, continues notwithstanding that its members or participants change, and
the affairs of which, like corporate affairs, are conducted by a single individual, a
committee, a board, or some other group, acting in a representative capacity. It is
immaterial whether such organization is created by an agreement, a declaration of
trust, a statute, or otherwise. It includes a voluntary association, a joint-stock
corporation or company, a 'business' trusts a 'Massachusetts' trust, a 'common law'
trust, and 'investment' trust (whether of the fixed or the management type), an
interinsuarance exchange operating through an attorney in fact, a partnership
association, and any other type of organization (by whatever name known) which is
not, within the meaning of the Code, a trust or an estate, or a partnership. (7A Mertens
Law of Federal Income Taxation, p. 788; emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term 'partnership 'it includes
not only a partnership as known at common law but, as well, a syndicate, group,
pool, joint venture or other unincorporated organizations which carries on any

business financial operation, or venture, and which is not, within the meaning of the
Code, a trust, estate, or a corporation. . . (7A Merten's Law of Federal Income taxation,
p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on, . . .. ( 8 Merten's Law of Federal Income Taxation,
p. 562 Note 63; emphasis supplied.) .
For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships with the exception only of duly registered general copartnerships within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned and are subject to the income tax for
corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465
provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or
organized, whether domestic or resident foreign, engaged in or doing business in the
Philippines shall pay an annual residence tax of five pesos and an annual additional
tax which in no case, shall exceed one thousand pesos, in accordance with the
following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership,
joint account (cuentas en participacion), association or insurance company, no
matter how created or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b)
of our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was
approved on June 15, 1939, the day immediately after the approval of said Commonwealth Act
No. 465 (June 14, 1939), it is apparent that the terms "corporation" and "partnership" are used
in both statutes with substantially the same meaning. Consequently, petitioners are subject, also,
to the residence tax for corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above
mentioned for a period of over twelve years, and that the yearly gross rentals of said properties
from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax
provided in section 193 (q) of our National Internal Revenue Code, for "real estate dealers,"
inasmuch as, pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding
himself out as a full or part time dealer in real estate or as an owner of rental property
or properties rented or offered to rent for an aggregate amount of three thousand
pesos or more a year. . . (emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs
against the petitioners herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

In June , 1946, they executed a supplementary agreement, extending the partnership for a period
of three years beginning January 1, 1948 to December 31, 1950. The benefits are to be divided
between them at the rate of 50-50 and after December 31, 1950, the showhouse building shall
belong exclusively to the second party, Mrs. Yulo.

EN BANC
G.R. No. L-12541

August 28, 1959

ROSARIO U. YULO, assisted by her husband JOSE C. YULO, plaintiffs-appellants,

vs.
YANG CHIAO SENG, defendant-appellee.
Punzalan, Yabut, Eusebio & Tiburcio for appellants.
Augusto Francisco and Julian T. Ocampo for appellee.
LABRADOR, J.:
Appeal from the judgment of the Court of First Instance of Manila, Hon. Bienvenido A. Tan,
presiding, dismissing plaintiff's complaint as well as defendant's counterclaim. The appeal is
prosecuted by plaintiff.
The record discloses that on June 17, 1945, defendant Yang Chiao Seng wrote a letter to the
palintiff Mrs. Rosario U. Yulo, proposing the formation of a partnership between them to run
and operate a theatre on the premises occupied by former Cine Oro at Plaza Sta. Cruz, Manila.
The principal conditions of the offer are (1) that Yang Chiao Seng guarantees Mrs. Yulo a
monthly participation of P3,000 payable quarterly in advance within the first 15 days of each
quarter, (2) that the partnership shall be for a period of two years and six months, starting from
July 1, 1945 to December 31, 1947, with the condition that if the land is expropriated or rendered
impracticable for the business, or if the owner constructs a permanent building thereon, or Mrs.
Yulo's right of lease is terminated by the owner, then the partnership shall be terminated even if
the period for which the partnership was agreed to be established has not yet expired; (3) that
Mrs. Yulo is authorized personally to conduct such business in the lobby of the building as is
ordinarily carried on in lobbies of theatres in operation, provided the said business may not
obstruct the free ingress and agrees of patrons of the theatre; (4) that after December 31, 1947,
all improvements placed by the partnership shall belong to Mrs. Yulo, but if the partnership
agreement is terminated before the lapse of one and a half years period under any of the causes
mentioned in paragraph (2), then Yang Chiao Seng shall have the right to remove and take away
all improvements that the partnership may place in the premises.
Pursuant to the above offer, which plaintiff evidently accepted, the parties executed a
partnership agreement establishing the "Yang & Company, Limited," which was to exist from
July 1, 1945 to December 31, 1947. It states that it will conduct and carry on the business of
operating a theatre for the exhibition of motion and talking pictures. The capital is fixed at
P100,000, P80,000 of which is to be furnished by Yang Chiao Seng and P20,000, by Mrs. Yulo.
All gains and profits are to be distributed among the partners in the same proportion as their
capital contribution and the liability of Mrs. Yulo, in case of loss, shall be limited to her capital
contribution (Exh. "B").

The land on which the theatre was constructed was leased by plaintiff Mrs. Yulo from Emilia
Carrion Santa Marina and Maria Carrion Santa Marina. In the contract of lease it was stipulated
that the lease shall continue for an indefinite period of time, but that after one year the lease may
be cancelled by either party by written notice to the other party at least 90 days before the date of
cancellation. The last contract was executed between the owners and Mrs. Yulo on April 5, 1948.
But on April 12, 1949, the attorney for the owners notified Mrs. Yulo of the owner's desire to
cancel the contract of lease on July 31, 1949. In view of the above notice, Mrs. Yulo and her
husband brought a civil action to the Court of First Instance of Manila on July 3, 1949 to declare
the lease of the premises. On February 9, 1950, the Municipal Court of Manila rendered
judgment ordering the ejectment of Mrs. Yulo and Mr. Yang. The judgment was appealed. In the
Court of First Instance, the two cases were afterwards heard jointly, and judgment was rendered
dismissing the complaint of Mrs. Yulo and her husband, and declaring the contract of lease of
the premises terminated as of July 31, 1949, and fixing the reasonable monthly rentals of said
premises at P100. Both parties appealed from said decision and the Court of Appeals, on April
30, 1955, affirmed the judgment.
On October 27, 1950, Mrs. Yulo demanded from Yang Chiao Seng her share in the profits of the
business. Yang answered the letter saying that upon the advice of his counsel he had to suspend
the payment (of the rentals) because of the pendency of the ejectment suit by the owners of the
land against Mrs. Yulo. In this letter Yang alleges that inasmuch as he is a sublessee and
inasmuch as Mrs. Yulo has not paid to the lessors the rentals from August, 1949, he was
retaining the rentals to make good to the landowners the rentals due from Mrs. Yulo in arrears
(Exh. "E").
In view of the refusal of Yang to pay her the amount agreed upon, Mrs. Yulo instituted this action
on May 26, 1954, alleging the existence of a partnership between them and that the defendant
Yang Chiao Seng has refused to pay her share from December, 1949 to December, 1950; that
after December 31, 1950 the partnership between Mrs. Yulo and Yang terminated, as a result of
which, plaintiff became the absolute owner of the building occupied by the Cine Astor; that the
reasonable rental that the defendant should pay therefor from January, 1951 is P5,000; that the
defendant has acted maliciously and refuses to pay the participation of the plaintiff in the profits
of the business amounting to P35,000 from November, 1949 to October, 1950, and that as a
result of such bad faith and malice on the part of the defendant, Mrs. Yulo has suffered damages
in the amount of P160,000 and exemplary damages to the extent of P5,000. The prayer includes
a demand for the payment of the above sums plus the sum of P10,000 for the attorney's fees.
In answer to the complaint, defendant alleges that the real agreement between the plaintiff and
the defendant was one of lease and not of partnership; that the partnership was adopted as a
subterfuge to get around the prohibition contained in the contract of lease between the owners
and the plaintiff against the sublease of the said property. As to the other claims, he denies the
same and alleges that the fair rental value of the land is only P1,100. By way of counterclaim he
alleges that by reason of an attachment issued against the properties of the defendant the latter
has suffered damages amounting to P100,000.

The first hearing was had on April 19, 1955, at which time only the plaintiff appeared. The court
heard evidence of the plaintiff in the absence of the defendant and thereafter rendered judgment
ordering the defendant to pay to the plaintiff P41,000 for her participation in the business up to
December, 1950; P5,000 as monthly rental for the use and occupation of the building from
January 1, 1951 until defendant vacates the same, and P3,000 for the use and occupation of the
lobby from July 1, 1945 until defendant vacates the property. This decision, however, was set
aside on a motion for reconsideration. In said motion it is claimed that defendant failed to
appear at the hearing because of his honest belief that a joint petition for postponement filed by
both parties, in view of a possible amicable settlement, would be granted; that in view of the
decision of the Court of Appeals in two previous cases between the owners of the land and the
plaintiff Rosario Yulo, the plaintiff has no right to claim the alleged participation in the profit of
the business, etc. The court, finding the above motion, well-founded, set aside its decision and a
new trial was held. After trial the court rendered the decision making the following findings: that
it is not true that a partnership was created between the plaintiff and the defendant because
defendant has not actually contributed the sum mentioned in the Articles of Partnership, or any
other amount; that the real agreement between the plaintiff and the defendant is not of the
partnership but one of the lease for the reason that under the agreement the plaintiff did not
share either in the profits or in the losses of the business as required by Article 1769 of the Civil
Code; and that the fact that plaintiff was granted a "guaranteed participation" in the profits also
belies the supposed existence of a partnership between them. It. therefore, denied plaintiff's
claim for damages or supposed participation in the profits.
As to her claim for damages for the refusal of the defendant to allow the use of the supposed
lobby of the theatre, the court after ocular inspection found that the said lobby was very narrow
space leading to the balcony of the theatre which could not be used for business purposes under
existing ordinances of the City of Manila because it would constitute a hazard and danger to the
patrons of the theatre. The court, therefore, dismissed the complaint; so did it dismiss the
defendant's counterclaim, on the ground that the defendant failed to present sufficient evidence
to sustain the same. It is against this decision that the appeal has been prosecuted by plaintiff to
this Court.
The first assignment of error imputed to the trial court is its order setting aside its former
decision and allowing a new trial. This assignment of error is without merit. As that parties
agreed to postpone the trial because of a probable amicable settlement, the plaintiff could not
take advantage of defendant's absence at the time fixed for the hearing. The lower court,
therefore, did not err in setting aside its former judgment. The final result of the hearing shown
by the decision indicates that the setting aside of the previous decision was in the interest of
justice.
In the second assignment of error plaintiff-appellant claims that the lower court erred in not
striking out the evidence offered by the defendant-appellee to prove that the relation between
him and the plaintiff is one of the sublease and not of partnership. The action of the lower court
in admitting evidence is justified by the express allegation in the defendant's answer that the
agreement set forth in the complaint was one of lease and not of partnership, and that the
partnership formed was adopted in view of a prohibition contained in plaintiff's lease against a
sublease of the property.
The most important issue raised in the appeal is that contained in the fourth assignment of error,
to the effect that the lower court erred in holding that the written contracts, Exhs. "A", "B", and
"C, between plaintiff and defendant, are one of lease and not of partnership. We have gone over

the evidence and we fully agree with the conclusion of the trial court that the agreement was a
sublease, not a partnership. The following are the requisites of partnership: (1) two or more
persons who bind themselves to contribute money, property, or industry to a common fund; (2)
intention on the part of the partners to divide the profits among themselves. (Art. 1767, Civil
Code.).
In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she
did not furnish any help or intervention in the management of the theatre. In the third place, it
does not appear that she has ever demanded from defendant any accounting of the expenses and
earnings of the business. Were she really a partner, her first concern should have been to find
out how the business was progressing, whether the expenses were legitimate, whether the
earnings were correct, etc. She was absolutely silent with respect to any of the acts that a partner
should have done; all that she did was to receive her share of P3,000 a month, which can not be
interpreted in any manner than a payment for the use of the premises which she had leased from
the owners. Clearly, plaintiff had always acted in accordance with the original letter of defendant
of June 17, 1945 (Exh. "A"), which shows that both parties considered this offer as the real
contract between them.
Plaintiff claims the sum of P41,000 as representing her share or participation in the business
from December, 1949. But the original letter of the defendant, Exh. "A", expressly states that the
agreement between the plaintiff and the defendant was to end upon the termination of the right
of the plaintiff to the lease. Plaintiff's right having terminated in July, 1949 as found by the Court
of Appeals, the partnership agreement or the agreement for her to receive a participation of
P3,000 automatically ceased as of said date.
We find no error in the judgment of the court below and we affirm it in toto, with costs against
plaintiff-appellant.
Paras C.J., Padilla, Bautista Angelo, Endencia, and Barrera, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 159333

July 31, 2006

ARSENIO T. MENDIOLA, petitioner,

vs.
COURT OF APPEALS, NATIONAL LABOR RELATIONS COMMISSION, PACIFIC
FOREST RESOURCES, PHILS., INC. and/or CELLMARK AB, respondents.
DECISION
PUNO, J.:
On appeal are the Decision1 and Resolution2 of the Court of Appeals, dated January 30, 2003 and
July 30, 2003, respectively, in CA-G.R. SP No. 71028, affirming the ruling 3 of the National Labor
Relations Commission (NLRC), which in turn set aside the July 30, 2001 Decision 4 of the labor
arbiter. The labor arbiter declared illegal the dismissal of petitioner from employment and
awarded separation pay, moral and exemplary damages, and attorney's fees.
The facts are as follows:
Private respondent Pacific Forest Resources, Phils., Inc. (Pacfor) is a corporation organized and
existing under the laws of California, USA. It is a subsidiary of Cellulose Marketing
International, a corporation duly organized under the laws of Sweden, with principal office in
Gothenburg, Sweden.
Private respondent Pacfor entered into a "Side Agreement on Representative Office known as
Pacific Forest Resources (Phils.), Inc."5 with petitioner Arsenio T. Mendiola (ATM), effective May
1, 1995, "assuming that Pacfor-Phils. is already approved by the Securities and Exchange
Commission [SEC] on the said date."6 The Side Agreement outlines the business relationship of
the parties with regard to the Philippine operations of Pacfor. Private respondent will establish a
Pacfor representative office in the Philippines, to be known as Pacfor Phils, and petitioner ATM
will be its President. Petitioner's base salary and the overhead expenditures of the company shall
be borne by the representative office and funded by Pacfor/ATM, since Pacfor Phils. is equally
owned on a 50-50 equity by ATM and Pacfor-usa.
On July 14, 1995, the SEC granted the application of private respondent Pacfor for a license to
transact business in the Philippines under the name of Pacfor or Pacfor Phils. 7 In its application,
private respondent Pacfor proposed to establish its representative office in the Philippines with
the purpose of monitoring and coordinating the market activities for paper products. It also
designated petitioner as its resident agent in the Philippines, authorized to accept summons and
processes in all legal proceedings, and all notices affecting the corporation. 8

In March 1997, the Side Agreement was amended through a "Revised Operating and Profit
Sharing Agreement for the Representative Office Known as Pacific Forest Resources
(Philippines),"9 where the salary of petitioner was increased to $78,000 per annum. Both
agreements show that the operational expenses will be borne by the representative office and
funded by all parties "as equal partners," while the profits and commissions will be shared
among them.
In July 2000, petitioner wrote Kevin Daley, Vice President for Asia of Pacfor, seeking
confirmation of his 50% equity of Pacfor Phils.10 Private respondent Pacfor, through William
Gleason, its President, replied that petitioner is not a part-owner of Pacfor Phils. because the
latter is merely Pacfor-USA's representative office and not an entity separate and distinct from
Pacfor-USA. "It's simply a 'theoretical company' with the purpose of dividing the income 5050."11 Petitioner presumably knew of this arrangement from the start, having been the one to
propose to private respondent Pacfor the setting up of a representative office, and "not a branch
office" in the Philippines to save on taxes.12
Petitioner claimed that he was all along made to believe that he was in a joint venture with them.
He alleged he would have been better off remaining as an independent agent or representative of
Pacfor-USA as ATM Marketing Corp.13 Had he known that no joint venture existed, he would not
have allowed Pacfor to take the profitable business of his own company, ATM Marketing
Corp.14 Petitioner raised other issues, such as the rentals of office furniture, salary of the
employees, company car, as well as commissions allegedly due him. The issues were not
resolved, hence, in October 2000, petitioner wrote Pacfor-USA demanding payment of unpaid
commissions and office furniture and equipment rentals, amounting to more than one million
dollars.15
On November 27, 2000, private respondent Pacfor, through counsel, ordered petitioner to turn
over to it all papers, documents, files, records, and other materials in his or ATM Marketing
Corporation's possession that belong to Pacfor or Pacfor Phils. 16 On December 18, 2000, private
respondent Pacfor also required petitioner to remit more than three hundred thousand-peso
Christmas giveaway fund for clients of Pacfor Phils.17 Lastly, private respondent Pacfor withdrew
all its offers of settlement and ordered petitioner to transfer title and turn over to it possession of
the service car.18
Private respondent Pacfor likewise sent letters to its clients in the Philippines, advising them not
to deal with Pacfor Phils. In its letter to Intercontinental Paper Industries, Inc., dated November
21, 2000, private respondent Pacfor stated:
Until further notice, please course all inquiries and communications for Pacific Forest
Resources (Philippines) to:
Pacific Forest Resources
200 Tamal Plaza, Suite 200
Corte Madera, CA, USA 94925
(415) 927 1700 phone
(415) 381 4358 fax

Please do not send any communication to Mr. Arsenio "Boy" T. Mendiola or to the
offices of ATM Marketing Corporation at Room 504, Concorde Building, Legaspi
Village, Makati City, Philippines.19
In another letter addressed to Davao Corrugated Carton Corp. (DAVCOR), dated December
2000, private respondent directed said client "to please communicate directly with us on any
further questions associated with these payments or any future business. Do not communicate
with [Pacfor] and/or [ATM]."20
Petitioner construed these directives as a severance of the "unregistered partnership" between
him and Pacfor, and the termination of his employment as resident manager of Pacfor Phils. 21 In
a memorandum to the employees of Pacfor Phils., dated January 29, 2001, he stated:
I received a letter from Pacific Forest Resources, Inc. demanding the turnover of all
records to them effective December 19, 2000. The company records were turned over
only on January 26, 2001. This means our jobs with Pacific Forest were terminated
effective December 19, 2000. I am concerned about your welfare. I would like to help
you by offering you to work with ATM Marketing Corporation.
Please let me know if you are interested.22
On the basis of the "Side Agreement," petitioner insisted that he and Pacfor equally own Pacfor
Phils. Thus, it follows that he and Pacfor likewise own, on a 50/50 basis, Pacfor Phils.' office
furniture and equipment and the service car. He also reiterated his demand for unpaid
commissions, and proposed to offset these with the remaining Christmas giveaway fund in his
possession.23 Furthermore, he did not renew the lease contract with Pulp and Paper, Inc., the
lessor of the office premises of Pacfor Phils., wherein he was the signatory to the lease
agreement.24
On February 2, 2001, private respondent Pacfor placed petitioner on preventive suspension and
ordered him to show cause why no disciplinary action should be taken against him. Private
respondent Pacfor charged petitioner with willful disobedience and serious misconduct for his
refusal to turn over the service car and the Christmas giveaway fund which he applied to his
alleged unpaid commissions. Private respondent also alleged loss of confidence and gross neglect
of duty on the part of petitioner for allegedly allowing another corporation owned by petitioner's
relatives, High End Products, Inc. (HEPI), to use the same telephone and facsimile numbers of
Pacfor, to possibly steal and divert the sales and business of private respondent for HEPI's
principal, International Forest Products, a competitor of private respondent. 25
Petitioner denied the charges. He reiterated that he considered the import of Pacfor President
William Gleason's letters as a "cessation of his position and of the existence of Pacfor Phils." He
likewise informed private respondent Pacfor that ATM Marketing Corp. now occupies Pacfor
Phils.' office premises,26 and demanded payment of his separation pay.27 On February 15, 2001,
petitioner filed his complaint for illegal dismissal, recovery of separation pay, and payment of
attorney's fees with the NLRC.28
In the meantime, private respondent Pacfor lodged fresh charges against petitioner. In a
memorandum dated March 5, 2001, private respondent directed petitioner to explain why he
should not be disciplined for serious misconduct and conflict of interest. Private respondent

charged petitioner anew with serious misconduct for the latter's alleged act of fraud and
misrepresentation in authorizing the release of an additional peso salary for himself, besides the
dollar salary agreed upon by the parties. Private respondent also accused petitioner of disloyalty
and representation of conflicting interests for having continued using the Pacfor Phils.' office for
operations of HEPI. In addition, petitioner allegedly solicited business for HEPI from a
competitor company of private respondent Pacfor.29
Labor Arbiter Felipe Pati ruled in favor of petitioner, finding there was constructive dismissal. By
directing petitioner to turn over all office records and materials, regardless of whether he may
have retained copies, private respondent Pacfor virtually deprived petitioner of his job by the
gradual diminution of his authority as resident manager. Petitioner's position as resident
manager whose duty, among others, was to maintain the security of its business transactions and
communications was rendered meaningless. The dispositive portion of the decision of the Labor
Arbiter reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering herein
respondents Cellmark AB and Pacific Forest Resources, Inc., jointly and severally to
compensate complainant Arsenio T. Mendiola separation pay equivalent to at least
one month for every year of service, whichever is higher(sic), as reinstatement is no
longer feasible by reason of the strained relations of the parties equivalent to five (5)
months in the amount of $32,000.00 plus the sum of P250,000.00; pay complainant
the sum ofP500,000.00 as moral and exemplary damages and ten percent (10%) of
the amounts awarded as and for attorney's fees.
All other claims are dismissed for lack of basis.
SO ORDERED.30
Private respondent Pacfor appealed to the NLRC which ruled in its favor. On December 20,
2001, the NLRC set aside the July 30, 2001 decision of the labor arbiter, for lack of jurisdiction
and lack of merit.31 It held there was no employer-employee relationship between the parties.
Based on the two agreements between the parties, it concluded that petitioner is not an
employee of private respondent Pacfor, but a full co-owner (50/50 equity).
The NLRC denied petitioner's Motion for Reconsideration. 32
Petitioner was not successful on his appeal to the Court of Appeals. The appellate court upheld
the ruling of the NLRC.
Petitioner's Motion for Reconsideration33 of the decision of the Court of Appeals was denied.
Hence, this appeal.34
Petitioner assigns the following errors:
A. The Respondent Court of Appeals committed reversible error and abused its
discretion in rendering judgment against petitioner since jurisdiction has been

acquired over the subject matter of the case as there exists employer-employee
relationship between the parties.
B. The Respondent Court of Appeals committed reversible error and abused its
discretion in ruling that jurisdiction over the subject matter cannot be waived and may
be alleged even for the first time on appeal or considered by the court motu
prop[r]io.35
The first issue is whether an employer-employee relationship exists between petitioner and
private respondent Pacfor.
Petitioner argues that he is an industrial partner of the partnership he formed with private
respondent Pacfor, and also an employee of the partnership. Petitioner insists that an industrial
partner may at the same time be an employee of the partnership, provided there is such an
agreement, which, in this case, is the "Side Agreement" and the "Revised Operating and Profit
Sharing Agreement." The Court of Appeals denied the appeal of petitioner, holding that "the
legal basis of the complaint is not employment but perhaps partnership, co-ownership, or
independent contractorship." Hence, the Labor Code cannot apply.
We hold that petitioner is an employee of private respondent Pacfor and that no partnership or
co-ownership exists between the parties.
In a partnership, the members become co-owners of what is contributed to the firm capital and
of all property that may be acquired thereby and through the efforts of the members. 36 The
property or stock of the partnership forms a community of goods, a common fund, in which each
party has a proprietary interest.37 In fact, the New Civil Code regards a partner as a co-owner of
specific partnership property.38 Each partner possesses a joint interest in the whole of
partnership property. If the relation does not have this feature, it is not one of partnership. 39 This
essential element, the community of interest, or co-ownership of, or joint interest in partnership
property is absent in the relations between petitioner and private respondent Pacfor. Petitioner
is not a part-owner of Pacfor Phils. William Gleason, private respondent Pacfor's President
established this fact when he said that Pacfor Phils. is simply a "theoretical company" for the
purpose of dividing the income 50-50. He stressed that petitioner knew of this arrangement
from the very start, having been the one to propose to private respondent Pacfor the setting up of
a representative office, and "not a branch office" in the Philippines to save on taxes. Thus, the
parties in this case, merely shared profits. This alone does not make a partnership. 40
Besides, a corporation cannot become a member of a partnership in the absence of express
authorization by statute or charter.41 This doctrine is based on the following considerations: (1)
that the mutual agency between the partners, whereby the corporation would be bound by the
acts of persons who are not its duly appointed and authorized agents and officers, would be
inconsistent with the policy of the law that the corporation shall manage its own affairs
separately and exclusively; and, (2) that such an arrangement would improperly allow corporate
property to become subject to risks not contemplated by the stockholders when they originally
invested in the corporation.42 No such authorization has been proved in the case at bar.
Be that as it may, we hold that on the basis of the evidence, an employer-employee relationship
is present in the case at bar. The elements to determine the existence of an employment
relationship are: (a) the selection and engagement of the employee; (b) the payment of wages; (c)

the power of dismissal; and (d) the employer's power to control the employee's conduct. The
most important element is the employer's control of the employee's conduct, not only as to the
result of the work to be done, but also as to the means and methods to accomplish it. 43
In the instant case, all the foregoing elements are present. First, it was private respondent Pacfor
which selected and engaged the services of petitioner as its resident agent in the Philippines.
Second, as stipulated in their Side Agreement, private respondent Pacfor pays petitioner his
salary amounting to $65,000 per annum which was later increased to $78,000. Third, private
respondent Pacfor holds the power of dismissal, as may be gleaned through the various
memoranda it issued against petitioner, placing the latter on preventive suspension while
charging him with various offenses, including willful disobedience, serious misconduct, and
gross neglect of duty, and ordering him to show cause why no disciplinary action should be taken
against him.
Lastly and most important, private respondent Pacfor has the power of control over the means
and method of petitioner in accomplishing his work.
The power of control refers merely to the existence of the power, and not to the actual exercise
thereof. The principal consideration is whether the employer has the right to control the manner
of doing the work, and it is not the actual exercise of the right by interfering with the work, but
the right to control, which constitutes the test of the existence of an employer-employee
relationship.44 In the case at bar, private respondent Pacfor, as employer, clearly possesses such
right of control. Petitioner, as private respondent Pacfor's resident agent in the Philippines, is,
exactly so, only an agent of the corporation, a representative of Pacfor, who transacts business,
and accepts service on its behalf.
This right of control was exercised by private respondent Pacfor during the period of November
to December 2000, when it directed petitioner to turn over to it all records of Pacfor Phils.; when
it ordered petitioner to remit the Christmas giveaway fund intended for clients of Pacfor Phils.;
and, when it withdrew all its offers of settlement and ordered petitioner to transfer title and turn
over to it the possession of the service car. It was also during this period when private
respondent Pacfor sent letters to its clients in the Philippines, particularly Intercontinental Paper
Industries, Inc. and DAVCOR, advising them not to deal with petitioner and/or Pacfor Phils. In
its letter to DAVCOR, private respondent Pacfor replied to the client's request for an invoice
payment extension, and formulated a revised payment program for DAVCOR. This is one
unmistakable proof that private respondent Pacfor exercises control over the petitioner.
Next, we shall determine if petitioner was constructively dismissed from employment.
The evidence shows that when petitioner insisted on his 50% equity in Pacfor Phils., and would
not quit however, private respondent Pacfor began to systematically deprive petitioner of his
duties and benefits to make him feel that his presence in the company was no longer wanted.
First, private respondent Pacfor directed petitioner to turn over to it all records of Pacfor Phils.
This would certainly make the work of petitioner very difficult, if not impossible. Second, private
respondent Pacfor ordered petitioner to remit the Christmas giveaway fund intended for clients
of Pacfor Phils. Then it ordered petitioner to transfer title and turn over to it the possession of
the service car. It also advised its clients in the Philippines, particularly Intercontinental Paper
Industries, Inc. and DAVCOR, not to deal with petitioner and/or Pacfor Phils. Lastly, private
respondent Pacfor appointed a new resident agent for Pacfor Phils. 45

Although there is no reduction of the salary of petitioner, constructive dismissal is still present
because continued employment of petitioner is rendered, at the very least, unreasonable. 46 There
is an act of clear discrimination, insensibility or disdain by the employer that continued
employment may become so unbearable on the part of the employee so as to foreclose any choice
on his part except to resign from such employment.47
The harassing acts of the private respondent are unjustified. They were undertaken when
petitioner sought clarification from the private respondent about his supposed 50% equity on
Pacfor Phils. Private respondent Pacfor invokes its rights as an owner. Allegedly, its issuance of
the foregoing directives against petitioner was a valid exercise of management prerogative. We
remind private respondent Pacfor that the exercise of management prerogative is not absolute.
"By its very nature, encompassing as it could be, management prerogative must be exercised in
good faith and with due regard to the rights of labor verily, with the principles of fair play at
heart and justice in mind." The exercise of management prerogative cannot be utilized as an
implement to circumvent our laws and oppress employees. 48

As resident agent of private respondent corporation, petitioner occupied a position involving

trust and confidence. In the light of the strained relations between the parties, the full
restoration of an employment relationship based on trust and confidence is no longer possible.
He should be awarded separation pay, in lieu of reinstatement.
IN VIEW WHEREOF, the petition is GRANTED. The Court of Appeals' January 30, 2003
Decision in CA-G.R. SP No. 71028 and July 30, 2003 Resolution, affirming the December 20,
2001 Decision of the National Labor Relations Commission, are ANNULED and SET ASIDE.
The July 30, 2001 Decision of the Labor Arbiter isREINSTATED with
the MODIFICATION that the amount of P250,000.00 representing an alleged increase in
petitioner's salary shall be deducted from the grant of separation pay for lack of evidence.
SO ORDERED.
Sandoval-Gutierrez, Corona, Azcuna, Garcia, J.J., concur.