SALES

Aurbach vs sanitary wares manufacturing corporation

gr75875

G.R. No. 75875 December 15, 1989

WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR.,
ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUZ, respondents.

G.R. No. 75951 December 15, 1989

SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B. LAGDAMEO,

GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM, CHARLES
CHAMSAY and LUCIANO SALAZAR, respondents.

G.R. Nos. 75975-76 December 15, 1989

LUCIANO E. SALAZAR, petitioner,

vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR.,
ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and the
COURT OF APPEALS, respondents.

Belo, Abiera & Associates for petitioners in 75875.

Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-G.R.
SP Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then
Intermediate Appellate Court and directed that in all subsequent elections for directors of Sanitary Wares
Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot nominate more than three
(3) directors; that the Filipino stockholders shall not interfere in ASI's choice of its three (3) nominees;
that, on the other hand, the Filipino stockholders can nominate only six (6) candidates and in the event
they cannot agree on the six (6) nominees, they shall vote only among themselves to determine who the
six (6) nominees will be, with cumulative voting to be allowed but without interference from ASI.

The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing
and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for
foreign partners, European or American who could help in its expansion plans. On August 15, 1962, ASI, a
foreign corporation domiciled in Delaware, United States entered into an Agreement with Saniwares and
some Filipino investors whereby ASI and the Filipino investors agreed to participate in the ownership of
an enterprise which would engage primarily in the business of manufacturing in the Philippines and
selling here and abroad vitreous china and sanitary wares. The parties agreed that the business
operations in the Philippines shall be carried on by an incorporated enterprise and that the name of the
corporation shall initially be "Sanitary Wares Manufacturing Corporation."

The Agreement has the following provisions relevant to the issues in these cases on the nomination and
election of the directors of the corporation:

3. Articles of Incorporation

(a) The Articles of Incorporation of the Corporation shall be substantially in the form
annexed hereto as Exhibit A and, insofar as permitted under Philippine law, shall
specifically provide for

(1) Cumulative voting for directors:

xxx xxx xxx

5. Management

(a) The management of the Corporation shall be vested in a Board of Directors, which
shall consist of nine individuals. As long as American-Standard shall own at least 30% of
the outstanding stock of the Corporation, three of the nine directors shall be designated
by American-Standard, and the other six shall be designated by the other stockholders of
the Corporation. (pp. 51 & 53, Rollo of 75875)

At the request of ASI, the agreement contained provisions designed to protect it as a minority group,
including the grant of veto powers over a number of corporate acts and the right to designate certain
officers, such as a member of the Executive Committee whose vote was required for important corporate
transactions.

Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the
Board of Investments for availment of incentives with the condition that at least 60% of the capital stock
of the corporation shall be owned by Philippine nationals.

The joint enterprise thus entered into by the Filipino investors and the American corporation prospered.
Unfortunately, with the business successes, there came a deterioration of the initially harmonious
relations between the two groups. According to the Filipino group, a basic disagreement was due to their
desire to expand the export operations of the company to which ASI objected as it apparently had other
subsidiaries of joint joint venture groups in the countries where Philippine exports were contemplated.
On March 8, 1983, the annual stockholders' meeting was held. The meeting was presided by Baldwin
Young. The minutes were taken by the Secretary, Avelino Cruz. After disposing of the preliminary items in
the agenda, the stockholders then proceeded to the election of the members of the board of directors.
The ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin and David P.
Whittingham. The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A. Boncan,
Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr.
Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the
last two nominations out of order on the basis of section 5 (a) of the Agreement, the consistent practice
of the parties during the past annual stockholders' meetings to nominate only nine persons as nominees
for the nine-member board of directors, and the legal advice of Saniwares' legal counsel. The following
events then, transpired:

... There were protests against the action of the Chairman and heated arguments ensued.
An appeal was made by the ASI representative to the body of stockholders present that a
vote be taken on the ruling of the Chairman. The Chairman, Baldwin Young, declared the
appeal out of order and no vote on the ruling was taken. The Chairman then instructed
the Corporate Secretary to cast all the votes present and represented by proxy equally
for the 6 nominees of the Philippine Investors and the 3 nominees of ASI, thus effectively
excluding the 2 additional persons nominated, namely, Luciano E. Salazar and Charles
Chamsay. The ASI representative, Mr. Jaqua protested the decision of the Chairman and
announced that all votes accruing to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R.
SP No. 05617) were being cumulatively voted for the three ASI nominees and Charles
Chamsay, and instructed the Secretary to so vote. Luciano E. Salazar and other proxy
holders announced that all the votes owned by and or represented by them 467,197
shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being voted cumulatively in favor of
Luciano E. Salazar. The Chairman, Baldwin Young, nevertheless instructed the Secretary
to cast all votes equally in favor of the three ASI nominees, namely, Wolfgang Aurbach,
John Griffin and David Whittingham and the six originally nominated by Rogelio Vinluan,
namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo,
George F. Lee, and Baldwin Young. The Secretary then certified for the election of the
following Wolfgang Aurbach, John Griffin, David Whittingham Ernesto Lagdameo, Sr.,
Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young.
The representative of ASI then moved to recess the meeting which was duly seconded.
There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No. 05617). This motion to
adjourn was accepted by the Chairman, Baldwin Young, who announced that the motion
was carried and declared the meeting adjourned. Protests against the adjournment were
registered and having been ignored, Mr. Jaqua the ASI representative, stated that the
meeting was not adjourned but only recessed and that the meeting would be
reconvened in the next room. The Chairman then threatened to have the stockholders
who did not agree to the decision of the Chairman on the casting of votes bodily thrown
out. The ASI Group, Luciano E. Salazar and other stockholders, allegedly representing 53
or 54% of the shares of Saniwares, decided to continue the meeting at the elevator lobby
of the American Standard Building. The continued meeting was presided by Luciano E.
Salazar, while Andres Gatmaitan acted as Secretary. On the basis of the cumulative votes
cast earlier in the meeting, the ASI Group nominated its four nominees; Wolfgang
Aurbach, John Griffin, David Whittingham and Charles Chamsay. Luciano E. Salazar voted
for himself, thus the said five directors were certified as elected directors by the Acting
Secretary, Andres Gatmaitan, with the explanation that there was a tie among the other
six (6) nominees for the four (4) remaining positions of directors and that the body
decided not to break the tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities and
Exchange Commission (SEC). The first petition filed was for preliminary injunction by Saniwares, Emesto
V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F.
Lee against Luciano Salazar and Charles Chamsay. The case was denominated as SEC Case No. 2417. The
second petition was for quo warranto and application for receivership by Wolfgang Aurbach, John Griffin,
David Whittingham, Luciano E. Salazar and Charles Chamsay against the group of Young and Lagdameo
(petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both
sets of parties except for Avelino Cruz claimed to be the legitimate directors of the corporation.

The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision
upholding the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar and
Chamsay. The ASI Group and Salazar appealed the decision to the SEC en banc which affirmed the hearing
officer's decision.

The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by
Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP No.
05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were consolidated
and the appellate court in its decision ordered the remand of the case to the Securities and Exchange
Commission with the directive that a new stockholders' meeting of Saniwares be ordered convoked as
soon as possible, under the supervision of the Commission.

Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of
Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David
P. Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:

I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF PRIVATE

RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES WHEN IN
FACT THERE WAS NO ELECTION AT ALL.

II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING THEIR
FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN SANIWARES, THUS
DEPRIVING PETITIONERS AND THE CORPORATION THEY REPRESENT OF THEIR PROPERTY
RIGHTS WITHOUT DUE PROCESS OF LAW.

III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO THE
AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH ACTION IT CANNOT
LEGALLY DO. (p. 17, Rollo-75875)

Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following
grounds:

11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual

agreements entered into by stockholders and the replacement of the conditions of such
agreements with terms never contemplated by the stockholders but merely dictated by
the CA .
 11.2. The Amended decision would likewise sanction the deprivation of the property
rights of stockholders without due process of law in order that a favored group of
stockholders may be illegally benefitted and guaranteed a continuing monopoly of the
control of a corporation. (pp. 14-15, Rollo-75975-76)

On the other hand, the petitioners in G.R. No. 75951 contend that:

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING THAT THE
STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO FULLY
ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE LAW.

II

THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE PETITIONERS
HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8 MARCH 1983 ANNUAL
STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo-75951)

The issues raised in the petitions are interrelated, hence, they are discussed jointly.

The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its
annual stockholders' meeting held on March 8, 1983. To answer this question the following factors
should be determined: (1) the nature of the business established by the parties whether it was a joint
venture or a corporation and (2) whether or not the ASI Group may vote their additional 10% equity
during elections of Saniwares' board of directors.

The rule is that whether the parties to a particular contract have thereby established among themselves a
joint venture or some other relation depends upon their actual intention which is determined in
accordance with the rules governing the interpretation and construction of contracts. (Terminal Shares,
Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg. Co.
20 Cal. 2nd 751, 128 P 2nd 668)

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the parties
should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated that the
parties' intention was to form a corporation and not a joint venture.

They specifically mention number 16 under Miscellaneous Provisions which states:

xxx xxx xxx

c) nothing herein contained shall be construed to constitute any of the parties hereto
partners or joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR
No. 75875)

They object to the admission of other evidence which tends to show that the parties' agreement was to
establish a joint venture presented by the Lagdameo and Young Group on the ground that it contravenes
the parol evidence rule under section 7, Rule 130 of the Revised Rules of Court. According to them, the
Lagdameo and Young Group never pleaded in their pleading that the "Agreement" failed to express the
true intent of the parties.

The parol evidence Rule under Rule 130 provides:

Evidence of written agreements-When the terms of an agreement have been reduced to

writing, it is to be considered as containing all such terms, and therefore, there can be,
between the parties and their successors in interest, no evidence of the terms of the
agreement other than the contents of the writing, except in the following cases:

(a) Where a mistake or imperfection of the writing, or its failure to express the true intent
and agreement of the parties or the validity of the agreement is put in issue by the
pleadings.

(b) When there is an intrinsic ambiguity in the writing.

Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties, to
wit:

xxx xxx xxx

4. While certain provisions of the Agreement would make it appear that the parties
thereto disclaim being partners or joint venturers such disclaimer is directed at third
parties and is not inconsistent with, and does not preclude, the existence of two distinct
groups of stockholders in Saniwares one of which (the Philippine Investors) shall
constitute the majority, and the other ASI shall constitute the minority stockholder. In
any event, the evident intention of the Philippine Investors and ASI in entering into the
Agreement is to enter into ajoint venture enterprise, and if some words in the Agreement
appear to be contrary to the evident intention of the parties, the latter shall prevail over
the former (Art. 1370, New Civil Code). The various stipulations of a contract shall be
interpreted together attributing to the doubtful ones that sense which may result from
all of them taken jointly (Art. 1374, New Civil Code). Moreover, in order to judge the
intention of the contracting parties, their contemporaneous and subsequent acts shall be
principally considered. (Art. 1371, New Civil Code). (Part I, Original Records, SEC Case No.
2417)

It has been ruled:

In an action at law, where there is evidence tending to prove that the parties joined their
efforts in furtherance of an enterprise for their joint profit, the question whether they
intended by their agreement to create a joint adventure, or to assume some other
relation is a question of fact for the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S
653; Pyroa v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P
96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as well as the testimonial
evidence presented by the Lagdameo and Young Group shows that the parties agreed to establish a joint
venture and not a corporation. The history of the organization of Saniwares and the unusual
arrangements which govern its policy making body are all consistent with a joint venture and not with an
ordinary corporation. As stated by the SEC:

According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the

Agreement with ASI in behalf of the Philippine nationals. He testified that ASI agreed to
accept the role of minority vis-a-vis the Philippine National group of investors, on the
condition that the Agreement should contain provisions to protect ASI as the minority.

An examination of the Agreement shows that certain provisions were included to protect
the interests of ASI as the minority. For example, the vote of 7 out of 9 directors is
required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is
contractually entitled to designate a member of the Executive Committee and the vote of
this member is required for certain transactions [Sec. 3 (b) (i)].

The Agreement also requires a 75% super-majority vote for the amendment of the
articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to
designate the president and plant manager [Sec. 5 (6)]. The Agreement further provides
that the sales policy of Saniwares shall be that which is normally followed by ASI [Sec. 13
(a)] and that Saniwares should not export "Standard" products otherwise than through
ASI's Export Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to provide
technology and know-how to Saniwares and the latter paid royalties for the same. (At p.
2).

xxx xxx xxx

It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of
the board of directors for certain actions, in effect gave ASI (which designates 3 directors
under the Agreement) an effective veto power. Furthermore, the grant to ASI of the right
to designate certain officers of the corporation; the super-majority voting requirements
for amendments of the articles and by-laws; and most significantly to the issues of tms
case, the provision that ASI shall designate 3 out of the 9 directors and the other
stockholders shall designate the other 6, clearly indicate that there are two distinct
groups in Saniwares, namely ASI, which owns 40% of the capital stock and the Philippine
National stockholders who own the balance of 60%, and that 2) ASI is given certain
protections as the minority stockholder.

Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)

Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the
selection of the nine directors on a six to three ratio. Each group is assured of a fixed number of directors
in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also
testified that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint venturers in respect of any transaction hereunder"
was merely to obviate the possibility of the enterprise being treated as partnership for tax purposes and
liabilities to third parties.

Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities
of a local firm are constrained to seek the technology and marketing assistance of huge multinational
corporations of the developed world. Arrangements are formalized where a foreign group becomes a
minority owner of a firm in exchange for its manufacturing expertise, use of its brand names, and other
such assistance. However, there is always a danger from such arrangements. The foreign group may, from
the start, intend to establish its own sole or monopolistic operations and merely uses the joint venture
arrangement to gain a foothold or test the Philippine waters, so to speak. Or the covetousness may come
later. As the Philippine firm enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to completely or predominantly take over the
entire company. This undermining of joint ventures is not consistent with fair dealing to say the least. To
the extent that such subversive actions can be lawfully prevented, the courts should extend protection
especially in industries where constitutional and legal requirements reserve controlling ownership to
Filipino citizens.

The Lagdameo Group stated in their appellees' brief in the Court of Appeal

In fact, the Philippine Corporation Code itself recognizes the right of stockholders to
enter into agreements regarding the exercise of their voting rights.

Sec. 100. Agreements by stockholders.-

xxx xxx xxx

2. An agreement between two or more stockholders, if in writing and signed by the

parties thereto, may provide that in exercising any voting rights, the shares held by them
shall be voted as therein provided, or as they may agree, or as determined in accordance
with a procedure agreed upon by them.

Appellants contend that the above provision is included in the Corporation Code's
chapter on close corporations and Saniwares cannot be a close corporation because it
has 95 stockholders. Firstly, although Saniwares had 95 stockholders at the time of the
disputed stockholders meeting, these 95 stockholders are not separate from each other
but are divisible into groups representing a single Identifiable interest. For example, ASI,
its nominees and lawyers count for 13 of the 95 stockholders. The YoungYutivo family
count for another 13 stockholders, the Chamsay family for 8 stockholders, the Santos
family for 9 stockholders, the Dy family for 7 stockholders, etc. If the members of one
family and/or business or interest group are considered as one (which, it is respectfully
submitted, they should be for purposes of determining how closely held Saniwares is
there were as of 8 March 1983, practically only 17 stockholders of Saniwares. (Please
refer to discussion in pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11
December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close corporation because it
has more than 20 stockholders, the undeniable fact is that it is a close-held corporation.
Surely, appellants cannot honestly claim that Saniwares is a public issue or a widely held
corporation.

In the United States, many courts have taken a realistic approach to joint venture
corporations and have not rigidly applied principles of corporation law designed primarily
for public issue corporations. These courts have indicated that express arrangements
between corporate joint ventures should be construed with less emphasis on the
ordinary rules of law usually applied to corporate entities and with more consideration
given to the nature of the agreement between the joint venturers (Please see Wabash Ry
v. American Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des Moines
Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic Coast Line Ry; 240 N.C.
495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d 903; Hathway v. Porter
Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138 U.S. 262;
"The Legal Status of Joint Venture Corporations", 11 Vand Law Rev. p. 680,1958). These
American cases dealt with legal questions as to the extent to which the requirements
arising from the corporate form of joint venture corporations should control, and the
courts ruled that substantial justice lay with those litigants who relied on the joint
venture agreement rather than the litigants who relied on the orthodox principles of
corporation law.

As correctly held by the SEC Hearing Officer:

It is said that participants in a joint venture, in organizing the joint venture deviate from
the traditional pattern of corporation management. A noted authority has pointed out
that just as in close corporations, shareholders' agreements in joint venture corporations
often contain provisions which do one or more of the following: (1) require greater than
majority vote for shareholder and director action; (2) give certain shareholders or groups
of shareholders power to select a specified number of directors; (3) give to the
shareholders control over the selection and retention of employees; and (4) set up a
procedure for the settlement of disputes by arbitration (See I O' Neal, Close
Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC Hearing Officer, P. 16)

Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that
agreements regarding the exercise of voting rights are allowed only in close corporations.
As Campos and Lopez-Campos explain:

Paragraph 2 refers to pooling and voting agreements in particular. Does this provision
necessarily imply that these agreements can be valid only in close corporations as
defined by the Code? Suppose that a corporation has twenty five stockholders, and
therefore cannot qualify as a close corporation under section 96, can some of them enter
into an agreement to vote as a unit in the election of directors? It is submitted that there
is no reason for denying stockholders of corporations other than close ones the right to
enter into not voting or pooling agreements to protect their interests, as long as they do
not intend to commit any wrong, or fraud on the other stockholders not parties to the
agreement. Of course, voting or pooling agreements are perhaps more useful and more
often resorted to in close corporations. But they may also be found necessary even in
 widely held corporations. Moreover, since the Code limits the legal meaning of close
corporations to those which comply with the requisites laid down by section 96, it is
entirely possible that a corporation which is in fact a close corporation will not come
within the definition. In such case, its stockholders should not be precluded from
entering into contracts like voting agreements if these are otherwise valid. (Campos &
Lopez-Campos, op cit, p. 405)

In short, even assuming that sec. 5(a) of the Agreement relating to the designation or
nomination of directors restricts the right of the Agreement's signatories to vote for
directors, such contractual provision, as correctly held by the SEC, is valid and binding
upon the signatories thereto, which include appellants. (Rollo No. 75951, pp. 90-94)

In regard to the question as to whether or not the ASI group may vote their additional equity during
elections of Saniwares' board of directors, the Court of Appeals correctly stated:

As in other joint venture companies, the extent of ASI's participation in the management
of the corporation is spelled out in the Agreement. Section 5(a) hereof says that three of
the nine directors shall be designated by ASI and the remaining six by the other
stockholders, i.e., the Filipino stockholders. This allocation of board seats is obviously in
consonance with the minority position of ASI.

Having entered into a well-defined contractual relationship, it is imperative that the

parties should honor and adhere to their respective rights and obligations thereunder.
Appellants seem to contend that any allocation of board seats, even in joint venture
corporations, are null and void to the extent that such may interfere with the
stockholder's rights to cumulative voting as provided in Section 24 of the Corporation
Code. This Court should not be prepared to hold that any agreement which curtails in any
way cumulative voting should be struck down, even if such agreement has been freely
entered into by experienced businessmen and do not prejudice those who are not parties
thereto. It may well be that it would be more cogent to hold, as the Securities and
Exchange Commission has held in the decision appealed from, that cumulative voting
rights may be voluntarily waived by stockholders who enter into special relationships
with each other to pursue and implement specific purposes, as in joint venture
relationships between foreign and local stockholders, so long as such agreements do not
adversely affect third parties.

In any event, it is believed that we are not here called upon to make a general rule on this
question. Rather, all that needs to be done is to give life and effect to the particular
contractual rights and obligations which the parties have assumed for themselves.

On the one hand, the clearly established minority position of ASI and the contractual
allocation of board seats Cannot be disregarded. On the other hand, the rights of the
stockholders to cumulative voting should also be protected.

In our decision sought to be reconsidered, we opted to uphold the second over the first.
Upon further reflection, we feel that the proper and just solution to give due
consideration to both factors suggests itself quite clearly. This Court should recognize and
 uphold the division of the stockholders into two groups, and at the same time uphold the
right of the stockholders within each group to cumulative voting in the process of
determining who the group's nominees would be. In practical terms, as suggested by
appellant Luciano E. Salazar himself, this means that if the Filipino stockholders cannot
agree who their six nominees will be, a vote would have to be taken among the Filipino
stockholders only. During this voting, each Filipino stockholder can cumulate his votes.
ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board
seats, a result which is clearly contrary to the contractual intent of the parties.

Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or circumvention
of the Anti-Dummy Law (Com. Act No. 108, as amended) and the nationalization
requirements of the Constitution and the laws if ASI is allowed to nominate more than
three directors. (Rollo-75875, pp. 38-39)

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote
their additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a
corporation the right to cumulate their votes in electing directors. Petitioner Salazar adds that this right if
granted to the ASI Group would not necessarily mean a violation of the Anti-Dummy Act (Commonwealth
Act 108, as amended). He cites section 2-a thereof which provides:

And provided finally that the election of aliens as members of the board of directors or
governing body of corporations or associations engaging in partially nationalized activities
shall be allowed in proportion to their allowable participation or share in the capital of
such entities. (amendments introduced by Presidential Decree 715, section 1,
promulgated May 28, 1975)

The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point
of query, however, is whether or not that provision is applicable to a joint venture with clearly defined
agreements:

The legal concept of ajoint venture is of common law origin. It has no precise legal
definition but it has been generally understood to mean an organization formed for some
temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly
distinguishable from the partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a mutual right of control.
Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043
[1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]). The
main distinction cited by most opinions in common law jurisdictions is that the
partnership contemplates a general business with some degree of continuity, while the
joint venture is formed for the execution of a single transaction, and is thus of a
temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v.
Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This
observation is not entirely accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular partnership may have for its
 object a specific undertaking. (Art. 1783, Civil Code). It would seem therefore that under
Philippine law, a joint venture is a form of partnership and should thus be governed by
the law of partnerships. The Supreme Court has however recognized a distinction
between these two business forms, and has held that although a corporation cannot
enter into a partnership contract, it may however engage in a joint venture with others.
(At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments,
Notes and Selected Cases, Corporation Code 1981)

Moreover, the usual rules as regards the construction and operations of contracts generally apply to a
contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).

Bearing these principles in mind, the correct view would be that the resolution of the question of
whether or not the ASI Group may vote their additional equity lies in the agreement of the parties.

Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the
allocation of director seats under Section 5 (a) of the "Agreement," and the right of each group of
stockholders to cumulative voting in the process of determining who the group's nominees would be
under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement relates
to the manner of nominating the members of the board of directors while Section 3 (a) (1) relates to the
manner of voting for these nominees.

This is the proper interpretation of the Agreement of the parties as regards the election of members of
the board of directors.

To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be
beholden to them would obliterate their minority status as agreed upon by the parties. As aptly stated by
the appellate court:

... ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board
seats, a result which is clearly contrary to the contractual intent of the parties.

Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or circumvention
of the Anti-Dummy Law (Com. Act No. 108, as amended) and the nationalization
requirements of the Constitution and the laws if ASI is allowed to nominate more than
three directors. (At p. 39, Rollo, 75875)

Equally important as the consideration of the contractual intent of the parties is the consideration as
regards the possible domination by the foreign investors of the enterprise in violation of the
nationalization requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act. In
this regard, petitioner Salazar's position is that the Anti-Dummy Act allows the ASI group to elect board
directors in proportion to their share in the capital of the entity. It is to be noted, however, that the same
law also limits the election of aliens as members of the board of directors in proportion to their allowance
participation of said entity. In the instant case, the foreign Group ASI was limited to designate three
directors. This is the allowable participation of the ASI Group. Hence, in future dealings, this limitation of
six to three board seats should always be maintained as long as the joint venture agreement exists
considering that in limiting 3 board seats in the 9-man board of directors there are provisions already
agreed upon and embodied in the parties' Agreement to protect the interests arising from the minority
status of the foreign investors.

With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed
by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V.
Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F.
Lee as the duly elected directors of Saniwares at the March 8,1983 annual stockholders' meeting.

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a cumulative
voting during the election of the board of directors of the enterprise as ruled by the appellate court and
submits that the six (6) directors allotted the Filipino stockholders should be selected by consensus
pursuant to section 5 (a) of the Agreement which uses the word "designate" meaning "nominate,
delegate or appoint."

They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot determined by
the majority of their group.

Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors should
not be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the Agreement.
As we stated earlier, section 3(a) (1) relates to the manner of voting for these nominees which
is cumulative voting while section 5(a) relates to the manner of nominating the members of the board of
directors. The petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot now impugn its
legality.

The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot, however, be ignored. The validity of the cumulative voting procedure is dependent on
the directors thus elected being genuine members of the Filipino group, not voters whose interest is to
increase the ASI share in the management of Saniwares. The joint venture character of the enterprise
must always be taken into account, so long as the company exists under its original agreement.
Cumulative voting may not be used as a device to enable ASI to achieve stealthily or indirectly what they
cannot accomplish openly. There are substantial safeguards in the Agreement which are intended to
preserve the majority status of the Filipino investors as well as to maintain the minority status of the
foreign investors group as earlier discussed. They should be maintained.

WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in
G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is MODIFIED in that
Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A.
Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the duly elected
directors of Saniwares at the March 8,1983 annual stockholders' meeting. In all other respects, the
questioned decision is AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.

SO ORDERED.
Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.

Feliciano, J., took no part.

lim tong lim vs philippine fishing gear industries inc.

gr136448

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,

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

PANGANIBAN, J.:

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

The Case

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

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

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

WHEREFORE, the Court rules:

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

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;
 a. P532,045.00 representing [the] unpaid purchase price of the fishing
nets covered by the Agreement plus P68,000.00 representing the unpaid
price of the floats not covered by said Agreement;

b. 12% interest per annum counted from date of plaintiff's invoices and
computed on their respective amounts as follows:

i. Accrued interest of P73,221.00 on Invoice No. 14407

for P385,377.80 dated February 9, 1990;

ii. Accrued interest for P27,904.02 on Invoice No. 14413

for P146,868.00 dated February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426

for P68,000.00 dated February 19, 1990;

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

P500.00 per appearance in court;

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

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

e. Cost of suit.

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

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

SO ORDERED. 3

The Facts

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

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

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

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

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of
the witnesses presented and (2) on a Compromise Agreement executed by the three 9 in Civil Case No.
1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a
declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a declaration of
ownership of fishing boats; (d) an injunction and (e) damages.10 The Compromise Agreement provided:
 a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4)
vessels sold in the amount of P5,750,000.00 including the fishing net.
This P5,750,000.00 shall be applied as full payment for P3,250,000.00 in
favor of JL Holdings Corporation and/or Lim Tong Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3:
1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;

c) If the proceeds of the sale the vessels will be less than P5,750,000.00
whatever the deficiency shall be shouldered and paid to JL Holding
Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. 11

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

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

Ruling of the Court of Appeals

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

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

Hence, petitioner brought this recourse before this Court. 14

The Issues

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

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

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

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN
QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING,
THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM
AS WELL.
 III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF
PETITIONER LIM'S GOODS.

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

This Court's Ruling

The Petition is devoid of merit.

First and Second Issues:

Existence of a Partnership

and Petitioner's Liability

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

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

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

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

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

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

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim,
to finance the venture.
 (4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of
Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security
for the loan extended by Jesus Lim;

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

(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and
Chua entrusted the ownership papers of two other boats, Chua's FB Lady Anne
Mel and Yao's FB Tracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought
nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.

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

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

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

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

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

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

Compromise Agreement

Not the Sole Basis of Partnership

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

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

Petitioner Was a Partner,

Not a Lessor

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

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

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

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

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

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

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

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

performance thereof on the ground that there was in fact no corporation.

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

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

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

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the
nets it sold. The only question here is whether petitioner should be held jointly 18 liable with Chua and
Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible
corporation should be held liable. Since his name does not appear on any of the contracts and since he
never directly transacted with the respondent corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which
has earlier been proven to be an asset of the partnership. He in fact questions the attachment of the
nets, because the Writ has effectively stopped his use of the fishing vessel.

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

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

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

Third Issue:

Validity of Attachment

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

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

SO ORDERED.

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

Vitug, J., pls. see concurring opinion.

Separate Opinions
VITUG, J., concurring opinion;

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

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

Footnotes

1 Penned by J. Portia Alino-Hormachuelos; with the concurrence of JJ.

Buenaventura J. Guerrero, Division chairman, and Presbitero J. Velasco Jr.,
member.

2 CA Decision, p. 12; rollo, p. 36.

3 RTC Decision penned by Judge Maximiano C. Asuncion. pp. 11-12; rollo, pp. 48-
49.

4 CA Decision, pp. 1-2; rollo, pp. 25-26.

5 Ibid., p. 2; rollo, p. 26.

6 RTC Decision, p. 2; Rollo, p. 39.

7 Petition, p. 4; rollo, p. 11.

8 Ibid.
9 RTC Decision, pp. 6-7; rollo, pp. 43-44.

10 Respondent's Memorandum, pp. 5, 8; rollo, pp. 107, 109.

11 CA Decision, pp. 9-10; rollo, pp. 33-34.

12 RTC Decision, p. 10; rollo, p. 47.

13 Ibid.

14 This case was deemed submitted for resolution on August 10, 1999, when this
Court received petitioner's Memorandum signed by Atty. Roberto A. Abad.
Respondent's Memorandum signed by Atty. Benjamin S. Benito was filed earlier
on July 27, 1999.

15 Nos. 1-7 are from CA Decision p. 9 (rollo, p. 33); No. 8 is from RTC Decision, p.
5 (rollo, p. 42); and No. 9 is from CA Decision, pp. 9-10 (rollo, pp. 33-34).

16 See Fuentes v. Court of Appeals, 268 SCRA 703, February 26, 1997.

17 Salvatierra v. Garlitos, 103 SCRA 757, May 23, 1958, per Felix J.; citing Fay v.
Noble, 7 Cushing [Mass.] 188.

18 The liability is joint if it is not specifically stated that it is solidary," Maramba v.

Lozano, 126 Phil 833, June 29, 1967, per Makalintal, J. See also Article 1207 of
the Civil Code, which provides: "The concurrence of two or more creditors or of
two or more debtors in one [and] the same obligation does not imply that each
one of the former has a right to demand, or that each one of the latter is bound
to render, entire compliance with the prestation. There is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.

19 16 Phil. 315, July 26, 1910, per Moreland, J.

VITUG, J., concurring opinion;

1 Art. 1825. When a person, by words spoken or written or by conduct,

represents himself, or consents to another representing him to anyone, as a
partner in an existing partnership or with one or more persons not actual
partners, he is liable to any such persons to whom such representation has been
made, who has, on the faith of such representation, given credit to the actual or
apparent partnership, and if he has made such representation or consented to its
being made in a public manner he is liable to such person, whether the
representation has or has not been made or communicated to such person so
giving credit by or with the knowledge of the apparent partner making the
representation or consenting to its being made:
 (1) When a partnership liability results, he is liable as though he were an actual
member of the partnership;

(2) When no partnership liability results, he is liable pro rata with the other
persons, if any, so consenting to the contract or representation as to incur
liability, otherwise separately.

When a person has been thus represented to be a partner in an existing

partnership, or with one or more persons not actual partners, he is an agent of
the persons consenting to such representation to bind them to the same extent
and in the same manner as though he were a partner in fact, with respect to
persons who rely upon the representation. When all the members of the existing
partnership consent to the representation, a partnership act or obligation
results; but in all other cases it is the joint act or obligation of the person acting
and the persons consenting to the representation.

2 All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the
contracts which may be entered into in the name and for the account of the
partnership, under its signature and by a person authorized to act for the
partnership. However, any partner may enter into a separate obligation to
perform a partnership contract.

3 Art. 1824 in relation to Article 1822 and Article 1823, New Civil Code.

litonjua jr v litonjua sr et al
gr166299-300

SUPREME COURT

THIRD DIVISION

G.R. NOS. 166299-300 December 13, 2005

AURELIO K. LITONJUA, JR., Petitioner,

vs.
EDUARDO K. LITONJUA, SR., ROBERT T. YANG, ANGLO PHILS. MARITIME, INC., CINEPLEX, INC., DDM
GARMENTS, INC., EDDIE K. LITONJUA SHIPPING AGENCY, INC., EDDIE K. LITONJUA SHIPPING CO., INC.,
LITONJUA SECURITIES, INC. (formerly E. K. Litonjua Sec), LUNETA THEATER, INC., E & L REALTY, (formerly E
& L INTL SHIPPING CORP.), FNP CO., INC., HOME ENTERPRISES, INC., BEAUMONT DEV. REALTY CO., INC.,
GLOED LAND CORP., EQUITY TRADING CO., INC., 3D CORP., "L" DEV. CORP, LCM THEATRICAL ENTERPRISES,
INC., LITONJUA SHIPPING CO. INC., MACOIL INC., ODEON REALTY CORP., SARATOGA REALTY, INC., ACT
THEATER INC. (formerly General Theatrical & Film Exchange, INC.), AVENUE REALTY, INC., AVENUE
THEATER, INC. and LVF PHILIPPINES, INC., (Formerly VF PHILIPPINES),Respondents.

DECISION
GARCIA, J.:

In this petition for review under Rule 45 of the Rules of Court, petitioner Aurelio K. Litonjua, Jr. seeks to
nullify and set aside the Decision of the Court of Appeals (CA) dated March 31, 2004 1 in consolidated
cases C.A. G.R. Sp. No. 76987 and C.A. G.R. SP. No 78774 and its Resolution dated December 07,
2004,2 denying petitioners motion for reconsideration.

The recourse is cast against the following factual backdrop:

Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K. Litonjua, Sr. (Eduardo) are
brothers. The legal dispute between them started when, on December 4, 2002, in the Regional Trial Court
(RTC) at Pasig City, Aurelio filed a suit against his brother Eduardo and herein respondent Robert T. Yang
(Yang) and several corporations for specific performance and accounting. In his complaint,3 docketed as
Civil Case No. 69235 and eventually raffled to Branch 68 of the court,4 Aurelio alleged that, since June
1973, he and Eduardo are into a joint venture/partnership arrangement in the Odeon Theater business
which had expanded thru investment in Cineplex, Inc., LCM Theatrical Enterprises, Odeon Realty
Corporation (operator of Odeon I and II theatres), Avenue Realty, Inc., owner of lands and buildings,
among other corporations. Yang is described in the complaint as petitioners and Eduardos partner in
their Odeon Theater investment.5 The same complaint also contained the following material averments:

3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered into a joint venture/partnership for the
continuation of their family business and common family funds .

3.01.1 This joint venture/[partnership] agreement was contained in a memorandum addressed by

Eduardo to his siblings, parents and other relatives. Copy of this memorandum is attached hereto and
made an integral part asAnnex "A" and the portion referring to [Aurelio] submarked as Annex "A-1".

3.02 It was then agreed upon between [Aurelio] and Eduardo that in consideration of [Aurelios] retaining
his share in the remaining family businesses (mostly, movie theaters, shipping and land development) and
contributing his industry to the continued operation of these businesses, [Aurelio] will be given P1 Million
or 10% equity in all these businesses and those to be subsequently acquired by them whichever is
greater. . . .

4.01 from 22 June 1973 to about August 2001, or [in] a span of 28 years, [Aurelio] and Eduardo had
accumulated in their joint venture/partnership various assets including but not limited to the corporate
defendants and [their] respective assets.

4.02 In addition . . . the joint venture/partnership had also acquired [various other assets], but Eduardo
caused to be registered in the names of other parties.

xxx xxx xxx

4.04 The substantial assets of most of the corporate defendants consist of real properties . A list of
some of these real properties is attached hereto and made an integral part as Annex "B".

xxx xxx xxx

5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo became sour so that [Aurelio]
requested for an accounting and liquidation of his share in the joint venture/partnership [but these
demands for complete accounting and liquidation were not heeded].

xxx xxx xxx

5.05 What is worse, [Aurelio] has reasonable cause to believe that Eduardo and/or the corporate
defendants as well as Bobby [Yang], are transferring . . . various real properties of the corporations
belonging to the joint venture/partnership to other parties in fraud of [Aurelio]. In consequence, [Aurelio]
is therefore causing at this time the annotation on the titles of these real properties a notice of lis
pendens . (Emphasis in the original; underscoring and words in bracket added.)

For ease of reference, Annex "A-1" of the complaint, which petitioner asserts to have been meant for him
by his brother Eduardo, pertinently reads:

10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:

You have now your own life to live after having been married. .

I am trying my best to mold you the way I work so you can follow the pattern . You will be the only one
left with the company, among us brothers and I will ask you to stay as I want you to run this office every
time I am away. I want you to run it the way I am trying to run it because I will be all alone and I will
depend entirely to you (sic). My sons will not be ready to help me yet until about maybe 15/20 years from
now. Whatever is left in the corporation, I will make sure that you get ONE MILLION PESOS
(P1,000,000.00) or ten percent (10%) equity, whichever is greater. We two will gamble the whole thing of
what I have and what you are entitled to. . It will be you and me alone on this. If ever I pass away, I want
you to take care of all of this. You keep my share for my two sons are ready take over but give them the
chance to run the company which I have built.

xxx xxx xxx

Because you will need a place to stay, I will arrange to give you first ONE HUNDRED THOUSANDS PESOS:
(P100, 000.00) in cash or asset, like Lt. Artiaga so you can live better there. The rest I will give you in form
of stocks which you can keep. This stock I assure you is good and saleable. I will also gladly give you the
share of Wack-Wack and Valley Golf because you have been good. The rest will be in stocks from all
the corporations which I repeat, ten percent (10%) equity. 6

On December 20, 2002, Eduardo and the corporate respondents, as defendants a quo, filed a
joint ANSWERWith Compulsory Counterclaim denying under oath the material allegations of the
complaint, more particularly that portion thereof depicting petitioner and Eduardo as having entered into
a contract of partnership. As affirmative defenses, Eduardo, et al., apart from raising a jurisdictional
matter, alleged that the complaint states no cause of action, since no cause of action may be derived
from the actionable document, i.e., Annex "A-1",being void under the terms of Article 1767 in relation to
Article 1773 of the Civil Code, infra. It is further alleged that whatever undertaking Eduardo agreed to do,
if any, under Annex "A-1", are unenforceable under the provisions of the Statute of Frauds.7
For his part, Yang - who was served with summons long after the other defendants submitted their
answer moved to dismiss on the ground, inter alia, that, as to him, petitioner has no cause of action and
the complaint does not state any.8 Petitioner opposed this motion to dismiss.

On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative Defenses.9 To this motion,
petitioner interposed an Opposition with ex-Parte Motion to Set the Case for Pre-trial.10

Acting on the separate motions immediately adverted to above, the trial court, in an Omnibus Order
dated March 5, 2003, denied the affirmative defenses and, except for Yang, set the case for pre-trial on
April 10, 2003.11

In another Omnibus Order of April 2, 2003, the same court denied the motion of Eduardo, et al., for
reconsideration12 and Yangs motion to dismiss. The following then transpired insofar as Yang is
concerned:

1. On April 14, 2003, Yang filed his ANSWER, but expressly reserved the right to seek reconsideration of
the April 2, 2003 Omnibus Order and to pursue his failed motion to dismiss13 to its full resolution.

2. On April 24, 2003, he moved for reconsideration of the Omnibus Order of April 2, 2003, but his motion
was denied in an Order of July 4, 2003.14

3. On August 26, 2003, Yang went to the Court of Appeals (CA) in a petition for certiorari under Rule 65 of
the Rules of Court, docketed as CA-G.R. SP No. 78774,15 to nullify the separate orders of the trial court,
the first denying his motion to dismiss the basic complaint and, the second, denying his motion for
reconsideration.

Earlier, Eduardo and the corporate defendants, on the contention that grave abuse of discretion and
injudicious haste attended the issuance of the trial courts aforementioned Omnibus Orders dated March
5, and April 2, 2003, sought relief from the CA via similar recourse. Their petition for certiorari was
docketed as CA G.R. SP No. 76987.

Per its resolution dated October 2, 2003,16 the CAs 14th Division ordered the consolidation of CA G.R. SP
No. 78774 with CA G.R. SP No. 76987.

Following the submission by the parties of their respective Memoranda of Authorities, the appellate court
came out with the herein assailed Decision dated March 31, 2004, finding for Eduardo and Yang, as lead
petitioners therein, disposing as follows:

WHEREFORE, judgment is hereby rendered granting the issuance of the writ of certiorari in these
consolidated cases annulling, reversing and setting aside the assailed orders of the court a quo dated
March 5, 2003, April 2, 2003 and July 4, 2003 and the complaint filed by private respondent [now
petitioner Aurelio] against all the petitioners [now herein respondents Eduardo, et al.] with the court a
quo is hereby dismissed.

SO ORDERED.17 (Emphasis in the original; words in bracket added.)

Explaining its case disposition, the appellate court stated, inter alia, that the alleged partnership, as
evidenced by the actionable documents, Annex "A" and "A-1" attached to the complaint, and upon which
petitioner solely predicates his right/s allegedly violated by Eduardo, Yang and the corporate
defendants a quo is "void or legally inexistent".

In time, petitioner moved for reconsideration but his motion was denied by the CA in its equally
assailedResolution of December 7, 2004.18 .

Hence, petitioners present recourse, on the contention that the CA erred:

A. When it ruled that there was no partnership created by the actionable document because this was not
a public instrument and immovable properties were contributed to the partnership.

B. When it ruled that the actionable document did not create a demandable right in favor of petitioner.

C. When it ruled that the complaint stated no cause of action against [respondent] Robert Yang; and

D. When it ruled that petitioner has changed his theory on appeal when all that Petitioner had done was
to support his pleaded cause of action by another legal perspective/argument.

The petition lacks merit.

Petitioners demand, as defined in the petitory portion of his complaint in the trial court, is for delivery or
payment to him, as Eduardos and Yangs partner, of his partnership/joint venture share, after an
accounting has been duly conducted of what he deems to be partnership/joint venture property.19

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 between them.20 A contract of partnership is defined by the Civil Code as one where
two or more persons bound themselves to contribute money, property, or industry to a common fund
with the intention of dividing the profits among themselves.21 A joint venture, on the other hand, is hardly
distinguishable from, and may be likened to, a partnership since their elements are similar, i.e.,
community of interests in the business and sharing of profits and losses. Being a form of partnership, a
joint venture is generally governed by the law on partnership.22

The underlying issue that necessarily comes to mind in this proceedings is whether or not petitioner and
respondent Eduardo are partners in the theatre, shipping and realty business, as one claims but which the
other denies. And the issue bearing on the first assigned error relates to the question of what legal
provision is applicable under the premises, petitioner seeking, as it were, to enforce the actionable
document - Annex "A-1" - which he depicts in his complaint to be the contract of partnership/joint
venture between himself and Eduardo. Clearly, then, a look at the legal provisions determinative of the
existence, or defining the formal requisites, of a partnership is indicated. Foremost of these are the
following provisions of the Civil Code:

Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights
are contributed thereto, in which case a public instrument shall be necessary.
Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which must be recorded in the Office of the Securities and
Exchange Commission.

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

Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an
inventory of said property is not made, signed by the parties, and attached to the public instrument.

Annex "A-1", on its face, contains typewritten entries, personal in tone, but is unsigned and undated. As
an unsigned document, there can be no quibbling that Annex "A-1" does not meet the public
instrumentation requirements exacted under Article 1771 of the Civil Code. Moreover, being unsigned
and doubtless referring to a partnership involving more than P3,000.00 in money or property, Annex "A-
1" cannot be presented for notarization, let alone registered with the Securities and Exchange
Commission (SEC), as called for under the Article 1772 of the Code. And inasmuch as the inventory
requirement under the succeeding Article 1773 goes into the matter of validity when immovable property
is contributed to the partnership, the next logical point of inquiry turns on the nature of petitioners
contribution, if any, to the supposed partnership.

The CA, addressing the foregoing query, correctly stated that petitioners contribution consisted of
immovables and real rights. Wrote that court:

A further examination of the allegations in the complaint would show that [petitioners] contribution to
the so-called "partnership/joint venture" was his supposed share in the family business that is consisting
of movie theaters, shipping and land development under paragraph 3.02 of the complaint. In other
words, his contribution as a partner in the alleged partnership/joint venture consisted of immovable
properties and real rights. .23

Significantly enough, petitioner matter-of-factly concurred with the appellate courts observation that,
prescinding from what he himself alleged in his basic complaint, his contribution to the partnership
consisted of his share in the Litonjua family businesses which owned variable immovable properties.
Petitioners assertion in his motion for reconsideration24 of the CAs decision, that "what was to be
contributed to the business [of the partnership] was [petitioners] industry and his share in the family
[theatre and land development] business" leaves no room for speculation as to what petitioner
contributed to the perceived partnership.

Lest it be overlooked, the contract-validating inventory requirement under Article 1773 of the Civil Code
applies as long real property or real rights are initially brought into the partnership. In short, it is really of
no moment which of the partners, or, in this case, who between petitioner and his brother Eduardo,
contributed immovables. In context, the more important consideration is that real property was
contributed, in which case an inventory of the contributed property duly signed by the parties should be
attached to the public instrument, else there is legally no partnership to speak of.

Petitioner, in an obvious bid to evade the application of Article 1773, argues that the immovables in
question were not contributed, but were acquired after the formation of the supposed partnership.
Needless to stress, the Court cannot accord cogency to this specious argument. For, as earlier stated,
petitioner himself admitted contributing his share in the supposed shipping, movie theatres and realty
development family businesses which already owned immovables even before Annex "A-1" was allegedly
executed.

Considering thus the value and nature of petitioners alleged contribution to the purported partnership,
the Court, even if so disposed, cannot plausibly extend Annex "A-1" the legal effects that petitioner so
desires and pleads to be given. Annex "A-1", in fine, cannot support the existence of the partnership sued
upon and sought to be enforced. The legal and factual milieu of the case calls for this disposition. A
partnership may be constituted in any form, save when immovable property or real rights are contributed
thereto or when the partnership has a capital of at least P3,000.00, in which case a public instrument
shall be necessary.25 And if only to stress what has repeatedly been articulated, an inventory to be signed
by the parties and attached to the public instrument is also indispensable to the validity of the
partnership whenever immovable property is contributed to it.

Given the foregoing perspective, what the appellate court wrote in its assailed Decision26 about the
probative value and legal effect of Annex "A-1" commends itself for concurrence:

Considering that the allegations in the complaint showed that [petitioner] contributed immovable
properties to the alleged partnership, the "Memorandum" (Annex "A" of the complaint) which purports
to establish the said "partnership/joint venture" is NOT a public instrument and there was NO inventory
of the immovable property duly signed by the parties. As such, the said "Memorandum" is null and void
for purposes of establishing the existence of a valid contract of partnership. Indeed, because of the failure
to comply with the essential formalities of a valid contract, the purported "partnership/joint venture" is
legally inexistent and it produces no effect whatsoever. Necessarily, a void or legally inexistent contract
cannot be the source of any contractual or legal right. Accordingly, the allegations in the complaint,
including the actionable document attached thereto, clearly demonstrates that [petitioner] has NO valid
contractual or legal right which could be violated by the [individual respondents] herein. As a
consequence, [petitioners] complaint does NOT state a valid cause of action because NOT all the
essential elements of a cause of action are present. (Underscoring and words in bracket added.)

Likewise well-taken are the following complementary excerpts from the CAs equally assailed Resolution
of December 7, 200427 denying petitioners motion for reconsideration:

Further, We conclude that despite glaring defects in the allegations in the complaint as well as the
actionable document attached thereto (Rollo, p. 191), the [trial] court did not appreciate and apply the
legal provisions which were brought to its attention by herein [respondents] in the their pleadings. In our
evaluation of [petitioners] complaint, the latter alleged inter alia to have contributed immovable
properties to the alleged partnership but the actionable document is not a public document and there
was no inventory of immovable properties signed by the parties. Both the allegations in the complaint
and the actionable documents considered, it is crystal clear that [petitioner] has no valid or legal right
which could be violated by [respondents]. (Words in bracket added.)

Under the second assigned error, it is petitioners posture that Annex "A-1", assuming its inefficacy or
nullity as a partnership document, nevertheless created demandable rights in his favor. As petitioner
succinctly puts it in this petition:
43. Contrariwise, this actionable document, especially its above-quoted provisions, established an
actionable contract even though it may not be a partnership. This actionable contract is what is known as
an innominate contract (Civil Code, Article 1307).

44. It may not be a contract of loan, or a mortgage or whatever, but surely the contract does create rights
and obligations of the parties and which rights and obligations may be enforceable and demandable. Just
because the relationship created by the agreement cannot be specifically labeled or pigeonholed into a
category of nominate contract does not mean it is void or unenforceable.

Petitioner has thus thrusted the notion of an innominate contract on this Court - and earlier on the CA
after he experienced a reversal of fortune thereat - as an afterthought. The appellate court, however,
cannot really be faulted for not yielding to petitioners dubious stratagem of altering his theory of joint
venture/partnership to an innominate contract. For, at bottom, the appellate courts certiorari
jurisdiction was circumscribed by what was alleged to have been the order/s issued by the trial court in
grave abuse of discretion. As respondent Yang pointedly observed,28 since the parties basic position had
been well-defined, that of petitioner being that the actionable document established a partnership/joint
venture, it is on those positions that the appellate court exercised its certiorari jurisdiction. Petitioners
act of changing his original theory is an impermissible practice and constitutes, as the CA aptly declared,
an admission of the untenability of such theory in the first place.

[Petitioner] is now humming a different tune . . . . In a sudden twist of stance, he has now contended that
the actionable instrument may be considered an innominate contract. xxx Verily, this now changes
[petitioners] theory of the case which is not only prohibited by the Rules but also is an implied admission
that the very theory he himself has adopted, filed and prosecuted before the respondent court is
erroneous.

Be that as it may . . We hold that this new theory contravenes [petitioners] theory of the actionable
document being a partnership document. If anything, it is so obvious we do have to test the sufficiency of
the cause of action on the basis of partnership law xxx.29 (Emphasis in the original; Words in bracket
added).

But even assuming in gratia argumenti that Annex "A-1" partakes of a perfected innominate contract,
petitioners complaint would still be dismissible as against Eduardo and, more so, against Yang. It cannot
be over-emphasized that petitioner points to Eduardo as the author of Annex "A-1". Withal, even on this
consideration alone, petitioners claim against Yang is doomed from the very start.

As it were, the only portion of Annex "A-1" which could perhaps be remotely regarded as vesting
petitioner with a right to demand from respondent Eduardo the observance of a determinate conduct,
reads:

xxx You will be the only one left with the company, among us brothers and I will ask you to stay as I want
you to run this office everytime I am away. I want you to run it the way I am trying to run it because I will
be alone and I will depend entirely to you, My sons will not be ready to help me yet until about maybe
15/20 years from now.Whatever is left in the corporation, I will make sure that you get ONE MILLION
PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is greater. (Underscoring added)
It is at once apparent that what respondent Eduardo imposed upon himself under the above passage, if
he indeed wrote Annex "A-1", is a promise which is not to be performed within one year from "contract"
execution on June 22, 1973. Accordingly, the agreement embodied in Annex "A-1" is covered by the
Statute of Frauds andergo unenforceable for non-compliance therewith.30 By force of the statute of
frauds, an agreement that by its terms is not to be performed within a year from the making thereof shall
be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing
and subscribed by the party charged. Corollarily, no action can be proved unless the requirement exacted
by the statute of frauds is complied with.31

Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10% equity of the family
businesses supposedly promised by Eduardo to give in the near future. Any suggestion that the stated
amount or the equity component of the promise was intended to go to a common fund would be to read
something not written in Annex "A-1". Thus, even this angle alone argues against the very idea of a
partnership, the creation of which requires two or more contracting minds mutually agreeing to
contribute money, property or industry to a common fund with the intention of dividing the profits
between or among themselves.32

In sum then, the Court rules, as did the CA, that petitioners complaint for specific performance anchored
on an actionable document of partnership which is legally inexistent or void or, at best, unenforceable
does not state a cause of action as against respondent Eduardo and the corporate defendants. And if no
of action can successfully be maintained against respondent Eduardo because no valid partnership
existed between him and petitioner, the Court cannot see its way clear on how the same action could
plausibly prosper against Yang. Surely, Yang could not have become a partner in, or could not have had
any form of business relationship with, an inexistent partnership.

As may be noted, petitioner has not, in his complaint, provide the logical nexus that would tie Yang to him
as his partner. In fact, attendant circumstances would indicate the contrary. Consider:

1. Petitioner asserted in his complaint that his so-called joint venture/partnership with Eduardo was "for
the continuation of their family business and common family funds which were theretofore being mainly
managed by Eduardo." 33 But Yang denies kinship with the Litonjua family and petitioner has not disputed
the disclaimer.

2. In some detail, petitioner mentioned what he had contributed to the joint venture/partnership with
Eduardo and what his share in the businesses will be. No allegation is made whatsoever about what Yang
contributed, if any, let alone his proportional share in the profits. But such allegation cannot, however, be
made because, as aptly observed by the CA, the actionable document did not contain such provision, let
alone mention the name of Yang. How, indeed, could a person be considered a partner when the
document purporting to establish the partnership contract did not even mention his name.

3. Petitioner states in par. 2.01 of the complaint that "[he] and Eduardo are business partners in the
[respondent] corporations," while "Bobby is his and Eduardos partner in their Odeon Theater investment
(par. 2.03). This means that the partnership between petitioner and Eduardo came first; Yang became
their partner in their Odeon Theater investment thereafter. Several paragraphs later, however, petitioner
would contradict himself by alleging that his "investment and that of Eduardo and Yang in the Odeon
theater business has expanded through a reinvestment of profit income and direct investments in several
corporation including but not limited to [six] corporate respondents" This simply means that the "Odeon
Theatre business" came before the corporate respondents. Significantly enough, petitioner refers to the
corporate respondents as "progeny" of the Odeon Theatre business.34

Needless to stress, petitioner has not sufficiently established in his complaint the legal vinculum whence
he sourced his right to drag Yang into the fray. The Court of Appeals, in its assailed decision, captured and
formulated the legal situation in the following wise:

[Respondent] Yang, is impleaded because, as alleged in the complaint, he is a "partner" of [Eduardo]

and the [petitioner] in the Odeon Theater Investment which expanded through reinvestments of profits
and direct investments in several corporations, thus:

xxx xxx xxx

Clearly, [petitioners] claim against Yang arose from his alleged partnership with petitioner and the
respondent. However, there was NO allegation in the complaint which directly alleged how the
supposed contractual relation was created between [petitioner] and Yang. More importantly, however,
the foregoing ruling of this Court that the purported partnership between [Eduardo] is void and legally
inexistent directly affects said claim against Yang. Since [petitioner] is trying to establish his claim
against Yang by linking him to the legally inexistent partnership . . . such attempt had become futile
because there was NOTHING that would contractually connect [petitioner] and Yang. To establish a
valid cause of action, the complaint should have a statement of fact upon which to connect [respondent]
Yang to the alleged partnership between [petitioner] and respondent [Eduardo], including their alleged
investment in the Odeon Theater. A statement of facts on those matters is pivotal to the complaint as
they would constitute the ultimate facts necessary to establish the elements of a cause of action against
Yang. 35

Pressing its point, the CA later stated in its resolution denying petitioners motion for reconsideration the
following:

xxx Whatever the complaint calls it, it is the actionable document attached to the complaint that is
controlling. Suffice it to state, We have not ignored the actionable document As a matter of fact, We
emphasized in our decision that insofar as [Yang] is concerned, he is not even mentioned in the said
actionable document. We are therefore puzzled how a person not mentioned in a document purporting
to establish a partnership could be considered a partner.36 (Words in bracket ours).

The last issue raised by petitioner, referring to whether or not he changed his theory of the case, as
peremptorily determined by the CA, has been discussed at length earlier and need not detain us long.
Suffice it to say that after the CA has ruled that the alleged partnership is inexistent, petitioner took a
different tack. Thus, from a joint venture/partnership theory which he adopted and consistently pursued
in his complaint, petitioner embraced the innominate contract theory. Illustrative of this shift is
petitioners statement in par. #8 of his motion for reconsideration of the CAs decision combined with
what he said in par. # 43 of this petition, as follows:

8. Whether or not the actionable document creates a partnership, joint venture, or whatever, is a legal
matter. What is determinative for purposes of sufficiency of the complainants allegations, is whether the
actionable document bears out an actionable contract be it a partnership, a joint venture or whatever
or some innominate contract It may be noted that one kind of innominate contract is what is known
as du ut facias (I give that you may do).37

43. Contrariwise, this actionable document, especially its above-quoted provisions, established an
actionable contract even though it may not be a partnership. This actionable contract is what is known as
an innominate contract (Civil Code, Article 1307).38

Springing surprises on the opposing party is offensive to the sporting idea of fair play, justice and due
process; hence, the proscription against a party shifting from one theory at the trial court to a new and
different theory in the appellate court.39 On the same rationale, an issue which was neither averred in the
complaint cannot be raised for the first time on appeal.40 It is not difficult, therefore, to agree with the CA
when it made short shrift of petitioners innominate contract theory on the basis of the foregoing basic
reasons.

Petitioners protestation that his act of introducing the concept of innominate contract was not a case of
changing theories but of supporting his pleaded cause of action that of the existence of a partnership -
by another legal perspective/argument, strikes the Court as a strained attempt to rationalize an
untenable position. Paragraph 12 of his motion for reconsideration of the CAs decision virtually relegates
partnership as a fall-back theory. Two paragraphs later, in the same notion, petitioner faults the appellate
court for reading, with myopic eyes, the actionable document solely as establishing a partnership/joint
venture. Verily, the cited paragraphs are a study of a party hedging on whether or not to pursue the
original cause of action or altogether abandoning the same, thus:

12. Incidentally, assuming that the actionable document created a partnership between [respondent]
Eduardo, Sr. and [petitioner], no immovables were contributed to this partnership. xxx

14. All told, the Decision takes off from a false premise that the actionable document attached to the
complaint does not establish a contractual relationship between [petitioner] and Eduardo, Sr. and
Roberto T Yang simply because his document does not create a partnership or a joint venture. This is a
myopic reading of the actionable document.

Per the Courts own count, petitioner used in his complaint the mixed words "joint venture/partnership"
nineteen (19) times and the term "partner" four (4) times. He made reference to the "law of joint
venture/partnership [being applicable] to the business relationship between [him], Eduardo and Bobby
[Yang]" and to his "rights in all specific properties of their joint venture/partnership". Given this
consideration, petitioners right of action against respondents Eduardo and Yang doubtless pivots on the
existence of the partnership between the three of them, as purportedly evidenced by the undated and
unsigned Annex "A-1". A void Annex "A-1", as an actionable document of partnership, would strip
petitioner of a cause of action under the premises. A complaint for delivery and accounting of partnership
property based on such void or legally non-existent actionable document is dismissible for failure to state
of action. So, in gist, said the Court of Appeals. The Court agrees.

WHEREFORE, the instant petition is DENIED and the impugned Decision and Resolution of the Court of
AppealsAFFIRMED.

Cost against the petitioner.

SO ORDERED.

emnace vs ca
gr126334

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 126334 November 23, 2001

EMILIO EMNACE, petitioner,

vs.
COURT OF APPEALS, ESTATE OF VICENTE TABANAO, SHERWIN TABANAO, VICENTE WILLIAM TABANAO,
JANETTE TABANAO DEPOSOY, VICENTA MAY TABANAO VARELA, ROSELA TABANAO and VINCENT
TABANAO, respondents.

YNARES-SANTIAGO, J.:

Petitioner Emilio Emnace, Vicente Tabanao and Jacinto Divinagracia were partners in a business concern
known as Ma. Nelma Fishing Industry. Sometime in January of 1986, they decided to dissolve their
partnership and executed an agreement of partition and distribution of the partnership properties among
them, consequent to Jacinto Divinagracia's withdrawal from the partnership.1 Among the assets to be
distributed were five (5) fishing boats, six (6) vehicles, two (2) parcels of land located at Sto. Nio and
Talisay, Negros Occidental, and cash deposits in the local branches of the Bank of the Philippine Islands
and Prudential Bank.

Throughout the existence of the partnership, and even after Vicente Tabanao's untimely demise in 1994,
petitioner failed to submit to Tabanao's heirs any statement of assets and liabilities of the partnership,
and to render an accounting of the partnership's finances. Petitioner also reneged on his promise to turn
over to Tabanao's heirs the deceased's 1/3 share in the total assets of the partnership, amounting to
P30,000,000.00, or the sum of P10,000,000.00, despite formal demand for payment thereof. 2

Consequently, Tabanao' s heirs, respondents herein, filed against petitioner an action for accounting,
payment of shares, division of assets and damages.3 In their complaint, respondents prayed as follows:

1. Defendant be ordered to render the proper accounting of all the assets and liabilities of the
partnership at bar; and

2. After due notice and hearing defendant be ordered to pay/remit/deliver/surrender/yield to the

plaintiffs the following:
 A. No less than One Third (1/3) of the assets, properties, dividends, cash, land(s), fishing
vessels, trucks, motor vehicles, and other forms and substance of treasures which belong
and/or should belong, had accrued and/or must accrue to the partnership;

B. No less than Two Hundred Thousand Pesos (P200,000.00) as moral damages;

C. Attorney's fees equivalent to Thirty Percent (30%) of the entire share/amount/award

which the Honorable Court may resolve the plaintiffs as entitled to plus P1,000.00 for
every appearance in court.4

Petitioner filed a motion to dismiss the complaint on the grounds of improper venue, lack of jurisdiction
over the nature of the action or suit, and lack of capacity of the estate of Tabanao to sue.5 On August 30,
1994, the trial court denied the motion to dismiss. It held that venue was properly laid because, while
realties were involved, the action was directed against a particular person on the basis of his personal
liability; hence, the action is not only a personal action but also an action in personam. As regards
petitioner's argument of lack of jurisdiction over the action because the prescribed docket fee was not
paid considering the huge amount involved in the claim, the trial court noted that a request for
accounting was made in order that the exact value of the partnership may be ascertained and, thus, the
correct docket fee may be paid. Finally, the trial court held that the heirs of Tabanao had aright to sue in
their own names, in view of the provision of Article 777 of the Civil Code, which states that the rights to
the succession are transmitted from the moment of the death of the decedent.6

The following day, respondents filed an amended complaint,7 incorporating the additional prayer that
petitioner be ordered to "sell all (the partnership's) assets and thereafter
pay/remit/deliver/surrender/yield to the plaintiffs" their corresponding share in the proceeds thereof. In
due time, petitioner filed a manifestation and motion to dismiss,8arguing that the trial court did not
acquire jurisdiction over the case due to the plaintiffs' failure to pay the proper docket fees. Further, in a
supplement to his motion to dismiss,9 petitioner also raised prescription as an additional ground
warranting the outright dismissal of the complaint.

On June 15, 1995, the trial court issued an Order,10 denying the motion to dismiss inasmuch as the
grounds raised therein were basically the same as the earlier motion to dismiss which has been denied.
Anent the issue of prescription, the trial court ruled that prescription begins to run only upon the
dissolution of the partnership when the final accounting is done. Hence, prescription has not set in the
absence of a final accounting. Moreover, an action based on a written contract prescribes in ten years
from the time the right of action accrues.

Petitioner filed a petition for certiorari before the Court of Appeals,11 raising the following issues:

I. Whether or not respondent Judge acted without jurisdiction or with grave abuse of
discretion in taking cognizance of a case despite the failure to pay the required docket fee;

II. Whether or not respondent Judge acted without jurisdiction or with grave abuse of
discretion in insisting to try the case which involve (sic) a parcel of land situated outside of its
territorial jurisdiction;
 III. Whether or not respondent Judge acted without jurisdiction or with grave abuse of
discretion in allowing the estate of the deceased to appear as party plaintiff, when there is no
intestate case and filed by one who was never appointed by the court as administratrix of the
estates; and

IV. Whether or not respondent Judge acted without jurisdiction or with grave abuse of
discretion in not dismissing the case on the ground of prescription.

On August 8, 1996, the Court of Appeals rendered the assailed decision,12 dismissing the petition for
certiorari, upon a finding that no grave abuse of discretion amounting to lack or excess of jurisdiction was
committed by the trial court in issuing the questioned orders denying petitioner's motions to dismiss.

Not satisfied, petitioner filed the instant petition for review, raising the same issues resolved by the Court
of Appeals, namely:

I. Failure to pay the proper docket fee;

II. Parcel of land subject of the case pending before the trial court is outside the said court's
territorial jurisdiction;

III. Lack of capacity to sue on the part of plaintiff heirs of Vicente Tabanao; and

IV. Prescription of the plaintiff heirs' cause of action.

It can be readily seen that respondents' primary and ultimate objective in instituting the action below was
to recover the decedent's 1/3 share in the partnership' s assets. While they ask for an accounting of the
partnership' s assets and finances, what they are actually asking is for the trial court to compel petitioner
to pay and turn over their share, or the equivalent value thereof, from the proceeds of the sale of the
partnership assets. They also assert that until and unless a proper accounting is done, the exact value of
the partnership' s assets, as well as their corresponding share therein, cannot be ascertained.
Consequently, they feel justified in not having paid the commensurate docket fee as required by the
Rules of Court.1wphi1.nt

We do not agree. The trial court does not have to employ guesswork in ascertaining the estimated value
of the partnership's assets, for respondents themselves voluntarily pegged the worth thereof at Thirty
Million Pesos (P30,000,000.00). Hence, this case is one which is really not beyond pecuniary estimation,
but rather partakes of the nature of a simple collection case where the value of the subject assets or
amount demanded is pecuniarily determinable.13 While it is true that the exact value of the partnership's
total assets cannot be shown with certainty at the time of filing, respondents can and must ascertain,
through informed and practical estimation, the amount they expect to collect from the partnership,
particularly from petitioner, in order to determine the proper amount of docket and other fees.14 It is
thus imperative for respondents to pay the corresponding docket fees in order that the trial court may
acquire jurisdiction over the action.15

Nevertheless, unlike in the case of Manchester Development Corp. v. Court of Appeals,16 where there was
clearly an effort to defraud the government in avoiding to pay the correct docket fees, we see no attempt
to cheat the courts on the part of respondents. In fact, the lower courts have noted their expressed
desire to remit to the court "any payable balance or lien on whatever award which the Honorable Court
may grant them in this case should there be any deficiency in the payment of the docket fees to be
computed by the Clerk of Court."17 There is evident willingness to pay, and the fact that the docket fee
paid so far is inadequate is not an indication that they are trying to avoid paying the required amount, but
may simply be due to an inability to pay at the time of filing. This consideration may have moved the trial
court and the Court of Appeals to declare that the unpaid docket fees shall be considered a lien on the
judgment award.

Petitioner, however, argues that the trial court and the Court of Appeals erred in condoning the non-
payment of the proper legal fees and in allowing the same to become a lien on the monetary or property
judgment that may be rendered in favor of respondents. There is merit in petitioner's assertion. The third
paragraph of Section 16, Rule 141 of the Rules of Court states that:

The legal fees shall be a lien on the monetary or property judgment in favor of the pauper-
litigant.

Respondents cannot invoke the above provision in their favor because it specifically applies to pauper-
litigants. Nowhere in the records does it appear that respondents are litigating as paupers, and as such
are exempted from the payment of court fees.18

The rule applicable to the case at bar is Section 5(a) of Rule 141 of the Rules of Court, which defines the
two kinds of claims as: (1) those which are immediately ascertainable; and (2) those which cannot be
immediately ascertained as to the exact amount. This second class of claims, where the exact amount still
has to be finally determined by the courts based on evidence presented, falls squarely under the third
paragraph of said Section 5(a), which provides:

In case the value of the property or estate or the sum claimed is less or more in accordance with
the appraisal of the court, the difference of fee shall be refunded or paid as the case may
be. (Underscoring ours)

In Pilipinas Shell Petroleum Corporation v. Court of Appeals,19 this Court pronounced that the above-
quoted provision "clearly contemplates an Initial payment of the filing fees corresponding to the
estimated amount of the claim subject to adjustment as to what later may be proved."20 Moreover, we
reiterated therein the principle that the payment of filing fees cannot be made contingent or dependent
on the result of the case. Thus, an initial payment of the docket fees based on an estimated amount must
be paid simultaneous with the filing of the complaint. Otherwise, the court would stand to lose the filing
fees should the judgment later turn out to be adverse to any claim of the respondent heirs.

The matter of payment of docket fees is not a mere triviality. These fees are necessary to defray court
expenses in the handling of cases. Consequently, in order to avoid tremendous losses to the judiciary, and
to the government as well, the payment of docket fees cannot be made dependent on the outcome of
the case, except when the claimant is a pauper-litigant.

Applied to the instant case, respondents have a specific claim - 1/3 of the value of all the partnership
assets - but they did not allege a specific amount. They did, however, estimate the partnership's total
assets to be worth Thirty Million Pesos (P30,000,000.00), in a letter21 addressed to petitioner.
Respondents cannot now say that they are unable to make an estimate, for the said letter and the
admissions therein form part of the records of this case. They cannot avoid paying the initial docket fees
by conveniently omitting the said amount in their amended complaint. This estimate can be made the
basis for the initial docket fees that respondents should pay. Even if it were later established that the
amount proved was less or more than the amount alleged or estimated, Rule 141, Section 5(a) of the
Rules of Court specifically provides that the court may refund the 'excess or exact additional fees should
the initial payment be insufficient. It is clear that it is only the difference between the amount finally
awarded and the fees paid upon filing of this complaint that is subject to adjustment and which may be
subjected to alien.

In the oft-quoted case of Sun Insurance Office, Ltd. v. Hon. Maximiano Asuncion, 22 this Court held that
when the specific claim "has been left for the determination by the court, the additional filing fee
therefor shall constitute a lien on the judgment and it shall be the responsibility of the Clerk of Court or
his duly authorized deputy to enforce said lien and assess and collect the additional fee." Clearly, the rules
and jurisprudence contemplate the initial payment of filing and docket fees based on the estimated
claims of the plaintiff, and it is only when there is a deficiency that a lien may be constituted on the
judgment award until such additional fee is collected.

Based on the foregoing, the trial court erred in not dismissing the complaint outright despite their failure
to pay the proper docket fees. Nevertheless, as in other procedural rules, it may be liberally construed in
certain cases if only to secure a just and speedy disposition of an action. While the rule is that the
payment of the docket fee in the proper amount should be adhered to, there are certain exceptions
which must be strictly construed.23

In recent rulings, this Court has relaxed the strict adherence to the Manchester doctrine, allowing the
plaintiff to pay the proper docket fees within a reasonable time before the expiration of the applicable
prescriptive or reglementary period.24

In the recent case of National Steel Corp. v. Court of Appeals,25 this Court held that:

The court acquires jurisdiction over the action if the filing of the initiatory pleading is
accompanied by the payment of the requisite fees, or, if the fees are not paid at the time of the
filing of the pleading, as of the time of full payment of the fees within such reasonable time as the
court may grant, unless, of course, prescription has set in the meantime.

It does not follow, however, that the trial court should have dismissed the complaint for failure of
private respondent to pay the correct amount of docket fees. Although the payment of the
proper docket fees is a jurisdictional requirement, the trial court may allow the plaintiff in an
action to pay the same within a reasonable time before the expiration of the applicable
prescriptive or reglementary period. If the plaintiff fails to comply within this requirement, the
defendant should timely raise the issue of jurisdiction or else he would be considered in estoppel.
In the latter case, the balance between the appropriate docket fees and the amount actually paid
by the plaintiff will be considered a lien or any award he may obtain in his favor. (Underscoring
ours)

Accordingly, the trial court in the case at bar should determine the proper docket fee based on the
estimated amount that respondents seek to collect from petitioner, and direct them to pay the same
within a reasonable time, provided the applicable prescriptive or reglementary period has not yet
expired, Failure to comply therewith, and upon motion by petitioner, the immediate dismissal of the
complaint shall issue on jurisdictional grounds.

On the matter of improper venue, we find no error on the part of the trial court and the Court of Appeals
in holding that the case below is a personal action which, under the Rules, may be commenced and tried
where the defendant resides or may be found, or where the plaintiffs reside, at the election of the
latter.26

Petitioner, however, insists that venue was improperly laid since the action is a real action involving a
parcel of land that is located outside the territorial jurisdiction of the court a quo. This contention is not
well-taken. The records indubitably show that respondents are asking that the assets of the partnership
be accounted for, sold and distributed according to the agreement of the partners. The fact that two of
the assets of the partnership are parcels of land does not materially change the nature of the action. It is
an action in personam because it is an action against a person, namely, petitioner, on the basis of his
personal liability. It is not an action in rem where the action is against the thing itself instead of against
the person.27 Furthermore, there is no showing that the parcels of land involved in this case are being
disputed. In fact, it is only incidental that part of the assets of the partnership under liquidation happen to
be parcels of land.

The time-tested case of Claridades v. Mercader, et al.,28 settled this issue thus:

The fact that plaintiff prays for the sale of the assets of the partnership, including the fishpond in
question, did not change the nature or character of the action, such sale being merely a
necessary incident of the liquidation of the partnership, which should precede and/or is part of its
process of dissolution.

The action filed by respondents not only seeks redress against petitioner. It also seeks the enforcement
of, and petitioner's compliance with, the contract that the partners executed to formalize the
partnership's dissolution, as well as to implement the liquidation and partition of the partnership's assets.
Clearly, it is a personal action that, in effect, claims a debt from petitioner and seeks the performance of a
personal duty on his part.29 In fine, respondents' complaint seeking the liquidation and partition of the
assets of the partnership with damages is a personal action which may be filed in the proper court where
any of the parties reside.30 Besides, venue has nothing to do with jurisdiction for venue touches more
upon the substance or merits of the case.31 As it is, venue in this case was properly laid and the trial court
correctly ruled so.

On the third issue, petitioner asserts that the surviving spouse of Vicente Tabanao has no legal capacity to
sue since she was never appointed as administratrix or executrix of his estate. Petitioner's objection in
this regard is misplaced. The surviving spouse does not need to be appointed as executrix or
administratrix of the estate before she can file the action. She and her children are complainants in their
own right as successors of Vicente Tabanao. From the very moment of Vicente Tabanao' s death, his
rights insofar as the partnership was concerned were transmitted to his heirs, for rights to the succession
are transmitted from the moment of death of the decedent.32

Whatever claims and rights Vicente Tabanao had against the partnership and petitioner were transmitted
to respondents by operation of law, more particularly by succession, which is a mode of acquisition by
virtue of which the property, rights and obligations to the extent of the value of the inheritance of a
person are transmitted.33 Moreover, respondents became owners of their respective hereditary shares
from the moment Vicente Tabanao died.34

A prior settlement of the estate, or even the appointment of Salvacion Tabanao as executrix or
administratrix, is not necessary for any of the heirs to acquire legal capacity to sue. As successors who
stepped into the shoes of their decedent upon his death, they can commence any action originally
pertaining to the decedent.35 From the moment of his death, his rights as a partner and to demand
fulfillment of petitioner's obligations as outlined in their dissolution agreement were transmitted to
respondents. They, therefore, had the capacity to sue and seek the court's intervention to compel
petitioner to fulfill his obligations.

Finally, petitioner contends that the trial court should have dismissed the complaint on the ground of
prescription, arguing that respondents' action prescribed four (4) years after it accrued in 1986. The trial
court and the Court of Appeals gave scant consideration to petitioner's hollow arguments, and rightly so.

The three (3) final stages of a partnership are: (1) dissolution; (2) winding-up; and (3) termination.36 The
partnership, although dissolved, continues to exist and its legal personality is retained, at which time it
completes the winding up of its affairs, including the partitioning and distribution of the net partnership
assets to the partners.37 For as long as the partnership exists, any of the partners may demand an
accounting of the partnership's business. Prescription of the said right starts to run only upon the
dissolution of the partnership when the final accounting is done.38

Contrary to petitioner's protestations that respondents' right to inquire into the business affairs of the
partnership accrued in 1986, prescribing four (4) years thereafter, prescription had not even begun to run
in the absence of a final accounting. Article 1842 of the Civil Code provides:

The right to an account of his interest shall accrue to any partner, or his legal representative as
against the winding up partners or the surviving partners or the person or partnership continuing
the business, at the date of dissolution, in the absence of any agreement to the contrary.

Applied in relation to Articles 1807 and 1809, which also deal with the duty to account, the above-cited
provision states that the right to demand an accounting accrues at the date of dissolution in the absence
of any agreement to the contrary. When a final accounting is made, it is only then that prescription begins
to run. In the case at bar, no final accounting has been made, and that is precisely what respondents are
seeking in their action before the trial court, since petitioner has failed or refused to render an accounting
of the partnership's business and assets. Hence, the said action is not barred by prescription.

In fine, the trial court neither erred nor abused its discretion when it denied petitioner's motions to
dismiss. Likewise, the Court of Appeals did not commit reversible error in upholding the trial court's
orders. Precious time has been lost just to settle this preliminary issue, with petitioner resurrecting the
very same arguments from the trial court all the way up to the Supreme Court. The litigation of the merits
and substantial issues of this controversy is now long overdue and must proceed without further delay.

WHEREFORE, in view of all the foregoing, the instant petition is DENIED for lack of merit, and the case
isREMANDED to the Regional Trial Court of Cadiz City, Branch 60, which is ORDERED to determine the
proper docket fee based on the estimated amount that plaintiffs therein seek to collect, and direct said
plaintiffs to pay the same within a reasonable time, provided the applicable prescriptive or reglementary
period has not yet expired. Thereafter, the trial court is ORDERED to conduct the appropriate proceedings
in Civil Case No. 416-C.

Costs against petitioner.1wphi1.nt

SO ORDERED.

testate estate of mota vs serra

grl22825

G.R. No. L-22825 February 14, 1925

TESTATE ESTATE OF LAZARO MOTA, deceased, ET AL., plaintiffs-appellants,

vs.
SALVADOR SERRA, defendant-appellee.

Eduardo Gutierrez Repide for appellants.

Hilado and Hilado, Fisher, DeWitt, Perkins and Brady, Araneta and Zaragosa, Antonio Sanz and Jose Galan
y Blanco for appellee.

VILLAMOR, J.:

On February 1, 1919, plaintiffs and defendant entered into a contract of partnership, marked Exhibit A,
for the construction and exploitation of a railroad line from the "San Isidro" and "Palma" centrals to the
place known as "Nandong." The original capital stipulated was P150,000. It was covenanted that the
parties should pay this amount in equal parts and the plaintiffs were entrusted with the administration of
the partnership. The agreed capital of P150,000, however, did not prove sufficient, as the expenses up to
May 15, 1920, had reached the amount of P226,092.92, as per statement Exhibit B, presented by the
administrator and O.K.'d by the defendant.

January 29, 1920, the defendant entered into a contract of sale with Venancio Concepcion, Phil. C.
Whitaker, and Eusebio R. de Luzuriaga, whereby he sold to the latter the estate and central known as
"Palma" with its running business, as well as all the improvements, machineries and buildings, real and
personal properties, rights, choses in action and interests, including the sugar plantation of the harvest
year of 1920 to 1921, covering all the property of the vendor. This contract was executed before a notary
public of Iloilo and is evidenced by Exhibit 1 of the defendant, paragraph 5 of which reads as follows:

5. The party of the first part hereby states that he has entered into a contract with the owners of
the "San Isidro" Central for the construction, operation, and exploitation of a railroad line of
about 10 kilometers extending from the "Palma" Central and "San Isidro" Central to a point
known as "Nandong," the expenses until the termination of which shall be for the account of the
"San Isidro" Central, and of which expenses, one-half shall be borne by the "Palma" Central with
the obligation to reimburse same within five (5) years with interest at the rate of 10 per cent per
annum to the said "San Isidro" Central. The vendee hereby obligates himself to respect the
aforesaid contract and all obligations arising therefrom.
Before the delivery to the purchasers of the hacienda thus sold, Eusebio R. de Luzuriaga renounced all his
rights under the contract of January 29, 1920, in favor of Messrs. Venancio Concepcion and Phil. C.
Whitaker. This gave rise to the fact that on July 17, 1920, Venancio Concepcion and Phil. C. Whitaker and
the herein defendant executed before Mr. Antonio Sanz, a notary public in and for the City of Manila,
another deed of absolute sale of the said "Palma" Estate for the amount of P1,695,961.90, of which the
vendor received at the time of executing the deed the amount of P945,861.90, and the balance was
payable by installments in the form and manner stipulated in the contract. The purchasers guaranteed
the unpaid balance of the purchase price by a first and special mortgage in favor of the vendor upon
the hacienda and the central with all the improvements, buildings, machineries, and appurtenances then
existing on the said hacienda.

Clause 6 of the deed of July 17, 1920, contains the following stipulations:

6. Messrs. Phil. C. Whitaker and Venancio Concepcion hereby state that they are aware of the
contract that Mr. Salvador Serra has with the proprietors of the "San Isidro" Central for the
operation and exploitation of a railroad line about 10 kilometers long from the "Palma" and "San
Isidro" centrals to the place known as "Nandong;" and hereby obligate themselves to respect the
said contract and subrogate themselves into the rights and obligations thereunder. They also bind
themselves to comply with all the contracts heretofore entered by the vendor with the
customers, coparceners on shares and employees.

Afterwards, on January 8, 1921, Venancio Concepcion and Phil. C. Whitaker bought from the plaintiffs the
one-half of the railroad line pertaining to the latter, executing therefor the document Exhibit 5. The price
of this sale was P237,722.15, excluding any amount which the defendant might be owing to the plaintiffs.
Of the purchase price, Venancio Concepcion and Phil. C. Whitaker paid the sum of P47,544.43 only. In the
deed Exhibit 5, the plaintiffs and Concepcion and Whitaker agreed, among other things, that the
partnership "Palma" and "San Isidro," formed by the agreement of February 1, 1919, between Serra,
Lazaro Mota, now deceased, and Juan J. Vidaurrazaga for himself and in behalf of his brother, Felix and
Dionisio Vidaurrazaga, should be dissolved upon the execution of this contract, and that the said
partnership agreement should be totally cancelled and of no force and effect whatever.

So it results that the "Hacienda Palma," with the entire railroad, the subject-matter of the contract of
partnership between plaintiffs and defendant, became the property of Whitaker and Concepcion. Phil. C.
Whitaker and Venancio Concepcion having failed to pay to the defendant a part of the purchase price,
that is, P750,000, the vendor, the herein defendant, foreclosed the mortgage upon the said hacienda,
which was adjudicated to him at the public sale held by the sheriff for the amount of P500,000, and the
defendant put in possession thereof, including what was planted at the time, together with all the
improvements made by Messrs. Phil. C. Whitaker and Venancio Concepcion.

Since the defendant Salvador Serra failed to pay one-half of the amount expended by the plaintiffs upon
the construction of the railroad line, that is, P113,046.46, as well as Phil. C. Whitaker and Venancio
Concepcion, the plaintiffs instituted the present action praying: (1) That the deed of February 1, 1919, be
declared valid and binding; (2) that after the execution of the said document the defendant improved
economically so as to be able to pay the plaintiffs the amount owed, but that he refused to pay either in
part or in whole the said amount notwithstanding the several demands made on him for the purpose;
and (3) that the defendant be sentenced to pay plaintiffs the aforesaid sum of P113,046.46, with the
stipulated interest at 10 per cent per annum beginning June 4, 1920, until full payment thereof, with the
costs of the present action.
Defendant set up three special defenses: (1) The novation of the contract by the substitution of the
debtor with the conformity of the creditors; (2) the confusion of the rights of the creditor and debtor; and
(3) the extinguishment of the contract, Exhibit A.

The court a quo in its decision held that there was a novation of the contract by the substitution of the
debtor, and therefore absolved the defendant from the complaint with costs against the plaintiffs. With
regard to the prayer that the said contract be declared valid and binding, the court held that there was no
way of reviving the contract which the parties themselves in interest had spontaneously and voluntarily
extinguished. (Exhibit 5.)

Plaintiffs have appealed from this judgment and as causes for the review, they allege that the trial court
erred: (a) In holding that Messrs. Whitaker and Concepcion, upon purchasing the "Palma" Central, were
subrogated in the place of the defendant in all his rights and obligations under the contract relating to the
railroad line existing between the "Palma" and the "San Isidro" centrals and that the plaintiffs agreed to
this subrogation; (b) in holding that the deed Exhibit A of February 1, 1919, had been extinguished in its
entirety and made null and void by the agreement Exhibit 5 dated December 16, 1920; (c) in absolving
the defendant from the complaint and in sentencing the plaintiffs to pay the costs; and (d) in not
sentencing the defendant to pay the plaintiffs the sum of P113,046.46, with legal interest at 10 per cent
per annum from June 4, 1920, until full payment, with costs against the defendant.

Taking for granted that the defendant was under obligation to pay the plaintiffs one-half of the cost of
the construction of the railroad line in question, by virtue of the contract of partnership Exhibit A, the
decisive point here to determine is whether there was a novation of the contract by the substitution of
the debtor with the consent of the creditor, as required by article 1205 of the Civil Code. If so, it is clear
that the obligation of the defendant was, in accordance with article 1156 of the same code, extinguished.

It should be noted that in order to give novation its legal effect, the law requires that the creditor should
consent to the substitution of a new debtor. This consent must be given expressly for the reason that,
since novation extinguishes the personality of the first debtor who is to be substituted by new one, it
implies on the part of the creditor a waiver of the right that he had before the novation which waiver
must be express under the principle that renuntiatio non praesumitur, recognized by the law in declaring
that a waiver of right may not be performed unless the will to waive is indisputably shown by him who
holds the right.

The fact that Phil. C. Whitaker and Venancio Concepcion were willing to assume the defendant's
obligation to the plaintiffs is of no avail, if the latter have not expressly consented to the substitution of
the first debtor. Neither can the letter, Exhibit 6, on page 87 of the record be considered as proof of the
consent of the plaintiffs to the substitution of the debtor, because that exhibit is a letter written by
plaintiffs to Phil. C. Whitaker and Venancio Concepcion for the very reason that the defendant had told
them (plaintiffs) that after the sale of the "Hacienda Palma" to Messrs. Phil. C. Whitaker and Venancio
Concepcion, the latter from then on would bear the cost of the repairs and maintenance of the railroad
line and of the construction of whatever addition thereto might be necessary. So the plaintiffs by their
letter of August 14th, submitted a statement of account to Phil. C. Whitaker and Venancio Concepcion
containing the accounts of the "San Isidro" Central, as stated June 30, 1920, saying that they had already
explained previously the reason for the increase in the expenses and since the retiring partner, Mr. Serra,
had already given conformity with the accounts, as stated May 15, 1920, it remained only to hear the
conformity of the new purchasers for the accounts covering the period from May 15 to June 30, 1920,
and their authority for future investments, or their objection, if any, to the amounts previously expended.
Neither can the testimony of Julio Infante in connection with Exhibit 7 be taken as evidence of the
consent of the plaintiffs to the change of the person of the debtor for that of Messrs. Phil. C. Whitaker
and Venancio Concepcion. This witness testified, in substance, that he is acquainted with the partnership
formed by the owners of the "Hacienda Palma" and Hacienda San Isidro" for the construction of the
railroad line; that the cost of the construction thereof was originally estimated at P150,000; that the
owner of the "Hacienda Palma" would pay one-half of this amount; that when the "Hacienda Palma" was
sold to Messrs. Phil. C. Whitaker and Venancio Concepcion, the latter agreed to pay one-half of the cost
of P150,000; that as the cost of construction exceeded P200,000, he, as an employee of Messrs. Phil. C.
Whitaker and Venancio Concepcion, could not O.K. the accounts as presented by the plaintiffs, and
suggested that they take up in writing their points of view directly with Messrs. Phil. C. Whitaker and
Venancio Concepcion. Then the plaintiffs did as suggested, and wrote the letter Exhibit 7 in which they
asked the new owners of the "Hacienda Palma" their decision upon the following three questions: 1. Will
the "Palma" Central accept the statement of account as presented by the "San Isidro" Central regarding
the actual cost of the railroad line "Palma-San Isidro-Nandong?" 2. Is the "Palma" Central willing to
continue as co-proprietor of the railroad line for the exploitation of the sugar-cane business of "Nandong"
and neighboring barrios, and therefore to pay 50 per cent of the expenses that may be incurred in
completing the line?

It was but natural that the plaintiffs should have done this. Defendant transferred his hacienda to Messrs.
Phil. C. Whitaker and Venancio Concepcion and made it known to the plaintiffs that the new owners
would hold themselves liable for the cost of constructing the said railroad line. Plaintiffs could not prevent
the defendant from selling to Phil. C. Whitaker and Venancio Concepcion his "Hacienda Palma" with the
rights that he had over the railroad in question. The defendant ceased to be a partner in said line and,
therefore, the plaintiffs had to take the vendees as their new partners. Plaintiffs had to come to an
understanding with the new owners of the "Hacienda Palma" in connection with the railroad line "Palma-
San Isidro-Nandong." But in all of this, there was nothing to show the express consent, the manifest and
deliberate intention of the plaintiffs to exempt the defendant from his obligation and to transfer it to his
successors in interest, Messrs. Phil. C. Whitaker and Venancio Concepcion.

The plaintiffs were not a party to the document Exhibit 1. Neither in this document, nor in others in the
record, do we find any stipulation whereby the obligation of the defendant was novated with the consent
of the creditor, and as it has been held in the case of Martinez vs. Cavives (25 Phil., 581), the oral
evidence tending to prove such a fact as this is not in law sufficient.

As has been said, in all contracts of novation consisting in the change of the debtor, the consent of the
creditor is indispensable, pursuant to article 1205 of the Civil Code which reads as follows:

Novation which consists in the substitution of a new debtor in the place of the original one may
be made without the knowledge of the latter, but not without the consent of the creditor.

Mr. Manresa in his commentaries on articles 1205 and 1206 of the Civil Code (vol. 8, 1907 ed., pp. 424-
426) says as follows:

Article 1205 clearly says in what this kind of novation must consist, because in stating that
another person must be substituted in lieu of the debtor, it means that it is not enough to extend
the juridical relation to that other person, but that it is necessary to place the latter in the same
position occupied by the original debtor.
 Consequently, the obligation contracted by a third person to answer for the debtor, as in the case
of suretyship, in the last analysis, does not work as a true novation, because the third person is
not put in the same position as the debtor the latter continues in his same place and with the
same obligation which is guaranteed by the former.

Since it is necessary that the third person should become a debtor in the same position as the
debtor whom he substitutes, this change and the resulting novation may be respected as to the
whole debt, thus untying the debtor from his obligation, except the eventual responsibilities of
which we shall speak later, or he may continue with the character of such debtor and also allow
the third person to participate in the obligation. In the first case, there is a complete and perfect
novation; in the second, there is a change that does not free the debtor nor authorize the
extinguishment of the accessory obligations of the latter. In this last hypothesis, if there has been
no agreement as to solidarity, the first and the new debtor should be considered as obligated
severally.

The provisions of article 1205 which require the consent of the creditor as an indispensable
requisite in this kind of novation and not always that of the debtor, while not making it impossible
to express the same, imply the distinction between these two forms of novation and it is based
on the simple consideration of justice that since the consequences of the substitution may be
prejudicial to the creditor, but not to the debtor, the consent of the creditor alone is necessary.

The two forms of this novation, also impliedly recognized by article 1206 which employs the word
"delegate," as applied to the debt, are the expromission and the delegation. Between these, there
is a marked difference of meaning and, as a consequence, a logical difference of requisite and
another clear difference as to their effects, of which we shall speak later.

In the expromission, the initiative of the change does not emanate from the debtor and may be
made even without his consent, since it consists in a third person assuming his obligation; it
logically requires the consent of this third man and of the creditor and in this last requisite lies
the difference between novation and payment, as the latter can be effected by a third person
even against the will of the creditor, whereas in the former case it cannot.

In the delegation, the debtor offers and the creditor accepts a third person who consents to the
substitution so that the intervention and the consent of these three persons are necessary and
they are respectively known as delegante, delegatario, and delegado. It must be noted that the
consent need not be given simultaneously and that it may be given afterwards, as for example,
that of the creditor delegatario to the proposition of the debtor accepted by the delegado.

Delegation notably differs from the mere indication made by the debtor that a third person shall
pay the debt; in this case, there is no novation and the former is not acquitted of his obligation
and his relations with the third person are regulated by the rules of agency. The French Code in
article 1276 expressly provides for this case, as well as the inverse one where the debtor points
out somebody else to answer for the payment, declaring that there is no novation in either case.
The same sound criterion is impliedly accepted by our Code.

In the case of E.C. McCullough & Co. vs. Veloso and Serna (46 Phil., 1), it appears that McCullough and
Co., Inc., sold to Veloso a real estate worth P700,000 on account of which Veloso paid P50,000, promising
to pay the balance at the times and manner stipulated in the contract. He further bound himself to pay 10
per cent of the amount of the debt as attorney's fees in case of litigation. To secure the unpaid balance of
the purchaser price he executed a first mortgage upon the property in favor of the vendor. Subsequently,
Veloso sold the property for P100,000 to Joaquin Serna who bound himself to respect the mortgage in
favor of McCullough and Co., Inc., and to assume Veloso's obligation to pay the unpaid balance of the
purchase price of the property at the times agreed upon in the contract between Veloso and McCullough
and Co., Inc.

Veloso had paid on account of the price the amount of P50,000, and Serna also made several payments
aggregating the total amount of P250,000. But after this, neither Veloso nor Serna made further
payments and thus gave cause for a litigation. The court in deciding the case said:

The defendant contends that having sold the property to Serna, and the latter having assumed
the obligation to pay the plaintiff the unpaid balance of the price secured by the mortgage upon
the property, he was relieved from this obligation and it then devolved upon Serna to pay the
plaintiff. This means that as a consequence of the contract between the defendant and Serna, the
contract between the defendant and the plaintiff was novated by the substitution of Serna as a
new debtor. This is untenable. In order that this novation may take place, the law requires the
consent of the creditor (art. 1205 of the Civil Code). The plaintiff did not intervene in the contract
between Veloso and Serna and did not expressly give his consent to this substitution. Novation
must be express, and cannot be presumed.

In Martinez vs. Cavives (25 Phil., 581), it was held that:

. . . The consent of the new debtor is as essential to the novation as is that of the creditor . . . .

There is no express stipulation in any of the documents of record that the obligation of the
defendant was novated, and the parol evidence tending to show that it was novated is not
sufficient in law to establish that fact.

The same doctrine was upheld in the case of Vaca vs. Kosca (26 Phil., 388):

A new debtor cannot be substituted for the original obligor in the first contract without the
creditor's consent.

The supreme court of Spain has constantly laid down the same doctrine with regard to novation of
contracts:

The obligations and rights in a contract cannot be novated with regard to a third person who has
not intervened in the execution thereof. (Decision of June 28, 1860.)

Novation by the change of debtors cannot be effected without the express approval of the
creditor. (Decisions of February 8, 1862 and June 12, 1867.)

Novation should not be established by presumptions but by the express will of the parties.
(Decisions of February 14, 1876 and June 16, 1883.)
 In order that novation of a contract by subrogation of the debtor may take effect and thus
liberate the first debtor from the obligation, it is necessary that the subrogation be made with the
consent of the creditor. (Decision of March 2, 1897.)

It is undeniable that obligations judicially declared, as well as those acquired by any title, can be
novated by substituting a new debtor in place of the primitive, only when the creditor gives his
consent to the substitution. (Decision of November 15, 1899.)

Novation can in no case be presumed in contracts, but it is necessary that it should result from
the will of the parties, or that the old and the new one be altogether incompatible. (Decision of
December 31, 1904.)

An obligation cannot be deemed novated by means of modifications which do not substantially

change the essence thereof, nor when it is not extinguished by another obligation, nor when the
debtor is not substituted. (Decision of March 14, 1908.)

The consent of the creditor required in a novation consisting of the change of debtors (art. 1205,
Civil Code) must appear in an express and positive manner and must be given with the deliberate
intention of exonerating the primitive debtor of his obligations and transfer them wholly upon
the new debtor. (Decision of June 22, 1911.)

In the decision in the case of Martinez vs. Cavives, supra, the following decisions of the several courts of
the United States are cited, wherein this question was decided in the same manner:

In Latiolais, admrx. vs. Citizens' Bank of Louisiana (33 La. Ann., 1444), one Duclozel mortgaged
property to the defendant bank for the triple purpose of obtaining shares in the capital stock of
the bank, bonds which the bank was authorized to issue, and loans to him as a stockholder.
Duclozel subsequently sold this mortgaged property to one Sproule, who, as one of the terms of
the sale, assumed the liabilities of his vendor to the bank. Sproule sold part of the property to
Graff and Chalfant. The debt becoming due, the bank brought suit against the last two named
and Sproule as owners. Duclozel was not made a party. The bank discontinued these proceedings
and subsequently brought suit against Latiolais, administratrix of Duclozel, who had died.

The court said: "But the plaintiff insists that in its petition in the proceeding first brought the bank
ratified the sale made by Duclozel to Sproule, and by the latter to other parties, in treating them
as owners. Be that so, but it does not follow in the absence of either a formal and express or of
an implied consent to novate, which should be irresistibly inferred from surrounding
circumstances, that it has discharged Duclozel unconditionally, and has accepted those parties as
new delegated debtors in his place. Nemo presumitur donare.

"Novation is a contract, the object of which is: either to extinguish an existing obligation
and to substitute a new one in its place; or to discharge an old debtor and substitute a
new one to him; or to substitute a new creditor to an old creditor with regard to whom
the debtor is discharged.

"It is never presumed. The intention must clearly result from the terms of the agreement
or by a full discharge of the original debt. Novation by the substitution of a new debtor
 can take place without the consent of the debtor, but the delegation does not operate a
novation, unless the creditor has expressly declared that he intends to discharge with
delegating debtor, and the delegating debtor was not in open failure or insolvency at the
time. The mere indication by a debtor of a person who is to pay in his place does not
operate a novation. Delegatus debitor est odiosus in lege.

"The most that could be inferred would be that the bank in the exercise of a sound
discretion, proposed to better its condition by accepting an additional debtor to be and
remain bound with the original one."

In Fidelity L. & T. Co. vs. Engleby (99 Va., 168), the court said: "Whether or not a debt has been
novated is a question of fact and depends entirely upon the intention of the parties to the
particular transaction claimed to be novated. In the absence of satisfactory proof to the contrary,
the presumption is that the debt has not been extinguished by taking the new evidence in the
absence of an intention expressed or implied, being treated as a conditional payment merely."

In Hamlin vs. Drummond (91 Me., 175; 39 A., 551), it was said that novation is never presumed
but must always be proven. In Netterstorn vs. Gallistel (110 Ill. App., 352), it was said that the
burden of establishing a novation is on the party who asserts its existence; that novation is not
easily presumed; and that it must clearly appear before the court will recognize it.

Notwithstanding the doctrines above quoted, defendant's counsel calls our attention to the decision of
the supreme court of Spain of June 16, 1908, wherein it was held that the provisions of article 1205 of
Code do not mean nor require that the consent of the creditor to the change of a debtor must be given
just at the time when the debtors agree on the substitution, because its evident object being the full
protection of the rights of the creditor, it is sufficient if the latter manifests his consent in any form and at
any time as long as the agreement among the debtors holds good. And defendant insists that the acts
performed by the plaintiffs after the "Hacienda Palma" was sold to Messrs. Phil. C. Whitaker and Venancio
Concepcion constitute evidence of the consent of the creditor. First of all, we should have an idea of the
facts upon which that decision was rendered by the supreme court of Spain.

A partnership known as "La Azucarera de Pravia" obtained a fire insurance policy from the company "La
Union y Fenix Espanol," by virtue of which, said company insured in consideration of an annual premium
of 3,000pesetas, the buildings, machinery and other apparatuses pertaining to the "Pravia Factory" for
ten years and for half their value, and another insurance from another insurance company insuring the
same property and effects for the other half of their value.

Later, "La Azucarera de Pravia," with other sugar companies, ceded all its property to another company
known as "Sociedad General Azucarera de Espaa," in which in consideration of certain amount of stock
that the said "Sociedad General Azucarera de Espaa" issued to the "La Azucarera de Pravia," the latter
was merged with the former. After the cession, "La Union y Fenix Expaol" sued the "Sociedad General
Azucarera de Espaa" demanding the payment of the premium that should have been paid by the "La
Azucarera de Pravia," which payment the "Sociedad General Azucarera de Espaa" refused to make on
the ground that the "La Azucarera de Pravia" was not merged with the "Sociedad General Azucarera de
Espaa," but merely transferred its properties to the latter in consideration of the stock that was issued
to the "La Azucarera de Pravia." It was further contended by the "Sociedad General Azucarera de Espaa"
that even if it were true that in the contract of cession it appeared that the "La Azucarera de Pravia" was
merged with the "Sociedad General Azucarera de Espaa," nevertheless, there was no such merger in
law, for in truth and in fact, the "La Azucarera de Pravia" had ceded only its property, but not its rights
and obligations; that the existence of the partnership known as "La Azucarera de Pravia" was proven by
its registration in the mercantile register, which was not cancelled, did it contain any statement to the
effect that the "La Azucarera de Pravia" had been extinguished or had ceased to do business even after
the cession of properties to the "Sociedad General Azucarera de Espaa." Another argument advanced by
the "Sociedad General" was that at the time the "Azucarera de Pravia" ceded its properties to the
"Sociedad General Azucarera de Espaa," the insurance company "La Union y Fenix Espanol" did not
assent to the subrogation of the "Sociedad General Azucarera" into the rights and obligations of the
"Azucarera de Pravia," assuming that there had been such a subrogation or substitution of a debtor by
another.

The supreme court of Spain gave judgment in favor of the "La Union y Fenix Espaol" insurance company
for the following reasons:

1. While it is true that it cannot be strictly said that "La Azucarera de Pravia" was merged with the
"Sociedad General Azucarera de Espaa," the document whereby the property of the "La
Azucarera de Pravia" was ceded to the "Sociedad General Azucarera de Espaa" clearly and
expressly recites that this company upon taking charge of the immovable property of the "La
Azucarera de Pravia" accepted in general, with respect to the property ceded, "everything
belonging to the same," after making provisions about active and passive easements, contracts
for transportation and other matters.

The supreme court held that by virtue of the words hereinabove quoted, the "Sociedad General
Azucarera de Espaa" took over the obligation to pay the insurance premiums of the "La Azucarera de
Pravia" inasmuch as said insurance pertained to the property that was ceded.

2. While it is true that "La Union y Fenix Espaol" insurance company did not give its consent to
the contract of cession at the moment of its execution, yet the mere fact that the said insurance
company now sues the "Sociedad General Azucarera de Espaa" is an incontrovertible proof that
the said insurance company accepts the substitution of the new debtor.

By comparing the facts of that case with the defenses of the case at bar, it will be seen that, whereas in
the former case the creditor sued the new debtor, in the instant case the creditor sues the original
debtor. The supreme court of Spain in that case held that the fact that the creditor sued the new debtor
was proof incontrovertible of his assent to the substitution of the debtor. This would seem evident
because the judicial demand made on the new debtor to comply with the obligation of the first debtor is
the best proof that the creditor accepts the change of the debtor. His complaint is an authentic document
where his consent is given to the change of the debtor. We are not holding that the creditor's consent
must necessarily be given in the same instrument between the first and the new debtor. The consent of
the creditor may be given subsequently, but in either case it must be expressly manifested. In the present
case, however, the creditor makes judicial demand upon the first debtor for the fulfillment of his
obligation, evidently showing by this act that he does not give his consent to the substitution of the new
debtor. We are of the opinion that the decision of the supreme court of Spain of June 16, 1908, cannot be
successfully invoked in support of defendant's contention. Wherefore, we hold that in accordance with
article 1205 of the Civil Code, in the instant case, there was no novation of the contract, by the change of
the person of the debtor.
Another defense urged by the defendant is the merger of the rights of debtor and creditor, whereby
under article 1192 of the Civil Code, the obligation, the fulfillment of which is demanded in the complaint,
became extinguished. It is maintained in appellee's brief that the debt of the defendant was transferred
to Phil. C. Whitaker and Venancio Concepcion by the document Exhibit 1. These in turn acquired the
credit of the plaintiffs by virtue of the debt, Exhibit 5; thus the rights of the debtor and creditor were
merged in one person. The argument would at first seem to be incontrovertible, but if we bear in mind
that the rights and titles which the plaintiffs sold to Phil. C. Whitaker and Venancio Concepcion refer only
to one-half of the railroad line in question, it will be seen that the credit which they had against the
defendant for the amount of one-half of the cost of construction of the said line was not included in the
sale contained in Exhibit 5. That the plaintiffs sold their rights and titles over one-half of the line, is
evident from the very Exhibit 5. The purchasers, Phil. C. Whitaker and Venancio Concepcion, to secure the
payment of the price, executed a mortgage in favor of the plaintiffs on the same rights and titles that they
had bought and also upon what they had purchased from Mr. Salvador Serra. In other words, Phil. C.
Whitaker and Venancio Concepcion mortgaged unto the plaintiffs what they had bought from the
plaintiffs and also what they had bought from Salvador Serra. If Messrs. Phil. C. Whitaker and Venancio
Concepcion had purchased something from Mr. Salvador Serra, the herein defendant, regarding the
railroad line, it was undoubtedly the one-half thereof pertaining to Mr. Salvador Serra. This clearly shows
that the rights and titles transferred by the plaintiffs to Phil. C. Whitaker and Venancio Concepcion were
only those they had over the other half of the railroad line. Therefore, as already stated, since there was
no novation of the contract between the plaintiffs and the defendant, as regards the obligation of the
latter to pay the former one-half of the cost of the construction of the said railroad line, and since the
plaintiffs did not include in the sale, evidenced by Exhibit 5, the credit that they had against the
defendant, the allegation that the obligation of the defendant became extinguished by the merger of the
rights of creditor and debtor by the purchase of Messrs. Phil. C. Whitaker and Venancio Concepcion is
wholly untenable.

Appellants assign also as a ground of their appeal the holding of the court that by the termination of the
partnership, as shown by the document Exhibit 5, no legal rights can be derived therefrom.

By virtue of the contract Exhibit 5, the plaintiffs and Phil. C. Whitaker and Venancio Concepcion, by
common consent, decided to dissolve the partnership between the "Hacienda Palma" and "Hacienda San
Isidro," thus cancelling the contract of partnership of February 1, 1919.

Counsel for appellee in his brief and oral argument maintains that the plaintiffs cannot enforce any right
arising out of that contract of partnership, which has been annulled, such as the right to claim now a part
of the cost of the construction of the railroad line stipulated in that contract.

Defendant's contention signifies that any person, who has contracted a valid obligation with a
partnership, is exempt from complying with his obligation by the mere fact of the dissolution of the
partnership. Defendant's contention is untenable. The dissolution of a partnership must not be
understood in the absolute and strict sense so that at the termination of the object for which it was
created the partnership is extinguished, pending the winding up of some incidents and obligations of the
partnership, but in such case, the partnership will be reputed as existing until the juridical relations arising
out of the contract are dissolved. This doctrine has been upheld by the supreme court of Spain in its
decision of February 6, 1903, in the following case: There was a partnership formed between several
persons to purchase some lands sold by the state. The partnership paid the purchase price and
distributed among its members the lands so acquired, but after the lapse of some time, one of the
partners instituted an action in the court of Badajoz, praying that he be accepted as a partner with the
same rights and obligations as the others, for the reason that he had not been allowed all that he had a
right to. The court granted the petition, which judgment was affirmed by the Audiencia de Caceres.

From that decision the defendant sued out a writ of error alleging infringement of articles 1680 and 1700
of the Civil Code, on the proposition that all contracts are reputed consummated and therefore
extinguished, when the contracting parties fulfill all the obligations arising therefrom and that by the
payment of the money and the granting and distribution of the lands without any opposition, the juridical
relations between the contracting parties become extinguished and none of the parties has any right of
action under the contract. The supreme court, holding that some corrections and liquidations asked by
the actor were still pending, denied the writ, ruling that the articles cited were not infringed because a
partnership cannot be considered as extinguished until all the obligations pertaining to it are fulfilled. (11
Manresa, page 312.)

The dissolution of a firm does not relieve any of its members from liability for existing obligations,
although it does save them from new obligations to which they have not expressly or impliedly assented,
and any of them may be discharged from old obligations by novation of other form of release. It is often
said that a partnership continues, even after dissolution, for the purpose of winding up its affairs. (30
Cyc., page 659.)

Another question presented by appellee's counsel in his memorandum and oral argument is that as in the
partnership articles of February 1, 1919, it was covenanted that the defendant would put up one-half of
the cost of the railroad line within five years from the date, that is, from February 1, 1919, with interest at
10 per cent per annum, the present action is premature since, from the execution of the contract until
October 25, 1922, the date of the complaint, the five years, within which the defendant could pay his part
of the cost of the construction of the line, had not yet elapsed. Suffice it to say that the plaintiff and the
successors in interest of the defendant, by mutual consent, dissolved the partnership on June 16, 1920,
cancelling the contract Exhibit A to all of which the defendant consented as evidence by his allegations in
his answer. If this is so, there is no reason for waiting for the expiration of the five years which the parties
themselves had seen fit to stipulate and therefore the provisions of article 113, regarding the fulfillment
of pure obligations, must be applied in this case.

For all of the foregoing, the judgment appealed from is reversed, and we hold that the defendant
Salvador Serra is indebted to the plaintiffs, the Testate Estate of Lazaro Mota, et al., in the amount of
P113,046.46, and said defendant is hereby sentenced to pay the plaintiffs the said amount, together with
the agreed interest at the rate of 10 per cent per annum from the date of the filing of the complaint.

Without special pronouncement as to costs, it is so ordered.

Johnson, Street, Malcolm, Ostrand, Johns, and Romualdez, JJ., concur.

victorias milling co inc v ca

gr117356

SECOND DIVISION

G.R. No. 117356 June 19, 2000

VICTORIAS MILLING CO., INC., petitioner,
vs.
COURT OF APPEALS and CONSOLIDATED SUGAR CORPORATION, respondents.

DECISION

QUISUMBING, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision of
the Court of Appeals dated February 24, 1994, in CA-G.R. CV No. 31717, as well as the respondent court's
resolution of September 30, 1994 modifying said decision. Both decision and resolution amended the
judgment dated February 13, 1991, of the Regional Trial Court of Makati City, Branch 147, in Civil Case
No. 90-118.

The facts of this case as found by both the trial and appellate courts are as follows:

St. Therese Merchandising (hereafter STM) regularly bought sugar from petitioner Victorias Milling Co.,
Inc., (VMC). In the course of their dealings, petitioner issued several Shipping List/Delivery Receipts
(SLDRs) to STM as proof of purchases. Among these was SLDR No. 1214M, which gave rise to the instant
case. Dated October 16, 1989, SLDR No. 1214M covers 25,000 bags of sugar. Each bag contained 50
kilograms and priced at P638.00 per bag as "per sales order VMC Marketing No. 042 dated October 16,
1989."1 The transaction it covered was a "direct sale."2 The SLDR also contains an additional note which
reads: "subject for (sic) availability of a (sic) stock at NAWACO (warehouse)."3

On October 25, 1989, STM sold to private respondent Consolidated Sugar Corporation (CSC) its rights in
SLDR No. 1214M for P 14,750,000.00. CSC issued one check dated October 25, 1989 and three checks
postdated November 13, 1989 in payment. That same day, CSC wrote petitioner that it had been
authorized by STM to withdraw the sugar covered by SLDR No. 1214M. Enclosed in the letter were a copy
of SLDR No. 1214M and a letter of authority from STM authorizing CSC "to withdraw for and in our behalf
the refined sugar covered by Shipping List/Delivery Receipt-Refined Sugar (SDR) No. 1214 dated October
16, 1989 in the total quantity of 25,000 bags."4

On October 27, 1989, STM issued 16 checks in the total amount of P31,900,000.00 with petitioner as
payee. The latter, in turn, issued Official Receipt No. 33743 dated October 27, 1989 acknowledging
receipt of the said checks in payment of 50,000 bags. Aside from SLDR No. 1214M, said checks also
covered SLDR No. 1213.

Private respondent CSC surrendered SLDR No. 1214M to the petitioner's NAWACO warehouse and was
allowed to withdraw sugar. However, after 2,000 bags had been released, petitioner refused to allow
further withdrawals of sugar against SLDR No. 1214M. CSC then sent petitioner a letter dated January 23,
1990 informing it that SLDR No. 1214M had been "sold and endorsed" to it but that it had been refused
further withdrawals of sugar from petitioner's warehouse despite the fact that only 2,000 bags had been
withdrawn.5 CSC thus inquired when it would be allowed to withdraw the remaining 23,000 bags.

On January 31, 1990, petitioner replied that it could not allow any further withdrawals of sugar against
SLDR No. 1214M because STM had already dwithdrawn all the sugar covered by the cleared checks.6
On March 2, 1990, CSC sent petitioner a letter demanding the release of the balance of 23,000 bags.

Seven days later, petitioner reiterated that all the sugar corresponding to the amount of STM's cleared
checks had been fully withdrawn and hence, there would be no more deliveries of the commodity to
STM's account. Petitioner also noted that CSC had represented itself to be STM's agent as it had
withdrawn the 2,000 bags against SLDR No. 1214M "for and in behalf" of STM.

On April 27, 1990, CSC filed a complaint for specific performance, docketed as Civil Case No. 90-1118.
Defendants were Teresita Ng Sy (doing business under the name of St. Therese Merchandising) and
herein petitioner. Since the former could not be served with summons, the case proceeded only against
the latter. During the trial, it was discovered that Teresita Ng Go who testified for CSC was the same
Teresita Ng Sy who could not be reached through summons.7 CSC, however, did not bother to pursue its
case against her, but instead used her as its witness.

CSC's complaint alleged that STM had fully paid petitioner for the sugar covered by SLDR No. 1214M.
Therefore, the latter had no justification for refusing delivery of the sugar. CSC prayed that petitioner be
ordered to deliver the 23,000 bags covered by SLDR No. 1214M and sought the award of P1,104,000.00
in unrealized profits, P3,000,000.00 as exemplary damages, P2,200,000.00 as attorney's fees and
litigation expenses.

Petitioner's primary defense a quo was that it was an unpaid seller for the 23,000 bags.8 Since STM had
already drawn in full all the sugar corresponding to the amount of its cleared checks, it could no longer
authorize further delivery of sugar to CSC. Petitioner also contended that it had no privity of contract with
CSC.

Petitioner explained that the SLDRs, which it had issued, were not documents of title, but mere delivery
receipts issued pursuant to a series of transactions entered into between it and STM. The SLDRs
prescribed delivery of the sugar to the party specified therein and did not authorize the transfer of said
party's rights and interests.

Petitioner also alleged that CSC did not pay for the SLDR and was actually STM's co-conspirator to defraud
it through a misrepresentation that CSC was an innocent purchaser for value and in good faith. Petitioner
then prayed that CSC be ordered to pay it the following sums: P10,000,000.00 as moral damages;
P10,000,000.00 as exemplary damages; and P1,500,000.00 as attorney's fees. Petitioner also prayed that
cross-defendant STM be ordered to pay it P10,000,000.00 in exemplary damages, and P1,500,000.00 as
attorney's fees.

Since no settlement was reached at pre-trial, the trial court heard the case on the merits.

As earlier stated, the trial court rendered its judgment favoring private respondent CSC, as follows:

"WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and
against defendant Victorias Milling Company:

"1) Ordering defendant Victorias Milling Company to deliver to the plaintiff 23,000 bags of
refined sugar due under SLDR No. 1214;
 "2) Ordering defendant Victorias Milling Company to pay the amount of P920,000.00 as
unrealized profits, the amount of P800,000.00 as exemplary damages and the amount of
P1,357,000.00, which is 10% of the acquisition value of the undelivered bags of refined sugar in
the amount of P13,570,000.00, as attorney's fees, plus the costs.

"SO ORDERED."9

It made the following observations:

"[T]he testimony of plaintiff's witness Teresita Ng Go, that she had fully paid the purchase price of
P15,950,000.00 of the 25,000 bags of sugar bought by her covered by SLDR No. 1214 as well as the
purchase price of P15,950,000.00 for the 25,000 bags of sugar bought by her covered by SLDR No. 1213
on the same date, October 16, 1989 (date of the two SLDRs) is duly supported by Exhibits C to C-15
inclusive which are post-dated checks dated October 27, 1989 issued by St. Therese Merchandising in
favor of Victorias Milling Company at the time it purchased the 50,000 bags of sugar covered by SLDR No.
1213 and 1214. Said checks appear to have been honored and duly credited to the account of Victorias
Milling Company because on October 27, 1989 Victorias Milling Company issued official receipt no. 34734
in favor of St. Therese Merchandising for the amount of P31,900,000.00 (Exhibits B and B-1). The
testimony of Teresita Ng Go is further supported by Exhibit F, which is a computer printout of defendant
Victorias Milling Company showing the quantity and value of the purchases made by St. Therese
Merchandising, the SLDR no. issued to cover the purchase, the official reciept no. and the status of
payment. It is clear in Exhibit 'F' that with respect to the sugar covered by SLDR No. 1214 the same has
been fully paid as indicated by the word 'cleared' appearing under the column of 'status of payment.'

"On the other hand, the claim of defendant Victorias Milling Company that the purchase price of the
25,000 bags of sugar purchased by St. Therese Merchandising covered by SLDR No. 1214 has not been
fully paid is supported only by the testimony of Arnulfo Caintic, witness for defendant Victorias Milling
Company. The Court notes that the testimony of Arnulfo Caintic is merely a sweeping barren assertion
that the purchase price has not been fully paid and is not corroborated by any positive evidence. There is
an insinuation by Arnulfo Caintic in his testimony that the postdated checks issued by the buyer in
payment of the purchased price were dishonored. However, said witness failed to present in Court any
dishonored check or any replacement check. Said witness likewise failed to present any bank record
showing that the checks issued by the buyer, Teresita Ng Go, in payment of the purchase price of the
sugar covered by SLDR No. 1214 were dishonored."10

Petitioner appealed the trial courts decision to the Court of Appeals.

On appeal, petitioner averred that the dealings between it and STM were part of a series of transactions
involving only one account or one general contract of sale. Pursuant to this contract, STM or any of its
authorized agents could withdraw bags of sugar only against cleared checks of STM. SLDR No. 21214M
was only one of 22 SLDRs issued to STM and since the latter had already withdrawn its full quota of sugar
under the said SLDR, CSC was already precluded from seeking delivery of the 23,000 bags of sugar.

Private respondent CSC countered that the sugar purchases involving SLDR No. 1214M were separate and
independent transactions and that the details of the series of purchases were contained in a single
statement with a consolidated summary of cleared check payments and sugar stock withdrawals because
this a more convenient system than issuing separate statements for each purchase.
The appellate court considered the following issues: (a) Whether or not the transaction between
petitioner and STM involving SLDR No. 1214M was a separate, independent, and single transaction; (b)
Whether or not CSC had the capacity to sue on its own on SLDR No. 1214M; and (c) Whether or not CSC
as buyer from STM of the rights to 25,000 bags of sugar covered by SLDR No. 1214M could compel
petitioner to deliver 23,000 bagsallegedly unwithdrawn.

On February 24, 1994, the Court of Appeals rendered its decision modifying the trial court's judgment, to
wit:

"WHEREFORE, the Court hereby MODIFIES the assailed judgment and orders defendant-appellant to:

"1) Deliver to plaintiff-appellee 12,586 bags of sugar covered by SLDR No. 1214M;

"2) Pay to plaintiff-appellee P792,918.00 which is 10% of the value of the undelivered bags of
refined sugar, as attorneys fees;

"3) Pay the costs of suit.

"SO ORDERED."11

Both parties then seasonably filed separate motions for reconsideration.

In its resolution dated September 30, 1994, the appellate court modified its decision to read:

"WHEREFORE, the Court hereby modifies the assailed judgment and orders defendant-appellant to:

"(1) Deliver to plaintiff-appellee 23,000 bags of refined sugar under SLDR No. 1214M;

"(2) Pay costs of suit.

"SO ORDERED."12

The appellate court explained the rationale for the modification as follows:

"There is merit in plaintiff-appellee's position.

"Exhibit F' We relied upon in fixing the number of bags of sugar which remained undelivered as 12,586
cannot be made the basis for such a finding. The rule is explicit that courts should consider the evidence
only for the purpose for which it was offered. (People v. Abalos, et al, 1 CA Rep 783). The rationale for this
is to afford the party against whom the evidence is presented to object thereto if he deems it necessary.
Plaintiff-appellee is, therefore, correct in its argument that Exhibit F' which was offered to prove that
checks in the total amount of P15,950,000.00 had been cleared. (Formal Offer of Evidence for Plaintiff,
Records p. 58) cannot be used to prove the proposition that 12,586 bags of sugar remained undelivered.

"Testimonial evidence (Testimonies of Teresita Ng [TSN, 10 October 1990, p. 33] and Marianito L. Santos
[TSN, 17 October 1990, pp. 16, 18, and 36]) presented by plaintiff-appellee was to the effect that it had
withdrawn only 2,000 bags of sugar from SLDR after which it was not allowed to withdraw anymore.
Documentary evidence (Exhibit I, Id., p. 78, Exhibit K, Id., p. 80) show that plaintiff-appellee had sent
demand letters to defendant-appellant asking the latter to allow it to withdraw the remaining 23,000
bags of sugar from SLDR 1214M. Defendant-appellant, on the other hand, alleged that sugar delivery to
the STM corresponded only to the value of cleared checks; and that all sugar corresponded to cleared
checks had been withdrawn. Defendant-appellant did not rebut plaintiff-appellee's assertions. It did not
present evidence to show how many bags of sugar had been withdrawn against SLDR No. 1214M,
precisely because of its theory that all sales in question were a series of one single transaction and
withdrawal of sugar depended on the clearing of checks paid therefor.

"After a second look at the evidence, We see no reason to overturn the findings of the trial court on this
point."13

Hence, the instant petition, positing the following errors as grounds for review:

"1. The Court of Appeals erred in not holding that STM's and private respondent's specially
informing petitioner that respondent was authorized by buyer STM to withdraw sugar against
SLDR No. 1214M "for and in our (STM) behalf," (emphasis in the original) private respondent's
withdrawing 2,000 bags of sugar for STM, and STM's empowering other persons as its agents to
withdraw sugar against the same SLDR No. 1214M, rendered respondent like the other persons,
an agent of STM as held in Rallos v. Felix Go Chan & Realty Corp., 81 SCRA 252, and precluded it
from subsequently claiming and proving being an assignee of SLDR No. 1214M and from suing by
itself for its enforcement because it was conclusively presumed to be an agent (Sec. 2, Rule 131,
Rules of Court) and estopped from doing so. (Art. 1431, Civil Code).

"2. The Court of Appeals erred in manifestly and arbitrarily ignoring and disregarding certain
relevant and undisputed facts which, had they been considered, would have shown that
petitioner was not liable, except for 69 bags of sugar, and which would justify review of its
conclusion of facts by this Honorable Court.

"3. The Court of Appeals misapplied the law on compensation under Arts. 1279, 1285 and 1626 of
the Civil Code when it ruled that compensation applied only to credits from one SLDR or contract
and not to those from two or more distinct contracts between the same parties; and erred in
denying petitioner's right to setoff all its credits arising prior to notice of assignment from other
sales or SLDRs against private respondent's claim as assignee under SLDR No. 1214M, so as to
extinguish or reduce its liability to 69 bags, because the law on compensation applies precisely to
two or more distinct contracts between the same parties (emphasis in the original).

"4. The Court of Appeals erred in concluding that the settlement or liquidation of accounts in Exh.
F between petitioner and STM, respondent's admission of its balance, and STM's acquiescence
thereto by silence for almost one year did not render Exh. `F' an account stated and its balance
binding.

"5. The Court of Appeals erred in not holding that the conditions of the assigned SLDR No. 1214,
namely, (a) its subject matter being generic, and (b) the sale of sugar being subject to its
availability at the Nawaco warehouse, made the sale conditional and prevented STM or private
respondent from acquiring title to the sugar; and the non-availability of sugar freed petitioner
from further obligation.
 "6. The Court of Appeals erred in not holding that the "clean hands" doctrine precluded
respondent from seeking judicial reliefs (sic) from petitioner, its only remedy being against its
assignor."14

Simply stated, the issues now to be resolved are:

(1)....Whether or not the Court of Appeals erred in not ruling that CSC was an agent of STM and
hence, estopped to sue upon SLDR No. 1214M as an assignee.

(2)....Whether or not the Court of Appeals erred in applying the law on compensation to the
transaction under SLDR No. 1214M so as to preclude petitioner from offsetting its credits on the
other SLDRs.

(3)....Whether or not the Court of Appeals erred in not ruling that the sale of sugar under SLDR
No. 1214M was a conditional sale or a contract to sell and hence freed petitioner from further
obligations.

(4)....Whether or not the Court of Appeals committed an error of law in not applying the "clean
hands doctrine" to preclude CSC from seeking judicial relief.

The issues will be discussed in seriatim.

Anent the first issue, we find from the records that petitioner raised this issue for the first time on
appeal.1avvphi1 It is settled that an issue which was not raised during the trial in the court below could
not be raised for the first time on appeal as to do so would be offensive to the basic rules of fair play,
justice, and due process.15 Nonetheless, the Court of Appeals opted to address this issue, hence, now a
matter for our consideration.

Petitioner heavily relies upon STM's letter of authority allowing CSC to withdraw sugar against SLDR No.
1214M to show that the latter was STM's agent. The pertinent portion of said letter reads:

"This is to authorize Consolidated Sugar Corporation or its representative to withdraw for and in our
behalf (stress supplied) the refined sugar covered by Shipping List/Delivery Receipt = Refined Sugar (SDR)
No. 1214 dated October 16, 1989 in the total quantity of 25, 000 bags."16

The Civil Code defines a contract of agency as follows:

"Art. 1868. By the contract of agency a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter."

It is clear from Article 1868 that the basis of agency is representation.17 On the part of the principal, there
must be an actual intention to appoint18 or an intention naturally inferable from his words or
actions;19 and on the part of the agent, there must be an intention to accept the appointment and act on
it,20 and in the absence of such intent, there is generally no agency.21 One factor which most clearly
distinguishes agency from other legal concepts is control; one person - the agent - agrees to act under the
control or direction of another - the principal. Indeed, the very word "agency" has come to connote
control by the principal.22 The control factor, more than any other, has caused the courts to put contracts
between principal and agent in a separate category.23 The Court of Appeals, in finding that CSC, was not
an agent of STM, opined:

"This Court has ruled that where the relation of agency is dependent upon the acts of the parties, the law
makes no presumption of agency, and it is always a fact to be proved, with the burden of proof resting
upon the persons alleging the agency, to show not only the fact of its existence, but also its nature and
extent (Antonio vs. Enriquez[CA], 51 O.G. 3536]. Here, defendant-appellant failed to sufficiently establish
the existence of an agency relation between plaintiff-appellee and STM. The fact alone that it (STM) had
authorized withdrawal of sugar by plaintiff-appellee "for and in our (STM's) behalf" should not be eyed as
pointing to the existence of an agency relation ...It should be viewed in the context of all the
circumstances obtaining. Although it would seem STM represented plaintiff-appellee as being its agent by
the use of the phrase "for and in our (STM's) behalf" the matter was cleared when on 23 January 1990,
plaintiff-appellee informed defendant-appellant that SLDFR No. 1214M had been "sold and endorsed" to
it by STM (Exhibit I, Records, p. 78). Further, plaintiff-appellee has shown that the 25, 000 bags of sugar
covered by the SLDR No. 1214M were sold and transferred by STM to it ...A conclusion that there was a
valid sale and transfer to plaintiff-appellee may, therefore, be made thus capacitating plaintiff-appellee to
sue in its own name, without need of joining its imputed principal STM as co-plaintiff."24

In the instant case, it appears plain to us that private respondent CSC was a buyer of the SLDFR form, and
not an agent of STM. Private respondent CSC was not subject to STM's control. The question of whether a
contract is one of sale or agency depends on the intention of the parties as gathered from the whole
scope and effect of the language employed.25 That the authorization given to CSC contained the phrase
"for and in our (STM's) behalf" did not establish an agency. Ultimately, what is decisive is the intention of
the parties.26 That no agency was meant to be established by the CSC and STM is clearly shown by CSC's
communication to petitioner that SLDR No. 1214M had been "sold and endorsed" to it.27 The use of the
words "sold and endorsed" means that STM and CSC intended a contract of sale, and not an agency.
Hence, on this score, no error was committed by the respondent appellate court when it held that CSC
was not STM's agent and could independently sue petitioner.

On the second issue, proceeding from the theory that the transactions entered into between petitioner
and STM are but serial parts of one account, petitioner insists that its debt has been offset by its claim for
STM's unpaid purchases, pursuant to Article 1279 of the Civil Code.28 However, the trial court found, and
the Court of Appeals concurred, that the purchase of sugar covered by SLDR No. 1214M was a separate
and independent transaction; it was not a serial part of a single transaction or of one account contrary to
petitioner's insistence. Evidence on record shows, without being rebutted, that petitioner had been paid
for the sugar purchased under SLDR No. 1214M. Petitioner clearly had the obligation to deliver said
commodity to STM or its assignee. Since said sugar had been fully paid for, petitioner and CSC, as
assignee of STM, were not mutually creditors and debtors of each other. No reversible error could
thereby be imputed to respondent appellate court when, it refused to apply Article 1279 of the Civil Code
to the present case.

Regarding the third issue, petitioner contends that the sale of sugar under SLDR No. 1214M is a
conditional sale or a contract to sell, with title to the sugar still remaining with the vendor. Noteworthy,
SLDR No. 1214M contains the following terms and conditions:

"It is understood and agreed that by payment by buyer/trader of refined sugar and/or receipt of this
document by the buyer/trader personally or through a representative, title to refined sugar is transferred
to buyer/trader and delivery to him/it is deemed effected and completed (stress supplied) and
buyer/trader assumes full responsibility therefore"29

The aforequoted terms and conditions clearly show that petitioner transferred title to the sugar to the
buyer or his assignee upon payment of the purchase price. Said terms clearly establish a contract of sale,
not a contract to sell. Petitioner is now estopped from alleging the contrary. The contract is the law
between the contracting parties.30 And where the terms and conditions so stipulated are not contrary to
law, morals, good customs, public policy or public order, the contract is valid and must be
upheld.31 Having transferred title to the sugar in question, petitioner is now obliged to deliver it to the
purchaser or its assignee.

As to the fourth issue, petitioner submits that STM and private respondent CSC have entered into a
conspiracy to defraud it of its sugar. This conspiracy is allegedly evidenced by: (a) the fact that STM's
selling price to CSC was below its purchasing price; (b) CSC's refusal to pursue its case against Teresita Ng
Go; and (c) the authority given by the latter to other persons to withdraw sugar against SLDR No. 1214M
after she had sold her rights under said SLDR to CSC. Petitioner prays that the doctrine of "clean hands"
should be applied to preclude CSC from seeking judicial relief. However, despite careful scrutiny, we find
here the records bare of convincing evidence whatsoever to support the petitioner's allegations of fraud.
We are now constrained to deem this matter purely speculative, bereft of concrete proof.

WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner.

SO ORDERED.

amon trading corp vs ca

gr158585

G.R. No. 158585 December 13, 2005

Amon trading corporation and juliana marketing, Petitioners,

vs.
HON. COURT OF APPEALS and TRI-REALTY DEVELOPMENT AND CONSTRUCTION
CORPORATION,Respondents.

DECISION

CHICO-NAZARIO, J.:

This is an appeal by certiorari from the Decision1 dated 28 November 2002 of the Court of Appeals in CA-
G.R. CV No. 60031, reversing the Decision of the Regional Trial Court of Quezon City, Branch 104, and
holding petitioners Amon Trading Corporation and Juliana Marketing to be solidarily liable with Lines &
Spaces Interiors Center (Lines & Spaces) in refunding private respondent Tri-Realty Development and
Construction Corporation (Tri-Realty) the amount corresponding to the value of undelivered bags of
cement.

The undisputed facts:

Private respondent Tri-Realty is a developer and contractor with projects in Bulacan and Quezon City.
Sometime in February 1992, private respondent had difficulty in purchasing cement needed for its
projects. Lines & Spaces, represented by Eleanor Bahia Sanchez, informed private respondent that it
could obtain cement to its satisfaction from petitioners, Amon Trading Corporation and its sister
company, Juliana Marketing. On the strength of such representation, private respondent proceeded to
order from Sanchez Six Thousand Fifty (6,050) bags of cement from petitioner Amon Trading Corporation,
and from Juliana Marketing, Six Thousand (6,000) bags atP98.00/bag.

Private respondent, through Mrs. Sanchez of Lines & Spaces, paid in advance the amount of P592,900.00
through Solidbank Managers Check No. 0011565 payable to Amon Trading Corporation, and the amount
ofP588,000.00 payable to Juliana Marketing, through Solidbank Managers Check No. 0011566. A certain
"Weng Chua" signed the check vouchers for Lines & Spaces while Mrs. Sanchez issued receipts for the
two managers checks. Private respondent likewise paid to Lines & Spaces an advance fee for the 12,050
cement bags at the rate of P7.00/bag, or a total of P84,350.00, in consideration of the facilitation of the
orders and certainty of delivery of the same to the private respondent. Solidbank Managers Check Nos.
0011565 and 0011566 were paid by Sanchez to petitioners.

There were deliveries to private respondent from Amon Trading Corporation and Juliana Marketing of
3,850 bags and 3,000 bags, respectively, during the period from April to June 1992. However, the balance
of 2,200 bags from Amon Trading Corporation and 3,000 bags from Juliana Marketing, or a total of 5,200
bags, was not delivered. Private respondent, thus, sent petitioners written demands but in reply,
petitioners stated that they have already refunded the amount of undelivered bags of cement to Lines
and Spaces per written instructions of Eleanor Sanchez.

Left high and dry, with news reaching it that Eleanor Sanchez had already fled abroad, private respondent
filed this case for sum of money against petitioners and Lines & Spaces.

Petitioners plead in defense lack of right or cause of action, alleging that private respondent had no
privity of contract with them as it was Lines & Spaces/Tri-Realty, through Mrs. Sanchez, that ordered or
purchased several bags of cement and paid the price thereof without informing them of any special
arrangement nor disclosing to them that Lines & Spaces and respondent corporation are distinct and
separate entities. They added that there were purchases or orders made by Lines & Spaces/Tri-Realty
which they were about to deliver, but were cancelled by Mrs. Sanchez and the consideration of the
cancelled purchases or orders was later reimbursed to Lines & Spaces. The refund was in the form of a
check payable to Lines & Spaces.

Lines & Spaces denied in its Answer that it is represented by Eleanor B. Sanchez and pleads in defense
lack of cause of action and in the alternative, it raised the defense that it was only an intermediary
between the private respondent and petitioners.2 Soon after, though, counsel for Lines & Spaces moved
to withdraw from the case for the reason that its client was beyond contact.

On 29 January 1998, the Regional Trial Court of Quezon City, Branch 104, found Lines & Spaces solely
liable to private respondent and absolved petitioners of any liability. The dispositive portion of the trial
courts Decision reads:

Wherefore, judgment is hereby rendered ordering defendant Lines and Spaces Interiors Center as
follows: to pay plaintiff on the complaint the amount of P47,950.00 as refund of the fee for the
undelivered 5,200 bags of cement at the rate of P7.00 per bag; the amount of P509,600.00 for the refund
of the price of the 5,200 undelivered bags of cement at P98.00 per bag; the amount of P2,000,000.00 for
compensatory damages; as well as the amount of P639,387.50 as attorneys fees; and to pay Amon
Trading and Juliana Marketing, Inc. on the crossclaim the sum of P200,000.00 as attorneys fees. 3

Private Respondent Tri-Realty partially appealed from the trial courts decision absolving Amon Trading
Corporation and Juliana Marketing of any liability to Tri-Realty. In the presently assailed Decision, the
Court of Appeals reversed the decision of the trial court and held petitioners Amon Trading Corporation
and Juliana Marketing to be jointly and severally liable with Lines & Spaces for the undelivered bags of
cement. The Court of Appeals disposed-

WHEREFORE, premises considered, the decision of the court a quo is hereby REVERSED AND SET ASIDE,
and another one is entered ordering the following:

Defendant-appellee Amon Trading Corporation is held liable jointly and severally with defendant-appellee
Lines and Spaces Interiors Center in the amount of P215,600.00 for the refund of the price of 2,200
undelivered bags of cement.

Defendant-appellee Juliana Marketing is held liable jointly and severally with defendant-appellee Lines
and Spaces Interiors Center in the amount of P294,000.00 for the refund of the price of 3,000
undelivered bags of cement.

The defendant-appellee Lines and Spaces Interiors Center is held solely in the amount of P47,950.00 as
refund of the fee for the 5,200 undelivered bags of cement to the plaintiff-appellant Tri-Realty
Development and Construction Corporation.

The awards of compensatory damages and attorneys fees are DELETED.

The cross claim of defendants-appellees Amon Trading Corporation and Juliana Marketing is DISMISSED
for lack of merit.

No pronouncement as to costs.4

Pained by the ruling, petitioners elevated the case to this Court via the present petition for review to
challenge the Decision and Resolution of the Court of Appeals on the following issues:

I. WHETHER OR NOT THERE WAS A CONTRACT OF AGENCY BETWEEN LINES AND SPACES INTERIOR
CENTER AND RESPONDENT;

II. WHETHER OR NOT PETITIONERS AND RESPONDENT HAS PRIVITY OF CONTRACT.5

At the focus of scrutiny is the issue of whether or not the Court of Appeals committed reversible error in
ruling that petitioners are solidarily liable with Lines & Spaces. The key to unlocking this issue is to
determine whether or not Lines & Spaces is the private respondents agent and whether or not there is
privity of contract between petitioners and private respondent.

We shall consider these issues concurrently as they are interrelated.

Petitioners, in their brief, zealously make a case that there was no contract of agency between Lines &
Spaces and private respondent.6 Petitioners strongly assert that they did not have a hint that Lines &
Spaces and Tri-Realty are two different and distinct entities inasmuch as Eleanor Sanchez whom they
have dealt with just represented herself to be from Lines & Spaces/Tri-Realty when she placed her order
for the delivery of the bags of cement. Hence, no privity of contract can be said to exist between
petitioners and private respondent.7

Private respondent, on the other hand, goes over the top in arguing that contrary to their claim of
innocence, petitioners had knowledge that Lines & Spaces, as represented by Eleanor Sanchez, was a
separate and distinct entity from tri-realty.8 Then, too, private respondent stirs up support for its
contention that contrary to petitioners' claim, there was privity of contract between private respondent
and petitioners.9

Primarily, there was no written contract entered into between petitioners and private respondent for the
delivery of the bags of cement. As gleaned from the records, and as private respondent itself admitted in
its Complaint, private respondent agreed with Eleanor Sanchez of Lines & Spaces for the latter to source
the cement needs of the former in consideration of P7.00 per bag of cement. It is worthy to note that the
payment in managers checks was made to Eleanor Sanchez of Lines & Spaces and was not directly paid
to petitioners. While the managers check issued by respondent company was eventually paid to
petitioners for the delivery of the bags of cement, there is obviously nothing from the face of said
managers check to hint that private respondent was the one making the payments. There was likewise
no intimation from Sanchez that the purchase order placed by her was for private respondents benefit.
The meeting of minds, therefore, was between private respondent and Eleanor Sanchez of Lines &
Spaces. This contract is distinct and separate from the contract of sale between petitioners and Eleanor
Sanchez who represented herself to be from Lines & Spaces/Tri-Realty, which, per her representation,
was a single account or entity.

The records bear out, too, Annex "A" showing a check voucher payable to Amon Trading Corporation for
the 6,050 bags of cement received by a certain "Weng Chua" for Mrs. Eleanor Sanchez of Lines & Spaces,
and Annex "B" which is a check voucher bearing the name of Juliana Marketing as payee, but was
received again by said "Weng Chua." Nowhere from the face of the check vouchers is it shown that
petitioners or any of their authorized representatives received the payments from respondent company.

Also on record are the receipts issued by Lines & Spaces, signed by Eleanor Bahia Sanchez, covering the
said managers checks. As Engr. Guido Ganhinhin of respondent Tri-Realty testified, it was Lines & Spaces,
not petitioners, which issued to them a receipt for the two (2) managers checks. Thus-

Q: And what is your proof that Amon and Juliana were paid of the purchases through managers checks?

A: Lines & Spaces who represented Amon Trading and Juliana Marketing issued us receipts for the two (2)
managers checks we paid to Amon Trading and Juliana Marketing Corporation.

Q: I am showing to you check no. 074 issued by Lines & Spaces Interiors Center, what relation has this
check to that check you mentioned earlier?
A: Official Receipt No. 074 issued by Lines & Spaces Interiors Center was for the P592,900.00 we paid to
Amon Trading Corporation for 6,050 bags of cement.

Q: Now there appears a signature in that receipt above the printed words authorized signature, whose
signature is that?

A: The signature of Mrs. Eleanor Bahia Sanchez, the representative of Lines and Spaces.

Q: Why do you know that that is her signature?

A: She is quite familiar with me and I saw her affix her signature upon issuance of the receipt.10 (Emphasis
supplied.)

Without doubt, no vinculum could be said to exist between petitioners and private respondent.

There is likewise nothing meaty about the assertion of private respondent that inasmuch as the delivery
receipts as well as the purchase order were for the account of Lines & Spaces/Tri-Realty, then petitioners
should have been placed on guard that it was private respondent which is the principal of Sanchez.
In China Banking Corp. v. Members of the Board of Trustees, Home Development Mutual Fund 11 and the
later case of Romulo, Mabanta, Buenaventura, Sayoc and De los Angeles v. Home Development Mutual
Fund,12 the term "and/or" was held to mean that effect shall be given to both the conjunctive "and" and
the disjunctive "or"; or that one word or the other may be taken accordingly as one or the other will best
effectuate the intended purpose. It was accordingly ordinarily held that in using the term "and/or" the
word "and" and the word "or" are to be used interchangeably.

By analogy, the words "Lines & Spaces/Tri-Realty" mean that effect shall be given to both Lines & Spaces
and Tri-Realty or that Lines & Spaces and Tri-Realty may be used interchangeably. Hence, petitioners
were not remiss when they believed Eleanor Sanchezs representation that "Lines & Spaces/Tri-Realty"
refers to just one entity. There was, therefore, no error attributable to petitioners when they refunded
the value of the undelivered bags of cement to Lines & Spaces only.

There is likewise a dearth of evidence to show that the case at bar is an open-and-shut case of agency
between private respondent and Lines & Spaces. Neither Eleanor Sanchez nor Lines & Spaces was an
agent for private respondent, but rather a supplier for the latters cement needs. The Civil Code defines a
contract of agency as follows:

Art. 1868. By the contract of agency a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter.

In a bevy of cases such as the avuncular case of Victorias Milling Co., Inc. v. Court of Appeals,13 the Court
decreed from Article 1868 that the basis of agency is representation.

. . . On the part of the principal, there must be an actual intention to appoint or an intention naturally
inferable from his words or actions and on the part of the agent, there must be an intention to accept the
appointment and act on it, and in the absence of such intent, there is generally no agency. One factor
which most clearly distinguishes agency from other legal concepts is control; one person - the agent -
agrees to act under the control or direction of another - the principal. Indeed, the very word "agency" has
come to connote control by the principal. The control factor, more than any other, has caused the courts
to put contracts between principal and agent in a separate category.

Here, the intention of private respondent, as the Executive Officer of respondent corporation testified on,
was merely for Lines & Spaces, through Eleanor Sanchez, to supply them with the needed bags of
cement.

Q: Do you know the defendant Lines & Spaces in this case?

A: Yes, sir.

Q: How come you know this defendant?

A: Lines & Spaces represented by Eleanor Bahia Sanchez offered to supply us cement when there was
scarcity of cement experienced in our projects.14 (Emphasis supplied)

We cannot go along the Court of Appeals disquisition that Amon Trading Corporation and Juliana
Marketing should have required a special power of attorney form when they refunded Eleanor B. Sanchez
the cost of the undelivered bags of cement. All the quibbling about whether Lines & Spaces acted as
agent of private respondent is inane because as illustrated earlier, petitioners took orders from Eleanor
Sanchez who, after all, was the one who paid them the managers checks for the purchase of cement.
Sanchez represented herself to be from Lines & Spaces/Tri-Realty, purportedly a single entity. Inasmuch
as they have never directly dealt with private respondent and there is no paper trail on record to guide
them that the private respondent, in fact, is the beneficiary, petitioners had no reason to doubt the
request of Eleanor Sanchez later on to refund the value of the undelivered bags of cement to Lines &
Spaces. Moreover, the check refund was payable to Lines & Spaces, not to Sanchez, so there was indeed
no cause to suspect the scheme.

The fact that the deliveries were made at the construction sites of private respondent does not by itself
raise suspicion that petitioners were delivering for private respondent. There was no sufficient showing
that petitioners knew that the delivery sites were that of private respondent and for another thing, the
deliveries were made by petitioners men who have no business nosing around their clients affairs.

Parenthetically, Eleanor Sanchez has absconded to the United States of America and the story of what
happened to the check refund may be forever locked with her. Lines & Spaces, in its Answer to the
Complaint, washed its hands of the apparent ruse perpetuated by Sanchez, but argues that if at all, it was
merely an intermediary between petitioners and private respondent. With no other way out, Lines &
Spaces was a no-show at the trial proceedings so that eventually, its counsel had to withdraw his
appearance because of his clients vanishing act. Left with an empty bag, so to speak, private respondent
now puts the blame on petitioners. But this Court finds plausible the stance of petitioners that they had
no inkling of the deception that was forthcoming. Indeed, without any contract or any hard evidence to
show any privity of contract between it and petitioners, private respondents claim against petitioners
lacks legal foothold.

Considering the vagaries of the case, private respondent brought the wrong upon itself. As adeptly
surmised by the trial court, between petitioners and private respondent, it is the latter who had made
possible the wrong that was perpetuated by Eleanor Sanchez against it so it must bear its own loss. It is in
this sense that we must apply the equitable maxim that "as between two innocent parties, the one who
made it possible for the wrong to be done should be the one to bear the resulting loss."15 First, private
respondent was the one who had reposed too much trust on Eleanor Sanchez for the latter to source its
cement needs. Second, it failed to employ safety nets to steer clear of the rip-off. For such huge sums of
money involved in this case, it is surprising that a corporation such as private respondent would pay its
construction materials in advance instead of in credit thus opening a window of opportunity for Eleanor
Sanchez or Lines & Spaces to pocket the remaining balance of the amount paid corresponding to the
undelivered materials. Private respondent likewise paid in advance the commission of Eleanor Sanchez
for the materials that have yet to be delivered so it really had no means of control over her.Finally, there
is no paper trail linking private respondent to petitioners thereby leaving the latter clueless that private
respondent was their true client. Private respondent should have, at the very least, required petitioners
to sign the check vouchers or to issue receipts for the advance payments so that it could have a hold on
petitioners. In this case, it was the representative of Lines & Spaces who signed the check vouchers. For
its failure to establish any of these deterrent measures, private respondent incurred the risk of not being
able to recoup the value of the materials it had paid good money for.

WHEREFORE, the present petition is hereby GRANTED. Accordingly, the Decision and the Resolution dated
28 November 2002 and 10 June 2003, of the Court of Appeals in CA-G.R CV No. 60031, are
hereby REVERSED andSET ASIDE. The Decision dated 29 January 1998 of the Regional Trial Court of
Quezon City, Branch 104, in Civil Case Q-92-14235 is hereby REINSTATED. No costs.

SO ORDERED.

MINITA V. CHICO-NAZARIO

Cuison vs CA
GR No 88539

G.R. No. 88539 October 26, 1993

KUE CUISON, doing business under the firm name and style"KUE CUISON PAPER SUPPLY," petitioner,
vs.
THE COURT OF APPEALS, VALIANT INVESTMENT ASSOCIATES, respondents.

Leighton R. Siazon for petitioner.

Melanio L. Zoreta for private respondent.

BIDIN, J.:

This petition for review assails the decision of the respondent Court of Appeals ordering petitioner to pay
private respondent, among others, the sum of P297,482.30 with interest. Said decision reversed the
appealed decision of the trial court rendered in favor of petitioner.
The case involves an action for a sum of money filed by respondent against petitioner anchored on the
following antecedent facts:

Petitioner Kue Cuison is a sole proprietorship engaged in the purchase and sale of newsprint, bond paper
and scrap, with places of business at Baesa, Quezon City, and Sto. Cristo, Binondo, Manila. Private
respondent Valiant Investment Associates, on the other hand, is a partnership duly organized and existing
under the laws of the Philippines with business address at Kalookan City.

From December 4, 1979 to February 15, 1980, private respondent delivered various kinds of paper
products amounting to P297,487.30 to a certain Lilian Tan of LT Trading. The deliveries were made by
respondent pursuant to orders allegedly placed by Tiu Huy Tiac who was then employed in the Binondo
office of petitioner. It was likewise pursuant to Tiac's instructions that the merchandise was delivered to
Lilian Tan. Upon delivery, Lilian Tan paid for the merchandise by issuing several checks payable to cash at
the specific request of Tiu Huy Tiac. In turn, Tiac issued nine (9) postdated checks to private respondent
as payment for the paper products. Unfortunately, sad checks were later dishonored by the drawee bank.

Thereafter, private respondent made several demands upon petitioner to pay for the merchandise in
question, claiming that Tiu Huy Tiac was duly authorized by petitioner as the manager of his Binondo
office, to enter into the questioned transactions with private respondent and Lilian Tan. Petitioner denied
any involvement in the transaction entered into by Tiu Huy Tiac and refused to pay private respondent
the amount corresponding to the selling price of the subject merchandise.

Left with no recourse, private respondent filed an action against petitioner for the collection of
P297,487.30 representing the price of the merchandise. After due hearing, the trial court dismissed the
complaint against petitioner for lack of merit. On appeal, however, the decision of the trial court was
modified, but was in effect reversed by the Court of Appeals, the dispositive portion of which reads:

WHEREFORE, the decision appealed from is MODIFIED in that defendant-appellant Kue

Cuison is hereby ordered to pay plaintiff-appellant Valiant Investment Associates the sum
of P297,487.30 with 12% interest from the filing of the complaint until the amount is fully
paid, plus the sum of 7% of the total amount due as attorney's fees, and to pay the costs.
In all other respects, the decision appealed from is affirmed. (Rollo, p. 55)

In this petition, petitioner contends that:

THE HONORABLE COURT ERRED IN FINDING TIU HUY TIAC AGENT OF DEFENDANT-
APPELLANT CONTRARY TO THE UNDISPUTED/ESTABLISHED FACTS AND CIRCUMSTANCES.

THE HONORABLE COURT ERRED IN FINDING DEFENDANT-APPELLANT LIABLE FOR AN

OBLIGATION UNDISPUTEDLY BELONGING TO TIU HUY TIAC.

THE HONORABLE COURT ERRED IN REVERSING THE WELL-FOUNDED DECISION OF THE TRIAL COURT,
(Rollo, p, 19)

The issue here is really quite simple whether or not Tiu Huy Tiac possessed the required authority from
petitioner sufficient to hold the latter liable for the disputed transaction.
This petition ought to have been denied outright, forin the final analysis, it raises a factual issue. It is
elementary that in petitions for review under Rule 45, this Court only passes upon questions of law. An
exception thereto occurs where the findings of fact of the Court of Appeals are at variance with the trial
court, in which case the Court reviews the evidence in order to arrive at the correct findings based on the
records.

As to the merits of the case, it is a well-established rule that one who clothes another with apparent
authority as his agent and holds him out to the public as such cannot be permitted to deny the authority
of such person to act as his agent, to the prejudice of innocent third parties dealing with such person in
good faith and in the honest belief that he is what he appears to be (Macke, et al, v. Camps, 7 Phil. 553
(1907]; Philippine National Bank. v Court of Appeals, 94 SCRA 357 [1979]). From the facts and the
evidence on record, there is no doubt that this rule obtains. The petition must therefore fail.

It is evident from the records that by his own acts and admission, petitioner held out Tiu Huy Tiac to the
public as the manager of his store in Sto. Cristo, Binondo, Manila. More particularly, petitioner explicitly
introduced Tiu Huy Tiac to Bernardino Villanueva, respondent's manager, as his (petitioner's) branch
manager as testified to by Bernardino Villanueva. Secondly, Lilian Tan, who has been doing business with
petitioner for quite a while, also testified that she knew Tiu Huy Tiac to be the manager of petitioner's
Sto. Cristo, Binondo branch. This general perception of Tiu Huy Tiac as the manager of petitioner's Sto.
Cristo store is even made manifest by the fact that Tiu Huy Tiac is known in the community to be the
"kinakapatid" (godbrother) of petitioner. In fact, even petitioner admitted his close relationship with Tiu
Huy Tiac when he said that they are "like brothers" (Rollo, p. 54). There was thus no reason for anybody
especially those transacting business with petitioner to even doubt the authority of Tiu Huy Tiac as his
manager in the Sto. Cristo Binondo branch.

In a futile attempt to discredit Villanueva, petitioner alleges that the former's testimony is clearly self-
serving inasmuch as Villanueva worked for private respondent as its manager.

We disagree, The argument that Villanueva's testimony is self-serving and therefore inadmissible on the
lame excuse of his employment with private respondent utterly misconstrues the nature of "'self-serving
evidence" and the specific ground for its exclusion. As pointed out by this Court in Co v. Court of Appeals
et, al., (99 SCRA 321 [1980]):

Self-serving evidence is evidence made by a party out of court at one time; it does not
include a party's testimony as a witness in court. It is excluded on the same ground as any
hearsay evidence, that is the lack of opportunity for cross-examination by the adverse
party, and on the consideration that its admission would open the door to fraud and to
fabrication of testimony. On theother hand, a party's testimony in court is sworn and
affords the other party the opportunity for cross-examination (emphasis supplied)

Petitioner cites Villanueva's failure, despite his commitment to do so on cross-examination, to produce

the very first invoice of the transaction between petitioner and private respondent as another ground to
discredit Villanueva's testimony. Such failure, proves that Villanueva was not only bluffing when he
pretended that he can produce the invoice, but that Villanueva was likewise prevaricating when he
insisted that such prior transactions actually took place. Petitioner is mistaken. In fact, it was petitioner's
counsel himself who withdrew the reservation to have Villanueva produce the document in court. As
aptly observed by the Court of Appeals in its decision:
 . . . However, during the hearing on March 3, 1981, Villanueva failed to present the
document adverted to because defendant-appellant's counsel withdrew his reservation
to have the former (Villanueva) produce the document or invoice, thus prompting
plaintiff-appellant to rest its case that same day (t.s.n., pp. 39-40, Sess. of March 3, 1981).
Now, defendant-appellant assails the credibility of Villanueva for having allegedly failed
to produce even one single document to show that plaintiff-appellant have had
transactions before, when in fact said failure of Villanueva to produce said document is a
direct off-shoot of the action of defendant-appellant's counsel who withdrew his
reservation for the production of the document or invoice and which led plaintiff-
appellant to rest its case that very day. (Rollo, p.52)

In the same manner, petitioner assails the credibility of Lilian Tan by alleging that Tan was part of an
intricate plot to defraud him. However, petitioner failed to substantiate or prove that the subject
transaction was designed to defraud him. Ironically, it was even the testimony of petitioner's daughter
and assistant manager Imelda Kue Cuison which confirmed the credibility of Tan as a witness. On the
witness stand, Imelda testified that she knew for a fact that prior to the transaction in question, Tan
regularly transacted business with her father (petitioner herein), thereby corroborating Tan's testimony
to the same effect. As correctly found by the respondent court, there was no logical explanation for Tan
to impute liability upon petitioner. Rather, the testimony of Imelda Kue Cuison only served to add
credence to Tan's testimony as regards the transaction, the liability for which petitioner wishes to be
absolved.

But of even greater weight than any of these testimonies, is petitioner's categorical admission on the
witness stand that Tiu Huy Tiac was the manager of his store in Sto. Cristo, Binondo, to wit:

Court:

xxx xxx xxx

Q And who was managing the store in Sto. Cristo?

A At first it was Mr. Ang, then later Mr. Tiu Huy Tiac but I cannot
remember the exact year.

Q So, Mr. Tiu Huy Tiac took over the management,.

A Not that was because every afternoon, I was there, sir.

Q But in the morning, who takes charge?

A Tiu Huy Tiac takes charge of management and if there (sic) orders for
newsprint or bond papers they are always referred to the compound in
Baesa, sir. (t.s.n., p. 16, Session of January 20, 1981, CA decision, Rollo, p.
50, emphasis supplied).

Such admission, spontaneous no doubt, and standing alone, is sufficient to negate all the denials made by
petitioner regarding the capacity of Tiu Huy Tiac to enter into the transaction in question. Furthermore,
consistent with and as an obvious indication of the fact that Tiu Huy Tiac was the manager of the Sto.
Cristo branch, three (3) months after Tiu Huy Tiac left petitioner's employ, petitioner even sent,
communications to its customers notifying them that Tiu Huy Tiac is no longer connected with
petitioner's business. Such undertaking spoke unmistakenly of Tiu Huy Tiac's valuable position as
petitioner's manager than any uttered disclaimer. More than anything else, this act taken together with
the declaration of petitioner in open court amount to admissions under Rule 130 Section 22 of the Rules
of Court, to wit : "The act, declaration or omission of a party as to a relevant fact may be given in
evidence against him." For well-settled is the rule that "a man's acts, conduct, and declaration, wherever
made, if voluntary, are admissible against him, for the reason that it is fair to presume that they
correspond with the truth, and it is his fault if they do not. If a man's extrajudicial admissions are
admissible against him, there seems to be no reason why his admissions made in open court, under oath,
should not be accepted against him." (U.S. vs. Ching Po, 23 Phil. 578, 583 [1912];).

Moreover, petitioner's unexplained delay in disowning the transactions entered into by Tiu Huy Tiac
despite several attempts made by respondent to collect the amount from him, proved all the more that
petitioner was aware of the questioned commission was tantamount to an admission by silence under
Rule 130 Section 23 of the Rules of Court, thus: "Any act or declaration made in the presence of and
within the observation of a party who does or says nothing when the act or declaration is such as
naturally to call for action or comment if not true, may be given in evidence against him."

All of these point to the fact that at the time of the transaction Tiu Huy Tiac was admittedly the manager
of petitioner's store in Sto. Cristo, Binondo. Consequently, the transaction in question as well as the
concomitant obligation is valid and binding upon petitioner.

By his representations, petitioner is now estopped from disclaiming liability for the transaction entered by
Tiu Huy Tiac on his behalf. It matters not whether the representations are intentional or merely negligent
so long as innocent, third persons relied upon such representations in good faith and for value As held in
the case of Manila Remnant Co. Inc. v. Court of Appeals, (191 SCRA 622 [1990]):

More in point, we find that by the principle of estoppel, Manila Remnant is deemed to
have allowed its agent to act as though it had plenary powers. Article 1911 of the Civil
Code provides:

"Even when the agent has exceeded his authority, the principal
issolidarily liable with the agent if the former allowed the latter to act as
though he had full powers." (Emphasis supplied).

The above-quoted article is new. It is intended to protect the rights of innocent persons.
In such a situation, both the principal and the agent may be considered as joint
tortfeasors whose liability is joint and solidary.

Authority by estoppel has arisen in the instant case because by its negligence, the
principal, Manila Remnant, has permitted its agent, A.U. Valencia and Co., to exercise
powers not granted to it. That the principal might not have had actual knowledge of
theagent's misdeed is of no moment.
Tiu Huy Tiac, therefore, by petitioner's own representations and manifestations, became an agent of
petitioner by estoppel, an admission or representation is rendered conclusive upon the person making it,
and cannot be denied or disproved as against the person relying thereon (Article 1431, Civil Code of the
Philippines). A party cannot be allowed to go back on his own acts and representations to the prejudice of
the other party who, in good faith, relied upon them (Philippine National Bank v. Intermediate Appellate
Court, et al., 189 SCRA 680 [1990]).

Taken in this light,. petitioner is liable for the transaction entered into by Tiu Huy Tiac on his behalf. Thus,
even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the
former allowed the latter to fact as though he had full powers (Article 1911 Civil Code), as in the case at
bar.

Finally, although it may appear that Tiu Huy Tiac defrauded his principal (petitioner) in not turning over
the proceeds of the transaction to the latter, such fact cannot in any way relieve nor exonerate petitioner
of his liability to private respondent. For it is an equitable maxim that as between two innocent parties,
the one who made it possible for the wrong to be done should be the one to bear the resulting loss
(Francisco vs. Government Service Insurance System, 7 SCRA 577 [1963]).

Inasmuch as the fundamental issue of the capacity or incapacity of the purported agent Tiu Huy Tiac, has
already been resolved, the Court deems it unnecessary to resolve the other peripheral issues raised by
petitioner.

WHEREFORE, the instant petition in hereby DENIED for lack of merit. Costs against petitioner.

SO ORDERED.

Feliciano, Romero, Melo and Vitug, JJ., concur.

dominion insurance corp vs ca

gr129919

DOMINION INSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS, RODOLFO S. GUEVARRA, and FERNANDO AUSTRIA, respondents.

DECISION

PARDO, J.:

The Case

This is an appeal via certiorari1 from the decision of the Court of Appeals2 affirming the decision3 of the
Regional Trial Court, Branch 44, San Fernando, Pampanga, which ordered petitioner Dominion Insurance
Corporation (Dominion) to pay Rodolfo S. Guevarra (Guevarra) the sum of P156,473.90 representing the
total amount advanced by Guevarra in the payment of the claims of Dominions clients.
 The Facts

The facts, as found by the Court of Appeals, are as follows:

"On January 25, 1991, plaintiff Rodolfo S. Guevarra instituted Civil Case No. 8855 for sum of money
against defendant Dominion Insurance Corporation. Plaintiff sought to recover thereunder the sum of
P156,473.90 which he claimed to have advanced in his capacity as manager of defendant to satisfy
certain claims filed by defendants clients.

"In its traverse, defendant denied any liability to plaintiff and asserted a counterclaim for P249,672.53,
representing premiums that plaintiff allegedly failed to remit.

"On August 8, 1991, defendant filed a third-party complaint against Fernando Austria, who, at the time
relevant to the case, was its Regional Manager for Central Luzon area.

"In due time, third-party defendant Austria filed his answer.

"Thereafter the pre-trial conference was set on the following dates: October 18, 1991, November 12,
1991, March 29, 1991, December 12, 1991, January 17, 1992, January 29, 1992, February 28, 1992,
March 17, 1992 and April 6, 1992, in all of which dates no pre-trial conference was held. The record
shows that except for the settings on October 18, 1991, January 17, 1992 and March 17, 1992 which
were cancelled at the instance of defendant, third-party defendant and plaintiff, respectively, the rest
were postponed upon joint request of the parties.

"On May 22, 1992 the case was again called for pre-trial conference. Only plaintiff and counsel were
present. Despite due notice, defendant and counsel did not appear, although a messenger, Roy Gamboa,
submitted to the trial court a handwritten note sent to him by defendants counsel which instructed him
to request for postponement. Plaintiffs counsel objected to the desired postponement and moved to
have defendant declared as in default. This was granted by the trial court in the following order:

"ORDER

"When this case was called for pre-trial this afternoon only plaintiff and his counsel Atty. Romeo
Maglalang appeared. When shown a note dated May 21, 1992 addressed to a certain Roy who was
requested to ask for postponement, Atty. Maglalang vigorously objected to any postponement on the
ground that the note is but a mere scrap of paper and moved that the defendant corporation be declared
as in default for its failure to appear in court despite due notice.

"Finding the verbal motion of plaintiffs counsel to be meritorious and considering that the pre-trial
conference has been repeatedly postponed on motion of the defendant Corporation, the defendant
Dominion Insurance Corporation is hereby declared (as) in default and plaintiff is allowed to present his
evidence on June 16, 1992 at 9:00 oclock in the morning.

"The plaintiff and his counsel are notified of this order in open court.

"SO ORDERED.
"Plaintiff presented his evidence on June 16, 1992. This was followed by a written offer of documentary
exhibits on July 8 and a supplemental offer of additional exhibits on July 13, 1992. The exhibits were
admitted in evidence in an order dated July 17, 1992.

"On August 7, 1992 defendant corporation filed a MOTION TO LIFT ORDER OF DEFAULT. It alleged
therein that the failure of counsel to attend the pre-trial conference was due to an unavoidable
circumstance and that counsel had sent his representative on that date to inform the trial court of his
inability to appear. The Motion was vehemently opposed by plaintiff.

"On August 25, 1992 the trial court denied defendants motion for reasons, among others, that it was
neither verified nor supported by an affidavit of merit and that it further failed to allege or specify the
facts constituting his meritorious defense.

"On September 28, 1992 defendant moved for reconsideration of the aforesaid order. For the first time
counsel revealed to the trial court that the reason for his nonappearance at the pre-trial conference was
his illness. An Affidavit of Merit executed by its Executive Vice-President purporting to explain its
meritorious defense was attached to the said Motion. Just the same, in an Order dated November 13,
1992, the trial court denied said Motion.

"On November 18, 1992, the court a quo rendered judgment as follows:

"WHEREFORE, premises considered, judgment is hereby rendered ordering:

"1. The defendant Dominion Insurance Corporation to pay plaintiff the sum of P156,473.90
representing the total amount advanced by plaintiff in the payment of the claims of defendants
clients;

"2. The defendant to pay plaintiff P10,000.00 as and by way of attorneys fees;

"3. The dismissal of the counter-claim of the defendant and the third-party complaint;

"4. The defendant to pay the costs of suit."4

On December 14, 1992, Dominion appealed the decision to the Court of Appeals.5

On July 19, 1996, the Court of Appeals promulgated a decision affirming that of the trial court.6 On
September 3, 1996, Dominion filed with the Court of Appeals a motion for reconsideration. 7 On July 16,
1997, the Court of Appeals denied the motion.8

Hence, this appeal.9

The Issues

The issues raised are: (1) whether respondent Guevarra acted within his authority as agent for petitioner,
and (2) whether respondent Guevarra is entitled to reimbursement of amounts he paid out of his
personal money in settling the claims of several insured.
 The Court's Ruling

The petition is without merit.

By the contract of agency, a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter.10 The basis for agency
is representation.11 On the part of the principal, there must be an actual intention to appoint12 or an
intention naturally inferrable from his words or actions;13 and on the part of the agent, there must be an
intention to accept the appointment and act on it,14 and in the absence of such intent, there is generally
no agency.15

A perusal of the Special Power of Attorney16 would show that petitioner (represented by third-party
defendant Austria) and respondent Guevarra intended to enter into a principal-agent relationship.
Despite the word "special" in the title of the document, the contents reveal that what was constituted
was actually a general agency. The terms of the agreement read:

"That we, FIRST CONTINENTAL ASSURANCE COMPANY, INC.,17 a corporation duly organized and existing
under and by virtue of the laws of the Republic of the Philippines, xxx represented by the undersigned as
Regional Manager, xxx do hereby appoint RSG Guevarra Insurance Services represented by Mr. Rodolfo
Guevarra xxx to be our Agency Manager in San Fdo., for our place and stead, to do and perform the
following acts and things:

"1. To conduct, sign, manager (sic), carry on and transact Bonding and Insurance business as
usually pertain to a Agency Office, or FIRE, MARINE, MOTOR CAR, PERSONAL ACCIDENT, and
BONDING with the right, upon our prior written consent, to appoint agents and sub-agents.

"2. To accept, underwrite and subscribed (sic) cover notes or Policies of Insurance and Bonds for
and on our behalf.

"3. To demand, sue, for (sic) collect, deposit, enforce payment, deliver and transfer for and receive
and give effectual receipts and discharge for all money to which the FIRST CONTINENTAL
ASSURANCE COMPANY, INC.,18 may hereafter become due, owing payable or transferable to said
Corporation by reason of or in connection with the above-mentioned appointment.

"4. To receive notices, summons, and legal processes for and in behalf of the FIRST CONTINENTAL
ASSURANCE COMPANY, INC., in connection with actions and all legal proceedings against the said
Corporation."19 [Emphasis supplied]

The agency comprises all the business of the principal,20 but, couched in general terms, it is limited only
to acts of administration.21

A general power permits the agent to do all acts for which the law does not require a special
power.22 Thus, the acts enumerated in or similar to those enumerated in the Special Power of Attorney
do not require a special power of attorney.

Article 1878, Civil Code, enumerates the instances when a special power of attorney is required. The
pertinent portion that applies to this case provides that:
"Article 1878. Special powers of attorney are necessary in the following cases:

"(1) To make such payments as are not usually considered as acts of administration;

"x x x xxx xxx

"(15) Any other act of strict dominion."

The payment of claims is not an act of administration. The settlement of claims is not included among the
acts enumerated in the Special Power of Attorney, neither is it of a character similar to the acts
enumerated therein. A special power of attorney is required before respondent Guevarra could settle the
insurance claims of the insured.

Respondent Guevarras authority to settle claims is embodied in the Memorandum of Management

Agreement23dated February 18, 1987 which enumerates the scope of respondent Guevarras duties and
responsibilities as agency manager for San Fernando, Pampanga, as follows:

"x x x xxx xxx

"1. You are hereby given authority to settle and dispose of all motor car claims in the amount of
P5,000.00 with prior approval of the Regional Office.

"2. Full authority is given you on TPPI claims settlement.

"xxx xxx x x x "24

In settling the claims mentioned above, respondent Guevarras authority is further limited by the written
standard authority to pay,25 which states that the payment shall come from respondent Guevarras
revolving fund or collection. The authority to pay is worded as follows:

"This is to authorize you to withdraw from your revolving fund/collection the amount of PESOS
__________________ (P ) representing the payment on the _________________ claim of assured
_______________ under Policy No. ______ in that accident of ___________ at ____________.

"It is further expected, release papers will be signed and authorized by the concerned and attached to the
corresponding claim folder after effecting payment of the claim.

"(sgd.) FERNANDO C. AUSTRIA

Regional Manager"26

[Emphasis supplied]

The instruction of petitioner as the principal could not be any clearer.1wphi1 Respondent Guevarra was
authorized to pay the claim of the insured, but the payment shall come from the revolving fund or
collection in his possession.
Having deviated from the instructions of the principal, the expenses that respondent Guevarra incurred in
the settlement of the claims of the insured may not be reimbursed from petitioner Dominion. This
conclusion is in accord with Article 1918, Civil Code, which states that:

"The principal is not liable for the expenses incurred by the agent in the following cases:

"(1) If the agent acted in contravention of the principals instructions, unless the latter should wish
to avail himself of the benefits derived from the contract;

"xxx xxx xxx"

However, while the law on agency prohibits respondent Guevarra from obtaining reimbursement, his
right to recover may still be justified under the general law on obligations and contracts.

Article 1236, second paragraph, Civil Code, provides:

"Whoever pays for another may demand from the debtor what he has paid, except that if he paid without
the knowledge or against the will of the debtor, he can recover only insofar as the payment has been
beneficial to the debtor."

In this case, when the risk insured against occurred, petitioners liability as insurer arose.1wphi1 This
obligation was extinguished when respondent Guevarra paid the claims and obtained Release of Claim
Loss and Subrogation Receipts from the insured who were paid.

Thus, to the extent that the obligation of the petitioner has been extinguished, respondent Guevarra may
demand for reimbursement from his principal. To rule otherwise would result in unjust enrichment of
petitioner.

The extent to which petitioner was benefited by the settlement of the insurance claims could best be
proven by the Release of Claim Loss and Subrogation Receipts27 which were attached to the original
complaint as Annexes C-2, D-1, E-1, F-1, G-1, H-1, I-1 and J-l, in the total amount of P116,276.95.

However, the amount of the revolving fund/collection that was then in the possession of respondent
Guevarra as reflected in the statement of account dated July 11, 1990 would be deducted from the above
amount.

The outstanding balance and the production/remittance for the period corresponding to the claims was
P3,604.84. Deducting this from P116,276.95, we get P112,672.11. This is the amount that may be
reimbursed to respondent Guevarra.

The Fallo

IN VIEW WHEREOF, we DENY the Petition. However, we MODIFY the decision of the Court of
Appeals28 and that of the Regional Trial Court, Branch 44, San Fernando, Pampanga,29 in that petitioner is
ordered to pay respondent Guevarra the amount of P112,672.11 representing the total amount advanced
by the latter in the payment of the claims of petitioners clients.
No costs in this instance.

SO ORDERED.

Davide, Jr., (Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.

sirey enterprise vs va
gr129039

SIREDY ENTERPRISES, INC. petitioner, vs. HON. COURT OF APPEALS and CONRADO DE GUZMAN, respondents.

DECISION
QUISUMBING, J.:

Before us is a petition for review seeking to annul the decision [1] dated April 26, 1996 of the Court of
Appeals in CA-G.R. CV No. 30374, reversing the decision of the Regional Trial Court of Malolos, Bulacan,
and the resolution[2] dated April 22, 1997, denying petitioners motion for reconsideration.
The following are the facts as found by the Court of Appeals,[3] undisputed by the parties and adopted
by petitioner:[4]
Private respondent Conrado De Guzman is an architect-contractor doing business under the name and
style of Jigscon Construction. Herein petitioner Siredy Enterprises, Inc. (hereafter Siredy) is the owner and
developer of Ysmael Village, a subdivision in Sta. Cruz, Marilao, Bulacan.[5] The president of Siredy is Ismael
E. Yanga.[6]
As stated in its Articles of Incorporation,[7] the primary corporate purpose of Siredy is to acquire lands,
subdivide and develop them, erect buildings and houses thereon, and sell, lease or otherwise dispose of
said properties to interested buyers.[8]
Sometime before October 1978, Yanga executed an undated Letter of Authority, [9] hereunder
reproduced verbatim:

KNOW ALL MEN BY THESE PRESENTS:

That I, DR. ISMAEL E. YANGA, SR., of legal age, Filipino, married, resident of and with Postal address at
Poblacion, Bocaue, Bulacan and duly authorized to execute this LETTER OF AUTHORITY, do hereby
authorize MR. HERMOGENES B. SANTOS of legal age, Filipino, married, resident of and with Postal
Address at 955 Banawe St., Quezon City to do and execute all or any of the following acts:

1. To negotiate and enter into contract or contracts to build Housing Units on our subdivision lots in
Ysmael Village, Sta. Rosa, Marilao, Bulacan. However, all proceeds from said contract or contracts shall be
deposited in my name, payments of all obligation in connection with the said contract or contracts should
be made and the remainder will be paid to MR. HERMOGENES B. SANTOS.

2. To sell lots on our subdivisions and;

3. To represent us, intercede and agree for or make agreements for all payments in our favor, provided
that actual receipts thereof shall be made by the undersigned.

(SGD) DR. ISMAEL E. YANGA, SR.

For myself and in my capacity as
President
of SIREDY ENTERPRISE, INCORPORATED
PRINCIPAL

On October 15, 1978, Santos entered into a Deed of Agreement[10] with De Guzman. The deed
expressly stated that Santos was representing Siredy Enterprises, Inc. Private respondent was referred to
as contractor while petitioner Siredy was cited as principal.
In said Deed of Agreement we find the following stipulations:
1.) That, the PRINCIPAL has contracts with different SSS members employed with different
domestic entities to build for them 2-bedroom single housing units and 4-bedroom duplex
housing units;
2.) That, the site of the said housing project is at YSMAEL VILLAGE, Bo. Sta. Rosa, Marilao, Bulacan
owned and developed by SIREDY ENTERPRISES and Mr. Ismael E. Yanga, Sr.;
3.) That, the PRINCIPAL has contracted to build the said units at the amount of FORTY FIVE
THOUSAND (P45,000.00) PESOS for the 2-bedroom single and SIXTY NINE THOUSAND
(P69,000.00) PESOS, Philippine Currency for the duplex residences;
4.) That, the CONTRACTOR intends to build for the PRINCIPAL eighty (80) units singles and
eighteen (18) units duplex residences at the cost above mentioned or a lump sum total of
FOUR MILLION, EIGHT HUNDRED FORTY TWO THOUSAND (P4,842,000.00) PESOS, Philippine
Currency;
5.) That, the CONTRACTOR agrees to supply all Construction Materials, labor, tools and
equipments necessary for the completion of the said housing units;
6.) That, the PRINCIPAL agrees to pay all necessary permits and papers in accordance with
Government rules and regulations;
7.) That, the PRINCIPAL agrees to supply water and electrical facilities needed during the time of
construction;
8.) That, the manner of payment shall be in accordance with SSS releases. Should the SSS fail to
pay the PRINCIPAL, the PRINCIPAL is still in obligation to pay the CONTRACTOR for whatever
accomplishments the CONTRACTOR have finished provided, that the failure of the SSS to pay
is not due to defective work of the CONTRACTOR;
9.) That, the CONTRACTOR promises to finish the project at the rate of TEN (10) units in THIRTY
(30) days or a total of THREE HUNDRED (300) working days;
10.) That, the integral part of this CONTRACT are:
a. Plans and Specifications
b. Subdivision Plan indicating the Lot location of each unit
c. Authority of the National Housing Authority;
 11.) That, the CONTRACTOR agree[s] to start work on the housing units thirty (30) days after
signing of this CONTRACT.

NOW THEREFORE, for and in consideration of the amount of FOUR MILLION, EIGHT HUNDRED FORTY
TWO THOUSAND (P4,842,000.00) PESOS, Philippine Currency, the PARTIES agree and herein set their
hands on the date and place above-mentioned.

xxx

From October 1978 to April 1990, De Guzman constructed 26 residential units at Ysmael
Village. Thirteen (13) of these were fully paid but the other 13 remained unpaid. The total contractual price
of these 13 unpaid houses is P412,154.93 which was verified and confirmed to be correct by Santos, per
an Accomplishment Billing[11] that the latter signed.
De Guzman tried but failed to collect the unpaid account from petitioner. Thus, he instituted the action
below for specific performance against Siredy, Yanga, and Santos who all denied liability.
During the trial, Santos disappeared and his whereabouts remain unknown.
In its defense, petitioner presented testimonial evidence to the effect that Siredy had no contract with
De Guzman and had not authorized Santos to enter into a contract with anyone for the construction of
housing units at Ysmael Village.
The trial court agreed with petitioner based on the doctrine of privity of contract and gave the
following rationale:[12]

The Deed of Agreement (Exh. A and A-1) clearly reflects that the said contract was entered into by and
between plaintiff De Guzman, on one hand, and defendant Hermogenes B. Santos as purported
authorized representative of defendant Siredy Enterprises, on the other. Plainly and clearly enough,
defendants Siredy Enterprises and Ismael Yanga, Sr. were neither parties nor signatories to the same. It
does not bear any legal significance that Dr. Yanga appears to have signed the Letter of Authority (Exh. B)
designating defendant Santos as the authorized representative for myself and as president of the Siredy
Enterprises, Inc. For the evidentiary fact remains that Siredy Enterprises and Dr. Yanga had absolutely had
nothing to do with the fulfillment of the terms and conditions stipulated in the Deed of Agreement, much
less had they benefited in any perceptible degree therefrom.

In the light of the foregoing circumstances, Siredy Enterprises and Dr. Yanga cannot be held liable in favor
of the plaintiff in any manner whatsoever respecting the unpaid residential units constructed by the
plaintiff. This is as it should be, because contracts take effect only between the parties, their assigns and
heirs, except only in the cases provided for by law. (Art. 1311, Civil Code of the Philippines). Not one of
the exceptions obtains in this case.[13]

Thus, the trial court disposed of the case as follows:

WHEREFORE, premises considered, judgment is hereby rendered:

a) directing defendant Hermogenes B. Santos to pay unto plaintiff Conrado de Guzman the
amount of P412,154.93 as actual damages with legal interest thereon from the filing of the
 complaint on July 29, 1982 until the same shall have been fully paid, and P25,000.00 as
attorneys fees, plus costs;
b) dismissing the above-entitled case as against defendants Siredy Enterprises, Inc. and Dr. Ismael
Yanga, Sr.

SO ORDERED.[14]

On appeal, De Guzman obtained a favorable judgment from the Court of Appeals. The appellate court
held that the Letter of Authority duly signed by Yanga clearly constituted Santos as Siredys agent,[15] whose
authority included entering into a contract for the building of housing units at Ysmael Village. Consequently,
Siredy cannot deny liability for the Deed of Agreement with private respondent De Guzman, since the same
contract was entered into by Siredys duly designated agent, Santos. There was no need for Yanga himself
to be a signatory to the contract, for him and Siredy to be bound by the terms thereof.
Hence, the Court of Appeals held:

WHEREFORE, We find merit in the appeal and We hereby REVERSE the appealed Decision. In its stead, we
render the following verdict: Appellee Siredy Enterprises. Inc. is ordered to pay appellant Conrado de
Guzman cost (sic) and P412,154.93 as actual damage plus legal interest thereon from the filing of the
Complaint on July 29, 1982 until full payment thereof. All other claims and counterclaims are dismissed.

SO ORDERED.[16]

Petitioner Siredy Enterprises, Inc. now comes to us via a petition for review on certiorari[17] under Rule
45 of the Rules of Court, on the following grounds:
I. RESPONDENT COURT ERRED IN HOLDING THAT A VALID AGENCY WAS CONSTITUTED DESPITE
THE FACT THAT PETITIONER WAS NOT INVOLVED IN THE CONSTRUCTION BUSINESS;
II. RESPONDENT COURT ERRED IN FAILING TO CONSIDER A VITAL PROVISION IN THE DEED OF
AGREEMENT (PAR. 8), WHEN IT RENDERED ITS DECISION; and
III. RESPONDENT COURT ERRED IN FAILING TO CONSIDER THAT PRIVATE RESPONDENT WAS NOT
ENTITLED TO HIS CLAIM AS HE WAS THE PARTY WHO VIOLATED THE CONTRACT.[18]
We find two main issues presented for resolution: First, whether or not Hermogenes B. Santos was a
duly constituted agent of Siredy, with authority to enter into contracts for the construction of residential
units in Ysmael Village and thus the capacity to bind Siredy to the Deed of Agreement; and Second,
assuming arguendo that Siredy was bound by the acts of Santos, whether or not under the terms of the
Deed of Agreement, Siredy can be held liable for the amount sought to be collected by private respondent
De Guzman.
By the relationship of agency, one party called the principal authorizes another called the agent to act
for and in his behalf in transactions with third persons. The authority of the agent to act emanates from
the powers granted to him by his principal; his act is the act of the principal if done within the scope of the
authority. He who acts through another acts himself.[19]
Was Santos then an agent of Siredy? Was he acting within the scope of his authority?
Resolution of the first issue necessitates a review of the Letter of Authority executed by Ismael E.
Yanga as president of Siredy in favor of Santos. Within its terms can be found the nature and extent of the
authority granted to Santos which, in turn, determines the extent of Siredys participation in the Deed of
Agreement.
On its face, the instrument executed by Yanga clearly and unequivocally constituted Santos to do and
execute, among other things, the act of negotiating and entering into contract or contracts to build Housing
Units on our subdivision lots in Ysmael Village, Sta. Rosa, Marilao, Bulacan. [20] Nothing could be more
express than the written stipulations contained therein.
It was upon the authority of this document that De Guzman transacted business with Santos that
resulted in the construction contract denominated as the Deed of Agreement.
However, petitioner denies any liability by stating that: (1) the nature of Siredys business did not
involve the construction of housing units since it was merely engaged in the selling of empty lots; (2) the
Letter of Authority is defective, and hence needed reformation; (3) Santos entering into the Deed of
Agreement was invalid because the same was in excess of his authority; and (4) there is now implied
revocation of such Letter of Authority.
Testifying on the nature of the business and the business practices of Siredy, its owner Yanga
testified[21] that Siredy was interested only in the sale of lots. It was up to the buyers, as owners, to construct
their houses in the particular style they prefer. It was allegedly never the practice of the company to sell
lots with houses already erected thereon. On the basis of the foregoing testimony, petitioner states that
despite the letter of authority, it is quite certain that such provision would go against the nature of the
business of Siredy as the same has absolutely no capability of undertaking such a task as constructing
houses.
However, the self-serving contention of petitioner cannot stand against the documentary evidence
clearly showing the companys liability to De Guzman. As we stated in the case ofCuizon vs. Court of
Appeals:[22]

As it is, the mere denial of petitioner cannot outweigh the strength of the documentary evidence
presented by and the positive testimony of private respondents. As a jurist once said, I would sooner trust
the smallest slip of paper for truth than the strongest and most retentive memory ever bestowed on
moral man.[23]

Aside from the Letter of Authority, Siredys Articles of Incorporation, duly approved by the Securities
and Exchange Commission, shows that Siredy may also undertake to erect buildings and houses on the lots
and sell, lease, or otherwise dispose of said properties to interested buyers. [24] Such Articles, coupled with
the Letter of Authority, is sufficient to have given De Guzman reason to believe that Santos was duly
authorized to represent Siredy for the purpose stated in the Deed of Agreement. Petitioners theory that it
merely sold lots is effectively debunked.
Thus, it was error for the trial court to have ignored the Letter of Authority. As correctly held by the
Court of Appeals:

There is absolutely no question that the Letter of Authority (Exhibit B) executed by appellee Yanga
constituted defendant Santos as his and appellee Siredys agent. As agent, he was empowered inter alia to
enter into a contract to build housing units in the Ysmael Village. This was in furtherance of appellees
business of developing and subdividing lands, erecting houses thereon, and selling them to the public.

x x x [25]
 We find that a valid agency was created between Siredy and Santos, and the authority conferred upon
the latter includes the power to enter into a construction contract to build houses such as the Deed of
Agreement between Santos and De Guzmans Jigscon Construction. Hence, the inescapable conclusion is
that Siredy is bound by the contract through the representation of its agent Santos.

The basis of agency is representation, that is, the agent acts for and in behalf of the principal on matters
within the scope of his authority (Art, 1881) and said acts have the same legal effect as if they were
personally done by the principal. By this legal fiction of representation, the actual or legal absence of the
principal is converted into his legal or juridical presence.[26]

Moreover, even if arguendo Santos mandate was only to sell subdivision lots as Siredy asserts, the
latter is still bound to pay De Guzman. De Guzman is considered a third party to the agency agreement who
had no knowledge of the specific instructions or agreements between Siredy and its agent. What De
Guzman only saw was the written Letter of Authority where Santos appears to be duly authorized. Article
1900 of the Civil Code provides:

Art. 1900. So far as third persons are concerned, an act is deemed to have been performed within the
scope of the agents authority, if such act is within the terms of the power of attorney, as written, even if
the agent has in fact exceeded the limits of his authority according to an understanding between the
principal and the agent.

The scope of the agents authority is what appears in the written terms of the power of attorney. While
third persons are bound to inquire into the extent or scope of the agents authority, they are not required
to go beyond the terms of the written power of attorney. Third persons cannot be adversely affected by an
understanding between the principal and his agent as to the limits of the latters authority. In the same way,
third persons need not concern themselves with instructions given by the principal to his agent outside of
the written power of attorney.
The essence of agency being the representation of another, it is evident that the obligations
contracted are for and on behalf of the principal. This is what gives rise to the juridical relation. A
consequence of this representation is the liability of the principal for the acts of his agent performed within
the limits of his authority that is equivalent to the performance by the principal himself who should answer
therefor.[27]
Petitioner belatedly asserts, however, that the Letter of Authority was defective as it allegedly failed
to reduce into writing the real intentions of the parties, and insists on its reformation.
Such an argument deserves scant consideration. As found by the Court of Appeals, being a doctor of
medicine and a businessman, Yanga knew the meaning and import of this document and had in fact
admitted having signed it. As aptly observed by the Court of Appeals, there is no evidence that ante litem,
he abrogated the Letter of Authority and withdrew the power conferred on Santos.
Siredys contention that the present case is in effect a revocation of the Letter of Authority also
deserves scant consideration. This is a patently erroneous claim considering that it was, in fact, private
respondent De Guzman who instituted the civil case before the RTC.
With regard to the second issue put forth by petitioner, this Court notes that this issue is being raised
for the first time on appeal. From the trial in the RTC to the appeal before the Court of Appeals, the alleged
violation of the Deed of Agreement by Conrado de Guzman was never put in issue. Heretofore, the
substance of petitioners defense before the courts a quoconsisted of its denial of any liability under the
Deed of Agreement.
As we held in the case of Safic Alcan & Cie vs. Imperial Vegetable Oil Co., Inc.:[28]

It must be borne in mind that a question that was never raised in the courts below cannot be allowed to
be raised for the first time on appeal without offending basic rules of fair play, justice and due process.
Such an issue was not brought to the fore either in the trial court or the appellate court, and would have
been disregarded by the latter tribunal for the reasons previously stated. With more reason, the same
does not deserve consideration by this Court.[29]

WHEREFORE, this petition is DENIED for lack of merit. The Decision of the Court of Appeals dated April
26, 1996, in CA-G.R. CV No. 30374, is hereby AFFIRMED. Petitioner Siredy Enterprises, Inc. is ordered to pay
Conrado de Guzman actual damages in the amount of P412,154.93, with legal interest thereon from the
time the case was filed until its full payment.Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Austria-Martinez, and Callejo, Sr., JJ., concur.