THIRD DIVISION

[G.R. No. 135813. October 25, 2001]

FERNANDO SANTOS, petitioner, vs. Spouses ARSENIO and NIEVES REYES, respondents.
DECISION
PANGANIBAN, J.:
As a general rule, the factual findings of the Court of Appeals affirming those of the trial court are binding on the
Supreme Court. However, there are several exceptions to this principle. In the present case, we find occasion to apply
both the rule and one of the exceptions.
The Case
Before us is a Petition for Review on Certiorari assailing the November 28, 1997 Decision,[1] as well as the August 17,
1998 and the October 9, 1998 Resolutions,[2] issued by the Court of Appeals (CA) in CA-GR CV No. 34742. The Assailed
Decision disposed as follows:
WHEREFORE, the decision appealed from is AFFIRMED save as for the counterclaim which is hereby DISMISSED. Costs
against [petitioner].[3]
Resolving respondents Motion for Reconsideration, the August 17, 1998 Resolution ruled as follows:
WHEREFORE, [respondents] motion for reconsideration is GRANTED. Accordingly, the courts decision dated November
28, 1997 is hereby MODIFIED in that the decision appealed from is AFFIRMED in toto, with costs against [petitioner].[4]
The October 9, 1998 Resolution denied for lack of merit petitioners Motion for Reconsideration of the August 17,
1998 Resolution.[5]
The Facts
The events that led to this case are summarized by the CA as follows:
Sometime in June, 1986, [Petitioner] Fernando Santos and [Respondent] Nieves Reyes were introduced to each other by
one Meliton Zabat regarding a lending business venture proposed by Nieves. It was verbally agreed that [petitioner
would] act as financier while [Nieves] and Zabat [would] take charge of solicitation of members and collection of loan
payments. The venture was launched on June 13, 1986, with the understanding that [petitioner] would receive 70% of
the profits while x x x Nieves and Zabat would earn 15% each.
In July, 1986, x x x Nieves introduced Cesar Gragera to [petitioner]. Gragera, as chairman of the Monte Maria
Development Corporation[6] (Monte Maria, for brevity), sought short-term loans for members of the
corporation. [Petitioner] and Gragera executed an agreement providing funds for Monte Marias members. Under the
agreement, Monte Maria, represented by Gragera, was entitled to P1.31 commission per thousand paid daily to
[petitioner] (Exh. A). x x x Nieves kept the books as representative of [petitioner] while [Respondent] Arsenio, husband of
Nieves, acted as credit investigator.
On August 6, 1986, [petitioner], x x x [Nieves] and Zabat executed the Article of Agreement which formalized their earlier
verbal arrangement.
[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in the same lending business in competition
with their partnership[.] Zabat was thereby expelled from the partnership. The operations with Monte Maria continued.
On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money and damages. [Petitioner] charged
[respondents], allegedly in their capacities as employees of [petitioner], with having misappropriated funds intended for
Gragera for the period July 8, 1986 up to March 31, 1987. Upon Grageras complaint that his commissions were
inadequately remitted, [petitioner] entrusted P200,000.00 to x x x Nieves to be given to Gragera. x x x Nieves allegedly
failed to account for the amount. [Petitioner] asserted that after examination of the records, he found that of the total
amount of P4,623,201.90 entrusted to [respondents], only P3,068,133.20 was remitted to Gragera, thereby leaving the
balance of P1,555,065.70 unaccounted for.
In their answer, [respondents] asserted that they were partners and not mere employees of [petitioner]. The complaint,
they alleged, was filed to preempt and prevent them from claiming their rightful share to the profits of the partnership.
x x x Arsenio alleged that he was enticed by [petitioner] to take the place of Zabat after [petitioner] learned of Zabats
activities. Arsenio resigned from his job at the Asian Development Bank to join the partnership.
For her part, x x x Nieves claimed that she participated in the business as a partner, as the lending activity with Monte
Maria originated from her initiative. Except for the limited period of July 8, 1986 through August 20, 1986, she did not
handle sums intended for Gragera. Collections were turned over to Gragera because he guaranteed 100% payment of all
sums loaned by Monte Maria. Entries she made on worksheets were based on this assumptive 100% collection of all
loans. The loan releases were made less Grageras agreed commission. Because of this arrangement, she neither received
payments from borrowers nor remitted any amount to Gragera. Her job was merely to make worksheets (Exhs. 15 to 15-
DDDDDDDDDD) to convey to [petitioner] how much he would earn if all the sums guaranteed by Gragera were collected.
[Petitioner] on the other hand insisted that [respondents] were his mere employees and not partners with respect to the
agreement with Gragera. He claimed that after he discovered Zabats activities, he ceased infusing funds, thereby causing
the extinguishment of the partnership. The agreement with Gragera was a distinct partnership [from] that of
[respondent] and Zabat. [Petitioner] asserted that [respondents] were hired as salaried employees with respect to the
partnership between [petitioner] and Gragera.
[Petitioner] further asserted that in Nieves capacity as bookkeeper, she received all payments from which Nieves
deducted Grageras commission. The commission would then be remitted to Gragera. She likewise determined loan
releases.
During the pre-trial, the parties narrowed the issues to the following points: whether [respondents] were employees or
partners of [petitioner], whether [petitioner] entrusted money to [respondents] for delivery to Gragera, whether
the P1,555,068.70 claimed under the complaint was actually remitted to Gragera and whether [respondents] were
entitled to their counterclaim for share in the profits.[7]
Ruling of the Trial Court
In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere employees, of
petitioner. It further ruled that Gragera was only a commission agent of petitioner, not his partner. Petitioner moreover
failed to prove that he had entrusted any money to Nieves. Thus, respondents counterclaim for their share in the
partnership and for damages was granted. The trial court disposed as follows:
39. WHEREFORE, the Court hereby renders judgment as follows:
39.1. THE SECOND AMENDED COMPLAINT dated July 26, 1989 is DISMISSED.
39.2. The [Petitioner] FERNANDO J. SANTOS is ordered to pay the [Respondent] NIEVES S. REYES, the
following:
39.2.1. P3,064,428.00 - The 15 percent share of the [respondent] NIEVES S. REYES in the
profits of her joint venture with the [petitioner].
39.2.2. Six (6) percent of - As damages from P3,064,428.00 August 3, 1987 until
the P3,064,428.00 is fully paid.
39.2.3. P50,000.00 - As moral damages
39.2.4. P10,000.00 - As exemplary damages
39.3. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondent] ARSENIO REYES, the following:
39.3.1. P2,899,739.50 - The balance of the 15 percent share of the [respondent] ARSENIO
REYES in the profits of his joint venture with the
[petitioner].
39.3.2. Six (6) percent of - As damages from P2,899,739.50 August 3, 1987 until
the P2,899,739.50 is fully paid.
39.3.3. P25,000.00 - As moral damages
39.3.4. P10,000.00 - As exemplary damages
39.4. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondents]:
39.4.1. P50,000.00 - As attorneys fees; and
39.4.2 The cost of the suit.[8]
Ruling of the Court of Appeals
On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents was dismissed. Upon the
latters Motion for Reconsideration, however, the trial courts Decision was reinstated in toto. Subsequently, petitioners
own Motion for Reconsideration was denied in the CA Resolution of October 9, 1998.
 The CA ruled that the following circumstances indicated the existence of a partnership among the parties: (1) it was
Nieves who broached to petitioner the idea of starting a money-lending business and introduced him to Gragera; (2)
Arsenio received dividends or profit-shares covering the period July 15 to August 7, 1986 (Exh. 6); and (3) the
partnership contract was executed after the Agreement with Gragera and petitioner and thus showed the parties intention
to consider it as a transaction of the partnership. In their common venture, petitioner invested capital while respondents
contributed industry or services, with the intention of sharing in the profits of the business.
The CA disbelieved petitioners claim that Nieves had misappropriated a total of P200,000 which was supposed to be
delivered to Gragera to cover unpaid commissions. It was his task to collect the amounts due, while hers was merely to
prepare the daily cash flow reports (Exhs. 15-15DDDDDDDDDD) to keep track of his collections.
Hence, this Petition.[9]
Issue
Petitioner asks this Court to rule on the following issues:[10]
Whether or not Respondent Court of Appeals acted with grave abuse of discretion tantamount to excess or lack of
jurisdiction in:
1. Holding that private respondents were partners/joint venturers and not employees of Santos in connection
with the agreement between Santos and Monte Maria/Gragera;
2. Affirming the findings of the trial court that the phrase Received by on documents signed by Nieves Reyes
signified receipt of copies of the documents and not of the sums shown thereon;
3. Affirming that the signature of Nieves Reyes on Exhibit E was a forgery;
4. Finding that Exhibit H [did] not establish receipt by Nieves Reyes of P200,000.00 for delivery to Gragera;
5. Affirming the dismissal of Santos [Second] Amended Complaint;
6. Affirming the decision of the trial court, upholding private respondents counterclaim;
7. Denying Santos motion for reconsideration dated September 11, 1998.
Succinctly put, the following were the issues raised by petitioner: (1) whether the parties relationship was one of
partnership or of employer-employee; (2) whether Nieves misappropriated the sums of money allegedly entrusted to her
for delivery to Gragera as his commissions; and (3) whether respondents were entitled to the partnership profits as
determined by the trial court.
The Courts Ruling
The Petition is partly meritorious.
First Issue:
Business Relationship
Petitioner maintains that he employed the services of respondent spouses in the money-lending venture with
Gragera, with Nieves as bookkeeper and Arsenio as credit investigator. That Nieves introduced Gragera to Santos did not
make her a partner. She was only a witness to the Agreement between the two. Separate from the partnership between
petitioner and Gragera was that which existed among petitioner, Nieves and Zabat, a partnership that was dissolved
when Zabat was expelled.
On the other hand, both the CA and the trial court rejected petitioners contentions and ruled that the business
relationship was one of partnership. We quote from the CA Decision, as follows:
[Respondents] were industrial partners of [petitioner]. x x x Nieves herself provided the initiative in the lending activities
with Monte Maria. In consonance with the agreement between appellant, Nieves and Zabat (later replaced by Arsenio),
[respondents] contributed industry to the common fund with the intention of sharing in the profits of the
partnership. [Respondents] provided services without which the partnership would not have [had] the wherewithal to
carry on the purpose for which it was organized and as such [were] considered industrial partners (Evangelista v. Abad
Santos, 51 SCRA 416 [1973]).
While concededly, the partnership between [petitioner,] Nieves and Zabat was technically dissolved by the expulsion of
Zabat therefrom, the remaining partners simply continued the business of the partnership without undergoing the
procedure relative to dissolution. Instead, they invited Arsenio to participate as a partner in their operations. There was
therefore, no intent to dissolve the earlier partnership. The partnership between [petitioner,] Nieves and Arsenio simply
took over and continued the business of the former partnership with Zabat, one of the incidents of which was the lending
operations with Monte Maria.
xxxxxxxxx
Gragera and [petitioner] were not partners. The money-lending activities undertaken with Monte Maria was done in
pursuit of the business for which the partnership between [petitioner], Nieves and Zabat (later Arsenio) was
organized. Gragera who represented Monte Maria was merely paid commissions in exchange for the collection of
loans. The commissions were fixed on gross returns, regardless of the expenses incurred in the operation of the
business. The sharing of gross returns does not in itself establish a partnership.[11]
We agree with both courts on this point. By the contract of partnership, two or more persons bind themselves to
contribute money, property or industry to a common fund, with the intention of dividing the profits among
themselves.[12] The Articles of Agreement stipulated that the signatories shall share the profits of the business in a 70-15-
15 manner, with petitioner getting the lions share.[13] This stipulation clearly proved the establishment of a partnership.
We find no cogent reason to disagree with the lower courts that the partnership continued lending money to the
members of the Monte Maria Community Development Group, Inc., which later on changed its business name to Private
Association for Community Development, Inc. (PACDI). Nieves was not merely petitioners employee. She discharged her
bookkeeping duties in accordance with paragraphs 2 and 3 of the Agreement, which states as follows:
2. That the SECOND PARTY and THIRD PARTY shall handle the solicitation and screening of prospective borrowers, and
shall x x x each be responsible in handling the collection of the loan payments of the borrowers that they each solicited.
3. That the bookkeeping and daily balancing of account of the business operation shall be handled by the SECOND
PARTY.[14]
The Second Party named in the Agreement was none other than Nieves Reyes. On the other hand, Arsenios duties
as credit investigator are subsumed under the phrase screening of prospective borrowers. Because of this Agreement and
the disbursement of monthly allowances and profit shares or dividends (Exh. 6) to Arsenio, we uphold the factual finding
of both courts that he replaced Zabat in the partnership.
Indeed, the partnership was established to engage in a money-lending business, despite the fact that it was
formalized only after the Memorandum of Agreement had been signed by petitioner and Gragera. Contrary to petitioners
contention, there is no evidence to show that a different business venture is referred to in this Agreement, which was
executed on August 6, 1986, or about a month after the Memorandum had been signed by petitioner and Gragera on July
14, 1986. The Agreement itself attests to this fact:
WHEREAS, the parties have decided to formalize the terms of their business relationship in order that their respective
interests may be properly defined and established for their mutual benefit and understanding. [15]
Second Issue:
No Proof of Misappropriation of Grageras Unpaid Commission
Petitioner faults the CA finding that Nieves did not misappropriate money intended for Grageras
commission. According to him, Gragera remitted his daily collection to Nieves. This is shown by Exhibit B (the Schedule of
Daily Payments), which bears her signature under the words received by. For the period July 1986 to March 1987,
Gragera should have earned a total commission of P4,282,429.30.However, only P3,068,133.20 was received by
him. Thus, petitioner infers that she misappropriated the difference of P1,214,296.10, which represented the unpaid
commissions. Exhibit H is an untitled tabulation which, according to him, shows that Gragera was also entitled to a
commission of P200,000, an amount that was never delivered by Nieves.[16]
On this point, the CA ruled that Exhibits B, F, E and H did not show that Nieves received for delivery to Gragera any
amount from which the P1,214,296.10 unpaid commission was supposed to come, and that such exhibits were
insufficient proof that she had embezzled P200,000. Said the CA:
The presentation of Exhibit D vaguely denominated as members ledger does not clearly establish that Nieves received
amounts from Monte Marias members. The document does not clearly state what amounts the entries thereon
represent. More importantly, Nieves made the entries for the limited period of January 11, 1987 to February 17, 1987
only while the rest were made by Grageras own staff.
Neither can we give probative value to Exhibit E which allegedly shows acknowledgment of the remittance of commissions
to Verona Gonzales. The document is a private one and its due execution and authenticity have not been duly proved as
required in [S]ection 20, Rule 132 of the Rules of Court which states:
Sec. 20. Proof of Private Document Before any private document offered as authentic is received in evidence, its due
execution and authenticity must be proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or handwriting of the maker.
Any other private document need only be identified as that which it is claimed to be.
The court a quo even ruled that the signature thereon was a forgery, as it found that:
x x x. But NIEVES denied that Exh. E-1 is her signature; she claimed that it is a forgery. The initial stroke of Exh. E-1
starts from up and goes downward. The initial stroke of the genuine signatures of NIEVES (Exhs. A-3, B-1, F-1, among
others) starts from below and goes upward. This difference in the start of the initial stroke of the signatures Exhs. E-1
and of the genuine signatures lends credence to Nieves claim that the signature Exh. E-1 is a forgery.
xxxxxxxxx
Nieves testimony that the schedules of daily payment (Exhs. B and F) were based on the predetermined 100% collection
as guaranteed by Gragera is credible and clearly in accord with the evidence. A perusal of Exhs. B and F as well as Exhs.
15 to 15-DDDDDDDDDD reveal that the entries were indeed based on the 100% assumptive collection guaranteed by
Gragera. Thus, the total amount recorded on Exh. B is exactly the number of borrowers multiplied by the projected
collection of P150.00 per borrower. This holds true for Exh. F.
Corollarily, Nieves explanation that the documents were pro forma and that she signed them not to signify that she
collected the amounts but that she received the documents themselves is more believable than [petitioners] assertion
that she actually handled the amounts.
Contrary to [petitioners] assertion, Exhibit H does not unequivocally establish that x x x Nieves received P200,000.00 as
commission for Gragera. As correctly stated by the court a quo, the document showed a liquidation of P240,000.00 and
not P200,000.00.
Accordingly, we find Nieves testimony that after August 20, 1986, all collections were made by Gragera believable and
worthy of credence. Since Gragera guaranteed a daily 100% payment of the loans, he took charge of the collections. As
[petitioners] representative, Nieves merely prepared the daily cash flow reports (Exh. 15 to 15 DDDDDDDDDD) to enable
[petitioner] to keep track of Grageras operations.Gragera on the other hand devised the schedule of daily payment (Exhs.
B and F) to record the projected gross daily collections.
As aptly observed by the court a quo:
26.1. As between the versions of SANTOS and NIEVES on how the commissions of GRAGERA [were] paid to him[,] that of
NIEVES is more logical and practical and therefore, more believable. SANTOS version would have given rise to this
improbable situation: GRAGERA would collect the daily amortizations and then give them to NIEVES; NIEVES would get
GRAGERAs commissions from the amortizations and then give such commission to GRAGERA. [17]
These findings are in harmony with the trial courts ruling, which we quote below:
21. Exh. H does not prove that SANTOS gave to NIEVES and the latter received P200,000.00 for delivery to
GRAGERA. Exh. H shows under its sixth column ADDITIONAL CASH that the additional cash was P240,000.00. If Exh. H
were the liquidation of the P200,000.00 as alleged by SANTOS, then his claim is not true. This is so because it is a
liquidation of the sum of P240,000.00.
21.1. SANTOS claimed that he learned of NIEVES failure to give the P200,000.00 to GRAGERA when he received the
latters letter complaining of its delayed release. Assuming as true SANTOS claim that he gave P200,000.00 to GRAGERA,
there is no competent evidence that NIEVES did not give it to GRAGERA. The only proof that NIEVES did not give it is the
letter. But SANTOS did not even present the letter in evidence. He did not explain why he did not.
21.2. The evidence shows that all money transactions of the money-lending business of SANTOS were covered by petty
cash vouchers. It is therefore strange why SANTOS did not present any voucher or receipt covering the P200,000.00.[18]
In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70 from the partnership. She
did not remit P1,214,296.10 to Gragera, because he had deducted his commissions before remitting his
collections. Exhibits B and F are merely computations of what Gragera should collect for the day; they do not show that
Nieves received the amounts stated therein. Neither is there sufficient proof that she misappropriated P200,000, because
Exhibit H does not indicate that such amount was received by her; in fact, it shows a different figure.
Petitioner has utterly failed to demonstrate why a review of these factual findings is warranted. Well-entrenched is
the basic rule that factual findings of the Court of Appeals affirming those of the trial court are binding and conclusive on
the Supreme Court.[19] Although there are exceptions to this rule, petitioner has not satisfactorily shown that any of them
is applicable to this issue.
Third Issue:
Accounting of Partnership
Petitioner refuses any liability for respondents claims on the profits of the partnership. He maintains that both
business propositions were flops, as his investments were consumed and eaten up by the commissions orchestrated to be
due Gragera a situation that could not have been rendered possible without complicity between Nieves and Gragera.
Respondent spouses, on the other hand, postulate that petitioner instituted the action below to avoid payment of the
demands of Nieves, because sometime in March 1987, she signified to petitioner that it was about time to get her share
of the profits which had already accumulated to some P3 million. Respondents add that while the partnership has not
declared dividends or liquidated its earnings, the profits are already reflected on paper. To prove the counterclaim of
Nieves, the spouses show that from June 13, 1986 up to April 19, 1987, the profit totaled P20,429,520 (Exhs. 10 et seq.
and 15 et seq.). Based on that income, her 15 percent share under the joint venture amounts to P3,064,428 (Exh. 10-I-
3); and Arsenios, P2,026,000 minus the P30,000 which was already advanced to him (Petty Cash Vouchers, Exhs. 6, 6-A
to 6-B).
The CA originally held that respondents counterclaim was premature, pending an accounting of the
partnership. However, in its assailed Resolution of August 17, 1998, it turned volte face. Affirming the trial courts ruling
on the counterclaim, it held as follows:
We earlier ruled that there is still need for an accounting of the profits and losses of the partnership before we can rule
with certainty as to the respective shares of the partners. Upon a further review of the records of this case, however,
there appears to be sufficient basis to determine the amount of shares of the parties and damages incurred by
[respondents]. The fact is that the court a quo already made such a determination [in its] decision dated August 13, 1991
on the basis of the facts on record.[20]
The trial courts ruling alluded to above is quoted below:
27. The defendants counterclaim for the payment of their share in the profits of their joint venture with SANTOS is
supported by the evidence.
27.1. NIEVES testified that: Her claim to a share in the profits is based on the agreement (Exhs. 5, 5-A and 5-B). The
profits are shown in the working papers (Exhs. 10 to 10-I, inclusive) which she prepared.Exhs. 10 to 10-I (inclusive) were
based on the daily cash flow reports of which Exh. 3 is a sample. The originals of the daily cash flow reports (Exhs. 3 and
15 to 15-D (10) were given to SANTOS. The joint venture had a net profit of P20,429,520.00 (Exh. 10-I-1), from its
operations from June 13, 1986 to April 19, 1987 (Exh. 1-I-4). She had a share of P3,064,428.00 (Exh. 10-I-3) and
ARSENIO, about P2,926,000.00, in the profits.
27.1.1 SANTOS never denied NIEVES testimony that the money-lending business he was engaged in netted a profit and
that the originals of the daily case flow reports were furnished to him. SANTOS however alleged that the money-lending
operation of his joint venture with NIEVES and ZABAT resulted in a loss of about half a million pesos to him. But such
loss, even if true, does not negate NIEVES claim that overall, the joint venture among them SANTOS, NIEVES and
ARSENIO netted a profit. There is no reason for the Court to doubt the veracity of [the testimony of] NIEVES.
27.2 The P26,260.50 which ARSENIO received as part of his share in the profits (Exhs. 6, 6-A and 6-B) should be
deducted from his total share.[21]
After a close examination of respondents exhibits, we find reason to disagree with the CA. Exhibit 10-I[22] shows that
the partnership earned a total income of P20,429,520 for the period June 13, 1986 until April 19, 1987. This entry is
derived from the sum of the amounts under the following column headings: 2-Day Advance Collection, Service Fee,
Notarial Fee, Application Fee, Net Interest Income and Interest Income on Investment. Such entries represent the
collections of the money-lending business or its gross income.
The total income shown on Exhibit 10-I did not consider the expenses sustained by the partnership. For instance, it
did not factor in the gross loan releases representing the money loaned to clients. Since the business is money-lending,
such releases are comparable with the inventory or supplies in other business enterprises.
Noticeably missing from the computation of the total income is the deduction of the weekly allowance disbursed to
respondents. Exhibits I et seq. and J et seq.[23] show that Arsenio received allowances from July 19, 1986 to March 27,
1987 in the aggregate amount of P25,500; and Nieves, from July 12, 1986 to March 27, 1987 in the total amount
of P25,600. These allowances are different from the profit already received by Arsenio. They represent expenses that
should have been deducted from the business profits. The point is that all expenses incurred by the money-lending
enterprise of the parties must first be deducted from the total income in order to arrive at the net profit of the
partnership. The share of each one of them should be based on this net profit and not from the gross income or total
income reflected in Exhibit 10-I, which the two courts invariably referred to as cash flow sheets.
Similarly, Exhibits 15 et seq.,[24] which are the Daily Cashflow Reports, do not reflect the business expenses incurred
by the parties, because they show only the daily cash collections. Contrary to the rulings of both the trial and the
appellate courts, respondents exhibits do not reflect the complete financial condition of the money-lending business. The
lower courts obviously labored over a mistaken notion that Exhibit 10-I-1 represented the net profits earned by the
partnership.
For the purpose of determining the profit that should go to an industrial partner (who shares in the profits but is not
liable for the losses), the gross income from all the transactions carried on by the firm must be added together, and from
this sum must be subtracted the expenses or the losses sustained in the business. Only in the difference representing the
net profits does the industrial partner share. But if, on the contrary, the losses exceed the income, the industrial partner
does not share in the losses.[25]
When the judgment of the CA is premised on a misapprehension of facts or a failure to notice certain relevant facts
that would otherwise justify a different conclusion, as in this particular issue, a review of its factual findings may be
conducted, as an exception to the general rule applied to the first two issues. [26]
The trial court has the advantage of observing the witnesses while they are testifying, an opportunity not available to
appellate courts. Thus, its assessment of the credibility of witnesses and their testimonies are accorded great weight,
even finality, when supported by substantial evidence; more so when such assessment is affirmed by the CA. But when
the issue involves the evaluation of exhibits or documents that are attached to the case records, as in the third issue, the
rule may be relaxed. Under that situation, this Court has a similar opportunity to inspect, examine and evaluate those
records, independently of the lower courts. Hence, we deem the award of the partnership share, as computed by the trial
court and adopted by the CA, to be incomplete and not binding on this Court.
WHEREFORE, the Petition is partly GRANTED. The assailed November 28, 1997 Decision is AFFIRMED, but the
challenged Resolutions dated August 17, 1998 and October 9, 1998 are REVERSEDand SET ASIDE. No costs.
SO ORDERED.
Melo, (Chairman), and Sandoval-Gutierrez, JJ., concur.
Vitug, J., on official leave.
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents

GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the
issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28, 1966, they
bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners in 1968
toMarenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria
Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70, while
they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were assessed and
required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax amnesties
way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners
as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation
under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the National Internal
Revenue Code 1 that the unregistered partnership was subject to corporate income tax as distinguished from profits
derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty
under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities but did not
relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay the
deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045. In due
course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the decision and action taken by
respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact formed by
petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of this
case, although there might in fact be a co-ownership between the petitioners, there was no adequate basis for the
conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income tax under
the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT
COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP
SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN
OPPOSITION THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN
UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW
THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE
SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF
OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their own personal funds
they used in buying several real properties. They appointed their brother to manage their properties with full power to
lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants for several years
and they gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded the payment of
income tax on a corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations provided for in section
24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as well as to
the residence tax for corporations and the real estate dealers' fixed tax. With respect to the tax on
corporations, the issue hinges on the meaning of the terms corporation and partnership as used in
sections 24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected, and paid annually
upon the total net income received in the preceding taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (companies collectives), a tax upon such income equal
to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participation), associations or insurance companies, but does not
include duly registered general co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among the
contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions
for monetary gain and then divide the same among themselves , because:
1. Said common fund was not something they found already in existence . It was not a property inherited
by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion
thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series of transactions . On February 2,
1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This
was soon followed, on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5)
days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and
transcations undertaken, as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not limited to the conservation
and preservation of the aforementioned common fund or even of the property acquired by petitioners in
February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of petitioners
herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid
the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do
not even suggest that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one person , namely, Simeon
Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have
been handled as if the same belonged to a corporation or business enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years , or, to be exact, over fifteen (15)
years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelists
became the manager.
 6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up
already adverted to, or on the causes for its continued existence. They did not even try to offer an
explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances were
present in the cases cited by petitioners herein, and, hence, those cases are not in point . 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide the profits among themselves. Respondent commissioner
and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased
certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by
them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present .
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when
they sold the two (2) parcels of land after which they did not make any additional or new purchase. The remaining three
(3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under the management of
one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances are present in the case
at bar. The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code lays down the rule
for determining when a transaction should be deemed a partnership or a co-ownership. Said article
paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived;
From the above it appears that the fact that those who agree to form a co- ownership share or do not
share any profits made by the use of the property held in common does not convert their venture into a
partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the property. This only means
that, aside from the circumstance of profit, the presence of other elements constituting partnership is
necessary, such as the clear intent to form a partnership, the existence of a juridical personality different
from that of the individual partners, and the freedom to transfer or assign any interest in the property by
one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp.
635-636)
It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain
real estate for profit in the absence of other circumstances showing a contrary intention cannot be
considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to share the gross returns
of that enterprise in proportion to their contribution, but who severally retain the title to their respective
contribution, are not thereby rendered partners. They have no common stock or capital, and no
community of interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land create a partnership; the parties are only
tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
 Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as
tenants in common, and to divide the profits of disposing of it, the brother and the other not being
entitled to share in plaintiffs commission, no partnership existed as between the three parties, whatever
their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c) and such a community of interest, as far as third
persons are concerned as enables each party to make contract, manage the business, and dispose of the
whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between the owners, though they
may use it for the purpose of making gains; and they may, without becoming partners, agree among
themselves as to the management, and use of such property and the application of the proceeds
therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or
common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to
support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby
they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in
the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty
thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have been formed, since
there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for
said deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid obligation
of the partnership p. 7 However, as petitioners have availed of the benefits of tax amnesty as individual taxpayers in
these transactions, they are thereby relieved of any further tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March 30,
1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the corporate
income tax liability in this case, without pronouncement as to costs.
SO ORDERED.
Cruz, Grio-Aquino and Medialdea, JJ., concur.
Narvasa, J., took no part.
Philex Mining Corp. vs. CIR, GR No. 148187, April 16, 2008

DECISION

YNARES-SANTIAGO, J.:

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

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an agreement [4] with Baguio
Gold Mining Company (Baguio Gold) for the former to manage and operate the latters mining claim, known as the Sto.
Nino mine, located in Atok and Tublay, Benguet Province. The parties agreement was denominated as Power of Attorney
and provided for the following terms:

4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available to the
MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from
time to time may be required by the MANAGERS within the said 3-year period, for use in the
MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be
deemed, for internal audit purposes, as the owners account in the Sto. Nino PROJECT. Any part of any
income of the PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino PROJECT, shall be
added to such owners account.

5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the Sto. Nino
PROJECT, in accordance with the following arrangements:

(a) The properties shall be appraised and, together with the cash, shall be carried by the Sto. Nino
PROJECT as a special fund to be known as the MANAGERS account.

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

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

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

xxxx

12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto. Nino
PROJECT before income tax. It is understood that the MANAGERS shall pay income tax on their
compensation, while the PRINCIPAL shall pay income tax on the net profit of the Sto. Nino PROJECT after
deduction therefrom of the MANAGERS compensation.

xxxx

16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the future, may
incur other obligations in favor of the MANAGERS. This Power of Attorney has been executed as security
for the payment and satisfaction of all such obligations of the PRINCIPAL in favor of the MANAGERS and
as a means to fulfill the same. Therefore, this Agency shall be irrevocable while any obligation of the
PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS account. After all
obligations of the PRINCIPAL in favor of the MANAGERS have been paid and satisfied in full, this Agency
shall be revocable by the PRINCIPAL upon 36-month notice to the MANAGERS.

17. Notwithstanding any agreement or understanding between the PRINCIPAL and the MANAGERS to the
contrary, the MANAGERS may withdraw from this Agency by giving 6-month notice to the PRINCIPAL.
The MANAGERS shall not in any manner be held liable to the PRINCIPAL by reason alone of such
withdrawal. Paragraph 5(d) hereof shall be operative in case of the MANAGERS withdrawal.

x x x x[5]

In the course of managing and operating the project, Philex Mining made advances of cash and property in accordance
with paragraph 5 of the agreement. However, the mine suffered continuing losses over the years which resulted to
petitioners withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation of mine operations
on February 20, 1982.[6]

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

On December 31, 1982, the parties executed an Amendment to Compromise with Dation in Payment [8] where the parties
determined that Baguio Golds indebtedness to petitioner actually amounted to P259,137,245.00, which sum included
liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. These liabilities pertained to long-
term loans amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA and Citibank
N.A. This time, Baguio Gold undertook to pay petitioner in two segments by first assigning its tangible assets for
P127,838,051.00 and then transferring its equitable title in its Philodrill assets for P16,302,426.00. The parties then
ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in the amount of P114,996,768.00.

Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio Gold by
charging P112,136,000.00 to allowances and reserves that were set up in 1981 and P2,860,768.00 to the 1982
operations.
In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112,136,000.00 as loss
on settlement of receivables from Baguio Gold against reserves and allowances. [9] However, the Bureau of Internal
Revenue (BIR) disallowed the amount as deduction for bad debt and assessed petitioner a deficiency income tax of
P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt
deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was ascertained to be worthless;
and (c) it was charged off within the taxable year when it was determined to be worthless.

Petitioner emphasized that the debt arose out of a valid management contract it entered into with Baguio Gold. The bad
debt deduction represented advances made by petitioner which, pursuant to the management contract, formed part of
Baguio Golds pecuniary obligations to petitioner. It also included payments made by petitioner as guarantor of Baguio
Golds long-term loans which legally entitled petitioner to be subrogated to the rights of the original creditor.

Petitioner also asserted that due to Baguio Golds irreversible losses, it became evident that it would not be able
to recover the advances and payments it had made in behalf of Baguio Gold. For a debt to be considered worthless,
petitioner claimed that it was neither required to institute a judicial action for collection against the debtor nor to sell or
dispose of collateral assets in satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to enforce
collection and exhausted all reasonable means to collect.

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

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

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED for lack
of merit. The assessment in question, viz: FAS-1-82-88-003067 for deficiency income tax in the amount
of P62,811,161.39 is hereby AFFIRMED.

ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY respondent

Commissioner of Internal Revenue the amount of P62,811,161.39, plus, 20% delinquency interest due
computed from February 10, 1995, which is the date after the 20-day grace period given by the
respondent within which petitioner has to pay the deficiency amount x x x up to actual date of payment.

SO ORDERED.[11]

The CTA rejected petitioners assertion that the advances it made for the Sto. Nino mine were in the nature of a
loan. It instead characterized the advances as petitioners investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The CTA held that the Power of Attorney executed by petitioner and
Baguio Gold was actually a partnership agreement. Since the advanced amount partook of the nature of an investment, it
could not be deducted as a bad debt from petitioners gross income.

The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio Gold could
not be allowed as a bad debt deduction. At the time the payments were made, Baguio Gold was not in default since its
loans were not yet due and demandable. What petitioner did was to pre-pay the loans as evidenced by the notice sent by
Bank of America showing that it was merely demanding payment of the installment and interests due. Moreover, Citibank
imposed and collected a pre-termination penalty for the pre-payment.
 The Court of Appeals affirmed the decision of the CTA.[12] Hence, upon denial of its motion for
reconsideration,[13] petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:

I.
The Court of Appeals erred in construing that the advances made by Philex in the management of the
Sto. Nino Mine pursuant to the Power of Attorney partook of the nature of an investment rather than a
loan.

II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. Nino Mine
indicates that Philex is a partner of Baguio Gold in the development of the Sto. Nino Mine
notwithstanding the clear absence of any intent on the part of Philex and Baguio Gold to form a
partnership.

III.
The Court of Appeals erred in relying only on the Power of Attorney and in completely disregarding the
Compromise Agreement and the Amended Compromise Agreement when it construed the nature of the
advances made by Philex.

IV.
The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad debts write-
off.[14]

Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we should not only
rely on the Power of Attorney, but also on the subsequent Compromise with Dation in Payment and Amended
Compromise with Dation in Payment that the parties executed in 1982. These documents, allegedly evinced the parties
intent to treat the advances and payments as a loan and establish a creditor-debtor relationship between them.

The petition lacks merit.

The lower courts correctly held that the Power of Attorney is the instrument that is material in determining the
true nature of the business relationship between petitioner and Baguio Gold. Before resort may be had to the two
compromise agreements, the parties contractual intent must first be discovered from the expressed language of the
primary contract under which the parties business relations were founded. It should be noted that the compromise
agreements were mere collateral documents executed by the parties pursuant to the termination of their business
relationship created under the Power of Attorney. On the other hand, it is the latter which established the juridical
relation of the parties and defined the parameters of their dealings with one another.

The execution of the two compromise agreements can hardly be considered as a subsequent or
contemporaneous act that is reflective of the parties true intent. The compromise agreements were executed eleven
years after the Power of Attorney and merely laid out a plan or procedure by which petitioner could recover the advances
and payments it made under the Power of Attorney. The parties entered into the compromise agreements as a
consequence of the dissolution of their business relationship. It did not define that relationship or indicate its real
character.
 An examination of the Power of Attorney reveals that a partnership or joint venture was indeed intended by the
parties. Under a contract of partnership, two or more persons bind themselves to contribute money, property, or industry
to a common fund, with the intention of dividing the profits among themselves. [15] While a corporation, like petitioner,
cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been held that it may
enter into a joint venture which is akin to a particular partnership:

The legal concept of a joint venture is of common law origin. It has no precise legal definition,
but it has been generally understood to mean an organization formed for some temporary purpose. x x x
It is in fact hardly distinguishable from the partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a mutual right of control. x x x The main
distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a
general business with some degree of continuity, while the joint venture is formed for the execution of a
single transaction, and is thus of a temporary nature. x x x This observation is not entirely accurate in
this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking. x x x It would seem therefore that under
Philippine law, a joint venture is a form of partnership and should be governed by the law of
partnerships. The Supreme Court has however recognized a distinction between these two business
forms, and has held that although a corporation cannot enter into a partnership contract, it may however
engage in a joint venture with others. x x x (Citations omitted) [16]

Perusal of the agreement denominated as the Power of Attorney indicates that the parties had intended to create
a partnership and establish a common fund for the purpose. They also had a joint interest in the profits of the business as
shown by a 50-50 sharing in the income of the mine.

Under the Power of Attorney, petitioner and Baguio Gold undertook to contribute money, property and industry to
the common fund known as the Sto. Nio mine.[17] In this regard, we note that there is a substantive equivalence in the
respective contributions of the parties to the development and operation of the mine. Pursuant to paragraphs 4 and 5 of
the agreement, petitioner and Baguio Gold were to contribute equally to the joint venture assets under their respective
accounts. Baguio Gold would contribute P11Munder its owners account plus any of its income that is left in the project,
in addition to its actual mining claim. Meanwhile, petitioners contribution would consist of its expertise in the
management and operation of mines, as well as the managers account which is comprised of P11M in funds and
property and petitioners compensation as manager that cannot be paid in cash.

However, petitioner asserts that it could not have entered into a partnership agreement with Baguio Gold
because it did not bind itself to contribute money or property to the project; that under paragraph 5 of the agreement, it
was only optional for petitioner to transfer funds or property to the Sto. Nio project (w)henever the MANAGERS shall
deem it necessary and convenient in connection with the MANAGEMENT of the STO. NIO MINE. [18]

The wording of the parties agreement as to petitioners contribution to the common fund does not detract from
the fact that petitioner transferred its funds and property to the project as specified in paragraph 5, thus rendering
effective the other stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner from withdrawing the
advances until termination of the parties business relations. As can be seen, petitioner became bound by its contributions
once the transfers were made. The contributions acquired an obligatory nature as soon as petitioner had chosen to
exercise its option under paragraph 5.

There is no merit to petitioners claim that the prohibition in paragraph 5(c) against withdrawal of advances
should not be taken as an indication that it had entered into a partnership with Baguio Gold; that the stipulation only
showed that what the parties entered into was actually a contract of agency coupled with an interest which is not
revocable at will and not a partnership.

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

Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the parties was one
of agency and not a partnership. Although the said provision states that this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS account, it does not
necessarily follow that the parties entered into an agency contract coupled with an interest that cannot be withdrawn by
Baguio Gold.

It should be stressed that the main object of the Power of Attorney was not to confer a power in favor of
petitioner to contract with third persons on behalf of Baguio Gold but to create a business relationship between petitioner
and Baguio Gold, in which the former was to manage and operate the latters mine through the parties mutual
contribution of material resources and industry. The essence of an agency, even one that is coupled with interest, is
the agents ability to represent his principal and bring about business relations between the latter and third
persons.[20] Where representation for and in behalf of the principal is merely incidental or necessary for the proper
discharge of ones paramount undertaking under a contract, the latter may not necessarily be a contract of agency, but
some other agreement depending on the ultimate undertaking of the parties. [21]

In this case, the totality of the circumstances and the stipulations in the parties agreement indubitably lead to the
conclusion that a partnership was formed between petitioner and Baguio Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by
petitioner under the agreement. Paragraph 5 (d) thereof provides that upon termination of the parties business relations,
the ratio which the MANAGERS account has to the owners account will be determined, and the corresponding proportion
of the entire assets of the STO. NINO MINE, excluding the claims shall be transferred to petitioner. [22] As pointed out by
the Court of Tax Appeals, petitioner was merely entitled to a proportionate return of the mines assets upon dissolution of
the parties business relations. There was nothing in the agreement that would require Baguio Gold to make payments of
the advances to petitioner as would be recognized as an item of obligation or accounts payable for Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the Sto. Nio
mine upon termination, a provision that is more consistent with a partnership than a creditor-debtor relationship. It
should be pointed out that in a contract of loan, a person who receives a loan or money or any fungible thing acquires
ownership thereof and is bound to pay the creditor an equal amount of the same kind and quality. [23] In this case,
however, there was no stipulation for Baguio Gold to actually repay petitioner the cash and property that it had advanced,
but only the return of an amount pegged at a ratio which the managers account had to the owners account.

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

Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds of millions
of pesos to another corporation with neither security, or collateral, nor a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide a specific maturity date for the advances to become due and
demandable, and the manner of payment was unclear. All these point to the inevitable conclusion that the advances were
not loans but capital contributions to a partnership.
 The strongest indication that petitioner was a partner in the Sto Nio mine is the fact that it would receive 50% of
the net profits as compensation under paragraph 12 of the agreement. The entirety of the parties contractual stipulations
simply leads to no other conclusion than that petitioners compensation is actually its share in the income of the joint
venture.

Article 1769 (4) of the Civil Code explicitly provides that the receipt by a person of a share in the profits of a
business is prima facie evidence that he is a partner in the business. Petitioner asserts, however, that no such inference
can be drawn against it since its share in the profits of the Sto Nio project was in the nature of compensation or wages of
an employee, under the exception provided in Article 1769 (4) (b). [24]

On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who will be paid
wages pursuant to an employer-employee relationship. To begin with, petitioner was the manager of the project and had
put substantial sums into the venture in order to ensure its viability and profitability. By pegging its compensation to
profits, petitioner also stood not to be remunerated in case the mine had no income. It is hard to believe that petitioner
would take the risk of not being paid at all for its services, if it were truly just an ordinary employee.

Consequently, we find that petitioners compensation under paragraph 12 of the agreement actually constitutes its
share in the net profits of the partnership. Indeed, petitioner would not be entitled to an equal share in the income of the
mine if it were just an employee of Baguio Gold. [25] It is not surprising that petitioner was to receive a 50% share in the
net profits, considering that the Power of Attorney also provided for an almost equal contribution of the parties to the St.
Nino mine. The compensation agreed upon only serves to reinforce the notion that the parties relations were indeed of
partners and not employer-employee.

All told, the lower courts did not err in treating petitioners advances as investments in a partnership known as the
Sto. Nino mine. The advances were not debts of Baguio Gold to petitioner inasmuch as the latter was under no
unconditional obligation to return the same to the former under the Power of Attorney. As for the amounts that petitioner
paid as guarantor to Baguio Golds creditors, we find no reason to depart from the tax courts factual finding that Baguio
Golds debts were not yet due and demandable at the time that petitioner paid the same. Verily, petitioner pre-paid
Baguio Golds outstanding loans to its bank creditors and this conclusion is supported by the evidence on record. [26]

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions for
income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must
prove by convincing evidence that he is entitled to the deduction claimed. [27] In this case, petitioner failed to substantiate
its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross
income. Consequently, it could not claim the advances as a valid bad debt deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No. 49385 dated June 30,
2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner Philex
Mining Corporation is ORDERED to PAY the deficiency tax on its 1982 income in the amount of P62,811,161.31, with
20% delinquency interest computed from February 10, 1995, which is the due date given for the payment of the
deficiency income tax, up to the actual date of payment.

SO ORDERED.
G.R. No. L-21906 December 24, 1968
INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees,
vs.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, defendant-appellant.
Aportadera and Palabrica and Pelaez, Jalandoni and Jamir plaintiffs-appellees.
Ruiz Law Offices for defendant-appellant.
CASTRO, J.:
This is an appeal from the order of May 2, 1956, the decision of May 4, 1956 and the order of May 21, 1956, all of the
Court of First Instance of Davao, in civil case 629. The basic action is for specific performance, and damages resulting
from an alleged breach of contract.
In 1940 Nicanor Casteel filed a fishpond application for a big tract of swampy land in the then Sitio of Malalag (now the
Municipality of Malalag), Municipality of Padada, Davao. No action was taken thereon by the authorities concerned.
During the Japanese occupation, he filed another fishpond application for the same area, but because of the conditions
then prevailing, it was not acted upon either. On December 12, 1945 he filed a third fishpond application for the same
area, which, after a survey, was found to contain 178.76 hectares. Upon investigation conducted by a representative of
the Bureau of Forestry, it was discovered that the area applied for was still needed for firewood production. Hence on
May 13, 1946 this third application was disapproved.
Despite the said rejection, Casteel did not lose interest. He filed a motion for reconsideration. While this motion was
pending resolution, he was advised by the district forester of Davao City that no further action would be taken on his
motion, unless he filed a new application for the area concerned. So he filed on May 27, 1947 his fishpond application
1717.
Meanwhile, several applications were submitted by other persons for portions of the area covered by Casteel's
application.
On May 20, 1946 Leoncio Aradillos filed his fishpond application 1202 covering 10 hectares of land found inside the area
applied for by Casteel; he was later granted fishpond permit F-289-C covering 9.3 hectares certified as available for
fishpond purposes by the Bureau of Forestry.
Victor D. Carpio filed on August 8, 1946 his fishpond application 762 over a portion of the land applied for by Casteel.
Alejandro Cacam's fishpond application 1276, filed on December 26, 1946, was given due course on December 9, 1947
with the issuance to him of fishpond permit F-539-C to develop 30 hectares of land comprising a portion of the area
applied for by Casteel, upon certification of the Bureau of Forestry that the area was likewise available for fishpond
purposes. On November 17, 1948 Felipe Deluao filed his own fishpond application for the area covered by Casteel's
application.
Because of the threat poised upon his position by the above applicants who entered upon and spread themselves within
the area, Casteel realized the urgent necessity of expanding his occupation thereof by constructing dikes and cultivating
marketable fishes, in order to prevent old and new squatters from usurping the land. But lacking financial resources at
that time, he sought financial aid from his uncle Felipe Deluao who then extended loans totalling more or less P27,000
with which to finance the needed improvements on the fishpond. Hence, a wide productive fishpond was built.
Moreover, upon learning that portions of the area applied for by him were already occupied by rival applicants, Casteel
immediately filed the corresponding protests. Consequently, two administrative cases ensued involving the area in
question, to wit: DANR Case 353, entitled "Fp. Ap. No. 661 (now Fp. A. No. 1717), Nicanor Casteel, applicant-appellant
versus Fp. A. No. 763, Victorio D. Carpio, applicant-appellant"; and DANR Case 353-B, entitled "Fp. A. No. 661 (now Fp.
A. No. 1717), Nicanor Casteel, applicant-protestant versus Fp. Permit No. 289-C, Leoncio Aradillos, Fp. Permit No. 539-C,
Alejandro Cacam, Permittees-Respondents."
However, despite the finding made in the investigation of the above administrative cases that Casteel had already
introduced improvements on portions of the area applied for by him in the form of dikes, fishpond gates, clearings, etc.,
the Director of Fisheries nevertheless rejected Casteel's application on October 25, 1949, required him to remove all the
improvements which he had introduced on the land, and ordered that the land be leased through public auction. Failing
to secure a favorable resolution of his motion for reconsideration of the Director's order, Casteel appealed to the
Secretary of Agriculture and Natural Resources.
In the interregnum, some more incidents occurred. To avoid repetition, they will be taken up in our discussion of the
appellant's third assignment of error.
On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as party of the first part, and Nicanor Casteel as party of
the second part, executed a contract denominated a "contract of service" the salient provisions of which are as
follows:
That the Party of the First Part in consideration of the mutual covenants and agreements made herein to the
Party of the Second Part, hereby enter into a contract of service, whereby the Party of the First Part hires and
employs the Party of the Second Part on the following terms and conditions, to wit:
That the Party of the First Part will finance as she has hereby financed the sum of TWENTY SEVEN THOUSAND
PESOS (P27,000.00), Philippine Currency, to the Party of the Second Part who renders only his services for the
construction and improvements of a fishpond at Barrio Malalag, Municipality of Padada, Province of Davao,
Philippines;
That the Party of the Second Part will be the Manager and sole buyer of all the produce of the fish that will be
produced from said fishpond;
That the Party of the First Part will be the administrator of the same she having financed the construction and
improvement of said fishpond;
That this contract was the result of a verbal agreement entered into between the Parties sometime in the month
of November, 1947, with all the above-mentioned conditions enumerated; ...
On the same date the above contract was entered into, Inocencia Deluao executed a special power of attorney in favor of
Jesus Donesa, extending to the latter the authority "To represent me in the administration of the fishpond at Malalag,
Municipality of Padada, Province of Davao, Philippines, which has been applied for fishpond permit by Nicanor Casteel,
but rejected by the Bureau of Fisheries, and to supervise, demand, receive, and collect the value of the fish that is being
periodically realized from it...."
On November 29, 1949 the Director of Fisheries rejected the application filed by Felipe Deluao on November 17, 1948.
Unfazed by this rejection, Deluao reiterated his claim over the same area in the two administrative cases (DANR Cases
353 and 353-B) and asked for reinvestigation of the application of Nicanor Casteel over the subject fishpond. However, by
letter dated March 15, 1950 sent to the Secretary of Commerce and Agriculture and Natural Resources (now Secretary of
Agriculture and Natural Resources), Deluao withdrew his petition for reinvestigation.
On September 15, 1950 the Secretary of Agriculture and Natural Resources issued a decision in DANR Case 353, the
dispositive portion of which reads as follows:
In view of all the foregoing considerations, Fp. A. No. 661 (now Fp. A. No. 1717) of Nicanor Casteel should be, as
hereby it is, reinstated and given due course for the area indicated in the sketch drawn at the back of the last
page hereof; and Fp. A. No. 762 of Victorio D. Carpio shall remain rejected.
On the same date, the same official issued a decision in DANR Case 353-B, the dispositive portion stating as follows:
WHEREFORE, Fishpond Permit No. F-289-C of Leoncio Aradillos and Fishpond Permit No. F-539-C of Alejandro
Cacam, should be, as they are hereby cancelled and revoked; Nicanor Casteel is required to pay the
improvements introduced thereon by said permittees in accordance with the terms and dispositions contained
elsewhere in this decision....
Sometime in January 1951 Nicanor Casteel forbade Inocencia Deluao from further administering the fishpond, and
ejected the latter's representative (encargado), Jesus Donesa, from the premises.
Alleging violation of the contract of service (exhibit A) entered into between Inocencia Deluao and Nicanor Casteel, Felipe
Deluao and Inocencia Deluao on April 3, 1951 filed an action in the Court of First Instance of Davao for specific
performance and damages against Nicanor Casteel and Juan Depra (who, they alleged, instigated Casteel to violate his
contract), praying inter alia, (a) that Casteel be ordered to respect and abide by the terms and conditions of said contract
and that Inocencia Deluao be allowed to continue administering the said fishpond and collecting the proceeds from the
sale of the fishes caught from time to time; and (b) that the defendants be ordered to pay jointly and severally to
plaintiffs the sum of P20,000 in damages.
On April 18, 1951 the plaintiffs filed an ex parte motion for the issuance of a preliminary injunction, praying among other
things, that during the pendency of the case and upon their filling the requisite bond as may be fixed by the court, a
preliminary injunction be issued to restrain Casteel from doing the acts complained of, and that after trial the said
injunction be made permanent. The lower court on April 26, 1951 granted the motion, and, two days later, it issued a
preliminary mandatory injunction addressed to Casteel, the dispositive portion of which reads as follows:
POR EL PRESENTE, queda usted ordenado que, hasta nueva orden, usted, el demandado y todos usu abogados,
agentes, mandatarios y demas personas que obren en su ayuda, desista de impedir a la demandante Inocencia
 R. Deluao que continue administrando personalmente la pesqueria objeto de esta causa y que la misma continue
recibiendo los productos de la venta de los pescados provenientes de dicha pesqueria, y que, asimismo, se
prohibe a dicho demandado Nicanor Casteel a desahuciar mediante fuerza al encargado de los demandantes
llamado Jesus Donesa de la pesqueria objeto de la demanda de autos.
On May 10, 1951 Casteel filed a motion to dissolve the injunction, alleging among others, that he was the owner, lawful
applicant and occupant of the fishpond in question. This motion, opposed by the plaintiffs on June 15, 1951, was denied
by the lower court in its order of June 26, 1961.
The defendants on May 14, 1951 filed their answer with counterclaim, amended on January 8, 1952, denying the material
averments of the plaintiffs' complaint. A reply to the defendants' amended answer was filed by the plaintiffs on January
31, 1952.
The defendant Juan Depra moved on May 22, 1951 to dismiss the complaint as to him. On June 4, 1951 the plaintiffs
opposed his motion.
The defendants filed on October 3, 1951 a joint motion to dismiss on the ground that the plaintiffs' complaint failed to
state a claim upon which relief may be granted. The motion, opposed by the plaintiffs on October 12, 1951, was denied
for lack of merit by the lower court in its order of October 22, 1951. The defendants' motion for reconsideration filed on
October 31, 1951 suffered the same fate when it was likewise denied by the lower court in its order of November 12,
1951.
After the issues were joined, the case was set for trial. Then came a series of postponements. The lower court (Branch I,
presided by Judge Enrique A. Fernandez) finally issued on March 21, 1956 an order in open court, reading as follows: .
Upon petition of plaintiffs, without any objection on the part of defendants, the hearing of this case is hereby
transferred to May 2 and 3, 1956 at 8:30 o'clock in the morning.
This case was filed on April 3, 1951 and under any circumstance this Court will not entertain any other transfer of
hearing of this case and if the parties will not be ready on that day set for hearing, the court will take the
necessary steps for the final determination of this case. (emphasis supplied)
On April 25, 1956 the defendants' counsel received a notice of hearing dated April 21, 1956, issued by the office of the
Clerk of Court (thru the special deputy Clerk of Court) of the Court of First Instance of Davao, setting the hearing of the
case for May 2 and 3, 1956 before Judge Amador Gomez of Branch II. The defendants, thru counsel, on April 26, 1956
filed a motion for postponement. Acting on this motion, the lower court (Branch II, presided by Judge Gomez) issued an
order dated April 27, 1956, quoted as follows:
This is a motion for postponement of the hearing of this case set for May 2 and 3, 1956. The motion is filed by
the counsel for the defendants and has the conformity of the counsel for the plaintiffs.
An examination of the records of this case shows that this case was initiated as early as April 1951 and that the
same has been under advisement of the Honorable Enrique A. Fernandez, Presiding Judge of Branch No. I, since
September 24, 1953, and that various incidents have already been considered and resolved by Judge Fernandez
on various occasions. The last order issued by Judge Fernandez on this case was issued on March 21, 1956,
wherein he definitely states that the Court will not entertain any further postponement of the hearing of this case.
CONSIDERING ALL THE FOREGOING, the Court believes that the consideration and termination of any incident
referring to this case should be referred back to Branch I, so that the same may be disposed of therein.
(emphasis supplied)
A copy of the abovequoted order was served on the defendants' counsel on May 4, 1956.
On the scheduled date of hearing, that is, on May 2, 1956, the lower court (Branch I, with Judge Fernandez presiding),
when informed about the defendants' motion for postponement filed on April 26, 1956, issued an order reiterating its
previous order handed down in open court on March 21, 1956 and directing the plaintiffs to introduce their evidence ex
parte, there being no appearance on the part of the defendants or their counsel. On the basis of the plaintiffs' evidence, a
decision was rendered on May 4, 1956 the dispositive portion of which reads as follows:
EN SU VIRTUD, el Juzgado dicta de decision a favor de los demandantes y en contra del demandado Nicanor
Casteel:
(a) Declara permanente el interdicto prohibitorio expedido contra el demandado;
(b) Ordena al demandado entregue la demandante la posesion y administracion de la mitad () del "fishpond"
en cuestion con todas las mejoras existentes dentro de la misma;
 (c) Condena al demandado a pagar a la demandante la suma de P200.00 mensualmente en concepto de danos a
contar de la fecha de la expiracion de los 30 dias de la promulgacion de esta decision hasta que entregue la
posesion y administracion de la porcion del "fishpond" en conflicto;
(d) Condena al demandado a pagar a la demandante la suma de P2,000.00 valor de los pescado beneficiados,
mas los intereses legales de la fecha de la incoacion de la demanda de autos hasta el completo pago de la
obligacion principal;
(e) Condena al demandado a pagar a la demandante la suma de P2,000.00, por gastos incurridos por aquella
durante la pendencia de esta causa;
(f) Condena al demandado a pagar a la demandante, en concepto de honorarios, la suma de P2,000.00;
(g) Ordena el sobreseimiento de esta demanda, por insuficiencia de pruebas, en tanto en cuanto se refiere al
demandado Juan Depra;
(h) Ordena el sobreseimiento de la reconvencion de los demandados por falta de pruebas;
(i) Con las costas contra del demandado, Casteel.
The defendant Casteel filed a petition for relief from the foregoing decision, alleging, inter alia, lack of knowledge of the
order of the court a quo setting the case for trial. The petition, however, was denied by the lower court in its order of
May 21, 1956, the pertinent portion of which reads as follows:
The duty of Atty. Ruiz, was not to inquire from the Clerk of Court whether the trial of this case has been
transferred or not, but to inquire from the presiding Judge, particularly because his motion asking the transfer of
this case was not set for hearing and was not also acted upon.
Atty. Ruiz knows the nature of the order of this Court dated March 21, 1956, which reads as follows:
Upon petition of the plaintiff without any objection on the part of the defendants, the hearing of this case
is hereby transferred to May 2 and 3, 1956, at 8:30 o'clock in the morning.
This case was filed on April 3, 1951, and under any circumstance this Court will not entertain any other
transfer of the hearing of this case, and if the parties will not be ready on the day set for hearing, the
Court will take necessary steps for the final disposition of this case.
In view of the order above-quoted, the Court will not accede to any transfer of this case and the duty of Atty.
Ruiz is no other than to be present in the Sala of this Court and to call the attention of the same to the existence
of his motion for transfer.
Petition for relief from judgment filed by Atty. Ruiz in behalf of the defendant, not well taken, the same is hereby
denied.
Dissatisfied with the said ruling, Casteel appealed to the Court of Appeals which certified the case to us for final
determination on the ground that it involves only questions of law.
Casteel raises the following issues:
(1) Whether the lower court committed gross abuse of discretion when it ordered reception of the appellees'
evidence in the absence of the appellant at the trial on May 2, 1956, thus depriving the appellant of his day in
court and of his property without due process of law;
(2) Whether the lower court committed grave abuse of discretion when it denied the verified petition for relief
from judgment filed by the appellant on May 11, 1956 in accordance with Rule 38, Rules of Court; and
(3) Whether the lower court erred in ordering the issuance ex parte of a writ of preliminary injunction against
defendant-appellant, and in not dismissing appellees' complaint.
1. The first and second issues must be resolved against the appellant.
The record indisputably shows that in the order given in open court on March 21, 1956, the lower court set the case for
hearing on May 2 and 3, 1956 at 8:30 o'clock in the morning and empathically stated that, since the case had been
pending since April 3, 1951, it would not entertain any further motion for transfer of the scheduled hearing.
An order given in open court is presumed received by the parties on the very date and time of promulgation, 1 and
amounts to a legal notification for all legal purposes.2 The order of March 21, 1956, given in open court, was a valid
notice to the parties, and the notice of hearing dated April 21, 1956 or one month thereafter, was a superfluity.
Moreover, as between the order of March 21, 1956, duly promulgated by the lower court, thru Judge Fernandez, and the
notice of hearing signed by a "special deputy clerk of court" setting the hearing in another branch of the same court, the
former's order was the one legally binding. This is because the incidents of postponements and adjournments are
controlled by the court and not by the clerk of court, pursuant to section 4, Rule 31 (now sec. 3, Rule 22) of the Rules of
Court.
Much less had the clerk of court the authority to interfere with the order of the court or to transfer the cage from one sala
to another without authority or order from the court where the case originated and was being tried. He had neither the
duty nor prerogative to re-assign the trial of the case to a different branch of the same court. His duty as such clerk of
court, in so far as the incident in question was concerned, was simply to prepare the trial calendar. And this duty
devolved upon the clerk of court and not upon the "special deputy clerk of court" who purportedly signed the notice of
hearing.
It is of no moment that the motion for postponement had the conformity of the appellees' counsel. The postponement of
hearings does not depend upon agreement of the parties, but upon the court's discretion. 3
The record further discloses that Casteel was represented by a total of 12 lawyers, none of whom had ever withdrawn as
counsel. Notice to Atty. Ruiz of the order dated March 21, 1956 intransferably setting the case for hearing for May 2 and
3, 1956, was sufficient notice to all the appellant's eleven other counsel of record. This is a well-settled rule in our
jurisdiction.4
It was the duty of Atty. Ruiz, or of the other lawyers of record, not excluding the appellant himself, to appear before
Judge Fernandez on the scheduled dates of hearing Parties and their lawyers have no right to presume that their motions
for postponement will be granted.5 For indeed, the appellant and his 12 lawyers cannot pretend ignorance of the
recorded fact that since September 24, 1953 until the trial held on May 2, 1956, the case was under the advisement of
Judge Fernandez who presided over Branch I. There was, therefore, no necessity to "re-assign" the same to Branch II
because Judge Fernandez had exclusive control of said case, unless he was legally inhibited to try the case and he was
not.
There is truth in the appellant's contention that it is the duty of the clerk of court not of the Court to prepare the
trial calendar. But the assignment or reassignment of cases already pending in one sala to another sala, and the setting
of the date of trial after the trial calendar has been prepared, fall within the exclusive control of the presiding judge.
The appellant does not deny the appellees' claim that on May 2 and 3, 1956, the office of the clerk of court of the Court
of First Instance of Davao was located directly below Branch I. If the appellant and his counsel had exercised due
diligence, there was no impediment to their going upstairs to the second storey of the Court of First Instance building in
Davao on May 2, 1956 and checking if the case was scheduled for hearing in the said sala. The appellant after all admits
that on May 2, 1956 his counsel went to the office of the clerk of court.
The appellant's statement that parties as a matter of right are entitled to notice of trial, is correct. But he was properly
accorded this right. He was notified in open court on March 21, 1956 that the case was definitely and intransferably set
for hearing on May 2 and 3, 1956 before Branch I. He cannot argue that, pursuant to the doctrine in Siochi vs.
Tirona,6 his counsel was entitled to a timely notice of the denial of his motion for postponement. In the cited case the
motion for postponement was the first one filed by the defendant; in the case at bar, there had already been a series of
postponements. Unlike the case at bar, the Siochi case was not intransferably set for hearing. Finally, whereas the cited
case did not spend for a long time, the case at bar was only finally and intransferably set for hearing on March 21, 1956
after almost five years had elapsed from the filing of the complaint on April 3, 1951.
The pretension of the appellant and his 12 counsel of record that they lacked ample time to prepare for trial is
unacceptable because between March 21, 1956 and May 2, 1956, they had one month and ten days to do so. In effect,
the appellant had waived his right to appear at the trial and therefore he cannot be heard to complain that he has been
deprived of his property without due process of law.7 Verily, the constitutional requirements of due process have been
fulfilled in this case: the lower court is a competent court; it lawfully acquired jurisdiction over the person of the
defendant (appellant) and the subject matter of the action; the defendant (appellant) was given an opportunity to be
heard; and judgment was rendered upon lawful hearing.8
2. Finally, the appellant contends that the lower court incurred an error in ordering the issuance ex parte of a writ of
preliminary injunction against him, and in not dismissing the appellee's complaint. We find this contention meritorious.
Apparently, the court a quo relied on exhibit A the so-called "contract of service" and the appellees' contention that
it created a contract of co-ownership and partnership between Inocencia Deluao and the appellant over the fishpond in
question.
Too well-settled to require any citation of authority is the rule that everyone is conclusively presumed to know the law. It
must be assumed, conformably to such rule, that the parties entered into the so-called "contract of service" cognizant of
the mandatory and prohibitory laws governing the filing of applications for fishpond permits. And since they were aware
of the said laws, it must likewise be assumed in fairness to the parties that they did not intend to violate them. This
view must perforce negate the appellees' allegation that exhibit A created a contract of co-ownership between the parties
over the disputed fishpond. Were we to admit the establishment of a co-ownership violative of the prohibitory laws which
will hereafter be discussed, we shall be compelled to declare altogether the nullity of the contract. This would certainly
not serve the cause of equity and justice, considering that rights and obligations have already arisen between the parties.
We shall therefore construe the contract as one of partnership, divided into two parts namely, a contract of partnership
to exploit the fishpond pending its award to either Felipe Deluao or Nicanor Casteel, and a contract of partnership to
divide the fishpond between them after such award. The first is valid, the second illegal.
It is well to note that when the appellee Inocencia Deluao and the appellant entered into the so-called "contract of
service" on November 25, 1949, there were two pending applications over the fishpond. One was Casteel's which was
appealed by him to the Secretary of Agriculture and Natural Resources after it was disallowed by the Director of Fisheries
on October 25, 1949. The other was Felipe Deluao's application over the same area which was likewise rejected by the
Director of Fisheries on November 29, 1949, refiled by Deluao and later on withdrawn by him by letter dated March 15,
1950 to the Secretary of Agriculture and Natural Resources. Clearly, although the fishpond was then in the possession of
Casteel, neither he nor, Felipe Deluao was the holder of a fishpond permit over the area. But be that as it may, they were
not however precluded from exploiting the fishpond pending resolution of Casteel's appeal or the approval of Deluao's
application over the same area whichever event happened first. No law, rule or regulation prohibited them from doing
so. Thus, rather than let the fishpond remain idle they cultivated it.
The evidence preponderates in favor of the view that the initial intention of the parties was not to form a co-ownership
but to establish a partnership Inocencia Deluao as capitalist partner and Casteel as industrial partner the ultimate
undertaking of which was to divide into two equal parts such portion of the fishpond as might have been developed by
the amount extended by the plaintiffs-appellees, with the further provision that Casteel should reimburse the expenses
incurred by the appellees over one-half of the fishpond that would pertain to him. This can be gleaned, among others,
from the letter of Casteel to Felipe Deluao on November 15, 1949, which states, inter alia:
... [W]ith respect to your allowing me to use your money, same will redound to your benefit because you are the
ones interested in half of the work we have done so far, besides I did not insist on our being partners in my
fishpond permit, but it was you "Tatay" Eping the one who wanted that we be partners and it so happened that
we became partners because I am poor, but in the midst of my poverty it never occurred to me to be unfair to
you. Therefore so that each of us may be secured, let us have a document prepared to the effect that we are
partners in the fishpond that we caused to be made here in Balasinon, but it does not mean that you will treat
me as one of your "Bantay" (caretaker) on wage basis but not earning wages at all, while the truth is that we are
partners. In the event that you are not amenable to my proposition and consider me as "Bantay" (caretaker)
instead, do not blame me if I withdraw all my cases and be left without even a little and you likewise.
(emphasis supplied)9
Pursuant to the foregoing suggestion of the appellant that a document be drawn evidencing their partnership, the
appellee Inocencia Deluao and the appellant executed exhibit A which, although denominated a "contract of service," was
actually the memorandum of their partnership agreement. That it was not a contract of the services of the appellant, was
admitted by the appellees themselves in their letter10 to Casteel dated December 19, 1949 wherein they stated that they
did not employ him in his (Casteel's) claim but because he used their money in developing and improving the fishpond,
his right must be divided between them. Of course, although exhibit A did not specify any wage or share appertaining to
the appellant as industrial partner, he was so entitled this being one of the conditions he specified for the execution of
the document of partnership.11
Further exchanges of letters between the parties reveal the continuing intent to divide the fishpond. In a letter, 12dated
March 24, 1950, the appellant suggested that they divide the fishpond and the remaining capital, and offered to pay the
Deluaos a yearly installment of P3,000 presumably as reimbursement for the expenses of the appellees for the
development and improvement of the one-half that would pertain to the appellant. Two days later, the appellee Felipe
Deluao replied,13expressing his concurrence in the appellant's suggestion and advising the latter to ask for a
reconsideration of the order of the Director of Fisheries disapproving his (appellant's) application, so that if a favorable
decision was secured, then they would divide the area.
Apparently relying on the partnership agreement, the appellee Felipe Deluao saw no further need to maintain his petition
for the reinvestigation of Casteel's application. Thus by letter 14 dated March 15, 1950 addressed to the Secretary of
Agriculture and Natural Resources, he withdrew his petition on the alleged ground that he was no longer interested in the
area, but stated however that he wanted his interest to be protected and his capital to be reimbursed by the highest
bidder.
The arrangement under the so-called "contract of service" continued until the decisions both dated September 15, 1950
were issued by the Secretary of Agriculture and Natural Resources in DANR Cases 353 and 353-B. This development, by
itself, brought about the dissolution of the partnership. Moreover, subsequent events likewise reveal the intent of both
parties to terminate the partnership because each refused to share the fishpond with the other.
Art. 1830(3) of the Civil Code enumerates, as one of the causes for the dissolution of a partnership, "... any event which
makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership."
The approval of the appellant's fishpond application by the decisions in DANR Cases 353 and 353-B brought to the fore
several provisions of law which made the continuation of the partnership unlawful and therefore caused its ipso
facto dissolution.
Act 4003, known as the Fisheries Act, prohibits the holder of a fishpond permit (the permittee) from transferring or
subletting the fishpond granted to him, without the previous consent or approval of the Secretary of Agriculture and
Natural Resources.15 To the same effect is Condition No. 3 of the fishpond permit which states that "The permittee shall
not transfer or sublet all or any area herein granted or any rights acquired therein without the previous consent and
approval of this Office." Parenthetically, we must observe that in DANR Case 353-B, the permit granted to one of the
parties therein, Leoncio Aradillos, was cancelled not solely for the reason that his permit covered a portion of the area
included in the appellant's prior fishpond application, but also because, upon investigation, it was ascertained thru the
admission of Aradillos himself that due to lack of capital, he allowed one Lino Estepa to develop with the latter's capital
the area covered by his fishpond permit F-289-C with the understanding that he (Aradillos) would be given a share in the
produce thereof.16
Sec. 40 of Commonwealth Act 141, otherwise known as the Public Land Act, likewise provides that
The lessee shall not assign, encumber, or sublet his rights without the consent of the Secretary of Agriculture and
Commerce, and the violation of this condition shall avoid the contract; Provided, That assignment, encumbrance,
or subletting for purposes of speculation shall not be permitted in any case: Provided, further, That nothing
contained in this section shall be understood or construed to permit the assignment, encumbrance, or subletting
of lands leased under this Act, or under any previous Act, to persons, corporations, or associations which under
this Act, are not authorized to lease public lands.
Finally, section 37 of Administrative Order No. 14 of the Secretary of Agriculture and Natural Resources issued in August
1937, prohibits a transfer or sublease unless first approved by the Director of Lands and under such terms and conditions
as he may prescribe. Thus, it states:
When a transfer or sub-lease of area and improvement may be allowed. If the permittee or lessee had, unless
otherwise specifically provided, held the permit or lease and actually operated and made improvements on the
area for at least one year, he/she may request permission to sub-lease or transfer the area and improvements
under certain conditions.
(a) Transfer subject to approval. A sub-lease or transfer shall only be valid when first approved by the Director
under such terms and conditions as may be prescribed, otherwise it shall be null and void. A transfer not
previously approved or reported shall be considered sufficient cause for the cancellation of the permit or lease
and forfeiture of the bond and for granting the area to a qualified applicant or bidder, as provided in subsection
(r) of Sec. 33 of this Order.
Since the partnership had for its object the division into two equal parts of the fishpond between the appellees and the
appellant after it shall have been awarded to the latter, and therefore it envisaged the unauthorized transfer of one-half
thereof to parties other than the applicant Casteel, it was dissolved by the approval of his application and the award to
him of the fishpond. The approval was an event which made it unlawful for the business of the partnership to be carried
on or for the members to carry it on in partnership.
The appellees, however, argue that in approving the appellant's application, the Secretary of Agriculture and Natural
Resources likewise recognized and/or confirmed their property right to one-half of the fishpond by virtue of the contract
of service, exhibit A. But the untenability of this argument would readily surface if one were to consider that the Secretary
of Agriculture and Natural Resources did not do so for the simple reason that he does not possess the authority to violate
the aforementioned prohibitory laws nor to exempt anyone from their operation.
However, assuming in gratia argumenti that the approval of Casteel's application, coupled with the foregoing prohibitory
laws, was not enough to cause the dissolution ipso facto of their partnership, succeeding events reveal the intent of both
parties to terminate the partnership by refusing to share the fishpond with the other.
On December 27, 1950 Casteel wrote17 the appellee Inocencia Deluao, expressing his desire to divide the fishpond so that
he could administer his own share, such division to be subject to the approval of the Secretary of Agriculture and Natural
Resources. By letter dated December 29, 1950, 18 the appellee Felipe Deluao demurred to Casteel's proposition because
there were allegedly no appropriate grounds to support the same and, moreover, the conflict over the fishpond had not
been finally resolved.
The appellant wrote on January 4, 1951 a last letter 19 to the appellee Felipe Deluao wherein the former expressed his
determination to administer the fishpond himself because the decision of the Government was in his favor and the only
reason why administration had been granted to the Deluaos was because he was indebted to them. In the same letter,
the appellant forbade Felipe Deluao from sending the couple's encargado, Jesus Donesa, to the fishpond. In reply
thereto, Felipe Deluao wrote a letter20 dated January 5, 1951 in which he reiterated his refusal to grant the administration
of the fishpond to the appellant, stating as a ground his belief "that only the competent agencies of the government are
in a better position to render any equitable arrangement relative to the present case; hence, any action we may privately
take may not meet the procedure of legal order."
Inasmuch as the erstwhile partners articulated in the aforecited letters their respective resolutions not to share the
fishpond with each other in direct violation of the undertaking for which they have established their partnership
each must be deemed to have expressly withdrawn from the partnership, thereby causing its dissolution pursuant to art.
1830(2) of the Civil Code which provides, inter alia, that dissolution is caused "by the express will of any partner at any
time."
In this jurisdiction, the Secretary of Agriculture and Natural Resources possesses executive and administrative powers
with regard to the survey, classification, lease, sale or any other form of concession or disposition and management of
the lands of the public domain, and, more specifically, with regard to the grant or withholding of licenses, permits, leases
and contracts over portions of the public domain to be utilized as fishponds. 21, Thus, we held in Pajo, et al. vs. Ago, et al.
(L-15414, June 30, 1960), and reiterated in Ganitano vs. Secretary of Agriculture and Natural Resources, et al.
(L-21167, March 31, 1966), that
... [T]he powers granted to the Secretary of Agriculture and Commerce (Natural Resources) by law regarding the
disposition of public lands such as granting of licenses, permits, leases, and contracts, or approving, rejecting,
reinstating, or cancelling applications, or deciding conflicting applications, are all executive and administrative in
nature. It is a well-recognized principle that purely administrative and discretionary functions may not be
interfered with by the courts (Coloso v. Board of Accountancy, G.R. No. L-5750, April 20, 1953). In general,
courts have no supervising power over the proceedings and action of the administrative departments of the
government. This is generally true with respect to acts involving the exercise of judgment or discretion, and
findings of fact. (54 Am. Jur. 558-559) Findings of fact by an administrative board or official, following a hearing,
are binding upon the courts and will not be disturbed except where the board or official has gone beyond his
statutory authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to his duty or
with grave abuse of discretion... (emphasis supplied)
In the case at bar, the Secretary of Agriculture and Natural Resources gave due course to the appellant's fishpond
application 1717 and awarded to him the possession of the area in question. In view of the finality of the Secretary's
decision in DANR Cases 353 and 353-B, and considering the absence of any proof that the said official exceeded his
statutory authority, exercised unconstitutional powers, or acted with arbitrariness and in disregard of his duty, or with
grave abuse of discretion, we can do no less than respect and maintain unfettered his official acts in the premises. It is a
salutary rule that the judicial department should not dictate to the executive department what to do with regard to the
administration and disposition of the public domain which the law has entrusted to its care and administration. Indeed,
courts cannot superimpose their discretion on that of the land department and compel the latter to do an act which
involves the exercise of judgment and discretion. 22
Therefore, with the view that we take of this case, and even assuming that the injunction was properly issued because
present all the requisite grounds for its issuance, its continuation, and, worse, its declaration as permanent, was improper
in the face of the knowledge later acquired by the lower court that it was the appellant's application over the fishpond
which was given due course. After the Secretary of Agriculture and Natural Resources approved the appellant's
application, he became to all intents and purposes the legal permittee of the area with the corresponding right to
possess, occupy and enjoy the same. Consequently, the lower court erred in issuing the preliminary mandatory injunction.
We cannot overemphasize that an injunction should not be granted to take property out of the possession and control of
one party and place it in the hands of another whose title has not been clearly established by law. 23
However, pursuant to our holding that there was a partnership between the parties for the exploitation of the fishpond
before it was awarded to Casteel, this case should be remanded to the lower court for the reception of evidence relative
to an accounting from November 25, 1949 to September 15, 1950, in order for the court to determine (a) the profits
realized by the partnership, (b) the share (in the profits) of Casteel as industrial partner, (e) the share (in the profits) of
Deluao as capitalist partner, and (d) whether the amounts totalling about P27,000 advanced by Deluao to Casteel for the
development and improvement of the fishpond have already been liquidated. Besides, since the appellee Inocencia
Deluao continued in possession and enjoyment of the fishpond even after it was awarded to Casteel, she did so no longer
in the concept of a capitalist partner but merely as creditor of the appellant, and therefore, she must likewise submit in
the lower court an accounting of the proceeds of the sales of all the fishes harvested from the fishpond from September
16, 1950 until Casteel shall have been finally given the possession and enjoyment of the same. In the event that the
appellee Deluao has received more than her lawful credit of P27,000 (or whatever amounts have been advanced to
Casteel), plus 6% interest thereon per annum, then she should reimburse the excess to the appellant.
ACCORDINGLY, the judgment of the lower court is set aside. Another judgment is hereby rendered: (1) dissolving the
injunction issued against the appellant, (2) placing the latter back in possession of the fishpond in litigation, and (3)
remanding this case to the court of origin for the reception of evidence relative to the accounting that the parties must
perforce render in the premises, at the termination of which the court shall render judgment accordingly. The appellant's
counterclaim is dismissed. No pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Fernando and Capistrano, JJ., concur.
 [G.R. No. 143340. August 15, 2001]
LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners, vs. LAMBERTO T. CHUA, respondent.
DECISION
GONZAGA-REYES, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the Decision [1] of the Court of
Appeals dated January 31, 2000 in the case entitled Lamberto T. Chua vs.
Lilibeth Sunga Chan and Cecilia Sunga and of the Resolution dated May 23, 2000 denying the motion for
reconsideration of herein petitioners Lilibeth Sunga Chan and Cecilia Sunga (hereafter collectively referred to as
petitioners).
The pertinent facts of this case are as follows:
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth Sunga Chan (hereafter
petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia), daughter and wife, respectively of the deceased
Jacinto L. Sunga (hereafter Jacinto), for Winding Up of Partnership Affairs, Accounting, Appraisal and Recovery of Shares
and Damages with Writ of Preliminary Attachment with the Regional Trial Court, Branch 11, Sindangan, Zamboanga del
Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the distribution of Shellane
Liquefied Petroleum Gas (LPG) in Manila. For business convenience, respondent and Jacinto allegedly agreed to register
the business name of their partnership, SHELLITE GAS APPLIANCE CENTER (hereafter Shellite), under the name of
Jacinto as a sole proprietorship. Respondent allegedly delivered his initial capital contribution of P100,000.00 to Jacinto
while the latter in turn produced P100,000.00 as his counterpart contribution, with the intention that the profits would be
equally divided between them. The partnership allegedly had Jacinto as manager, assisted by Josephine Sy (hereafter
Josephine), a sister of the wife of respondent, Erlinda Sy. As compensation, Jacinto would receive a managers fee or
remuneration of 10% of the gross profit and Josephine would receive 10% of the net profits, in addition to her wages
and other remuneration from the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation went quite well and
was profitable. Respondent claimed that he could attest to the success of their business because of the volume of orders
and deliveries of filled Shellane cylinder tanks supplied by Pilipinas Shell Petroleum Corporation. While Jacinto furnished
respondent with the merchandise inventories, balance sheets and net worth of Shellite from 1977 to 1989, respondent
however suspected that the amount indicated in these documents were understated and undervalued by Jacinto and
Josephine for their own selfish reasons and for tax avoidance.
Upon Jacintos death in the later part of 1989, his surviving wife, petitioner Cecilia and particularly his daughter,
petitioner Lilibeth, took over the operations, control, custody, disposition and management of Shellite without
respondents consent.
Despite respondents repeated demands upon petitioners for accounting, inventory, appraisal, winding up and
restitution of his net shares in the partnership, petitioners failed to comply. Petitioner Lilibeth allegedly continued the
operations of Shellite, converting to her own use and advantage its properties.
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out of alibis and reasons to evade
respondents demands, she disbursed out of the partnership funds the amount of P200,000.00 and partially paid the same
to respondent. Petitioner Lilibeth allegedly informed respondent that the P200,000.00 represented partial payment of the
latters share in the partnership, with a promise that the former would make the complete inventory and winding up of the
properties of the business establishment. Despite such commitment, petitioners allegedly failed to comply with their duty
to account, and continued to benefit from the assets and income of Shellite to the damage and prejudice of respondent.
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities and Exchange
Commission (SEC) in Manila, not the Regional Trial Court in Zambaonga del Norte had jurisdiction over the
action. Respondent opposed the motion to dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in form and substance denied the motion to
dismiss.
On January 30, 1993, petitioners filed their Answer with Compulsory Counterclaims, contending that they are not
liable for partnership shares, unreceived income/profits, interests, damages and attorneys fees, that respondent does not
have a cause of action against them, and that the trial court has no jurisdiction over the nature of the action, the SEC
being the agency that has original and exclusive jurisdiction over the case. As counterclaim, petitioner sought attorneys
fees and expenses of litigation.
 On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the claim for winding up
of partnership affairs, accounting and recovery of shares in partnership affairs, accounting and recovery of shares
in partnership assets /properties should be dismissed and prosecuted against the estate of deceased Jacinto in a probate
or intestate proceeding.
On August 16, 1993, the trial court denied the second motion to dismiss for lack of merit.
On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and Mandamus with the Court of
Appeals docketed as CA-G.R. SP No. 32499 questioning the denial of the motion to dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of merit.
On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner, as petitioners failed to
show that a reversible error was committed by the appellate court."[2]
On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was remanded to the trial
court on April 26, 1995.
On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of the case on
January 17, 1996. Respondent presented his evidence while petitioners were considered to have waived their right to
present evidence for their failure to attend the scheduled date for reception of evidence despite notice.
On October 7, 1997, the trial court rendered its Decision ruling for respondent. The dispositive portion of the
Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as follows:
(1) DIRECTING them to render an accounting in acceptable form under accounting procedures and standards of the
properties, assets, income and profits of the Shellite Gas Appliance Center since the time of death of Jacinto L. Sunga,
from whom they continued the business operations including all businesses derived from the Shellite Gas Appliance
Center; submit an inventory, and appraisal of all these properties, assets, income, profits, etc. to the Court and to plaintiff
for approval or disapproval;
(2) ORDERING them to return and restitute to the partnership any and all properties, assets, income and profits they
misapplied and converted to their own use and advantage that legally pertain to the plaintiff and account for the
properties mentioned in pars. A and B on pages 4-5 of this petition as basis;
(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the plaintiff in the partnership of the listed
properties, assets and good will (sic) in schedules A, B and C, on pages 4-5 of the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the partnership from 1988 to may
30, 1992, when the plaintiff learned of the closure of the store the sum of P35,000.00 per month, with legal rate of
interest until fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities pursuant to law, after
delivering to the plaintiff all the interest, shares, participation and equity in the partnership, or the value thereof in money
or moneys worth, if the properties are not physically divisible;
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and hold them liable to the
plaintiff the sum of P50,000.00 as moral and exemplary damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorneys (sic) and P25,00.00 as litigation
expenses.
NO special pronouncements as to COSTS.
SO ORDERED.[3]
On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case to the Court of
Appeals.
On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the Decision reads:
WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all respects.[4]
On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner.
 Hence, this petition wherein petitioner relies upon the following grounds:
1. The Court of Appeals erred in making a legal conclusion that there existed a partnership between respondent
Lamberto T. Chua and the late Jacinto L. Sunga upon the latters invitation and offer and that upon his death
the partnership assets and business were taken over by petitioners.
2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did not apply in the
instant case.
3. The Court of Appeals erred in making the legal conclusion that there was competent and credible evidence to
warrant the finding of a partnership, and assuming arguendo that indeed there was a partnership, the
finding of highly exaggerated amounts or values in the partnership assets and profits. [5]
Petitioners question the correctness of the finding of the trial court and the Court of Appeals that a partnership
existed between respondent and Jacinto from 1977 until Jacintos death. In the absence of any written document to show
such partnership between respondent and Jacinto, petitioners argue that these courts were proscribed from hearing the
testimonies of respondent and his witness, Josephine, to prove the alleged partnership three years after Jacintos
death. To support this argument, petitioners invoke the Dead Mans Statute or Survivorship Rule under Section 23, Rule
130 of the Rules of Court that provides:
SEC. 23. Disqualification by reason of death or insanity of adverse party.-- Parties or assignors of parties to a case, or
persons in whose behalf a case is prosecuted, against an executor or administrator or other representative of a deceased
person, or against a person of unsound mind, upon a claim or demand against the estate of such deceased person, or
against such person of unsound mind, cannot testify as to any matter of fact occurring before the death of such deceased
person or before such person became of unsound mind.
Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego, Josephine, should not
have been admitted to prove certain claims against a deceased person (Jacinto), now represented by petitioners.
We are not persuaded.
A partnership may be constituted in any form, except where immovable property or real rights are contributed
thereto, in which case a public instrument shall be necessary. [6] Hence, based on the intention of the parties, as gathered
from the facts and ascertained from their language and conduct, a verbal contract of partnership may arise. [7] The
essential points that must be proven to show that a partnership was agreed upon are (1) mutual contribution to a
common stock, and (2) a joint interest in the profits. [8] Understandably so, in view of the absence of a written contract of
partnership between respondent and Jacinto, respondent resorted to the introduction of documentary and testimonial
evidence to prove said partnership. The crucial issue to settle then is whether or not the Dead Mans Statute applies to
this case so as to render inadmissible respondents testimony and that of his witness, Josephine.
The Dead Mans Statute provides that if one party to the alleged transaction is precluded from testifying by death,
insanity, or other mental disabilities, the surviving party is not entitled to the undue advantage of giving his own
uncontradicted and unexplained account of the transaction. [9] But before this rule can be successfully invoked to bar the
introduction of testimonial evidence, it is necessary that:
1. The witness is a party or assignor of a party to a case or persons in whose behalf a case is prosecuted.
2. The action is against an executor or administrator or other representative of a deceased person or a person
of unsound mind;
3. The subject-matter of the action is a claim or demand against the estate of such deceased person or against
person of unsound mind;
4. His testimony refers to any matter of fact which occurred before the death of such deceased person or
before such person became of unsound mind.[10]
Two reasons forestall the application of the Dead Mans Statute to this case.
First, petitioners filed a compulsory counterclaim[11] against respondent in their answer before the trial court, and
with the filing of their counterclaim, petitioners themselves effectively removed this case from the ambit of the Dead
Mans Statute.[12] Well entrenched is the rule that when it is the executor or administrator or representatives of the estate
that sets up the counterclaim, the plaintiff, herein respondent, may testify to occurrences before the death of the
deceased to defeat the counterclaim.[13] Moreover, as defendant in the counterclaim, respondent is not disqualified from
testifying as to matters of fact occurring before the death of the deceased, said action not having been brought against
but by the estate or representatives of the deceased.[14]
 Second, the testimony of Josephine is not covered by the Dead Mans Statute for the simple reason that she is not a
party or assignor of a party to a case or persons in whose behalf a case is prosecuted.Records show that respondent
offered the testimony of Josephine to establish the existence of the partnership between respondent and
Jacinto. Petitioners insistence that Josephine is the alter ego of respondent does not make her an assignor because the
term assignor of a party means assignor of a cause of action which has arisen, and not the assignor of a right assigned
before any cause of action has arisen.[15] Plainly then, Josephine is merely a witness of respondent, the latter being the
party plaintiff.
We are not convinced by petitioners allegation that Josephines testimony lacks probative value because she was
allegedly coerced by respondent, her brother-in-law, to testify in his favor. Josephine merely declared in court that she
was requested by respondent to testify and that if she were not requested to do so she would not have testified. We fail
to see how we can conclude from this candid admission that Josephines testimony is involuntary when she did not in any
way categorically say that she was forced to be a witness of respondent. Also, the fact that Josephine is the sister of the
wife of respondent does not diminish the value of her testimony since relationship per se, without more, does not affect
the credibility of witnesses.[16]
Petitioners reliance alone on the Dead Mans Statute to defeat respondents claim cannot prevail over the factual
findings of the trial court and the Court of Appeals that a partnership was established between respondent and
Jacinto. Based not only on the testimonial evidence, but the documentary evidence as well, the trial court and the Court
of Appeals considered the evidence for respondent as sufficient to prove the formation of a partnership, albeit an informal
one.
Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial precedents, a
factual matter like the finding of the existence of a partnership between respondent and Jacinto cannot be inquired into
by this Court on review.[17] This Court can no longer be tasked to go over the proofs presented by the parties and
analyze, assess and weigh them to ascertain if the trial court and the appellate court were correct in according superior
credit to this or that piece of evidence of one party or the other. [18] It must be also pointed out that petitioners failed to
attend the presentation of evidence of respondent. Petitioners cannot now turn to this Court to question the admissibility
and authenticity of the documentary evidence of respondent when petitioners failed to object to the admissibility of the
evidence at the time that such evidence was offered.[19]
With regard to petitioners insistence that laches and/or prescription should have extinguished respondents claim, we
agree with the trial court and the Court of Appeals that the action for accounting filed by respondent three (3) years after
Jacintos death was well within the prescribed period. The Civil Code provides that an action to enforce an oral contract
prescribes in six (6) years[20] while the right to demand an accounting for a partners interest as against the person
continuing the business accrues at the date of dissolution, in the absence of any contrary agreement. [21] Considering that
the death of a partner results in the dissolution of the partnership [22], in this case, it was after Jacintos death that
respondent as the surviving partner had the right to an account of his interest as against petitioners. It bears stressing
that while Jacintos death dissolved the partnership, the dissolution did not immediately terminate the partnership. The
Civil Code[23] expressly provides that upon dissolution, the partnership continues and its legal personality is retained until
the complete winding up of its business, culminating in its termination. [24]
In a desperate bid to cast doubt on the validity of the oral partnership between respondent and Jacinto, petitioners
maintain that said partnership that had an initial capital of P200,000.00 should have been registered with the Securities
and Exchange Commission (SEC) since registration is mandated by the Civil Code. True, Article 1772 of the Civil Code
requires that partnerships with a capital of P3,000.00 or more must register with the SEC, however, this registration
requirement is not mandatory. Article 1768 of the Civil Code[25] explicitly provides that the partnership retains its juridical
personality even if it fails to register. The failure to register the contract of partnership does not invalidate the same as
among the partners, so long as the contract has the essential requisites, because the main purpose of registration is to
give notice to third parties, and it can be assumed that the members themselves knew of the contents of their
contract.[26] In the case at bar, non-compliance with this directory provision of the law will not invalidate the partnership
considering that the totality of the evidence proves that respondent and Jacinto indeed forged the partnership in
question.
WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is AFFIRMED.
SO ORDERED.
G.R. No. L-24193 June 28, 1968
MAURICIO AGAD, plaintiff-appellant,
vs.
SEVERINO MABATO and MABATO and AGAD COMPANY, defendants-appellees.
Angeles, Maskarino and Associates for plaintiff-appellant.
Victorio S. Advincula for defendants-appellees.
CONCEPCION, C.J.:
In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of the Court of First Instance of Davao, we are
called upon to determine the applicability of Article 1773 of our Civil Code to the contract of partnership on which the
complaint herein is based.
Alleging that he and defendant Severino Mabato are pursuant to a public instrument dated August 29, 1952, copy of
which is attached to the complaint as Annex "A" partners in a fishpond business, to the capital of which Agad
contributed P1,000, with the right to receive 50% of the profits; that from 1952 up to and including 1956, Mabato who
handled the partnership funds, had yearly rendered accounts of the operations of the partnership; and that, despite
repeated demands, Mabato had failed and refused to render accounts for the years 1957 to 1963, Agad prayed in his
complaint against Mabato and Mabato & Agad Company, filed on June 9, 1964, that judgment be rendered sentencing
Mabato to pay him (Agad) the sum of P14,000, as his share in the profits of the partnership for the period from 1957 to
1963, in addition to P1,000 as attorney's fees, and ordering the dissolution of the partnership, as well as the winding up
of its affairs by a receiver to be appointed therefor.
In his answer, Mabato admitted the formal allegations of the complaint and denied the existence of said partnership,
upon the ground that the contract therefor had not been perfected, despite the execution of Annex "A", because Agad
had allegedly failed to give his P1,000 contribution to the partnership capital. Mabato prayed, therefore, that the
complaint be dismissed; that Annex "A" be declared void ab initio; and that Agad be sentenced to pay actual, moral and
exemplary damages, as well as attorney's fees.
Subsequently, Mabato filed a motion to dismiss, upon the ground that the complaint states no cause of action and that
the lower court had no jurisdiction over the subject matter of the case, because it involves principally the determination of
rights over public lands. After due hearing, the court issued the order appealed from, granting the motion to dismiss the
complaint for failure to state a cause of action. This conclusion was predicated upon the theory that the contract of
partnership, Annex "A", is null and void, pursuant to Art. 1773 of our Civil Code, because an inventory of the fishpond
referred in said instrument had not been attached thereto. A reconsideration of this order having been denied, Agad
brought the matter to us for review by record on appeal.
Articles 1771 and 1773 of said Code provide:
Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if inventory of
said property is not made, signed by the parties; and attached to the public instrument.
The issue before us hinges on whether or not "immovable property or real rights" have been contributed to the
partnership under consideration. Mabato alleged and the lower court held that the answer should be in the affirmative,
because "it is really inconceivable how a partnership engaged in the fishpond business could exist without said fishpond
property (being) contributed to the partnership." It should be noted, however, that, as stated in Annex "A" the
partnership was established "to operate a fishpond", not to "engage in a fishpond business". Moreover, none of the
partners contributed either a fishpond or a real right to any fishpond. Their contributions were limited to the sum of
P1,000 each. Indeed, Paragraph 4 of Annex "A" provides:
That the capital of the said partnership is Two Thousand (P2,000.00) Pesos Philippine Currency, of which One
Thousand (P1,000.00) pesos has been contributed by Severino Mabato and One Thousand (P1,000.00) Pesos has
been contributed by Mauricio Agad.
xxx xxx xxx
The operation of the fishpond mentioned in Annex "A" was the purpose of the partnership. Neither said fishpond nor a
real right thereto was contributed to the partnership or became part of the capital thereof, even if a fishpond or a real
right thereto could become part of its assets.
WHEREFORE, we find that said Article 1773 of the Civil Code is not in point and that, the order appealed from should be,
as it is hereby set aside and the case remanded to the lower court for further proceedings, with the costs of this instance
against defendant-appellee, Severino Mabato. It is so ordered.
OSCAR ANGELES and EMERITA ANGELES, petitioners, vs. THE HON. SECRETARY OF JUSTICE and FELINO
MERCADO, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari to annul the letter-resolution[2] dated 1 February 2000 of the Secretary of Justice in
[1]

Resolution No. 155.[3] The Secretary of Justice affirmed the resolution[4] in I.S. No. 96-939 dated 28 February 1997
rendered by the Provincial Prosecution Office of the Department of Justice in Santa Cruz, Laguna (Provincial Prosecution
Office). The Provincial Prosecution Office resolved to dismiss the complaint for estafa filed by petitioners Oscar and
Emerita Angeles (Angeles spouses) against respondent Felino Mercado (Mercado).
Antecedent Facts
On 19 November 1996, the Angeles spouses filed a criminal complaint for estafa under Article 315 of the Revised
Penal Code against Mercado before the Provincial Prosecution Office. Mercado is the brother-in-law of the Angeles
spouses, being married to Emerita Angeles sister Laura.
In their affidavits, the Angeles spouses claimed that in November 1992, Mercado convinced them to enter into a
contract of antichresis,[5] colloquially known as sanglaang-perde, covering eight parcels of land (subject land) planted with
fruit-bearing lanzones trees located in Nagcarlan, Laguna and owned by Juana Suazo. The contract of antichresis was to
last for five years with P210,000 as consideration. As the Angeles spouses stay in Manila during weekdays and go to
Laguna only on weekends, the parties agreed that Mercado would administer the lands and complete the necessary
paperwork.[6]
After three years, the Angeles spouses asked for an accounting from Mercado. Mercado explained that the subject
land earned P46,210 in 1993, which he used to buy more lanzones trees. Mercado also reported that the trees bore no
fruit in 1994. Mercado gave no accounting for 1995. The Angeles spouses claim that only after this demand for an
accounting did they discover that Mercado had put the contract of sanglaang-perde over the subject land under Mercado
and his spouses names.[7] The relevant portions of the contract of sanglaang-perde, signed by Juana Suazo alone, read:
xxx
Na alang-alang sa halagang DALAWANG DAAN AT SAMPUNG LIBONG PISO (P210,000), salaping gastahin, na aking
tinanggap sa mag[-]asawa nila G. AT GNG. FELINO MERCADO, mga nasa hustong gulang, Filipino, tumitira at may
pahatirang sulat sa Bgy. Maravilla, bayan ng Nagcarlan, lalawigan ng Laguna, ay aking ipinagbili, iniliwat at isinalin sa
naulit na halaga, sa nabanggit na mag[-] asawa nila G. AT GNG. FELINO MERCADO[,] sa kanila ay magmamana, kahalili
at ibang dapat pagliwatan ng kanilang karapatan, ang lahat na ibubunga ng lahat na puno ng lanzones, hindi kasama ang
ibang halaman na napapalooban nito, ng nabanggit na WALONG (8) Lagay na Lupang Cocal-Lanzonal, sa takdang LIMA
(5) NA [sic] TAON, magpapasimula sa taong 1993, at magtatapos sa taong 1997, kayat pagkatapos ng lansonesan sa
taong 1997, ang pamomosision at pakikinabang sa lahat na puno ng lanzones sa nabanggit na WALONG (8) Lagay na
Lupang Cocal-Lanzonal ay manunumbalik sa akin, sa akin ay magmamana, kahalili at ibang dapat pagliwatan ng aking
karapatan na ako ay walang ibabalik na ano pa mang halaga, sa mag[-] asawa nila G. AT GNG. FELINO MERCADO.
Na ako at ang mag[-]asawa nila G. AT GNG. FELINO MERCADO ay nagkasundo na ako ay bibigyan nila ng LIMA (5) na
[sic] kaing na lanzones taon-taon sa loob ng LIMA (5) na [sic] taon ng aming kasunduang ito.
Na ako at ang mag[-]asawa nila G. AT GNG. FELINO MERCADO ay nagkasundo na silang mag[-]asawa nila G. AT GNG.
FELINO MERCADO ang magpapaalis ng dapo sa puno ng lansones taon-taon [sic] sa loob ng LIMA (5) [sic] taonng [sic]
aming kasunduang ito.[8]
In his counter-affidavit, Mercado denied the Angeles spouses allegations. Mercado claimed that there exists an
industrial partnership, colloquially known as sosyo industrial, between him and his spouse as industrial partners and the
Angeles spouses as the financiers. This industrial partnership had existed since 1991, before the contract of antichresis
over the subject land. As the years passed, Mercado used his and his spouses earnings as part of the capital in the
business transactions which he entered into in behalf of the Angeles spouses. It was their practice to enter into business
transactions with other people under the name of Mercado because the Angeles spouses did not want to be identified as
the financiers.
Mercado attached bank receipts showing deposits in behalf of Emerita Angeles and contracts under his name for the
Angeles spouses. Mercado also attached the minutes of the barangay conciliation proceedings held on 7 September 1996.
During the barangay conciliation proceedings, Oscar Angeles stated that there was a written sosyo industrial agreement:
capital would come from the Angeles spouses while the profit would be divided evenly between Mercado and the Angeles
spouses.[9]
The Ruling of the Provincial Prosecution Office
On 3 January 1997, the Provincial Prosecution Office issued a resolution recommending the filing of criminal
information for estafa against Mercado. This resolution, however, was issued without Mercados counter-affidavit.
Meanwhile, Mercado filed his counter-affidavit on 2 January 1997. On receiving the 3 January 1997 resolution,
Mercado moved for its reconsideration. Hence, on 26 February 1997, the Provincial Prosecution Office issued an amended
resolution dismissing the Angeles spouses complaint for estafa against Mercado.
The Provincial Prosecution Office stated thus:
The subject of the complaint hinges on a partnership gone sour. The partnership was initially unsaddled [with] problems.
Management became the source of misunderstanding including the accounting of profits, which led to further
misunderstanding until it was revealed that the contract with the orchard owner was only with the name of the
respondent, without the names of the complainants.
The accusation of estafa here lacks enough credible evidentiary support to sustain a prima facie finding.
Premises considered, it is respectfully recommended that the complaint for estafa be dismissed.
RESPECTFULLY SUBMITTED.[10]
The Angeles spouses filed a motion for reconsideration, which the Provincial Prosecution Office denied in a resolution
dated 4 August 1997.
The Ruling of the Secretary of Justice
On appeal to the Secretary of Justice, the Angeles spouses emphasized that the document evidencing the contract
of sanglaang-perde with Juana Suazo was executed in the name of the Mercado spouses, instead of the Angeles spouses.
The Angeles spouses allege that this document alone proves Mercados misappropriation of their P210,000.
The Secretary of Justice found otherwise. Thus:
Reviewing the records of the case, we are of the opinion that the indictment of [Mercado] for the crime of estafa cannot
be sustained. [The Angeles spouses] failed to show sufficient proof that [Mercado] deliberately deceived them in the
sanglaang perde transaction. The document alone, which was in the name of [Mercado and his spouse], failed to
convince us that there was deceit or false representation on the part of [Mercado] that induced the [Angeles spouses] to
part with their money. [Mercado] satisfactorily explained that the [Angeles spouses] do not want to be revealed as the
financiers. Indeed, it is difficult to believe that the [Angeles spouses] would readily part with their money without holding
on to some document to evidence the receipt of money, or at least to inspect the document involved in the said
transaction. Under the circumstances, we are inclined to believe that [the Angeles spouses] knew from the very start that
the questioned document was not really in their names.
In addition, we are convinced that a partnership truly existed between the [Angeles spouses] and [Mercado]. The
formation of a partnership was clear from the fact that they contributed money to a common fund and divided the profits
among themselves. Records would show that [Mercado] was able to make deposits for the account of the [Angeles
spouses]. These deposits represented their share in the profits of their business venture. Although the [Angeles spouses]
deny the existence of a partnership, they, however, never disputed that the deposits made by [Mercado] were indeed for
their account.
The transcript of notes on the dialogue between the [Angeles spouses] and [Mercado] during the hearing of their
barangay conciliation case reveals that the [Angeles spouses] acknowledged their joint business ventures with [Mercado]
although they assailed the manner by which [Mercado] conducted the business and handled and distributed the funds.
The veracity of this transcript was not raised in issued [sic] by [the Angeles spouses]. Although the legal formalities for
the formation of a partnership were not adhered to, the partnership relationship of the [Angeles spouses] and [Mercado]
is evident in this case. Consequently, there is no estafa where money is delivered by a partner to his co-partner on the
latters representation that the amount shall be applied to the business of their partnership. In case of misapplication or
conversion of the money received, the co-partners liability is civil in nature (People v. Clarin, 7 Phil. 504)
WHEREFORE, the appeal is hereby DISMISSED.[11]
Hence, this petition.
Issues
The Angeles spouses ask us to consider the following issues:
 1. Whether the Secretary of Justice committed grave abuse of discretion amounting to lack of jurisdiction in
dismissing the appeal of the Angeles spouses;
2. Whether a partnership existed between the Angeles spouses and Mercado even without any documentary
proof to sustain its existence;
3. Assuming that there was a partnership, whether there was misappropriation by Mercado of the proceeds of
the lanzones after the Angeles spouses demanded an accounting from him of the income at the office of the
barangay authorities on 7 September 1996, and Mercado failed to do so and also failed to deliver the
proceeds to the Angeles spouses;
4. Whether the Secretary of Justice should order the filing of the information for estafa against Mercado. [12]
The Ruling of the Court
The petition has no merit.
Whether the Secretary of Justice Committed
Grave Abuse of Discretion
An act of a court or tribunal may constitute grave abuse of discretion when the same is performed in a capricious or
whimsical exercise of judgment amounting to lack of jurisdiction. The abuse of discretion must be so patent and gross as
to amount to an evasion of positive duty, or to a virtual refusal to perform a duty enjoined by law, as where the power is
exercised in an arbitrary and despotic manner because of passion or personal hostility.[13]
The Angeles spouses fail to convince us that the Secretary of Justice committed grave abuse of discretion when he
dismissed their appeal. Moreover, the Angeles spouses committed an error in procedure when they failed to file a motion
for reconsideration of the Secretary of Justices resolution. A previous motion for reconsideration before the filing of a
petition for certiorari is necessary unless: (1) the issue raised is one purely of law; (2) public interest is involved; (3) there
is urgency; (4) a question of jurisdiction is squarely raised before and decided by the lower court; and (5) the order is a
patent nullity.[14] The Angeles spouses failed to show that their case falls under any of the exceptions. In fact, this present
petition for certiorari is dismissible for this reason alone.
Whether a Partnership Existed
Between Mercado and the Angeles Spouses
The Angeles spouses allege that they had no partnership with Mercado. The Angeles spouses rely on Articles 1771 to
1773 of the Civil Code, which state that:
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 requirements of the preceding paragraph shall not affect the liability of the partnership and the
members thereof to third persons.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said
property is not made, signed by the parties, and attached to the public instrument.
The Angeles spouses position that there is no partnership because of the lack of a public instrument indicating the
same and a lack of registration with the Securities and Exchange Commission (SEC) holds no water. First, the Angeles
spouses contributed money to the partnership and not immovable property. Second, mere failure to register the contract
of partnership with the SEC does not invalidate a contract that has the essential requisites of a partnership. The purpose
of registration of the contract of partnership is to give notice to third parties. Failure to register the contract of
partnership does not affect the liability of the partnership and of the partners to third persons. Neither does such failure
to register affect the partnerships juridical personality. A partnership may exist even if the partners do not use the words
partner or partnership.
Indeed, the Angeles spouses admit to facts that prove the existence of a partnership: a contract showing a sosyo
industrial or industrial partnership, contribution of money and industry to a common fund, and division of profits between
the Angeles spouses and Mercado.
Whether there was
Misappropriation by Mercado
 The Secretary of Justice adequately explained the alleged misappropriation by Mercado: The document alone, which
was in the name of [Mercado and his spouse], failed to convince us that there was deceit or false representation on the
part of [Mercado] that induced the [Angeles spouses] to part with their money. [Mercado] satisfactorily explained that the
[Angeles spouses] do not want to be revealed as the financiers.[15]
Even Branch 26 of the Regional Trial Court of Santa Cruz, Laguna which decided the civil case for damages,
injunction and restraining order filed by the Angeles spouses against Mercado and Leo Cerayban, stated:
xxx [I]t was the practice to have all the contracts of antichresis of their partnership secured in [Mercados] name as [the
Angeles spouses] are apprehensive that, if they come out into the open as financiers of said contracts, they might be
kidnapped by the New Peoples Army or their business deals be questioned by the Bureau of Internal Revenue or worse,
their assets and unexplained income be sequestered, as xxx Oscar Angeles was then working with the government.[16]
Furthermore, accounting of the proceeds is not a proper subject for the present case.
For these reasons, we hold that the Secretary of Justice did not abuse his discretion in dismissing the appeal of the
Angeles spouses.
WHEREFORE, we AFFIRM the decision of the Secretary of Justice. The present petition for certiorari is DISMISSED.
SO ORDERED.
 [G.R. No. 134559. December 9, 1999]
ANTONIA TORRES, assisted by her husband, ANGELO TORRES; and EMETERIA BARING, petitioners, vs.
COURT OF APPEALS and MANUEL TORRES, respondents.
DECISION
PANGANIBAN, J.:
Courts may not extricate parties from the necessary consequences of their acts. That the terms of a contract turn
out to be financially disadvantageous to them will not relieve them of their obligations therein. The lack of an inventory of
real property will not ipso facto release the contracting partners from their respective obligations to each other arising
from acts executed in accordance with their agreement.
The Case

The Petition for Review on Certiorari before us assails the March 5, 1998 Decision [1] Second Division of the Court of
Appeals[2] (CA) in CA-GR CV No. 42378 and its June 25, 1998 Resolution denying reconsideration. The assailed Decision
affirmed the ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-21208, which disposed as follows:
WHEREFORE, for all the foregoing considerations, the Court, finding for the defendant and against the plaintiffs, orders
the dismissal of the plaintiffs complaint. The counterclaims of the defendant are likewise ordered dismissed. No
pronouncement as to costs.[3]
The Facts

Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture agreement" with
Respondent Manuel Torres for the development of a parcel of land into a subdivision.Pursuant to the contract, they
executed a Deed of Sale covering the said parcel of land in favor of respondent, who then had it registered in his
name. By mortgaging the property, respondent obtained from Equitable Bank a loan of P40,000 which, under the Joint
Venture Agreement, was to be used for the development of the subdivision. [4] All three of them also agreed to share the
proceeds from the sale of the subdivided lots.
The project did not push through, and the land was subsequently foreclosed by the bank.
According to petitioners, the project failed because of respondents lack of funds or means and skills. They add that
respondent used the loan not for the development of the subdivision, but in furtherance of his own company, Universal
Umbrella Company.
On the other hand, respondent alleged that he used the loan to implement the Agreement. With the said amount, he
was able to effect the survey and the subdivision of the lots. He secured the Lapu Lapu City Councils approval of the
subdivision project which he advertised in a local newspaper. He also caused the construction of roads, curbs and
gutters. Likewise, he entered into a contract with an engineering firm for the building of sixty low-cost housing units and
actually even set up a model house on one of the subdivision lots. He did all of these for a total expense of P85,000.
Respondent claimed that the subdivision project failed, however, because petitioners and their relatives had
separately caused the annotations of adverse claims on the title to the land, which eventually scared away prospective
buyers. Despite his requests, petitioners refused to cause the clearing of the claims, thereby forcing him to give up on the
project.[5]
Subsequently, petitioners filed a criminal case for estafa against respondent and his wife, who were however
acquitted. Thereafter, they filed the present civil case which, upon respondent's motion, was later dismissed by the trial
court in an Order dated September 6, 1982. On appeal, however, the appellate court remanded the case for further
proceedings. Thereafter, the RTC issued its assailed Decision, which, as earlier stated, was affirmed by the CA.
Hence, this Petition.[6]
Ruling of the Court of Appeals

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

Petitioners impute to the Court of Appeals the following error:

x x x [The] Court of Appeals erred in concluding that the transaction x x x between the petitioners and respondent was
that of a joint venture/partnership, ignoring outright the provision of Article 1769, and other related provisions of the Civil
Code of the Philippines.[8]
The Courts Ruling

The Petition is bereft of merit.

Main Issue: Existence of a Partnership

Petitioners deny having formed a partnership with respondent. They contend that the Joint Venture Agreement and
the earlier Deed of Sale, both of which were the bases of the appellate courts finding of a partnership, were void.
In the same breath, however, they assert that under those very same contracts, respondent is liable for his failure to
implement the project. Because the agreement entitled them to receive 60 percent of the proceeds from the sale of the
subdivision lots, they pray that respondent pay them damages equivalent to 60 percent of the value of the property. [9]
The pertinent portions of the Joint Venture Agreement read as follows:
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of March, 1969, by and between MR.
MANUEL R. TORRES, x x x the FIRST PARTY, likewise, MRS. ANTONIA B. TORRES, and MISS EMETERIA BARING, x x x
the SECOND PARTY:
W I T N E S S E T H:
That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property located at Lapu-Lapu City, Island
of Mactan, under Lot No. 1368 covering TCT No. T-0184 with a total area of 17,009 square meters, to be sub-divided by
the FIRST PARTY;
Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY THOUSAND (P20,000.00) Pesos,
Philippine Currency, upon the execution of this contract for the property entrusted by the SECOND PARTY, for sub-
division projects and development purposes;
NOW THEREFORE, for and in consideration of the above covenants and promises herein contained the respective parties
hereto do hereby stipulate and agree as follows:
ONE: That the SECOND PARTY signed an absolute Deed of Sale x x x dated March 5, 1969, in the amount of TWENTY
FIVE THOUSAND FIVE HUNDRED THIRTEEN & FIFTY CTVS. (P25,513.50) Philippine Currency, for 1,700 square meters at
ONE [PESO] & FIFTY CTVS. (P1.50) Philippine Currency, in favor of the FIRST PARTY, but the SECOND PARTY did not
actually receive the payment.
SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the necessary amount of TWENTY THOUSAND
(P20,000.00) pesos, Philippine currency, for their personal obligations and this particular amount will serve as an advance
payment from the FIRST PARTY for the property mentioned to be sub-divided and to be deducted from the sales.
THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY, the interest and the principal amount involving
the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, until the sub-division project is terminated
and ready for sale to any interested parties, and the amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine
currency, will be deducted accordingly.
FOURTH: That all general expense[s] and all cost[s] involved in the sub-division project should be paid by the FIRST
PARTY, exclusively and all the expenses will not be deducted from the sales after the development of the sub-division
project.
FIFTH: That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM 60% for the SECOND PARTY and
FORTY PERCENTUM 40% for the FIRST PARTY, and additional profits or whatever income deriving from the sales will be
divided equally according to the x x x percentage [agreed upon] by both parties.
SIXTH: That the intended sub-division project of the property involved will start the work and all improvements upon the
adjacent lots will be negotiated in both parties['] favor and all sales shall [be] decided by both parties.
SEVENTH: That the SECOND PARTIES, should be given an option to get back the property mentioned provided the
amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, borrowed by the SECOND PARTY, will be paid
in full to the FIRST PARTY, including all necessary improvements spent by the FIRST PARTY, and the FIRST PARTY will be
given a grace period to turnover the property mentioned above.
That this AGREEMENT shall be binding and obligatory to the parties who executed same freely and voluntarily for the
uses and purposes therein stated.[10]
A reading of the terms embodied in the Agreement indubitably shows the existence of a partnership pursuant to
Article 1767 of the Civil Code, which provides:
ART. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.
Under the above-quoted Agreement, petitioners would contribute property to the partnership in the form of land
which was to be developed into a subdivision; while respondent would give, in addition to his industry, the amount
needed for general expenses and other costs. Furthermore, the income from the said project would be divided according
to the stipulated percentage. Clearly, the contract manifested the intention of the parties to form a partnership. [11]
It should be stressed that the parties implemented the contract. Thus, petitioners transferred the title to the land to
facilitate its use in the name of the respondent. On the other hand, respondent caused the subject land to be mortgaged,
the proceeds of which were used for the survey and the subdivision of the land. As noted earlier, he developed the roads,
the curbs and the gutters of the subdivision and entered into a contract to construct low-cost housing units on the
property.
Respondents actions clearly belie petitioners contention that he made no contribution to the partnership. Under
Article 1767 of the Civil Code, a partner may contribute not only money or property, but also industry.
Petitioners Bound by Terms of Contract

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

Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code, which provides:
ART. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said
property is not made, signed by the parties, and attached to the public instrument.
They contend that since the parties did not make, sign or attach to the public instrument an inventory of the real
property contributed, the partnership is void.
We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo M. Tolentino
states that under the aforecited provision which is a complement of Article 1771, [12]the execution of a public instrument
would be useless if there is no inventory of the property contributed, because without its designation and description,
they cannot be subject to inscription in the Registry of Property, and their contribution cannot prejudice third
persons. This will result in fraud to those who contract with the partnership in the belief [in] the efficacy of the guaranty
in which the immovables may consist. Thus, the contract is declared void by the law when no such inventory is
made. The case at bar does not involve third parties who may be prejudiced.
 Second, petitioners themselves invoke the allegedly void contract as basis for their claim that respondent should pay
them 60 percent of the value of the property. [13] They cannot in one breath deny the contract and in another recognize it,
depending on what momentarily suits their purpose. Parties cannot adopt inconsistent positions in regard to a contract
and courts will not tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from considering the Joint Venture Agreement
an ordinary contract from which the parties rights and obligations to each other may be inferred and enforced.
Partnership Agreement Not the Result of an Earlier Illegal Contract

Petitioners also contend that the Joint Venture Agreement is void under Article 1422 [14] of the Civil Code, because it
is the direct result of an earlier illegal contract, which was for the sale of the land without valid consideration.
This argument is puerile. The Joint Venture Agreement clearly states that the consideration for the sale was the
expectation of profits from the subdivision project. Its first stipulation states that petitioners did not actually receive
payment for the parcel of land sold to respondent. Consideration, more properly denominated as cause, can take different
forms, such as the prestation or promise of a thing or service by another. [15]
In this case, the cause of the contract of sale consisted not in the stated peso value of the land, but in the
expectation of profits from the subdivision project, for which the land was intended to be used. As explained by the trial
court, the land was in effect given to the partnership as [petitioners] participation therein. x x x There was therefore a
consideration for the sale, the [petitioners] acting in the expectation that, should the venture come into fruition, they
[would] get sixty percent of the net profits.
Liability of the Parties

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