G.R. No.
L-31684 June 28, 1973 The defendants denied such allegations, adding further
EVANGELISTA & CO., DOMINGO C. EVANGELISTA,
JR., CONCHITA B. NAVARRO and LEONARDA
ATIENZA ABAD SABTOS, petitioners, vs. ESTRELLA
ABAD SANTOS, respondent.
CASE SUMMARY
On October 9, 1954, a co-partnership was formed under
the name of "Evangelista & Co.", with Estrella Abad
Santos, as industrial partner, and petitioners Domingo C.
Evangelista, Jr., Leonardo Atienza Abad Santos and
Conchita P. Navarro, as capitalist partners with a
contribution of P17,500 each. The amended Articles of
Co-partnership provided, inter alia, that the profits and
losses "shall be divided and distributed among the
partners ... in the proportion of 70% for the first three
partners, Domingo C. Evangelista, Jr., Conchita P.
Navarro and Leonardo Atienza Abad Santos to be
divided among them equally; and 30% for the fourth
partner Estrella Abad Santos."
On December 17, 1963, Estrella filed suit against the
three other partners, alleging that the partnership had
been paying dividends to the partners except to her; and
that notwithstanding her demands the defendants had
refused and continued to refuse and let her examine the
partnership books or to give her information regarding the
partnership affairs to pay her any share in the dividends
declared by the partnership.
that the amended Articles of Co-partnership did not
express the true agreement of the parties, which was that
the plaintiff was not an industrial partner; that she did not
in fact contribute industry to the partnership; and that her
share of 30% was to be based on the profits which might
be realized by the partnership only until full payment of
the loan which it had obtained in December, 1955 from
the Rehabilitation Finance Corporation in the sum of
P30,000, for which the plaintiff had signed a promisory
note as co-maker and mortgaged her property as
security.
The CFI, CA, and the SC ultimately ruled in favor of
Estrella.
ISSUE OF THE CASE
Whether Estrella is an industrial partner or merely a profit
sharer.
LAWS APPLICABLE
In arguing that Estrella was amiss of her duties as an
industrial partner, if she is indeed one, petitioners invoke
Art. 1789 of the Civil Code, to wit:
Art. 1789. An industrial partner cannot engage in
business for himself, unless the partnership expressly
permits him to do so; and if he should do so, the capitalist
partners may either exclude him from the firm or avail
themselves of the benefits which he may have obtained
in violation of this provision, with a right to damages in
either case.
The Court counter by stating that the kind of industry that
an industrial partner may contribute was not specified
with particularity. Art. 1767 of the Civil Code provides:
Art. 1767. By 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, 'does not specify the kind
of industry that a partner may thus contribute, hence the
said services may legitimately be considered as
appellee's contribution to the common fund.
In ultimately ruling that Estrella has the right to demand
for a formal accounting, the Court cited Art. 1899 of the
Civil Code which provides:
Art. 1899. Any partner shall have the right to a formal
account as to partnership affairs:
(1) If he is wrongfully excluded from the partnership
business or possession of its property by his co-partners;
(2) If the right exists under the terms of any
agreement;
(3) As provided by article 1807;
(4) Whenever other circumstance render it just and
reasonable.
DECISION OF THE CASE
Estrella is an industrial partner.
First, the petitioners have admitted the genuineness and
due execution of the amended Articles of Co-partnership,
and the said articles indubitably show the appellee is an
industrial partner of appellant company. Appellants are
estopped from attempting to detract from the probative
force of the said articles because they all bear the imprint
of their knowledge and consent, and there is no credible
showing that they ever protested against or opposed their
contents prior of the filing of their answer to appellee's
complaint. Moreover, from June 7, 1955 up to the filing of
their answer to the complaint on February 8, 1964 — or a
period of over eight years — appellants did nothing to
correct the alleged false agreement of the parties.
Petitioners likewise posit that, even under the assumption
that Estrella is indeed an industrial partner, she is
nonetheless in violation of Art. 1789 of the Civil Code.
They contend that Estrella has been one of the judges of
the City Court of Manila, devoting all her time to the
performance of the duties of her public office. As such,
she could not lawfully contribute her full time and industry
which is the obligation of an industrial partner under the
aforesaid Civil Code provision.
The court however is of the position that even as she was
and still is a Judge of the City Court of Manila, she has
rendered services for appellants without which they
would not have had the wherewithal to operate the
business for which appellant company was organized.
Article 1767, NCC does not specify the kind of industry
that a partner may thus contribute, hence the said
services may legitimately be considered as appellee's
contribution to the common fund. Moreover, Estrella is
not engaged in any business antagonistic to that of
Evangelista & Co., since being a Judge can hardly be
characterized as a business.
Thus, Estrella, being an industrial partner, has the right to
demand for a formal accounting and to receive her share
in the net profit that may result from such an accounting,
in pursuance with Art. 1899, NCC.
even bother to correct what they were allegeing as false.
They should then suffer the consequences of their
inaction.
As for their contention that even assuming arguendo that
Estrella is indeed an industial partner, the latter has
nonetheless been amiss of her duties, I am of the opinion
that such claim is erroneous. First, it was proven that
Estrella has been rendering service to the partnership.
Moreover, nowhere in the laws governing Partnership is it
prohibited for an industrial partner to be engaged in
another lawful occupation. It is highly doubtful that being
a judge would be detrimental to a partnership of such
nature as the one in the present case.

OPINION

I agree with the Court’s ruling.

It is evident that the petitioners should be considered

barred by estoppel since it does not appear that they
were merely defrauded or forced when they executed the
amended Articles of Co-partnership together with
Estrella. Neither could they claim that the articles did not
reflect the true intentions of the parties since the
stipulations therein are clear and free of any ambiguity.
Besides, a considerable period of time had already
elapsed sine the articles were executed but they did not
 G.R. No. L-21906 December 24, 1968
INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-
appellees, vs. NICANOR CASTEEL and JUAN
DEPRA, defendants,
CASE SUMMARY
Following the inactions of the authorities on the two
fishpond applications filed by Nicanor Casteel over a
178.76 hectare tract of swampy land in Davao, he yet
again, filed another one, but such was disapproved. Not
losinh hope, he thereafter filed another application on
May 27, 1947.
Meanwhile, several applications were submitted by other
persons for portions of the area covered by Casteel's
application. As such, 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. He then obtained financial aid from his uncle Felipe
Deluao.
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.
However, the Director of Fisheries nevertheless rejected
Casteel's application on October 25, 1949. Casteel then
appealed to the Secretary of Agriculture and Natural
Resources.
Meanwhile, on November 25, 1949, Inocencia Deluao
(wife of Felipe Deluao) and Nicanor Casteel executed a
contract — denominated a "contract of service" — where
Deluao undertakes to finance P27,000.00 Casteel, who
shall, in turn, render his services for the construction and
improvements on the subject fishpond. On the same
date, Inocencia Deluao executed a special power of
attorney in favor of Jesus Donesa.
On September 15, 1950 the Secretary of Agriculture and
Natural Resources rendered a decision ordering Casteel
to be reinstated in the area and that he shall pay for the
improvement made thereupon.
Sometime in January 1951 Nicanor Casteel forbade
Inocencia Deluao from further administering the fishpond,
and ejected Jesus Donesa from the premises.
Alleging violation of the contract of service, Felipe Deluao
and Inocencia Deluao on April 3, 1951 filed an action for
specific performance and damages against Nicanor
Casteel and Juan Depra (who, they alleged, instigated
Casteel to violate his contract). They mainly contend that
the "contract of service" created a contract of co-
ownership and partnership between Inocencia and the
appellant over the fishpond in question. Casteel, on his
part, allege that he was the owner, lawful applicant and
occupant of the fishpond.
ISSUES OF THE CASE
1. WON there was a contract of partnership between
the parties;
2. If so, WON the partnership has been duly
dissolved.
LAWS APPLICABLE
In ruling that there was a dissolution of partnership in the
instant case, the Court invoked Art. 1830 of the Civil
Code:
Art. 1830. Dissolution is caused:
xxx
(2) In contravention of the agreement between the
partners, where the circumstances do not permit a
dissolution under any other provision of this article, by the
express will of any partner at any time;
(3) By 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;
xxx
The Court further cited the following special laws in the
instant case:
Public Land Act (Commonwealth Act 141)
Sec. 40. 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.
Administrative Order No. 14 of the Secretary of
Agriculture and Natural Resources (1937)
Sec. 37. 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.
DECISION OF THE CASE
1. There was a contract of partnership established in
the case at bar.
The evidence presents 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. The "contract of
service" was actually the memorandum of their
partnership agreement.
2. Said partnership has been duly dissolved.
The arrangement under the so-called "contract of
service" continued until the decision was issued by the
Secretary of Agriculture and Natural Resources. This
development, by itself, brought about the dissolution of
the partnership.
Since the partnership had for its object the division into
two equal parts of the fishpond between the spouses and
Casteel 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.
Moreover, the partners articulated in several 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. As such, each
must be deemed to have expressly withdrawn from the
partnership, thereby causing its dissolution pursuant to
art. 1830(2) of the Civil Code.
OPINION
I concur with the Court.
In construing contracts, it is established that the mutual
intention of the parties should prevail over what is written.
In the present case, it is apparent from the surrounding
circumstances that the nature of the contract executed
between Casteel and Inocencia was one of partnership—
with the former as an industrial partner, Inocencia as
capitalist, and the division into two equal parts of the
fishpond between the Deluaos and Casteel as the object.
I likewise agree that such partnership has been dissolved
by virtue of Deluao’s reinstatement over the subject area.
Considering that it is impossible for the parties to carry on
with the terms of the partnership without violating the law
( since to transfer half of the fishpond to the Deluaos
without the authorization of the Secretary of Agriculture
and Natural Resources is unlawful), the partnership must
be considered as dissolved. Art. 1830, par. (3), NCC is
clearly applicable.
 G.R. No. L-39780 November 11, 1985
ELMO MUÑASQUE, petitioner, vs. COURT OF
APPEALS,CELESTINO GALAN TROPICAL
COMMERCIAL COMPANY and RAMON PONS,
respondents.
CASE SUMMARY
Petitioner Elmo Muñasque in behalf of the partnership of
"Galan and Muñasque" as Contractor entered into a
written contract with Tropical Commercial Co. for
remodelling the latter's Cebu branch building. A total
amount of P25,000.00 was to be paid under the contract
for the entire services of the Contractor. The terms of
payment were as follows: 30% of the whole amount upon
the signing of the contract and the balance thereof
divided into three equal installments at the lute of
P6,000.00 every fifteen working days.
The first payment made by Tropical was in the form of a
check for P7,000.00 in the name of the Muñasque.
Muñasque, however, indorsed the check in favor of
Celestino Galan to enable the latter to deposit it in the
bank and pay for the materials and labor used in the
project.
Muñasque alleged that Galan spent P6,183.37 out of the
P7,000.00 for his personal use so that when the second
check in the amount of P6,000.00 came and Galan asked
him to indorse it again, he refused.
The check was withheld from Muñasque. Since Galan
informed the Cebu branch of Tropical that there was
a"misunderstanding" between him and Muñasque,
Tropical changed the name of the payee in the second
check from Muñasque to "Galan and Associates." This
enabled Galan to encash the second check.
Meanwhile, the construction continued through
Muñasque’s sole efforts. The construction work was
eventually finished ahead of schedule with the total
expenditure reaching P34,000.00. The two remaining
checks, each in the amount of P6,000.00, were
subsequently given to Muñasque alone with the last
check being given pursuant to a court order.
Muñasque thereafter filed a complaint against herein
respondents, seeking mainly to recover the following: the
amounts covered by the first and second checks which
fell into the hands of Galan, the additional expenses that
he incurred in the construction, moral and exemplary
damages, and attorney's fees. Muñasque posits that he
and Galan should not be considered as partners
considering that Galan was a sham who misappropriated
the amount of P13,000.00 due to him, and the payment
made by Tropical to Galan was not "good" payment since
it gave occasion for Galan’s misappropriation.
Both the trial and appellate courts not only absolved
respondents Tropical and its Cebu Manager, Ramon
Pons, from any liability but they also held Muñasque and
Galan jointly liable to Cebu Southern Hardware Company
and Blue Diamond Glass Palace for the credit which the
said compaines extended to the partnership of petitioner
and Galan.
ISSUES OF THE CASE
1. WON there existed a partners between Celestino
Galan and Elmo Muñasque;
2. WON there existed a justifiable cause on the part
of respondent Tropical to disburse money to
respondent Galan;
3. WON Galan and Muñasque should pay, jointly and
severally, the the credits of Blue Diamond and
Cebu Southern Hardware.
LAWS APPLICABLE
In holding that the liability of Galan and Muñasque on the
credits of Blue Diamond and Cebu Southern Hardware is
solidary, the Court cited Arts. 1816, 1824, 1822 and 1823
of the Civil Code. The said provisions state:
Art. 1816. All partners, including industrial ones, shall be
liable pro rata with all their property and after all the
partnership assets have been exhausted, for the
contracts which may be entered into in the name and for
the account of the partnership, under its signature and by
a person authorized to act for the partnership. However,
any partner may enter into a separate obligation to
perform a partnership contract.
Art. 1824. All partners are liable solidarily with the
partnership for everything chargeable to the partnership
under Articles 1822 and 1823.
Art. 1822. Where, by any wrongful act or omission of any
partner acting in the ordinary course of the business of
the partner-ship or with the authority of his co-partners,
loss or injury is caused to any person, not being a partner
in the partnership or any penalty is incurred, the
partnership is liable therefor to the same extent as the
partner so acting or omitting to act.
Art. 1823. The partnership is bound to make good:
(1) Where one partner acting within the scope of his
apparent authority receives money or property of a third
person and misapplies it; and
(2) Where the partnership in the course of its
business receives money or property of a third person
and t he money or property so received is misapplied by
any partner while it is in the custody of the partnership.
DECISION OF THE CASE
1. Galan and Muñasque are partners.
The records will show that the petitioner entered into a
contract with Tropical for the renovation of the latter's
building on behalf of the partnership of "Galan and
Muñasque." There is nothing in the records to indicate
that the partnership organized by the two men was not a
genuine one. If there was a falling out or
misunderstanding between the partners, such does not
convert the partnership into a sham organization.
Likewise, when Muñasque received the first payment of
Tropical in the amount of P7,000.00 with a check made
out in his name, he indorsed the check in favor of Galan.
Tropical therefore, had every right to presume that the
petitioner and Galan were true partners. If they were not
partners, then Muñasque has only himself to blame for
making the relationship appear otherwise, not only to
Tropical but to their other creditors as well. The payments
made to the partnership were, therefore, valid payments.
Where one of two innocent persons must suffer, that
person who gave occasion for the damages to be caused
must bear the consequences.
2. The payment made by Tropical to Galan was a
good payment which binds both Galan and the
petitioner.
Since the two were partners when the debts were
incurred, they, are also both liable to third persons who
extended credit to their partnership. There is a general
presumption that each individual partner is an authorized
agent for the firm and that he has authority to bind the
firm in carrying on the partnership transactions. The
presumption is sufficient to permit third persons to hold
the firm liable on transactions entered into by one of
members of the firm acting apparently in its behalf and
within the scope of his authority.
3. Muñasque and Galan should be held liable, in
solidum, to pay the credits of Blue Diamond and
Cebu Southern Hardware.
While the liability of the partners are merely joint in
transactions entered into by the partnership, a third
person who transacted with said partnership can hold the
partners solidarily liable for the whole obligation if the
case of the third person falls under Articles 1822 or 1823.
This is in pursuance to Art. 1816, construed together with
Art. 1824.
The obligation is solidary, because the law protects him,
who in good faith relied upon the authority of a partner,
whether such authority is real or apparent. That is why
under Article 1824 of the Civil Code all partners, whether
innocent or guilty, as well as the legal entity which is the
partnership, are solidarily liable.
In the case at bar the respondent Tropical had every
reason to believe that a partnership existed between the
petitioner and Galan and no fault or error can be imputed
against it for making payments to "Galan and Associates"
and delivering the same to Galan because as far as it
was concerned, Galan was a true partner with real
authority to transact on behalf of the partnership with
which it was dealing. This is even more true in the cases
of Cebu Southern Hardware and Blue Diamond Glass
Palace who supplied materials on credit to the
partnership.

However, as between the partners Muñasque and Galan,

justice also dictates that Muñasque be reimbursed by
Galan for the payments made by the former representing
the liability of their partnership to herein intervenors, as it
was satisfactorily established that Galan acted in bad
faith in his dealings with Muñasque as a partner.

OPINION

I agree with the Court’s pronouncement.

Muñasque and Galan should be considered as partners,

especially in so far as Tropical is concerned. It bears
stressing that when Muñasque entered into the contract
in question with Tropical, he manifested that he is acting
in his capacity as a contractor for the "Galan and
Muñasque” partnership. His subsequent acts likewise
made it appear that there is indeed an existing
partnership between him and Galan. Thus, Tropical
cannot be faulted in beliveing in the existence of the
same. Muñasque cannot later on deny the partnership to
an innocent third party especially considering that the
latter based its belief on the former’s very actions.

On the other hand, it would go against the dictates of

justice to let the burden fall upon Muñasque alone,
especially since Galan has been acting in bad faith. As
such, Galan must be held liable for reimbursement.
 G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION,
petitioner, vs. THE HON. COURT OF APPEALS,
BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and
JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner, vs. COURT OF APPEALS,
PIONEER INSURANCE AND SURETY
CORPORATION, BORDER MACHINERY and HEAVY
EQUIPMENT CO., INC., FRANCISCO and MODESTO
CERVANTES and CONSTANCIO MAGLANA
CASE SUMMARY
In 1965, Jacob S. Lim was engaged in the airline
business as owner-operator of Southern Air Lines (SAL)
a single proprietorship. Lim, in such capacity, and Japan
Domestic Airlines (JDA) executed a sales contract for the
sale and purchase of two aircrafts and one set of
necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. In relation to this,
it appears that Bormaheco, Francisco and Modesto
Cervantes and Constancio Maglana contributed some
funds used in the purchase of the above aircrafts and
spare parts. The funds were supposed to be their
contributions to a new corporation proposed by Lim to
expand his airline business.
It appears, however, that instead of using the money
given to him to pay in full the aircrafts, Lim, without the
knowledge of Bormaheco, the Cervanteses and Maglana,
entered into a surety agreement with Pioneer Insurance
for the latter to insure the two aircrafts using said aircrafts
as security.
Lim eventually defaulted on his subsequent installment
payments prompting JDA to request payments from
Pioneer. Pioneer then paid a total sum of P298,626.12.
Consequently, Pioneer filed a petition for the extrajudicial
foreclosure of the said chattel mortgage. Eventually, the
Court ordered Lim to reimburse certain amounts given by
the respondents Cervanteses, Bormaheco and Maglana
to him as their contributions to the intended corporation.
Lim questions such pronouncement, arguing that the
Cervanteses, Bormaheco and Maglana should be held
liable together with him for the loss incurred considering
mainly that a de facto partnership among the said
respondents was created, and that as a consequence of
such relationship, all must share in the losses and/or
gains of the venture in proportion to their contribution.
ISSUES OF THE CASE
WON there exist a de fact partnership between Lim, the
Cervanteses, Bormaheco and Maglana, thus making the
latter four liable as general partners in the loss together
with Lim.
PRINCIPLES OF LAW APPLICABLE
In making its pronouncement in the case at bar, the Court
took into consideration and applied the following
principles of law:
Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94
Am. S.R. 584
“As between themselves, the rights of the stockholders in
a defectively incorporated association should be
governed by the supposed charter and the laws of the
state relating thereto and not by the rules governing
partners.”
Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas.
1913A 1065
“Persons who attempt, but fail, to form a corporation and
who carry on business under the corporate name occupy
the position of partners inter se.”
Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me.
555; Whipple v. Parker, 29 Mich. 369
“Where persons associate themselves together under
articles to purchase property to carry on a business, and
their organization is so defective as to come short of
creating a corporation within the statute, they become in
legal effect partners inter se, and their rights as members
of the company to the property acquired by the company
will be recognized.”
Shorb v. Beaudry, 56 Cal. 446
“Where certain persons associated themselves as a
corporation for the development of land for irrigation
purposes, and each conveyed land to the corporation,
and two of them contracted to pay a third the difference
in the proportionate value of the land conveyed by him,
and no stock was ever issued in the corporation, it was
treated as a trustee for the associates in an action
between them for an accounting, and its capital stock
was treated as partnership assets, sold, and the
proceeds distributed among them in proportion to the
value of the property contributed by each.”
London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116
U.S. 461, 472, 29 L.Ed. 688
“Ordinarily, persons cannot be made to assume the
relation of partners, as between themselves, when their
purpose is that no partnership shall exist.”
Ward v. Brigham, 127 Mass. 24
“One who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does
not become a partner with other subscribers who engage
in business under the name of the pretended corporation,
so as to be liable as such in an action for settlement of
the alleged partnership and contribution.”
Heald v. Owen, 44 N.W. 210, 79 Iowa 23
“A partnership relation between certain stockholders and
other stockholders, who were also directors, will not be
implied in the absence of an agreement, so as to make
the former liable to contribute for payment of debts
illegally contracted by the latter.”
DECISION OF THE CASE
There was no de facto partnership.
While it is ordinarily held that where persons associate
themselves together under articles to purchase property
to carry on a business, and their organization is so
defective as to come short of creating a corporation
within the statute, they become in legal effect partners
inter se, and their rights as members of the company to
the property acquired by the company will be recognized.
However, such a relation does not necessarily exist, for,
ordinarily, persons cannot be made to assume the
relation of partners as between themselves when their
purpose is that no partnership shall exist. It should be
implied only when necessary to do justice between the
parties; thus, one who takes no part except to subscribe
for stock in a proposed corporation which is never legally
formed does not become a partner with other subscribers
who engage in business under the name of the
pretended corporation, so as to be liable as such in an
action for settlement of the alleged partnership and
contribution.
In the instant case, it is clear that Lim never had the
intention to form a corporation with the Cervanteses,
Bormaheco and Maglana despite his representations to
them. The record shows that the petitioner was acting on
his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and
spare parts. The respondents were merely induced and
lured by Lim to make contributions to a proposed
corporation which was never formed because Lim
reneged on their agreement. It should also be noted that
Lim of unilaterally took out a surety from Pioneer
Insurance without using the funds he got from the
respondents.
OPINION
The Court is correct.
A de facto partnership cannot be presumed in the case at
bar mainly because it is apparent that the purported
partners do not intend to form a corporation, moreso a
partnership. Clearly, Lim did not intend to form a
corporation with the herein respondents. He merely
wants to apply the money obtained from the respondents
for his own personal use. As fraud is attendant, there can
be no valid contract in the instant case. Hence, Lim alnoe
must bear the loss incurred.
 G.R. No. 114311 November 29, 1996
COSMIC LUMBER CORPORATION, petitioner, vs.
COURT OF APPEALS and ISIDRO PEREZ,
respondents.
CASE SUMMARY
Cosmic Lumber Corporation executed on 28 January
1985 a Special Power of Attorney appointing Paz G.
Villamil-Estrada as attorney-in-fact with regard to the
institution of any action in court to eject all persons found
on Lot Nos. 9127 and 443 so that Cosmic Lumber could
take material possession thereof, and for this purpose, to
appear at the pre-trial and enter into any stipulation of
facts and/or compromise agreement but only insofar as
this was protective of the rights and interests of Cosmic
Lumber in the property.
Villamil-Estrada then instituted an action for the
ejectment of Isidro Perez in a portion of the aforesaid
lots. On 25 November 1985, Villamil-Estrada entered into
a Compromise Agreement with Perez, where it was
agreed upon that the portion occupied by the latter will be
sold to him. Such was approved by the trial court.
Cosmic Lumber then sought annulment of the said
decision on the ground that the compromise agreement
(upon which the decision was based) was void, primarily
because the attorney-in-fact exceeded its authority by
selling the subject portion of land to Perez without its
consent and knowledge.
LAWS APPLICABLE
The Court mainly based its ruling in the case at bar on
the following Civil Code provisions:
Art. 1874. When a sale of a piece of land or any interest
therein is through an agent, the authority of the latter
shall be in writing; otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are necessary in
the following cases:
xxx
(5) To enter into any contract by which the ownership of
an immovable is transmitted or acquired either
gratuitously or for a valuable consideration x x x
ISSUES OF THE CASE
WON the judgement of the trial court is void.
DECISION OF THE CASE
Such judgement is void.
The authority granted Villamil-Estrada under the special
power of attorney was explicit and exclusionary. Nowhere
in the authorization was Villamil-Estrada granted
expressly or impliedly any power to sell the subject
property nor a portion thereof. Neither can a conferment
of the power to sell be validly inferred from the specific
authority to enter into a compromise agreement because
of the explicit limitation fixed by the grantor that the
compromise entered into shall only be so far as it shall
protect the rights and interest of the corporation in the
aforementioned lots. Alienation by sale of an immovable
certainly cannot be deemed protective of the right of
Cosmic Lumber to physically possess the same,
considering further that petitioner never received the
proceeds of the sale.
The authority of an agent to execute a contract for the
sale of real estate must be conferred in writing and must
give him specific authority, either to conduct the general
business of the principal or to execute a binding contract
containing terms and conditions which are in the contract
he did execute. Further, for the principal to confer the
right upon an agent to sell real estate, a power of
attorney must so express the powers of the agent in clear
and unmistakable language. When there is any
reasonable doubt that the language so used conveys
such power, no such construction shall be given the
document.
It is therefore clear that by selling to respondent Perez a
portion of petitioners land through a compromise
agreement, Villamil-Estrada acted without or in obvious
authority. The sale ipso jure is consequently void. So is
the compromise agreement. This being the case, the
judgment based thereon is necessarily void. The nullity of
the settlement between Villamil-Estrada and Perez
impaired the jurisdiction of the trial court to render its
decision based on the compromise agreement.
Villamil-Estrada who signed the compromise agreement
may have been the attorney-in-fact but she could not
legally bind petitioner thereto as she was not entrusted
with a special authority to sell the land, as required in Art.
1878, par. (5), NCC. It is apparent that Villamil-Estrada
deliberately concealed from her principal that a
compromise agreement had been forged with the end-
result that a portion of petitioners property was sold to the
unlawful possessor. Thus completely kept unaware of its
agents artifice, Cosmic Lumber was not accorded even a
fighting chance to repudiate the settlement so much so
that the judgment based thereon became final and
executory. Verily, when an agent is engaged in the
perpetration of a fraud upon his principal for his own
exclusive benefit, he is not really acting for the principal
but is really acting for himself, entirely outside the scope
of his agency.
OPINION
I agree with the Court’s ruling.
The attorney-in-fact in the present case evidently
exceeded her authority. The terms in the SPA is clear.
Villamil-Estrada is in no way allowed to effect the sale to
Perez since the same goes against the very purpose of
the executed SPA—for Cosmic Lumber to gain material
possession over the subject property. As such, it would
be erroneous to bind Cosmic Lumber to a clearly
unauthorized act of its agent, especially since the same
is prejudicial to the company’s interest.

Considering that the sale, as stipulated in the subject

compromise agreement, is void due the above reason,
the trial court’s decision must likewise be considered as
void regardless of whether or not it has already attained
finality. It is as if there was no comprosise agreement at
all in the present case. Thus, the judgment of the court is
considered as baseless. To push through with the
pronouncement therein would arbitrary and would go
against the very dictates of justice.
G.R. No. 95641 September 22, 1994
SANTOS B. AREOLA and LYDIA D. AREOLA,
petitioners-appellants, vs. COURT OF APPEALS and
PRUDENTIAL GUARANTEE AND ASSURANCE, INC.,
respondents-appellees.
On June 29, 1985, seven months after the Prudential
Guarantee issued an insurance policy to Santos Areola,
the respondent insurance company unilaterally cancelled
the same since company records revealed that petitioner-
insured allegedly failed to pay his premiums. Shocked by
the cancellation of the policy, petitioner-insured
demanded the issuance of an official receipt from Carlito
Ang, agent of Prudential Guarantee. However, petitioner-
insured failed to receive any official receipt from
Prudential.
On August 3, 1985, respondent insurance company
offered to reinstate same policy it had previously
cancelled and even proposed to extend its lifetime to
December 17, 1985, upon a finding that the cancellation
was erroneous and that the premiums were paid in full by
petitioner-insured but were not remitted by its Baguio City
branch manager, Teofilo M. Malapit. However, petitioner-
insured has already filed an action for breach of contract
with damages against Prudential Guarantee.
Areola contend that the fraudulent act of Malapit in
misappropriating his premium payments is the proximate
cause of the cancellation of the insurance policy. Further,
such fraudulent act is attributable to Prudential
Guarantee, an artificial corporate being which can act
only through its officers or employees. Malapit's actuation
is therefore not separate and distinct from that of
respondent-insurance company. It must, therefore, bear
the consequences of the erroneous cancellation of
subject insurance policy caused by the non-remittance by
its own employee of the premiums paid.
Prudential Guarantee, on the other hand, argued that by
acknowledging the inconvenience caused on petitioner-
insured and after taking steps to rectify its omission,
respondent insurance company had complied with its
obligation under the contract.
The trial court rendered a judgment in favor of petitioner-
insured, but the CA reversed. According to the CA,
respondent insurance company was not motivated by
negligence, malice or bad faith in cancelling subject
policy.
LAW APPLICABLE
Article 1910 thus reads:
Art. 1910. The principal must comply with all the
obligations which the agent may have contracted within
the scope of his authority.
As for any obligation wherein the agent has exceeded his
power, the principal is not bound except when he ratifies
it expressly or tacitly.
ISSUES:
WON Malapit’s fraudulent act attributable to Prudential
Guarantee.
HELD:
Prudential Guarantee must be held accountable for
Malapit’s act.
Malapit's fraudulent act of misappropriating the premiums
paid by petitioner-insured is beyond doubt directly
imputable to respondent insurance company. A
corporation, such as respondent insurance company,
acts solely through its employees. The latters' acts are
considered as its own for which it can be held to account.
It is beyond doubt that Malapit represented its interest
and acted in its behalf. His act of receiving the premiums
collected is well within the province of his authority. Thus,
his receipt of said premiums is receipt by private
respondent insurance company who, by provision of law,
particularly under Article 1910 of the Civil Code, is bound
by the acts of its agent.
Malapit's failure to remit the premiums he received
cannot constitute a defense for Prudential Guarantee.
The fact that the latter was itself defrauded does not free
the same from its obligation to petitioner Areola.
Consequently, respondent insurance company is liable
by way of damages for the fraudulent acts committed by
Malapit that gave occasion to the erroneous cancellation
of subject insurance policy. Its earlier act of reinstating
the insurance policy can not obliterate the injury inflicted
on Areola.
OPINION
The Court’s ruling is correct.
There is undoubtedly a contract of agency between
Malapit and Prudential Guarantee—with Malapit as agent
and the insurance company as principal. The law is clear
that the principal is bound by the actions of its agent so
as long the latter acted within the scope of its authority. In
the present case, while Malapit committed fraud, he did
the same under his capacity as agent of Prudential
Guarantee, as such the latter cannot escape liability to
Areola. While it is indeed true that the insurance
company was also defrauded by Malapit, this is an
altogether seperate matter. The same cannot work
against the prejudice of Areola.