COMMISSIONER OF INTERNAL REVENUE,
petitioner, vs. WILLIAM J. SUTER and THE
COURT OF TAX APPEALS, respondents.
REYES, J.B.L., J.:
A limited partnership, named "William J. Suter
'Morcoin' Co., Ltd.," was formed on 30
September 1947 by herein respondent William
J. Suter as the general partner, and Julia Spirig
and Gustav Carlson, as the limited partners. The
partners contributed, respectively, P20,000.00,
P18,000.00 and P2,000.00 to the partnership.
On 1 October 1947, the limited partnership was
registered with the Securities and Exchange
Commission. The firm engaged, among other
activities, in the importation, marketing,
distribution and operation of automatic
phonographs, radios, television sets and
amusement machines, their parts and
accessories. It had an office and held itself out
as a limited partnership, handling and carrying
merchandise, using invoices, bills and
letterheads bearing its trade-name, maintaining
its own books of accounts and bank accounts,
and had a quota allocation with the Central
Bank.
In 1948, however, general partner Suter and
limited partner Spirig got married and,
thereafter, on 18 December 1948, limited
partner Carlson sold his share in the partnership
to Suter and his wife. The sale was duly
recorded with the Securities and Exchange
Commission on 20 December 1948.
The limited partnership had been filing its
income tax returns as a corporation, without
objection by the herein petitioner,
Commissioner of Internal Revenue, until in 1959
when the latter, in an assessment, consolidated
the income of the firm and the individual
incomes of the partners-spouses Suter and
Spirig resulting in a determination of a
deficiency income tax against respondent Suter
in the amount of P2,678.06 for 1954 and
P4,567.00 for 1955.
Respondent Suter protested the assessment,
and requested its cancellation and withdrawal,
as not in accordance with law, but his request
was denied. Unable to secure a reconsideration,
he appealed to the Court of Tax Appeals, which
court, after trial, rendered a decision, on 11
November 1965, reversing that of the
Commissioner of Internal Revenue.
The present case is a petition for review, filed
by the Commissioner of Internal Revenue, of
the tax court's aforesaid decision. It raises these
issues:
(a) Whether or not the corporate personality of
the William J. Suter "Morcoin" Co., Ltd. should
be disregarded for income tax purposes,
considering that respondent William J. Suter
and his wife, Julia Spirig Suter actually formed a
single taxable unit; and
(b) Whether or not the partnership was
dissolved after the marriage of the partners,
respondent William J. Suter and Julia Spirig
Suter and the subsequent sale to them by the
remaining partner, Gustav Carlson, of his
participation of P2,000.00 in the partnership for
a nominal amount of P1.00.
The theory of the petitioner, Commissioner of
Internal Revenue, is that the marriage of Suter
and Spirig and their subsequent acquisition of
the interests of remaining partner Carlson in the
partnership dissolved the limited partnership,
and if they did not, the fiction of juridical
personality of the partnership should be
disregarded for income tax purposes because
the spouses have exclusive ownership and
control of the business; consequently the
income tax return of respondent Suter for the
years in question should have included his and
his wife's individual incomes and that of the
limited partnership, in accordance with Section
45 (d) of the National Internal Revenue Code,
which provides as follows:
(d) Husband and wife. — In the case of married
persons, whether citizens, residents or non-
residents, only one consolidated return for the
taxable year shall be filed by either spouse to
cover the income of both spouses; ....
In refutation of the foregoing, respondent Suter
maintains, as the Court of Tax Appeals held,
that his marriage with limited partner Spirig and
their acquisition of Carlson's interests in the
partnership in 1948 is not a ground for
dissolution of the partnership, either in the
Code of Commerce or in the New Civil Code,
and that since its juridical personality had not
been affected and since, as a limited
partnership, as contra distinguished from a duly
registered general partnership, it is taxable on
its income similarly with corporations, Suter
was not bound to include in his individual
return the income of the limited partnership.
We find the Commissioner's appeal
unmeritorious.
The thesis that the limited partnership, William
J. Suter "Morcoin" Co., Ltd., has been dissolved
by operation of law because of the marriage of
the only general partner, William J. Suter to the
originally limited partner, Julia Spirig one year
after the partnership was organized is rested by
the appellant upon the opinion of now Senator
Tolentino in Commentaries and Jurisprudence
on Commercial Laws of the Philippines, Vol. 1,
4th Ed., page 58, that reads as follows:
A husband and a wife may not enter into a
contract of general copartnership, because
under the Civil Code, which applies in the
absence of express provision in the Code of
Commerce, persons prohibited from making
donations to each other are prohibited from
entering into universal partnerships. (2
Echaverri 196) It follows that the marriage of
partners necessarily brings about the
dissolution of a pre-existing partnership. (1 Guy
de Montella 58)
The petitioner-appellant has evidently failed to
observe the fact that William J. Suter "Morcoin"
Co., Ltd. was not a universal partnership, but a
particular one. As appears from Articles 1674
and 1675 of the Spanish Civil Code, of 1889
(which was the law in force when the subject
firm was organized in 1947), a universal
partnership requires either that the object of
the association be all the present property of
the partners, as contributed by them to the
common fund, or else "all that the partners may
acquire by their industry or work during the
existence of the partnership". William J. Suter
"Morcoin" Co., Ltd. was not such a universal
partnership, since the contributions of the
partners were fixed sums of money, P20,000.00
by William Suter and P18,000.00 by Julia Spirig
and neither one of them was an industrial
partner. It follows that William J. Suter
"Morcoin" Co., Ltd. was not a partnership that
spouses were forbidden to enter by Article 1677
of the Civil Code of 1889.
The former Chief Justice of the Spanish
Supreme Court, D. Jose Casan, in his Derecho
Civil, 7th Edition, 1952, Volume 4, page 546,
footnote 1, says with regard to the prohibition
contained in the aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar
entre si el contrato de sociedad universal, pero
o podran constituir sociedad particular? Aunque
el punto ha sido muy debatido, nos inclinamos a
la tesis permisiva de los contratos de sociedad
particular entre esposos, ya que ningun
precepto de nuestro Codigo los prohibe, y hay
que estar a la norma general segun la que toda
persona es capaz para contratar mientras no
sea declarado incapaz por la ley. La
jurisprudencia de la Direccion de los Registros
fue favorable a esta misma tesis en su
resolution de 3 de febrero de 1936, mas parece
cambiar de rumbo en la de 9 de marzo de 1943.
Nor could the subsequent marriage of the
partners operate to dissolve it, such marriage
not being one of the causes provided for that
purpose either by the Spanish Civil Code or the
Code of Commerce.
The appellant's view, that by the marriage of
both partners the company became a single
proprietorship, is equally erroneous. The capital
contributions of partners William J. Suter and
Julia Spirig were separately owned and
contributed by them before their marriage; and
after they were joined in wedlock, such
contributions remained their respective
separate property under the Spanish Civil Code
(Article 1396):
The following shall be the exclusive property of
each spouse:
(a) That which is brought to the marriage as his
or her own; ....
Thus, the individual interest of each consort in
William J. Suter "Morcoin" Co., Ltd. did not
become common property of both after their
marriage in 1948.
It being a basic tenet of the Spanish and
Philippine law that the partnership has a
juridical personality of its own, distinct and
separate from that of its partners (unlike
American and English law that does not
recognize such separate juridical personality),
the bypassing of the existence of the limited
partnership as a taxpayer can only be done by
ignoring or disregarding clear statutory
mandates and basic principles of our law. The
limited partnership's separate individuality
makes it impossible to equate its income with
that of the component members. True, section
24 of the Internal Revenue Code merges
registered general co-partnerships (compañias
colectivas) with the personality of the individual
partners for income tax purposes. But this rule
is exceptional in its disregard of a cardinal tenet
of our partnership laws, and can not be
extended by mere implication to limited
partnerships.
The rulings cited by the petitioner (Collector of
Internal Revenue vs. University of the Visayas,
L-13554, Resolution of 30 October 1964, and
Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as
authority for disregarding the fiction of legal
personality of the corporations involved therein
are not applicable to the present case. In the
cited cases, the corporations were already
subject to tax when the fiction of their
corporate personality was pierced; in the
present case, to do so would exempt the limited
partnership from income taxation but would
throw the tax burden upon the partners-
spouses in their individual capacities. The
corporations, in the cases cited, merely served
as business conduits or alter egos of the
stockholders, a factor that justified a disregard
of their corporate personalities for tax
purposes. This is not true in the present case.
Here, the limited partnership is not a mere
business conduit of the partner-spouses; it was
organized for legitimate business purposes; it
conducted its own dealings with its customers
prior to appellee's marriage, and had been filing
its own income tax returns as such independent
entity. The change in its membership, brought
about by the marriage of the partners and their
subsequent acquisition of all interest therein, is
no ground for withdrawing the partnership
from the coverage of Section 24 of the tax code,
requiring it to pay income tax. As far as the
records show, the partners did not enter into
matrimony and thereafter buy the interests of
the remaining partner with the premeditated
scheme or design to use the partnership as a
business conduit to dodge the tax laws.
Regularity, not otherwise, is presumed.
As the limited partnership under consideration
is taxable on its income, to require that income
to be included in the individual tax return of
respondent Suter is to overstretch the letter
and intent of the law. In fact, it would even
conflict with what it specifically provides in its
Section 24: for the appellant Commissioner's
stand results in equal treatment, tax wise, of a
general copartnership (compañia colectiva) and
a limited partnership, when the code plainly
differentiates the two. Thus, the code taxes the
latter on its income, but not the former,
because it is in the case of compañias colectivas
that the members, and not the firm, are taxable
in their individual capacities for any dividend or
share of the profit derived from the duly
registered general partnership (Section 26,
N.I.R.C.; Arañas, Anno. & Juris. on the N.I.R.C.,
As Amended, Vol. 1, pp. 88-89).lawphi1.nêt
But it is argued that the income of the limited
partnership is actually or constructively the
income of the spouses and forms part of the
conjugal partnership of gains. This is not wholly
correct. As pointed out in Agapito vs. Molo 50
Phil. 779, and People's Bank vs. Register of
Deeds of Manila, 60 Phil. 167, the fruits of the
wife's parapherna become conjugal only when
no longer needed to defray the expenses for
the administration and preservation of the
paraphernal capital of the wife. Then again, the
appellant's argument erroneously confines itself
to the question of the legal personality of the
limited partnership, which is not essential to the
income taxability of the partnership since the
law taxes the income of even joint accounts
that have no personality of their own. 1
Appellant is, likewise, mistaken in that it
assumes that the conjugal partnership of gains
is a taxable unit, which it is not. What is taxable
is the "income of both spouses" (Section 45 [d]
in their individual capacities. Though the
amount of income (income of the conjugal
partnership vis-a-vis the joint income of
husband and wife) may be the same for a given
taxable year, their consequences would be
different, as their contributions in the business
partnership are not the same.
The difference in tax rates between the income
of the limited partnership being consolidated
with, and when split from the income of the
spouses, is not a justification for requiring
consolidation; the revenue code, as it presently
stands, does not authorize it, and even bars it
by requiring the limited partnership to pay tax
on its own income.
FOR THE FOREGOING REASONS, the decision
under review is hereby affirmed. No costs.
LIM TONG LIM, petitioner, vs. PHILIPPINE
FISHING GEAR INDUSTRIES, INC., respondent.
DECISION
PANGANIBAN, J.:
A partnership may be deemed to exist among
parties who agree to borrow money to pursue a
business and to divide the profits or losses that
may arise therefrom, even if it is shown that
they have not contributed any capital of their
own to a "common fund." Their contribution
may be in the form of credit or industry, not
necessarily cash or fixed assets. Being partners,
they are all liable for debts incurred by or on
behalf of the partnership. The liability for a
contract entered into on behalf of an
unincorporated association or ostensible
corporation may lie in a person who may not
have directly transacted on its behalf, but
reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before
us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV
41477, which disposed as follows:
WHEREFORE, [there being] no reversible error
in the appealed decision, the same is hereby
affirmed.
The decretal portion of the Quezon City
Regional Trial Court (RTC) ruling, which was
affirmed by the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of
preliminary attachment issued by this Court on
September 20, 1990;
2. That defendants are jointly liable to plaintiff
for the following amounts, subject to the
modifications as hereinafter made by reason of
the special and unique facts and circumstances
and the proceedings that transpired during the
trial of this case;
a. P532,045.00 representing [the] unpaid
purchase price of the fishing nets covered by
the Agreement plus P68,000.00 representing
the unpaid price of the floats not covered by
said Agreement;
b. 12% interest per annum counted from date
of plaintiffs invoices and computed on their
respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No.
14407 for P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No.
14413 for P146,868.00 dated February 13,
1990;
iii. Accrued interest of P12,920.00 on Invoice
No. 14426 for P68,000.00 dated February 19,
1990;
c. P50,000.00 as and for attorneys fees, plus
P8,500.00 representing P500.00 per appearance
in court;
d. P65,000.00 representing P5,000.00 monthly
rental for storage charges on the nets counted
from September 20, 1990 (date of attachment)
to September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants
for the principal obligation or for the unpaid
price of nets and floats in the amount of
P532,045.00 and P68,000.00, respectively, or
for the total amount of P600,045.00, this Court
noted that these items were attached to
guarantee any judgment that may be rendered
in favor of the plaintiff but, upon agreement of
the parties, and, to avoid further deterioration
of the nets during the pendency of this case, it
was ordered sold at public auction for not less
than P900,000.00 for which the plaintiff was the
sole and winning bidder. The proceeds of the
sale paid for by plaintiff was deposited in court.
In effect, the amount of P900,000.00 replaced
the attached property as a guaranty for any
judgment that plaintiff may be able to secure in
this case with the ownership and possession of
the nets and floats awarded and delivered by
the sheriff to plaintiff as the highest bidder in
the public auction sale. It has also been noted
that ownership of the nets [was] retained by
the plaintiff until full payment [was] made as
stipulated in the invoices; hence, in effect, the
plaintiff attached its own properties. It [was] for
this reason also that this Court earlier ordered
the attachment bond filed by plaintiff to
guaranty damages to defendants to be
cancelled and for the P900,000.00 cash bidded
and paid for by plaintiff to serve as its bond in
favor of defendants.
From the foregoing, it would appear therefore
that whatever judgment the plaintiff may be
entitled to in this case will have to be satisfied
from the amount of P900,000.00 as this amount
replaced the attached nets and floats.
Considering, however, that the total judgment
obligation as computed above would amount to
only P840,216.92, it would be inequitable,
unfair and unjust to award the excess to the
defendants who are not entitled to damages
and who did not put up a single centavo to raise
the amount of P900,000.00 aside from the fact
that they are not the owners of the nets and
floats. For this reason, the defendants are
hereby relieved from any and all liabilities
arising from the monetary judgment obligation
enumerated above and for plaintiff to retain
possession and ownership of the nets and floats
and for the reimbursement of the P900,000.00
deposited by it with the Clerk of Court.
SO ORDERED.
The Facts
On behalf of "Ocean Quest Fishing
Corporation," Antonio Chua and Peter Yao
entered into a Contract dated February 7, 1990,
for the purchase of fishing nets of various sizes
from the Philippine Fishing Gear Industries, Inc.
(herein respondent). They claimed that they
were engaged in a business venture with
Petitioner Lim Tong Lim, who however was not
a signatory to the agreement. The total price of
the nets amounted to P532,045. Four hundred
pieces of floats worth P68,000 were also sold to
the Corporation.
The buyers, however, failed to pay for the
fishing nets and the floats; hence, private
respondent filed a collection suit against Chua,
Yao and Petitioner Lim Tong Lim with a prayer
for a writ of preliminary attachment. The suit
was brought against the three in their capacities
as general partners, on the allegation that
Ocean Quest Fishing Corporation was a
nonexistent corporation as shown by a
Certification from the Securities and Exchange
Commission.[5] On September 20, 1990, the
lower court issued a Writ of Preliminary
Attachment, which the sheriff enforced by
attaching the fishing nets on board F/B Lourdes
which was then docked at the Fisheries Port,
Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed
a Manifestation admitting his liability and
requesting a reasonable time within which to
pay. He also turned over to respondent some of
the nets which were in his possession. Peter Yao
filed an Answer, after which he was deemed to
have waived his right to cross-examine
witnesses and to present evidence on his
behalf, because of his failure to appear in
subsequent hearings. Lim Tong Lim, on the
other hand, filed an Answer with Counterclaim
and Crossclaim and moved for the lifting of the
Writ of Attachment.[6] The trial court
maintained the Writ, and upon motion of
private respondent, ordered the sale of the
fishing nets at a public auction. Philippine
Fishing Gear Industries won the bidding and
deposited with the said court the sales
proceeds of P900,000.
On November 18, 1992, the trial court rendered
its Decision, ruling that Philippine Fishing Gear
Industries was entitled to the Writ of
Attachment and that Chua, Yao and Lim, as
general partners, were jointly liable to pay
respondent.
The trial court ruled that a partnership among
Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2)
on a Compromise Agreement executed by the
three[9] in Civil Case No. 1492-MN which Chua
and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of
nullity of commercial documents; (b) a
reformation of contracts; (c) a declaration of
ownership of fishing boats; (d) an injunction
and (e) damages.[10] The Compromise
Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim
agree to have the four (4) vessels sold in the
amount of P5,750,000.00 including the fishing
net. This P5,750,000.00 shall be applied as full
payment for P3,250,000.00 in favor of JL
Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will
be sold at a higher price than P5,750,000.00
whatever will be the excess will be divided into
3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3
Peter Yao;
c) If the proceeds of the sale the vessels will be
less than P5,750,000.00 whatever the
deficiency shall be shouldered and paid to JL
Holding Corporation by 1/3 Lim Tong Lim; 1/3
Antonio Chua; 1/3 Peter Yao.[11]
The trial court noted that the Compromise
Agreement was silent as to the nature of their
obligations, but that joint liability could be
presumed from the equal distribution of the
profit and loss.
Lim appealed to the Court of Appeals (CA)
which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that
petitioner was a partner of Chua and Yao in a
fishing business and may thus be held liable as a
such for the fishing nets and floats purchased
by and for the use of the partnership. The
appellate court ruled:
The evidence establishes that all the defendants
including herein appellant Lim Tong Lim
undertook a partnership for a specific
undertaking, that is for commercial fishing x x x.
Obviously, the ultimate undertaking of the
defendants was to divide the profits among
themselves which is what a partnership
essentially is x x x. By a contract of partnership,
two or more persons bind themselves to
contribute money, property or industry to a
common fund with the intention of dividing the
profits among themselves (Article 1767, New
Civil Code).
Hence, petitioner brought this recourse before
this Court.
The Issues
In his Petition and Memorandum, Lim asks this
Court to reverse the assailed Decision on the
following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING,
BASED ON A COMPROMISE AGREEMENT THAT
CHUA, YAO AND PETITIONER LIM ENTERED
INTO IN A SEPARATE CASE, THAT A
PARTNERSHIP AGREEMENT EXISTED AMONG
THEM.
II SINCE IT WAS ONLY CHUA WHO
REPRESENTED THAT HE WAS ACTING FOR
OCEAN QUEST FISHING CORPORATION WHEN
HE BOUGHT THE NETS FROM PHILIPPINE
FISHING, THE COURT OF APPEALS WAS
UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED
THE SEIZURE AND ATTACHMENT OF PETITIONER
LIMS GOODS.
In determining whether petitioner may be held
liable for the fishing nets and floats purchased
from respondent, the Court must resolve this
key issue: whether by their acts, Lim, Chua and
Yao could be deemed to have entered into a
partnership.
This Courts Ruling
The Petition is devoid of merit.
First and Second Issues: Existence of a
Partnership and Petitioner's Liability
In arguing that he should not be held liable for
the equipment purchased from respondent,
petitioner controverts the CA finding that a
partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its
finding on the Compromise Agreement alone.
Furthermore, he disclaims any direct
participation in the purchase of the nets,
alleging that the negotiations were conducted
by Chua and Yao only, and that he has not even
met the representatives of the respondent
company. Petitioner further argues that he was
a lessor, not a partner, of Chua and Yao, for the
"Contract of Lease" dated February 1, 1990,
showed that he had merely leased to the two
the main asset of the purported partnership --
the fishing boat F/B Lourdes. The lease was for
six months, with a monthly rental of P37,500
plus 25 percent of the gross catch of the boat.
We are not persuaded by the arguments of
petitioner. The facts as found by the two lower
courts clearly showed that there existed a
partnership among Chua, Yao and him,
pursuant to Article 1767 of the Civil Code which
provides:
Article 1767 - By the contract of partnership,
two or more persons bind themselves to
contribute money, property, or industry to a
common fund, with the intention of dividing the
profits among themselves.
Specifically, both lower courts ruled that a
partnership among the three existed based on
the following factual findings:
(1) That Petitioner Lim Tong Lim requested
Peter Yao who was engaged in commercial
fishing to join him, while Antonio Chua was
already Yaos partner;
(2) That after convening for a few times, Lim
Chua, and Yao verbally agreed to acquire two
fishing boats, the FB Lourdes and the FB Nelson
for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus
Lim, brother of Petitioner Lim Tong Lim, to
finance the venture.
(4) That they bought the boats from CMF
Fishing Corporation, which executed a Deed of
Sale over these two (2) boats in favor of
Petitioner Lim Tong Lim only to serve as security
for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the
refurbishing , re-equipping, repairing, dry
docking and other expenses for the boats would
be shouldered by Chua and Yao;
(6) That because of the unavailability of funds,
Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured
by a check, because of which, Yao and Chua
entrusted the ownership papers of two other
boats, Chuas FB Lady Anne Mel and Yaos FB
Tracy to Lim Tong Lim.
(7) That in pursuance of the business
agreement, Peter Yao and Antonio Chua bought
nets from Respondent Philippine Fishing Gear,
in behalf of "Ocean Quest Fishing Corporation,"
their purported business name.
(8) That subsequently, Civil Case No. 1492-MN
was filed in the Malabon RTC, Branch 72 by
Antonio Chua and Peter Yao against Lim Tong
Lim for (a) declaration of nullity of commercial
documents; (b) reformation of contracts; (c)
declaration of ownership of fishing boats; (4)
injunction; and (e) damages.
(9) That the case was amicably settled through
a Compromise Agreement executed between
the parties-litigants the terms of which are
already enumerated above.
From the factual findings of both lower courts,
it is clear that Chua, Yao and Lim had decided to
engage in a fishing business, which they started
by buying boats worth P3.35 million, financed
by a loan secured from Jesus Lim who was
petitioners brother. In their Compromise
Agreement, they subsequently revealed their
intention to pay the loan with the proceeds of
the sale of the boats, and to divide equally
among them the excess or loss. These boats,
the purchase and the repair of which were
financed with borrowed money, fell under the
term common fund under Article 1767. The
contribution to such fund need not be cash or
fixed assets; it could be an intangible like credit
or industry. That the parties agreed that any
loss or profit from the sale and operation of the
boats would be divided equally among them
also shows that they had indeed formed a
partnership.
Moreover, it is clear that the partnership
extended not only to the purchase of the boat,
but also to that of the nets and the floats. The
fishing nets and the floats, both essential to
fishing, were obviously acquired in furtherance
of their business. It would have been
inconceivable for Lim to involve himself so
much in buying the boat but not in the
acquisition of the aforesaid equipment, without
which the business could not have proceeded.
Given the preceding facts, it is clear that there
was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business.
They purchased the boats, which constituted
the main assets of the partnership, and they
agreed that the proceeds from the sales and
operations thereof would be divided among
them.
We stress that under Rule 45, a petition for
review like the present case should involve only
questions of law. Thus, the foregoing factual
findings of the RTC and the CA are binding on
this Court, absent any cogent proof that the
present action is embraced by one of the
exceptions to the rule. In assailing the factual
findings of the two lower courts, petitioner
effectively goes beyond the bounds of a
petition for review under Rule 45.
Compromise Agreement Not the Sole Basis of
Partnership
Petitioner argues that the appellate courts sole
basis for assuming the existence of a
partnership was the Compromise Agreement.
He also claims that the settlement was entered
into only to end the dispute among them, but
not to adjudicate their preexisting rights and
obligations. His arguments are baseless. The
Agreement was but an embodiment of the
relationship extant among the parties prior to
its execution.
A proper adjudication of claimants rights
mandates that courts must review and
thoroughly appraise all relevant facts. Both
lower courts have done so and have found,
correctly, a preexisting partnership among the
parties. In implying that the lower courts have
decided on the basis of one piece of document
alone, petitioner fails to appreciate that the CA
and the RTC delved into the history of the
document and explored all the possible
consequential combinations in harmony with
law, logic and fairness. Verily, the two lower
courts factual findings mentioned above
nullified petitioners argument that the
existence of a partnership was based only on
the Compromise Agreement.
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioners argument
that he was merely the lessor of the boats to
Chua and Yao, not a partner in the fishing
venture. His argument allegedly finds support in
the Contract of Lease and the registration
papers showing that he was the owner of the
boats, including F/B Lourdes where the nets
were found.
His allegation defies logic. In effect, he would
like this Court to believe that he consented to
the sale of his own boats to pay a debt of Chua
and Yao, with the excess of the proceeds to be
divided among the three of them. No lessor
would do what petitioner did. Indeed, his
consent to the sale proved that there was a
preexisting partnership among all three.
Verily, as found by the lower courts, petitioner
entered into a business agreement with Chua
and Yao, in which debts were undertaken in
order to finance the acquisition and the
upgrading of the vessels which would be used in
their fishing business. The sale of the boats, as
well as the division among the three of the
balance remaining after the payment of their
loans, proves beyond cavil that F/B Lourdes,
though registered in his name, was not his own
property but an asset of the partnership. It is
not uncommon to register the properties
acquired from a loan in the name of the person
the lender trusts, who in this case is the
petitioner himself. After all, he is the brother of
the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is
absurd -- for petitioner to sell his property to
pay a debt he did not incur, if the relationship
among the three of them was merely that of
lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of
corporation by estoppel, liability can be
imputed only to Chua and Yao, and not to him.
Again, we disagree.
Section 21 of the Corporation Code of the
Philippines provides:
Sec. 21. Corporation by estoppel. - All persons
who assume to act as a corporation knowing it
to be without authority to do so shall be liable
as general partners for all debts, liabilities and
damages incurred or arising as a result thereof:
Provided however, That when any such
ostensible corporation is sued on any
transaction entered by it as a corporation or on
any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate
personality.
One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
thereof on the ground that there was in fact no
corporation.
Thus, even if the ostensible corporate entity is
proven to be legally nonexistent, a party may be
estopped from denying its corporate existence.
The reason behind this doctrine is obvious - an
unincorporated association has no personality
and would be incompetent to act and
appropriate for itself the power and attributes
of a corporation as provided by law; it cannot
create agents or confer authority on another to
act in its behalf; thus, those who act or purport
to act as its representatives or agents do so
without authority and at their own risk. And as
it is an elementary principle of law that a
person who acts as an agent without authority
or without a principal is himself regarded as the
principal, possessed of all the right and subject
to all the liabilities of a principal, a person acting
or purporting to act on behalf of a corporation
which has no valid existence assumes such
privileges and obligations and becomes
personally liable for contracts entered into or
for other acts performed as such agent.
The doctrine of corporation by estoppel may
apply to the alleged corporation and to a third
party. In the first instance, an unincorporated
association, which represented itself to be a
corporation, will be estopped from denying its
corporate capacity in a suit against it by a third
person who relied in good faith on such
representation. It cannot allege lack of
personality to be sued to evade its
responsibility for a contract it entered into and
by virtue of which it received advantages and
benefits.
On the other hand, a third party who, knowing
an association to be unincorporated,
nonetheless treated it as a corporation and
received benefits from it, may be barred from
denying its corporate existence in a suit brought
against the alleged corporation. In such case, all
those who benefited from the transaction made
by the ostensible corporation, despite
knowledge of its legal defects, may be held
liable for contracts they impliedly assented to
or took advantage of.
There is no dispute that the respondent,
Philippine Fishing Gear Industries, is entitled to
be paid for the nets it sold. The only question
here is whether petitioner should be held jointly
liable with Chua and Yao. Petitioner contests
such liability, insisting that only those who dealt
in the name of the ostensible corporation
should be held liable. Since his name does not
appear on any of the contracts and since he
never directly transacted with the respondent
corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the
use of the nets found inside F/B Lourdes, the
boat which has earlier been proven to be an
asset of the partnership. He in fact questions
the attachment of the nets, because the Writ
has effectively stopped his use of the fishing
vessel.
It is difficult to disagree with the RTC and the CA
that Lim, Chua and Yao decided to form a
corporation. Although it was never legally
formed for unknown reasons, this fact alone
does not preclude the liabilities of the three as
contracting parties in representation of it.
Clearly, under the law on estoppel, those acting
on behalf of a corporation and those benefited
by it, knowing it to be without valid existence,
are held liable as general partners.
Technically, it is true that petitioner did not
directly act on behalf of the corporation.
However, having reaped the benefits of the
contract entered into by persons with whom he
previously had an existing relationship, he is
deemed to be part of said association and is
covered by the scope of the doctrine of
corporation by estoppel. We reiterate the ruling
of the Court in Alonso v. Villamor:
A litigation is not a game of technicalities in
which one, more deeply schooled and skilled in
the subtle art of movement and position ,
entraps and destroys the other. It is, rather, a
contest in which each contending party fully
and fairly lays before the court the facts in issue
and then, brushing aside as wholly trivial and
indecisive all imperfections of form and
technicalities of procedure, asks that justice be
done upon the merits. Lawsuits, unlike duels,
are not to be won by a rapiers thrust.
Technicality, when it deserts its proper office as
an aid to justice and becomes its great
hindrance and chief enemy, deserves scant
consideration from courts. There should be no
vested rights in technicalities.
Third Issue: Validity of Attachment
Finally, petitioner claims that the Writ of
Attachment was improperly issued against the
nets. We agree with the Court of Appeals that
this issue is now moot and academic. As
previously discussed, F/B Lourdes was an asset
of the partnership and that it was placed in the
name of petitioner, only to assure payment of
the debt he and his partners owed. The nets
and the floats were specifically manufactured
and tailor-made according to their own design,
and were bought and used in the fishing
venture they agreed upon. Hence, the issuance
of the Writ to assure the payment of the price
stipulated in the invoices is proper. Besides, by
specific agreement, ownership of the nets
remained with Respondent Philippine Fishing
Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the
assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.
GREGORIO F. ORTEGA, TOMAS O. DEL
CASTILLO, JR., and BENJAMIN T. BACORRO,
petitioners, vs. HON. COURT OF APPEALS,
SECURITIES AND EXCHANGE COMMISSION and
JOAQUIN L. MISA, respondents.
VITUG, J.:
The instant petition seeks a review of the
decision rendered by the Court of Appeals,
dated 26 February 1993, in CA-G.R. SP No.
24638 and No. 24648 affirming in toto that of
the Securities and Exchange Commission
("SEC") in SEC AC 254.
The antecedents of the controversy,
summarized by respondent Commission and
quoted at length by the appellate court in its
decision, are hereunder restated.
The law firm of ROSS, LAWRENCE, SELPH and
CARRASCOSO was duly registered in the
Mercantile Registry on 4 January 1937 and
reconstituted with the Securities and Exchange
Commission on 4 August 1948. The SEC records
show that there were several subsequent
amendments to the articles of partnership on
18 September 1958, to change the firm [name]
to ROSS, SELPH and CARRASCOSO; on 6 July
1965 . . . to ROSS, SELPH, SALCEDO, DEL
ROSARIO, BITO & MISA; on 18 April 1972 to
SALCEDO, DEL ROSARIO, BITO, MISA & LOZADA;
on 4 December 1972 to SALCEDO, DEL
ROSARIO, BITO, MISA & LOZADA; on 11 March
1977 to DEL ROSARIO, BITO, MISA & LOZADA;
on 7 June 1977 to BITO, MISA & LOZADA; on 19
December 1980, [Joaquin L. Misa] appellees
Jesus B. Bito and Mariano M. Lozada associated
themselves together, as senior partners with
respondents-appellees Gregorio F. Ortega,
Tomas O. del Castillo, Jr., and Benjamin Bacorro,
as junior partners.
On February 17, 1988, petitioner-appellant
wrote the respondents-appellees a letter
stating:
I am withdrawing and retiring from the firm of
Bito, Misa and Lozada, effective at the end of
this month.
"I trust that the accountants will be instructed
to make the proper liquidation of my
participation in the firm."
On the same day, petitioner-appellant wrote
respondents-appellees another letter stating:
"Further to my letter to you today, I would like
to have a meeting with all of you with regard to
the mechanics of liquidation, and more
particularly, my interest in the two floors of this
building. I would like to have this resolved soon
because it has to do with my own plans."
On 19 February 1988, petitioner-appellant
wrote respondents-appellees another letter
stating:
"The partnership has ceased to be mutually
satisfactory because of the working conditions
of our employees including the assistant
attorneys. All my efforts to ameliorate the
below subsistence level of the pay scale of our
employees have been thwarted by the other
partners. Not only have they refused to give
meaningful increases to the employees, even
attorneys, are dressed down publicly in a loud
voice in a manner that deprived them of their
self-respect. The result of such policies is the
formation of the union, including the assistant
attorneys."
On 30 June 1988, petitioner filed with this
Commission's Securities Investigation and
Clearing Department (SICD) a petition for
dissolution and liquidation of partnership,
docketed as SEC Case No. 3384 praying that the
Commission:
"1. Decree the formal dissolution and order
the immediate liquidation of (the partnership
of) Bito, Misa & Lozada;
"2. Order the respondents to deliver or pay
for petitioner's share in the partnership assets
plus the profits, rent or interest attributable to
the use of his right in the assets of the dissolved
partnership;
"3. Enjoin respondents from using the firm
name of Bito, Misa & Lozada in any of their
correspondence, checks and pleadings and to
pay petitioners damages for the use thereof
despite the dissolution of the partnership in the
amount of at least P50,000.00;
"4. Order respondents jointly and severally
to pay petitioner attorney's fees and expense of
litigation in such amounts as maybe proven
during the trial and which the Commission may
deem just and equitable under the premises but
in no case less than ten (10%) per cent of the
value of the shares of petitioner or
P100,000.00;
"5. Order the respondents to pay petitioner
moral damages with the amount of
P500,000.00 and exemplary damages in the
amount of P200,000.00.
"Petitioner likewise prayed for such other and
further reliefs that the Commission may deem
just and equitable under the premises."
On 13 July 1988, respondents-appellees filed
their opposition to the petition.
On 13 July 1988, petitioner filed his Reply to the
Opposition.
On 31 March 1989, the hearing officer rendered
a decision ruling that:
"[P]etitioner's withdrawal from the law firm
Bito, Misa & Lozada did not dissolve the said
law partnership. Accordingly, the petitioner and
respondents are hereby enjoined to abide by
the provisions of the Agreement relative to the
matter governing the liquidation of the shares
of any retiring or withdrawing partner in the
partnership interest."
On appeal, the SEC en banc reversed the
decision of the Hearing Officer and held that the
withdrawal of Attorney Joaquin L. Misa had
dissolved the partnership of "Bito, Misa &
Lozada." The Commission ruled that, being a
partnership at will, the law firm could be
dissolved by any partner at anytime, such as by
his withdrawal therefrom, regardless of good
faith or bad faith, since no partner can be
forced to continue in the partnership against his
will. In its decision, dated 17 January 1990, the
SEC held:
WHEREFORE, premises considered the appealed
order of 31 March 1989 is hereby REVERSED
insofar as it concludes that the partnership of
Bito, Misa & Lozada has not been dissolved. The
case is hereby REMANDED to the Hearing
Officer for determination of the respective
rights and obligations of the parties.2
The parties sought a reconsideration of the
above decision. Attorney Misa, in addition,
asked for an appointment of a receiver to take
over the assets of the dissolved partnership and
to take charge of the winding up of its affairs.
On 4 April 1991, respondent SEC issued an
order denying reconsideration, as well as
rejecting the petition for receivership, and
reiterating the remand of the case to the
Hearing Officer.
The parties filed with the appellate court
separate appeals (docketed CA-G.R. SP No.
24638 and CA-G.R. SP No. 24648).
During the pendency of the case with the Court
of Appeals, Attorney Jesus Bito and Attorney
Mariano Lozada both died on, respectively, 05
September 1991 and 21 December 1991. The
death of the two partners, as well as the
admission of new partners, in the law firm
prompted Attorney Misa to renew his
application for receivership (in CA G.R. SP No.
24648). He expressed concern over the need to
preserve and care for the partnership assets.
The other partners opposed the prayer.
The Court of Appeals, finding no reversible error
on the part of respondent Commission,
AFFIRMED in toto the SEC decision and order
appealed from. In fine, the appellate court held,
per its decision of 26 February 1993, (a) that
Atty. Misa's withdrawal from the partnership
had changed the relation of the parties and
inevitably caused the dissolution of the
partnership; (b) that such withdrawal was not in
bad faith; (c) that the liquidation should be to
the extent of Attorney Misa's interest or
participation in the partnership which could be
computed and paid in the manner stipulated in
the partnership agreement; (d) that the case
should be remanded to the SEC Hearing Officer
for the corresponding determination of the
value of Attorney Misa's share in the
partnership assets; and (e) that the
appointment of a receiver was unnecessary as
no sufficient proof had been shown to indicate
that the partnership assets were in any such
danger of being lost, removed or materially
impaired.
In this petition for review under Rule 45 of the
Rules of Court, petitioners confine themselves
to the following issues:
1. Whether or not the Court of Appeals
has erred in holding that the partnership of
Bito, Misa & Lozada (now Bito, Lozada, Ortega
& Castillo) is a partnership at will;
2. Whether or not the Court of Appeals
has erred in holding that the withdrawal of
private respondent dissolved the partnership
regardless of his good or bad faith; and
3. Whether or not the Court of Appeals
has erred in holding that private respondent's
demand for the dissolution of the partnership
so that he can get a physical partition of
partnership was not made in bad faith;
to which matters we shall, accordingly, likewise
limit ourselves.
A partnership that does not fix its term is a
partnership at will. That the law firm "Bito, Misa
& Lozada," and now "Bito, Lozada, Ortega and
Castillo," is indeed such a partnership need not
be unduly belabored. We quote, with approval,
like did the appellate court, the findings and
disquisition of respondent SEC on this matter;
viz:
The partnership agreement (amended articles
of 19 August 1948) does not provide for a
specified period or undertaking. The
"DURATION" clause simply states:
"5. DURATION. The partnership shall continue
so long as mutually satisfactory and upon the
death or legal incapacity of one of the partners,
shall be continued by the surviving partners."
The hearing officer however opined that the
partnership is one for a specific undertaking and
hence not a partnership at will, citing paragraph
2 of the Amended Articles of Partnership (19
August 1948):
"2. Purpose. The purpose for which the
partnership is formed, is to act as legal adviser
and representative of any individual, firm and
corporation engaged in commercial, industrial
or other lawful businesses and occupations; to
counsel and advise such persons and entities
with respect to their legal and other affairs; and
to appear for and represent their principals and
client in all courts of justice and government
departments and offices in the Philippines, and
elsewhere when legally authorized to do so."
The "purpose" of the partnership is not the
specific undertaking referred to in the law.
Otherwise, all partnerships, which necessarily
must have a purpose, would all be considered
as partnerships for a definite undertaking.
There would therefore be no need to provide
for articles on partnership at will as none would
so exist. Apparently what the law contemplates,
is a specific undertaking or "project" which has
a definite or definable period of completion.
The birth and life of a partnership at will is
predicated on the mutual desire and consent of
the partners. The right to choose with whom a
person wishes to associate himself is the very
foundation and essence of that partnership. Its
continued existence is, in turn, dependent on
the constancy of that mutual resolve, along
with each partner's capability to give it, and the
absence of a cause for dissolution provided by
the law itself. Verily, any one of the partners
may, at his sole pleasure, dictate a dissolution
of the partnership at will. He must, however,
act in good faith, not that the attendance of bad
faith can prevent the dissolution of the
partnership but that it can result in a liability for
damages.
In passing, neither would the presence of a
period for its specific duration or the statement
of a particular purpose for its creation prevent
the dissolution of any partnership by an act or
will of a partner.6 Among partners,7 mutual
agency arises and the doctrine of delectus
personae allows them to have the power,
although not necessarily the right, to dissolve
the partnership. An unjustified dissolution by
the partner can subject him to a possible action
for damages.
The dissolution of a partnership is the change in
the relation of the parties caused by any
partner ceasing to be associated in the carrying
on, as might be distinguished from the winding
up of, the business.8 Upon its dissolution, the
partnership continues and its legal personality is
retained until the complete winding up of its
business culminating in its termination.
The liquidation of the assets of the partnership
following its dissolution is governed by various
provisions of the Civil Code; 10 however, an
agreement of the partners, like any other
contract, is binding among them and normally
takes precedence to the extent applicable over
the Code's general provisions. We here take
note of paragraph 8 of the "Amendment to
Articles of Partnership" reading thusly:
. . . In the event of the death or retirement of
any partner, his interest in the partnership shall
be liquidated and paid in accordance with the
existing agreements and his partnership
participation shall revert to the Senior Partners
for allocation as the Senior Partners may
determine; provided, however, that with
respect to the two (2) floors of office
condominium which the partnership is now
acquiring, consisting of the 5th and the 6th
floors of the Alpap Building, 140 Alfaro Street, of a partner is not contrary to the dictates of
Salcedo Village, Makati, Metro Manila, their justice and fairness, nor for the purpose of
true value at the time of such death or unduly visiting harm and damage upon the
retirement shall be determined by two (2) partnership, bad faith cannot be said to
independent appraisers, one to be appointed characterize the act. Bad faith, in the context
(by the partnership and the other by the) here used, is no different from its normal
retiring partner or the heirs of a deceased concept of a conscious and intentional design to
partner, as the case may be. In the event of any do a wrongful act for a dishonest purpose or
disagreement between the said appraisers a moral obliquity.
third appraiser will be appointed by them
whose decision shall be final. The share of the WHEREFORE, the decision appealed from is
retiring or deceased partner in the AFFIRMED. No pronouncement on costs.
aforementioned two (2) floor office SO ORDERED.
condominium shall be determined upon the
basis of the valuation above mentioned which
shall be paid monthly within the first ten (10)
days of every month in installments of not less
than P20,000.00 for the Senior Partners,
P10,000.00 in the case of two (2) existing Junior
Partners and P5,000.00 in the case of the new
Junior Partner. 11

The term "retirement" must have been used in

the articles, as we so hold, in a generic sense to
mean the dissociation by a partner, inclusive of
resignation or withdrawal, from the partnership
that thereby dissolves it.

On the third and final issue, we accord due

respect to the appellate court and respondent
Commission on their common factual finding,
i.e., that Attorney Misa did not act in bad faith.
Public respondents viewed his withdrawal to
have been spurred by "interpersonal conflict"
among the partners. It would not be right, we
agree, to let any of the partners remain in the
partnership under such an atmosphere of
animosity; certainly, not against their will. 12
Indeed, for as long as the reason for withdrawal
CHARLES F. WOODHOUSE, plaintiff-appellant,
vs. FORTUNATO F. HALILI, defendant-appellant.
LABRADOR, J.:
On November 29, 1947, the plaintiff entered on
a written agreement, Exhibit A, with the
defendant, the most important provisions of
which are (1) that they shall organize a
partnership for the bottling and distribution of
Mision soft drinks, plaintiff to act as industrial
partner or manager, and the defendant as a
capitalist, furnishing the capital necessary
therefor; (2) that the defendant was to decide
matters of general policy regarding the
business, while the plaintiff was to attend to the
operation and development of the bottling
plant; (3) that the plaintiff was to secure the
Mission Soft Drinks franchise for and in behalf
of the proposed partnership; and (4) that the
plaintiff was to receive 30 per cent of the net
profits of the business. The above agreement
was arrived at after various conferences and
consultations by and between them, with the
assistance of their respective attorneys. Prior to
entering into this agreement, plaintiff had
informed the Mission Dry Corporation of Los
Angeles, California, U.S.A., manufacturers of the
bases and ingridients of the beverages bearing
its name, that he had interested a prominent
financier (defendant herein) in the business,
who was willing to invest half a million dollars in
the bottling and distribution of the said
beverages, and requested, in order that he may
close the deal with him, that the right to bottle
and distribute be granted him for a limited time
under the condition that it will finally be
transferred to the corporation (Exhibit H).
Pursuant for this request, plaintiff was given "a
thirty-days" option on exclusive bottling and
distribution rights for the Philippines" (Exhibit
J). Formal negotiations between plaintiff and
defendant began at a meeting on November 27,
1947, at the Manila Hotel, with their lawyers
attending. Before this meeting plaintiff's lawyer
had prepared the draft of the agreement,
Exhibit II or OO, but this was not satisfactory
because a partnership, instead of a corporation,
was desired. Defendant's lawyer prepared after
the meeting his own draft, Exhibit HH. This last
draft appears to be the main basis of the
agreement, Exhibit A.
The contract was finally signed by plaintiff on
December 3, 1947. Plaintiff did not like to go to
the United States without the agreement being
not first signed. On that day plaintiff and
defendant went to the United States, and on
December 10, 1947, a franchise agreement
(Exhibit V) was entered into the Mission Dry
Corporation and Fortunato F. Halili and/or
Charles F. Woodhouse, granted defendant the
exclusive right, license, and authority to
produce, bottle, distribute, and sell Mision
beverages in the Philippines. The plaintiff and
the defendant thereafter returned to the
Philippines. Plaintiff reported for duty in
January, 1948, but operations were not begun
until the first week of February, 1948. In
January plaintiff was given as advance, on
account of profits, the sum of P2,000, besides
the use of a car; in February, 1948, also P2,000,
and in March only P1,000. The car was
withdrawn from plaintiff on March 9, 1948.
When the bottling plant was already on
operation, plaintiff demanded of defendant that
the partnership papers be executed. At first
defendant executed himself, saying there was
no hurry. Then he promised to do so after the
sales of the product had been increased to
P50,000. As nothing definite was forthcoming,
after this condition was attained, and as
defendant refused to give further allowances to
plaintiff, the latter caused his attorneys to take
up the matter with the defendant with a view
to a possible settlement. as none could be
arrived at, the present action was instituted.
In his complaint plaintiff asks for the execution
of the contract of partnership, an accounting of
the profits, and a share thereof of 30 per cent,
as well as damages in the amount of P200,000.
In his answer defendant alleges by way of
defense (1) that defendant's consent to the
agreement, Exhibit A, was secured by the
representation of plaintiff that he was the
owner, or was about to become owner of an
exclusive bottling franchise, which
representation was false, and plaintiff did not
secure the franchise, but was given to
defendant himself; (2) that defendant did not
fail to carry out his undertakings, but that it was
plaintiff who failed; (3) that plaintiff agreed to
contribute the exclusive franchise to the
partnership, but plaintiff failed to do so. He also
presented a counter-claim for P200,000 as
damages. On these issues the parties went to
trial, and thereafter the Court of First Instance
rendered judgment ordering defendant to
render an accounting of the profits of the
bottling and distribution business, subject of
the action, and to pay plaintiff 15 percent
thereof. it held that the execution of the
contract of partnership could not be enforced
upon the parties, but it also held that the
defense of fraud was not proved. Against this
judgment both parties have appealed.
The most important question of fact to be
determined is whether defendant had falsely
represented that he had an exclusive franchise
to bottle Mission beverages, and whether this
false representation or fraud, if it existed,
annuls the agreement to form the partnership.
The trial court found that it is improbable that
defendant was never shown the letter, Exhibit J,
granting plaintiff had; that the drafts of the
contract prior to the final one cannot be
considered for the purpose of determining the
issue, as they are presumed to have been
already integrated into the final agreement;
that fraud is never presumed and must be
proved; that the parties were represented by
attorneys, and that if any party thereto got the
worse part of the bargain, this fact alone would
not invalidate the agreement. On this appeal
the defendant, as appellant, insists that plaintiff
did represent to the defendant that he had an
exclusive franchise, when as a matter of fact, at
the time of its execution, he no longer had it as
the same had expired, and that, therefore, the
consent of the defendant to the contract was
vitiated by fraud and it is, consequently, null
and void.
Our study of the record and a consideration of
all the surrounding circumstances lead us to
believe that defendant's contention is not
without merit. Plaintiff's attorney, Mr. Laurea,
testified that Woodhouse presented himself as
being the exclusive grantee of a franchise, thus:
A. I don't recall any discussion about that
matter. I took along with me the file of the
office with regards to this matter. I notice from
the first draft of the document which I prepared
which calls for the organization of a
corporation, that the manager, that is, Mr.
Woodhouse, is represented as being the
exclusive grantee of a franchise from the
Mission Dry Corporation. . . . (t.s.n., p.518)
As a matter of fact, the first draft that Mr.
Laurea prepared, which was made before the
Manila Hotel conference on November 27th,
expressly states that plaintiff had the exclusive
franchise. Thus, the first paragraph states:
Whereas, the manager is the exclusive grantee
of a franchise from the Mission Dry Corporation
San Francisco, California, for the bottling of
Mission products and their sale to the public
throughout the Philippines; . . . .
3. The manager, upon the organization of the
said corporation, shall forthwith transfer to the
said corporation his exclusive right to bottle
Mission products and to sell them throughout
the Philippines. . . . .
(Exhibit II; emphasis ours)
The trial court did not consider this draft on the
principle of integration of jural acts. We find
that the principle invoked is inapplicable, since
the purpose of considering the prior draft is not
to vary, alter, or modify the agreement, but to
discover the intent of the parties thereto and
the circumstances surrounding the execution of
the contract. The issue of fact is: Did plaintiff
represent to defendant that he had an exclusive
franchise? Certainly, his acts or statements
prior to the agreement are essential and
relevant to the determination of said issue. The
act or statement of the plaintiff was not sought
to be introduced to change or alter the terms of
the agreement, but to prove how he induced
the defendant to enter into it — to prove the
representations or inducements, or fraud, with
which or by which he secured the other party's
consent thereto. These are expressly excluded
from the parol evidence rule. (Bough and Bough
vs. Cantiveros and Hanopol, 40 Phil., 209; port
Banga Lumber Co. vs. Export & Import Lumber
Co., 26 Phil., 602; III Moran 221,1952 rev. ed.)
Fraud and false representation are an incident
to the creation of a jural act, not to its
integration, and are not governed by the rules
on integration. Were parties prohibited from
proving said representations or inducements,
on the ground that the agreement had already
been entered into, it would be impossible to
prove misrepresentation or fraud. Furthermore,
the parol evidence rule expressly allows the
evidence to be introduced when the validity of
an instrument is put in issue by the pleadings
(section 22, par. (a), Rule 123, Rules of Court),as
in this case.
That plaintiff did make the representation can
also be easily gleaned from his own letters and
his own testimony. In his letter to Mission Dry
Corporation, Exhibit H, he said:.
. . . He told me to come back to him when I was
able to speak with authority so that we could
come to terms as far as he and I were
concerned. That is the reason why the cable
was sent. Without this authority, I am in a poor
bargaining position. . .
I would propose that you grant me the exclusive
bottling and distributing rights for a limited
period of time, during which I may consummate
my plants. . . .
By virtue of this letter the option on exclusive
bottling was given to the plaintiff on October
14, 1947. (See Exhibit J.) If this option for an
exclusive franchise was intended by plaintiff as
an instrument with which to bargain with
defendant and close the deal with him, he must
have used his said option for the above-
indicated purpose, especially as it appears that
he was able to secure, through its use, what he
wanted.
Plaintiff's own version of the preliminary
conversation he had with defendant is to the
effect that when plaintiff called on the latter,
the latter answered, "Well, come back to me
when you have the authority to operate. I am
definitely interested in the bottling business."
(t. s. n., pp. 60-61.) When after the elections of
1949 plaintiff went to see the defendant (and at
that time he had already the option), he must
have exultantly told defendant that he had the
authority already. It is improbable and
incredible for him to have disclosed the fact
that he had only an option to the exclusive
franchise, which was to last thirty days only,
and still more improbable for him to have
disclosed that, at the time of the signing of the
formal agreement, his option had already
expired. Had he done so, he would have
destroyed all his bargaining power and
authority, and in all probability lost the deal
itself.
The trial court reasoned, and the plaintiff on
this appeal argues, that plaintiff only undertook
in the agreement "to secure the Mission Dry
franchise for and in behalf of the proposed
partnership." The existence of this provision in
the final agreement does not militate against
plaintiff having represented that he had the
exclusive franchise; it rather strengthens belief
that he did actually make the representation.
How could plaintiff assure defendant that he
would get the franchise for the latter if he had
not actually obtained it for himself? Defendant
would not have gone into the business unless
the franchise was raised in his name, or at least
in the name of the partnership. Plaintiff assured
defendant he could get the franchise. Thus, in
the draft prepared by defendant's attorney,
Exhibit HH, the above provision is inserted, with
the difference that instead of securing the
franchise for the defendant, plaintiff was to
secure it for the partnership. To show that the
insertion of the above provision does not
eliminate the probability of plaintiff
representing himself as the exclusive grantee of
the franchise, the final agreement contains in
its third paragraph the following:
. . . and the manager is ready and willing to
allow the capitalists to use the exclusive
franchise . . .
and in paragraph 11 it also expressly states:
1. In the event of the dissolution or termination
of the partnership, . . . the franchise from
Mission Dry Corporation shall be reassigned to
the manager.
These statements confirm the conclusion that
defendant believed, or was made to believe,
that plaintiff was the grantee of an exclusive
franchise. Thus it is that it was also agreed upon
that the franchise was to be transferred to the
name of the partnership, and that, upon its
dissolution or termination, the same shall be
reassigned to the plaintiff.
Again, the immediate reaction of defendant,
when in California he learned that plaintiff did
not have the exclusive franchise, was to reduce,
as he himself testified, plaintiff's participation in
the net profits to one half of that agreed upon.
He could not have had such a feeling had not
plaintiff actually made him believe that he
(plaintiff) was the exclusive grantee of the
franchise.
The learned trial judge reasons in his decision
that the assistance of counsel in the making of
the contract made fraud improbable. Not
necessarily, because the alleged representation
took place before the conferences were had, in
other words, plaintiff had already represented
to defendant, and the latter had already
believed in, the existence of plaintiff's exclusive
franchise before the formal negotiations, and
they were assisted by their lawyers only when
said formal negotiations actually took place.
Furthermore, plaintiff's attorney testified that
plaintiff had said that he had the exclusive
franchise; and defendant's lawyer testified that
plaintiff explained to him, upon being asked for
the franchise, that he had left the papers
evidencing it.(t.s.n., p. 266.)
We conclude from all the foregoing that
plaintiff did actually represent to defendant
that he was the holder of the exclusive
franchise. The defendant was made to believe,
and he actually believed, that plaintiff had the
exclusive franchise. Defendant would not
perhaps have gone to California and incurred
expenses for the trip, unless he believed that
plaintiff did have that exclusive privilege, and
that the latter would be able to get the same
from the Mission Dry Corporation itself. Plaintiff
knew what defendant believed about his
(plaintiff's) exclusive franchise, as he induced
him to that belief, and he may not be allowed
to deny that defendant was induced by that
belief. (IX Wigmore, sec. 2423; Sec. 65, Rule
123, Rules of Court.)
We now come to the legal aspect of the false
representation. Does it amount to a fraud that
would vitiate the contract? It must be noted
that fraud is manifested in illimitable number of
degrees or gradations, from the innocent
praises of a salesman about the excellence of
his wares to those malicious machinations and
representations that the law punishes as a
crime. In consequence, article 1270 of the
Spanish Civil Code distinguishes two kinds of
(civil) fraud, the causal fraud, which may be a
ground for the annulment of a contract, and the
incidental deceit, which only renders the party
who employs it liable for damages. This Court
had held that in order that fraud may vitiate
consent, it must be the causal (dolo causante),
not merely the incidental (dolo causante),
inducement to the making of the contract.
(Article 1270, Spanish Civil Code; Hill vs. Veloso,
31 Phil. 160.) The record abounds with
circumstances indicative that the fact that the
principal consideration, the main cause that
induced defendant to enter into the partnership
agreement with plaintiff, was the ability of
plaintiff to get the exclusive franchise to bottle
and distribute for the defendant or for the
partnership. The original draft prepared by
defendant's counsel was to the effect that
plaintiff obligated himself to secure a franchise
for the defendant. Correction appears in this
same original draft, but the change is made not
as to the said obligation but as to the grantee.
In the corrected draft the word
"capitalist"(grantee) is changed to
"partnership." The contract in its final form
retains the substituted term "partnership." The
defendant was, therefore, led to the belief that
plaintiff had the exclusive franchise, but that
the same was to be secured for or transferred
to the partnership. The plaintiff no longer had
the exclusive franchise, or the option thereto, at
the time the contract was perfected. But while
he had already lost his option thereto (when
the contract was entered into), the principal
obligation that he assumed or undertook was to
secure said franchise for the partnership, as the
bottler and distributor for the Mission Dry
Corporation. We declare, therefore, that if he
was guilty of a false representation, this was not
the causal consideration, or the principal
inducement, that led plaintiff to enter into the
partnership agreement.
But, on the other hand, this supposed
ownership of an exclusive franchise was actually
the consideration or price plaintiff gave in
exchange for the share of 30 percent granted
him in the net profits of the partnership
business. Defendant agreed to give plaintiff 30
per cent share in the net profits because he was
transferring his exclusive franchise to the
partnership. Thus, in the draft prepared by
plaintiff's lawyer, Exhibit II, the following
provision exists:
3. That the MANAGER, upon the organization of
the said corporation, shall forthwith transfer to
the said corporation his exclusive right to bottle
Mission products and to sell them throughout
the Philippines. As a consideration for such
transfer, the CAPITALIST shall transfer to the
Manager fully paid non assessable shares of the
said corporation . . . twenty-five per centum of
the capital stock of the said corporation. (Par. 3,
Exhibit II; emphasis ours.)
Plaintiff had never been a bottler or a chemist;
he never had experience in the production or
distribution of beverages. As a matter of fact,
when the bottling plant being built, all that he
suggested was about the toilet facilities for the
laborers.
We conclude from the above that while the
representation that plaintiff had the exclusive
franchise did not vitiate defendant's consent to
the contract, it was used by plaintiff to get from
defendant a share of 30 per cent of the net
profits; in other words, by pretending that he
had the exclusive franchise and promising to
transfer it to defendant, he obtained the
consent of the latter to give him (plaintiff) a big
slice in the net profits. This is the dolo incidente
defined in article 1270 of the Spanish Civil Code,
because it was used to get the other party's
consent to a big share in the profits, an
incidental matter in the agreement.
El dolo incidental no es el que puede producirse
en el cumplimiento del contrato sino que
significa aqui, el que concurriendoen el
consentimiento, o precediendolo, no influyo
para arrancar porsi solo el consentimiento ni en
la totalidad de la obligacion, sinoen algun
extremo o accidente de esta, dando lugar tan
solo a una accion para reclamar indemnizacion
de perjuicios. (8 Manresa 602.)
Having arrived at the conclusion that the
agreement may not be declared null and void,
the question that next comes before us is, May
the agreement be carried out or executed? We
find no merit in the claim of plaintiff that the
partnership was already a fait accompli from
the time of the operation of the plant, as it is
evident from the very language of the
agreement that the parties intended that the
execution of the agreement to form a
partnership was to be carried out at a later
date. They expressly agreed that they shall form
a partnership. (Par. No. 1, Exhibit A.) As a
matter of fact, from the time that the franchise
from the Mission Dry Corporation was obtained
in California, plaintiff himself had been
demanding that defendant comply with the
agreement. And plaintiff's present action seeks
the enforcement of this agreement. Plaintiff's
claim, therefore, is both inconsistent with their
intention and incompatible with his own
conduct and suit.
As the trial court correctly concluded, the
defendant may not be compelled against his
will to carry out the agreement nor execute the
partnership papers. Under the Spanish Civil
Code, the defendant has an obligation to do,
not to give. The law recognizes the individual's
freedom or liberty to do an act he has promised
to do, or not to do it, as he pleases. It falls
within what Spanish commentators call a very
personal act (acto personalismo), of which
courts may not compel compliance, as it is
considered an act of violence to do so.
Efectos de las obligaciones consistentes en
hechos personalismo.—Tratamos de la
ejecucion de las obligaciones de hacer en el
solocaso de su incumplimiento por parte del
deudor, ya sean los hechos personalisimos, ya
se hallen en la facultad de un tercero; porque el
complimiento espontaneo de las mismas esta
regido por los preceptos relativos al pago, y en
nada les afectan las disposiciones del art. 1.098.
Esto supuesto, la primera dificultad del asunto
consiste en resolver si el deudor puede ser
precisado a realizar el hecho y porque medios.
Se tiene por corriente entre los autores, y se
traslada generalmente sin observacion el
principio romano nemo potest precise cogi ad
factum. Nadie puede ser obligado
violentamente a haceruna cosa. Los que
perciben la posibilidad de la destruccion deeste
principio, añaden que, aun cuando se pudiera
obligar al deudor, no deberia hacerse, porque
esto constituiria una violencia, y noes la
violenciamodo propio de cumplir las
obligaciones (Bigot, Rolland, etc.). El maestro
Antonio Gomez opinaba lo mismo cuandodecia
que obligar por la violencia seria infrigir la
libertad eimponer una especie de esclavitud.
xxx xxx xxx
En efecto; las obligaciones contractuales no se
acomodan biencon el empleo de la fuerza fisica,
no ya precisamente porque seconstituya de
este modo una especie de esclavitud, segun el
dichode Antonio Gomez, sino porque se supone
que el acreedor tuvo encuenta el caracter
personalisimo del hecho ofrecido, y calculo
sobre laposibilidad de que por alguna razon no
se realizase. Repugna,ademas, a la conciencia
social el empleo de la fuerza publica, mediante
coaccion sobre las personas, en las relaciones
puramente particulares; porque la evolucion de
las ideas ha ido poniendo masde relieve cada
dia el respeto a la personalidad humana, y nose
admite bien la violencia sobre el individuo la
cual tiene caracter visiblemente penal, sino por
motivos que interesen a la colectividad de
ciudadanos. Es, pues, posible y licita esta
violencia cuando setrata de las obligaciones que
hemos llamado ex lege, que afectanal orden
social y a la entidad de Estado, y aparecen
impuestas sinconsideracion a las conveniencias
particulares, y sin que por estemotivo puedan
tampoco ser modificadas; pero no debe serlo
cuandola obligacion reviste un interes
puramente particular, como sucedeen las
contractuales, y cuando, por consecuencia,
paraceria salirseel Estado de su esfera propia,
entrado a dirimir, con apoyo dela fuerza
colectiva, las diferencias producidas entre los
ciudadanos. (19 Scaevola 428, 431-432.)
The last question for us to decide is that of
damages,damages that plaintiff is entitled to
receive because of defendant's refusal to form
the partnership, and damages that defendant is
also entitled to collect because of the falsity of
plaintiff's representation. (Article 1101, Spanish
Civil Code.) Under article 1106 of the Spanish
Civil Code the measure of damages is the actual
loss suffered and the profits reasonably
expected to be received, embraced in the terms
daño emergente and lucro cesante. Plaintiff is
entitled under the terms of the agreement to
30 per cent of the net profits of the business.
Against this amount of damages, we must set
off the damage defendant suffered by plaintiff's
misrepresentation that he had obtained a very
high percentage of share in the profits. We can
do no better than follow the appraisal that the
parties themselves had adopted.
When defendant learned in Los Angeles that
plaintiff did not have the exclusive franchise
which he pretended he had and which he had
agreed to transfer to the partnership, his
spontaneous reaction was to reduce plaintiff's
share form 30 per cent to 15 per cent only, to
which reduction defendant appears to have
readily given his assent. It was under this
understanding, which amounts to a virtual
modification of the contract, that the bottling
plant was established and plaintiff worked as
Manager for the first three months. If the
contract may not be considered modified as to
plaintiff's share in the profits, by the decision of
defendant to reduce the same to one-half and
the assent thereto of plaintiff, then we may
consider the said amount as a fair estimate of
the damages plaintiff is entitled to under the
principle enunciated in the case of Varadero de
Manila vs. Insular Lumber Co., 46 Phil. 176.
Defendant's decision to reduce plaintiff's share
and plaintiff's consent thereto amount to an
admission on the part of each of the
reasonableness of this amount as plaintiff's
share. This same amount was fixed by the trial
court. The agreement contains the stipulation
that upon the termination of the partnership,
defendant was to convey the franchise back to
plaintiff (Par. 11, Exhibit A). The judgment of
the trial court does not fix the period within
which these damages shall be paid to plaintiff.
In view of paragraph 11 of Exhibit A, we declare
that plaintiff's share of 15 per cent of the net
profits shall continue to be paid while
defendant uses the franchise from the Mission
Dry Corporation.

With the modification above indicated, the

judgment appealed from is hereby affirmed.
Without costs.
Alfredo Aguila Jr vs Court of Appeals et al
Business Organization – Partnership, Agency,
Trust – Identity Separate and Distinct
In April 1991, the spouses Ruben and Felicidad
Abrogar entered into a loan agreement with a
lending firm called A.C. Aguila & Sons, Co., a
partnership. The loan was for P200k. To secure
the loan, the spouses mortgaged their house
and lot located in a subdivision. The terms of
the loan further stipulates that in case of non-
payment, the property shall be automatically
appropriated to the partnership and a deed of
sale be readily executed in favor of the
partnership. She does have a 90 day
redemption period.
Ruben died, and Felicidad failed to make
payment. She refused to turn over the property
and so the firm filed an ejectment case against
her (wherein she lost). She also failed to
redeem the property within the period
stipulated. She then filed a civil case against
Alfredo Aguila, manager of the firm, seeking for
the declaration of nullity of the deed of sale.
The RTC retained the validity of the deed of
sale. The Court of Appeals reversed the RTC.
The CA ruled that the sale is void for it is a
pactum commissorium sale which is prohibited
under Art. 2088 of the Civil Code (note the
disparity of the purchase price, which is the
loan amount, with the actual value of the
property which is after all located in a
subdivision).
ISSUE: Whether or not the case filed by
Felicidad shall prosper.
HELD: No. Unfortunately, the civil case was filed
not against the real party in interest. As pointed
out by Aguila, he is not the real party in interest
but rather it was the partnership A.C. Aguila &
Sons, Co. The Rules of Court provide that “every
action must be prosecuted and defended in the
name of the real party in interest.” A real party
in interest is one who would be benefited or
injured by the judgment, or who is entitled to
the avails of the suit. Any decision rendered
against a person who is not a real party in
interest in the case cannot be executed. Hence,
a complaint filed against such a person should
be dismissed for failure to state a cause of
action, as in the case at bar.
Under Art. 1768 of the Civil Code, a partnership
“has a juridical personality separate and distinct
from that of each of the partners.” The partners
cannot be held liable for the obligations of the
partnership unless it is shown that the legal
fiction of a different juridical personality is
being used for fraudulent, unfair, or illegal
purposes. In this case, Felicidad has not shown
that A.C. Aguila & Sons, Co., as a separate
juridical entity, is being used for fraudulent,
unfair, or illegal purposes. Moreover, the title to
the subject property is in the name of A.C.
Aguila & Sons, Co. It is the partnership, not its
officers or agents, which should be impleaded
in any litigation involving property registered in
its name. A violation of this rule will result in
the dismissal of the complaint.
ANG PUE & COMPANY, ET AL., plaintiffs-
appellants, vs. SECRETARY OF COMMERCE AND
INDUSTRY, defendant-appellee.
DIZON, J.:
Action for declaratory relief filed in the Court of
First Instance of Iloilo by Ang Pue & Company,
Ang Pue and Tan Siong against the Secretary of
Commerce and Industry to secure judgment
"declaring that plaintiffs could extend for five
years the term of the partnership pursuant to
the provisions of plaintiffs' Amendment to the
Article of Co-partnership."
The answer filed by the defendant alleged, in
substance, that the extension for another five
years of the term of the plaintiffs' partnership
would be in violation of the provisions of
Republic Act No. 1180.
It appears that on May 1, 1953, Ang Pue and
Tan Siong, both Chinese citizens, organized the
partnership Ang Pue & Company for a term of
five years from May 1, 1953, extendible by their
mutual consent. The purpose of the partnership
was "to maintain the business of general
merchandising, buying and selling at wholesale
and retail, particularly of lumber, hardware and
other construction materials for commerce,
either native or foreign." The corresponding
articles of partnership (Exhibit B) were
registered in the Office of the Securities &
Exchange Commission on June 16, 1953.
On June 19, 1954 Republic Act No. 1180 was
enacted to regulate the retail business. It
provided, among other things, that, after its
enactment, a partnership not wholly formed by
Filipinos could continue to engage in the retail
business until the expiration of its term.
On April 15, 1958 — prior to the expiration of
the five-year term of the partnership Ang Pue &
Company, but after the enactment of the
Republic Act 1180, the partners already
mentioned amended the original articles of part
ownership (Exhibit B) so as to extend the term
of life of the partnership to another five years.
When the amended articles were presented for
registration in the Office of the Securities &
Exchange Commission on April 16, 1958,
registration was refused upon the ground that
the extension was in violation of the aforesaid
Act.
From the decision of the lower court dismissing
the action, with costs, the plaintiffs interposed
this appeal.
The question before us is too clear to require an
extended discussion. To organize a corporation
or a partnership that could claim a juridical
personality of its own and transact business as
such, is not a matter of absolute right but a
privilege which may be enjoyed only under such
terms as the State may deem necessary to
impose. That the State, through Congress, and
in the manner provided by law, had the right to
enact Republic Act No. 1180 and to provide
therein that only Filipinos and concerns wholly
owned by Filipinos may engage in the retail
business can not be seriously disputed. That this
provision was clearly intended to apply to
partnership already existing at the time of the
enactment of the law is clearly showing by its
provision giving them the right to continue
engaging in their retail business until the
expiration of their term or life.
To argue that because the original articles of
partnership provided that the partners could
extend the term of the partnership, the
provisions of Republic Act 1180 cannot be
adversely affect appellants herein, is to
erroneously assume that the aforesaid
provision constitute a property right of which
the partners can not be deprived without due
process or without their consent. The
agreement contain therein must be deemed
subject to the law existing at the time when the
partners came to agree regarding the extension.
In the present case, as already stated, when the
partners amended the articles of partnership,
the provisions of Republic Act 1180 were
already in force, and there can be not the
slightest doubt that the right claimed by
appellants to extend the original term of their
partnership to another five years would be in
violation of the clear intent and purpose of the
law aforesaid.

WHEREFORE, the judgment appealed from is

affirmed, with costs.
Afisco Insurance vs. CA
DECISION
PANGANIBAN, J.:
Pursuant to reinsurance treaties, a number of
local insurance firms formed themselves into a
pool in order to facilitate the handling of
business contracted with a nonresident foreign
reinsurance company. May the clearing house
or insurance pool so formed be deemed a
partnership or an association that is taxable as a
corporation under the National Internal
Revenue Code (NIRC)? Should the pools
remittances to the member companies and to
the said foreign firm be taxable as dividends?
Under the facts of this case, has the
governments right to assess and collect said tax
prescribed?
The Case
These are the main questions raised in the
Petition for Review on Certiorari before us,
assailing the October 11, 1993 Decision[1] of
the Court of Appeals[2]in CA-GR SP 29502,
which dismissed petitioners appeal of the
October 19, 1992 Decision[3] of the Court of
Tax Appeals[4] (CTA) which had previously
sustained petitioners liability for deficiency
income tax, interest and withholding tax. The
Court of Appeals ruled:
WHEREFORE, the petition is DISMISSED, with
costs against petitioners.
The petition also challenges the November 15,
1993 Court of Appeals (CA) Resolution[6]
denying reconsideration.
The Facts
The antecedent facts, as found by the Court of
Appeals, are as follows:
The petitioners are 41 non-life insurance
corporations, organized and existing under the
laws of the Philippines. Upon issuance by them
of Erection, Machinery Breakdown, Boiler
Explosion and Contractors All Risk insurance
policies, the petitioners on August 1, 1965
entered into a Quota Share Reinsurance Treaty
and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft
(hereafter called Munich), a non-resident
foreign insurance corporation. The reinsurance
treaties required petitioners to form a [p]ool.
Accordingly, a pool composed of the petitioners
was formed on the same day.
On April 14, 1976, the pool of machinery
insurers submitted a financial statement and
filed an Information Return of Organization
Exempt from Income Tax for the year ending in
1975, on the basis of which it was assessed by
the Commissioner of Internal Revenue
deficiency corporate taxes in the amount of
P1,843,273.60, and withholding taxes in the
amount of P1,768,799.39 and P89,438.68 on
dividends paid to Munich and to the petitioners,
respectively. These assessments were protested
by the petitioners through its auditors Sycip,
Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of
Internal Revenue denied the protest and
ordered the petitioners, assessed as Pool of
Machinery Insurers, to pay deficiency income
tax, interest, and with[h]olding tax, itemized as
follows:
The CA ruled in the main that the pool of
machinery insurers was a partnership taxable as
a corporation, and that the latters collection of
premiums on behalf of its members, the ceding
companies, was taxable income. It added that
prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due,
because the taxpayer cannot be located at the
address given in the information return filed.
Hence, this Petition for Review before us.[9]
The Issues
Before this Court, petitioners raise the following
issues:
1.Whether or not the Clearing House, acting as
a mere agent and performing strictly
administrative functions, and which did not
insure or assume any risk in its own name, was
a partnership or association subject to tax as a
corporation;
2.Whether or not the remittances to petitioners
and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their
individual and separate contracts of
reinsurance, were dividends subject to tax; and
3.Whether or not the respondent
Commissioners right to assess the Clearing
House had already prescribed.[10]
The Courts Ruling
The petition is devoid of merit. We sustain the
ruling of the Court of Appeals that the pool is
taxable as a corporation, and that the
governments right to assess and collect the
taxes had not prescribed.
First Issue: Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals
erred in finding that the pool or clearing house
was an informal partnership, which was taxable
as a corporation under the NIRC. They point out
that the reinsurance policies were written by
them individually and separately, and that their
liability was limited to the extent of their
allocated share in the original risks thus
reinsured.[11] Hence, the pool did not act or
earn income as a reinsurer.[12] Its role was
limited to its principal function of allocating and
distributing the risk(s) arising from the original
insurance among the signatories to the treaty
or the members of the pool based on their
ability to absorb the risk(s) ceded[;] as well as
the performance of incidental functions, such as
records, maintenance, collection and custody of
funds, etc.
Petitioners belie the existence of a partnership
in this case, because (1) they, the reinsurers, did
not share the same risk or solidary liability;[14]
(2) there was no common fund;[15] (3) the
executive board of the pool did not exercise
control and management of its funds, unlike the
board of directors of a corporation;[16] and (4)
the pool or clearing house was not and could
not possibly have engaged in the business of
reinsurance from which it could have derived
income for itself.
The Court is not persuaded. The opinion or
ruling of the Commission of Internal Revenue,
the agency tasked with the enforcement of tax
laws, is accorded much weight and even finality,
when there is no showing that it is patently
wrong,[18] particularly in this case where the
findings and conclusions of the internal revenue
commissioner were subsequently affirmed by
the CTA, a specialized body created for the
exclusive purpose of reviewing tax cases, and
the Court of Appeals. Indeed,
[I]t has been the long standing policy and
practice of this Court to respect the conclusions
of quasi-judicial agencies, such as the Court of
Tax Appeals which, by the nature of its
functions, is dedicated exclusively to the study
and consideration of tax problems and has
necessarily developed an expertise on the
subject, unless there has been an abuse or
improvident exercise of its authority.[20]
This Court rules that the Court of Appeals, in
affirming the CTA which had previously
sustained the internal revenue commissioner,
committed no reversible error. Section 24 of
the NIRC, as worded in the year ending 1975,
provides:
SEC. 24. Rate of tax on corporations. -- (a) Tax
on domestic corporations. -- A tax is hereby
imposed upon the taxable net income received
during each taxable year from all sources by
every corporation organized in, or existing
under the laws of the Philippines, no matter
how created or organized, but not including
duly registered general co-partnership
(compaias colectivas), general professional
partnerships, private educational institutions,
and building and loan associations xxx.
Ineludibly, the Philippine legislature included in
the concept of corporations those entities that
resembled them such as unregistered
partnerships and associations. Parenthetically,
the NLRCs inclusion of such entities in the tax
on corporations was made even clearer by the
Tax Reform Act of 1997,[21] which amended
the Tax Code. Pertinent provisions of the new
law read as follows:
SEC. 27. Rates of Income Tax on Domestic
Corporations. --
(A) In General. -- Except as otherwise provided
in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable
income derived during each taxable year from
all sources within and without the Philippines
by every corporation, as defined in Section 22
(B) of this Code, and taxable under this Title as a
corporation xxx.
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term corporation shall include
partnerships, no matter how created or
organized, joint-stock companies, joint accounts
(cuentas en participacion), associations, or
insurance companies, but does not include
general professional partnerships [or] a joint
venture or consortium formed for the purpose
of undertaking construction projects or
engaging in petroleum, coal, geothermal and
other energy operations pursuant to an
operating or consortium agreement under a
service contract without the Government.
General professional partnerships are
partnerships formed by persons for the sole
purpose of exercising their common profession,
no part of the income of which is derived from
engaging in any trade or business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of
Internal Revenue[22] held that Section 24
covered these unregistered partnerships and
even associations or joint accounts, which had
no legal personalities apart from their individual
members. The Court of Appeals astutely applied
Evangelista:
xxx Accordingly, a pool of individual real
property owners dealing in real estate business
was considered a corporation for purposes of
the tax in sec. 24 of the Tax Code in Evangelista
v. Collector of Internal Revenue, supra. The
Supreme Court said:
The term partnership includes a syndicate,
group, pool, joint venture or other
unincorporated organization, through or by
means of which any business, financial
operation, or venture is carried on. * * * (8
Mertens Law of Federal Income Taxation, p. 562
Note 63)
Article 1767 of the Civil Code recognizes the
creation of a contract of partnership when two
or more persons bind themselves to contribute
money, property, or industry to a common
fund, with the intention of dividing the profits
among themselves.[25] Its requisites are: (1)
mutual contribution to a common stock, and (2)
a joint interest in the profits.[26] In other
words, a partnership is formed when persons
contract to devote to a common purpose either
money, property, or labor with the intention of
dividing the profits between themselves.[27]
Meanwhile, an association implies associates
who enter into a joint enterprise x x x for the
transaction of business.
In the case before us, the ceding companies
entered into a Pool Agreement[29] or an
association[30] that would handle all the
insurance businesses covered under their
quota-share reinsurance treaty[31] and surplus
reinsurance treaty[32]with Munich. The
following unmistakably indicates a partnership
or an association covered by Section 24 of the
NIRC:
(1) The pool has a common fund, consisting of
money and other valuables that are deposited
in the name and credit of the pool. This
common fund pays for the administration and
operation expenses of the pool.
(2) The pool functions through an executive
board, which resembles the board of directors
of a corporation, composed of one
representative for each of the ceding
companies.
(3) True, the pool itself is not a reinsurer and
does not issue any insurance policy; however,
its work is indispensable, beneficial and
economically useful to the business of the
ceding companies and Munich, because without
it they would not have received their premiums.
The ceding companies share in the business
ceded to the pool and in the expenses
according to a Rules of Distribution annexed to
the Pool Agreement.[36] Profit motive or
business is, therefore, the primordial reason for
the pools formation. As aptly found by the CTA:
xxx The fact that the pool does not retain any
profit or income does not obliterate an
antecedent fact, that of the pool being used in
the transaction of business for profit. It is
apparent, and petitioners admit, that their
association or coaction was indispensable [to]
the transaction of the business. x x x If together
they have conducted business, profit must have
been the object as, indeed, profit was earned.
Though the profit was apportioned among the
members, this is only a matter of consequence,
as it implies that profit actually resulted.
The petitioners reliance on Pascual v.
Commissioner is misplaced, because the facts
obtaining therein are not on all fours with the
present case. In Pascual, there was no
unregistered partnership, but merely a co-
ownership which took up only two isolated
transactions.[39] The Court of Appeals did not
err in applying Evangelista, which involved a
partnership that engaged in a series of
transactions spanning more than ten years, as
in the case before us.
Second Issue: Pools Remittances Are Taxable
Petitioners further contend that the
remittances of the pool to the ceding
companies and Munich are not dividends
subject to tax. They insist that taxing such
remittances contravene Sections 24 (b) (I) and
263 of the 1977 NIRC and would be tantamount
to an illegal double taxation, as it would result
in taxing the same premium income twice in the
hands of the same taxpayer.[40] Moreover,
petitioners argue that since Munich was not a
signatory to the Pool Agreement, the
remittances it received from the pool cannot be
deemed dividends.[41] They add that even if
such remittances were treated as dividends,
they would have been exempt under the
previously mentioned sections of the 1977
NIRC,[42] as well as Article 7 of paragraph 1[43]
and Article 5 of paragraph 5[44] of the RP-West
German Tax Treaty.
Petitioners are clutching at straws. Double
taxation means taxing the same property twice
when it should be taxed only once. That is, xxx
taxing the same person twice by the same
jurisdiction for the same thing.[46] In the
instant case, the pool is a taxable entity distinct
from the individual corporate entities of the
ceding companies. The tax on its income is
obviously different from the tax on the
dividends received by the said companies.
Clearly, there is no double taxation here.
The tax exemptions claimed by petitioners
cannot be granted, since their entitlement
thereto remains unproven and unsubstantiated.
It is axiomatic in the law of taxation that taxes
are the lifeblood of the nation. Hence,
exemptions therefrom are highly disfavored in
law and he who claims tax exemption must be
able to justify his claim or right.[47] Petitioners
have failed to discharge this burden of proof.
The sections of the 1977 NIRC which they cite
are inapplicable, because these were not yet in
effect when the income was earned and when
the subject information return for the year
ending 1975 was filed.
Referring to the 1975 version of the counterpart
sections of the NIRC, the Court still cannot
justify the exemptions claimed. Section 255
provides that no tax shall xxx be paid upon
reinsurance by any company that has already
paid the tax xxx. This cannot be applied to the
present case because, as previously discussed,
the pool is a taxable entity distinct from the
ceding companies; therefore, the latter cannot
individually claim the income tax paid by the
former as their own.
On the other hand, Section 24 (b) (1) pertains to
tax on foreign corporations; hence, it cannot be
claimed by the ceding companies which are
domestic corporations. Nor can Munich, a
foreign corporation, be granted exemption
based solely on this provision of the Tax Code,
because the same subsection specifically taxes
dividends, the type of remittances forwarded to
it by the pool. Although not a signatory to the
Pool Agreement, Munich is patently an
associate of the ceding companies in the entity
formed, pursuant to their reinsurance treaties
which required the creation of said pool.
Under its pool arrangement with the ceding
companies, Munich shared in their income and
loss. This is manifest from a reading of Articles 3
and 10 of the Quota Share Reinsurance Treaty
and Articles 3[51] and 10[52] of the Surplus
Reinsurance Treaty. The foregoing
interpretation of Section 24 (b) (1) is in line with
the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory
exemption claimed must be expressed in a
language too plain to be mistaken.
Finally, the petitioners claim that Munich is tax-
exempt based on the RP-West German Tax
Treaty is likewise unpersuasive, because the
internal revenue commissioner assessed the
pool for corporate taxes on the basis of the
information return it had submitted for the year
ending 1975, a taxable year when said treaty
was not yet in effect. Although petitioners
omitted in their pleadings the date of effectivity
of the treaty, the Court takes judicial notice that
it took effect only later, on December 14, 1984.
Third Issue: Prescription
Petitioners also argue that the governments
right to assess and collect the subject tax had
prescribed. They claim that the subject
information return was filed by the pool on
April 14, 1976. On the basis of this return, the
BIR telephoned petitioners on November 11,
1981, to give them notice of its letter of
assessment dated March 27, 1981. Thus, the
petitioners contend that the five-year statute of
limitations then provided in the NIRC had
already lapsed, and that the internal revenue
commissioner was already barred by
prescription from making an assessment.[56]
Appeals that the pool changed its address, for
they stated that the pools information return
filed in 1980 indicated therein its present
address. The Court finds that this falls short of
the requirement of Section 333 of the NIRC for
the suspension of the prescriptive period. The
law clearly states that the said period will be
suspended only if the taxpayer informs the
Commissioner of Internal Revenue of any
change in the address.
WHEREFORE, the petition is DENIED. The
Resolutions of the Court of Appeals dated
October 11, 1993 and November 15, 1993 are
hereby AFFIRMED. Costs against petitioners.
SO ORDERED.

We cannot sustain the petitioners. The CA and

the CTA categorically found that the
prescriptive period was tolled under then
Section 333 of the NIRC,[57] because the
taxpayer cannot be located at the address given
in the information return filed and for which
reason there was delay in sending the
assessment.[58] Indeed, whether the
governments right to collect and assess the tax
has prescribed involves facts which have been
ruled upon by the lower courts. It is axiomatic
that in the absence of a clear showing of
palpable error or grave abuse of discretion, as
in this case, this Court must not overturn the
factual findings of the CA and the CTA.

Furthermore, petitioners admitted in their

Motion for Reconsideration before the Court of
Heirs of Tan Eng Kee vs Court of Appeals
Business Organization – Partnership, Agency,
Trust – Periodic Accounting – Profit Sharing
Benguet Lumber has been around even before
World War II but during the war, its stocks were
confiscated by the Japanese. After the war, the
brothers Tan Eng Lay and Tan Eng Kee pooled
their resources in order to revive the business.
In 1981, Tan Eng Lay caused the conversion of
Benguet Lumber into a corporation called
Benguet Lumber and Hardware Company, with
him and his family as the incorporators. In 1983,
Tan Eng Kee died. Thereafter, the heirs of Tan
Eng Kee demanded for an accounting and the
liquidation of the partnership.
Tan Eng Lay denied that there was a partnership
between him and his brother. He said that Tan
Eng Kee was merely an employee of Benguet
Lumber. He showed evidence consisting of Tan
Eng Kee’s payroll; his SSS as an employee and
Benguet Lumber being the employee. As a
result of the presentation of said evidence, the
heirs of Tan Eng Kee filed a criminal case against
Tan Eng Lay for allegedly fabricating those
evidence. Said criminal case was however
dismissed for lack of evidence.
ISSUE: Whether or not Tan Eng Kee is a partner.
HELD: No. There was no certificate of
partnership between the brothers. The heirs
were not able to show what was the agreement
between the brothers as to the sharing of
profits. All they presented were circumstantial
evidence which in no way proved partnership.
It is obvious that there was no partnership
whatsoever. Except for a firm name, there was
no firm account, no firm letterheads submitted
as evidence, no certificate of partnership, no
agreement as to profits and losses, and no time
fixed for the duration of the partnership. There
was even no attempt to submit an accounting
corresponding to the period after the war until
Kee’s death in 1984. It had no business book,
no written account nor any memorandum for
that matter and no license mentioning the
existence of a partnership.
In fact, Tan Eng Lay was able to show evidence
that Benguet Lumber is a sole proprietorship.
He registered the same as such in 1954; that
Kee was just an employee based on the latter’s
payroll and SSS coverage, and other records
indicating Tan Eng Lay as the proprietor.
Also, the business definitely amounted to more
P3,000.00 hence if there was a partnership, it
should have been made in a public instrument.
But the business was started after the war
(1945) prior to the publication of the New Civil
Code in 1950?
Even so, nothing prevented the parties from
complying with this requirement.
Also, the Supreme Court emphasized that for 40
years, Tan Eng Kee never asked for an
accounting. The essence of a partnership is that
the partners share in the profits and losses.
Each has the right to demand an accounting as
long as the partnership exists. Even if it can be
speculated that a scenario wherein “if excellent
relations exist among the partners at the start
of the business and all the partners are more
interested in seeing the firm grow rather than
get immediate returns, a deferment of sharing
in the profits is perfectly plausible.” But in the
situation in the case at bar, the deferment, if
any, had gone on too long to be plausible. A
person is presumed to take ordinary care of his
concerns. A demand for periodic accounting is
evidence of a partnership which Kee never did.
(e) As the consideration for the sale of a
goodwill of a business or other property by
installments or otherwise.

The Supreme Court also noted:

In determining whether a partnership exists,

these rules shall apply:

(1) Except as provided by Article 1825, persons

who are not partners as to each other are not
partners as to third persons;

(2) Co-ownership or co-possession does not of

itself establish a partnership, whether such co-
owners or co-possessors do or do not share any
profits made by the use of the property;

(3) The sharing of gross returns does not of

itself establish a partnership, whether or not
the persons sharing them have a joint or
common right or interest in any property which
the returns are derived;

(4) The receipt by a person of a share of the

profits of a business is prima facie evidence that
he is a partner in the business, but no such
inference shall be drawn if such profits were
received in payment:

(a) As a debt by installment or otherwise;

(b) As wages of an employee or rent to a

landlord;

(c) As an annuity to a widow or representative

of a deceased partner;

(d) As interest on a loan, though the amount of

payment vary with the profits of the business;
Pascual and Dragon v. CIR, G.R. No. 78133,
October 18, 1988
FACTS:
Petitioners bought two (2) parcels of land and a
year after, they bought another three (3)
parcels of land. Petitioners subsequently sold
the said lots in 1968 and 1970, and realized net
profits. 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, the Acting BIR Commissioner
assessed and required Petitioners 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
asserting that they had availed of tax amnesties
way back in 1974. In a reply, 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 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.
ISSUE:
Whether the Petitioners should be treated as an
unregistered partnership or a co-ownership for
the purposes of income tax.
RULING:
The Petitioners are simply under the regime of
co-ownership and not under unregistered
partnership.
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 (Art. 1767, Civil Code of the
Philippines). 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. 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. Hence, 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.
NOBIO SARDANE, petitioner,
vs.
THE COURT OF APPEALS and ROMEO J.
ACOJEDO, respondents.
REGALADO, J.:
The extensive discussion and exhaustive
disquisition in the decision 1 of the respondent
Court 2 should have written finis to this case
without further recourse to Us. The assignment
of errors and arguments raised in the
respondent Court by herein private respondent,
as the petitioner therein, having been correctly
and justifiedly sustained by said court without
any reversible error in its conclusions, the
present petition must fail.
The assailed decision details the facts and
proceedings which spawned the present
controversy as follows:
Petitioner brought an action in the City Court of
Dipolog for collection of a sum of P5,217.25
based on promissory notes executed by the
herein private respondent Nobio Sardane in
favor of the herein petitioner. Petitioner bases
his right to collect on Exhibits B, C, D, E, F, and G
executed on different dates and signed by
private respondent Nobio Sardane. Exhibit B is a
printed promissory note involving Pl,117.25 and
dated May 13, 1972. Exhibit C is likewise a
printed promissory note and denotes on its face
that the sum loaned was Pl,400.00. Exhibit D is
also a printed promissory note dated May 31,
1977 involving an amount of P100.00. Exhibit E
is what is commonly known to the layman as
'vale' which reads: 'Good for: two hundred
pesos (Sgd) Nobio Sardane'. Exhibit F is stated in
the following tenor: 'Received from Mr. Romeo
Acojedo the sum Pesos: Two Thousand Two
Hundred (P2,200.00) ONLY, to be paid on or
before December 25, 1975. (Sgd) Nobio
Sardane.' Exhibit G and H are both vales'
involving the same amount of one hundred
pesos, and dated August 25, 1972 and
September 12, 1972 respectively.
It has been established in the trial court that on
many occasions, the petitioner demanded the
payment of the total amount of P5,217.25. The
failure of the private respondent to pay the said
amount prompted the petitioner to seek the
services of lawyer who made a letter (Exhibit 1)
formally demanding the return of the sum
loaned. Because of the failure of the private
respondent to heed the demands extrajudicially
made by the petitioner, the latter was
constrained to bring an action for collection of
sum of money.
During the scheduled day for trial, private
respondent failed to appear and to file an
answer. On motion by the petitioner, the City
Court of Dipolog issued an order dated May 18,
1976 declaring the private respondent in
default and allowed the petitioner to present
his evidence ex-parte. Based on petitioner's
evidence, the City Court of Dipolog rendered
judgment by default in favor of the petitioner.
Private respondent filed a motion to lift the
order of default which was granted by the City
Court in an order dated May 24, 1976, taking
into consideration that the answer was filed
within two hours after the hearing of the
evidence presented ex-parte by the petitioner.
After the trial on the merits, the City Court of
Dipolog rendered its decision on September 14,
1976, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is
hereby rendered in favor of the plaintiff and
against the defendant as follows:
(a) Ordering the defendant to pay unto the
plaintiff the sum of Five Thousand Two Hundred
Seventeen Pesos and Twenty-five centavos
(P5,217.25) plus legal interest to commence
from April 23, 1976 when this case was filed in
court; and
(b) Ordering the defendant to pay the
plaintiff the sum of P200.00 as attorney's fee
and to pay the cost of this proceeding. 3
Therein defendant Sardane appealed to the
Court of First Instance of Zamboanga del Norte
which reversed the decision of the lower court
by dismissing the complaint and ordered the
plaintiff-appellee Acojedo to pay said
defendant-appellant P500.00 each for actual
damages, moral damages, exemplary damages
and attorney's fees, as well as the costs of suit.
Plaintiff-appellee then sought the review of said
decision by petition to the respondent Court.
The assignment of errors in said petition for
review can be capsulized into two decisive
issues, firstly, whether the oral testimony for
the therein private respondent Sardane that a
partnership existed between him and therein
petitioner Acojedo are admissible to vary the
meaning of the abovementioned promissory
notes; and, secondly, whether because of the
failure of therein petitioner to cross-examine
therein private respondent on his sur-rebuttal
testimony, there was a waiver of the
presumption accorded in favor of said
petitioner by Section 8, Rule 8 of the Rules of
Court.
On the first issue, the then Court of First
Instance held that "the pleadings of the parties
herein put in issue the imperfection or
ambiguity of the documents in question", hence
"the appellant can avail of the parol evidence
rule to prove his side of the case, that is, the
said amount taken by him from appellee is or
was not his personal debt to appellee, but
expenses of the partnership between him and
appellee."
Consequently, said trial court concluded that
the promissory notes involved were merely
receipts for the contributions to said
partnership and, therefore, upheld the claim
that there was ambiguity in the promissory
notes, hence parol evidence was allowable to
vary or contradict the terms of the represented
loan contract.
The parol evidence rule in Rule 130 provides:
Sec. 7. Evidence of written agreements.—When
the terms of an agreement have been reduced
to writing, it is to be considered as containing
all such terms, and, therefore, there can be,
between the parties and their successors in
interest, no evidence of the terms of the
agreement other than the contents of the
writing except in the following cases:
(a) Where a mistake or imperfection of the
writing or its failure to express the the true
intent and agreement of the parties, or the
validity of the agreement is put in issue by the
pleadings;
(b) When there is an intrinsic ambiguity in
the writing.
As correctly pointed out by the respondent
Court the exceptions to the rule do not apply in
this case as there is no ambiguity in the writings
in question, thus:
In the case at bar, Exhibits B, C, and D are
printed promissory notes containing a promise
to pay a sum certain in money, payable on
demand and the promise to bear the costs of
litigation in the event of the private
respondent's failure to pay the amount loaned
when demanded extrajudicially. Likewise, the
vales denote that the private respondent is
obliged to return the sum loaned to him by the
petitioner. On their face, nothing appears to be
vague or ambigous, for the terms of the
promissory notes clearly show that it was
incumbent upon the private respondent to pay
the amount involved in the promissory notes if
and when the petitioner demands the same. It
was clearly the intent of the parties to enter
into a contract of loan for how could an
educated man like the private respondent be
deceived to sign a promissory note yet
intending to make such a writing to be mere
receipts of the petitioner's supposed
contribution to the alleged partnership existing
between the parties?
It has been established in the trial court that,
the private respondent has been engaged in
business for quite a long period of time--as
owner of the Sardane Trucking Service, entering
into contracts with the government for the
construction of wharfs and seawall; and a
member of the City Council of Dapitan (TSN,
July 20, 1976, pp. 57-58).<äre||anº•1àw> It
indeed puzzles us how the private respondent
could have been misled into signing a document
containing terms which he did not mean them
to be. ...
xxx xxx xxx
The private respondent admitted during the
cross-examination made by petitioner's counsel
that he was the one who was responsible for
the printing of Exhibits B, C, and D (TSN, July 28,
1976, p. 64). How could he purportedly rely on
such a flimsy pretext that the promissory notes
were receipts of the petitioner's contribution? 4
The Court of Appeals held, and We agree, that
even if evidence aliunde other than the
promissory notes may be admitted to alter the
meaning conveyed thereby, still the evidence is
insufficient to prove that a partnership existed
between the private parties hereto.
As manager of the basnig Sarcado naturally
some degree of control over the operations and
maintenance thereof had to be exercised by
herein petitioner. The fact that he had received
50% of the net profits does not conclusively
establish that he was a partner of the private
respondent herein. Article 1769(4) of the Civil
Code is explicit that while the receipt by a
person of a share of the profits of a business is
prima facie evidence that he is a partner in the
business, no such inference shall be drawn if
such profits were received in payment as wages
of an employee. Furthermore, herein petitioner
had no voice in the management of the affairs
of the basnig. Under similar facts, this Court in
the early case of Fortis vs. Gutierrez Hermanos,
5 in denying the claim of the plaintiff therein
that he was a partner in the business of the
defendant, declared:
This contention cannot be sustained. It was a
mere contract of employment. The plaintiff had
no voice nor vote in the management of the
affairs of the company. The fact that the
compensation received by him was to be
determined with reference to the profits made
by the defendant in their business did not in any
sense make him a partner therein. ...
The same rule was reiterated in Bastida vs.
Menzi & Co., Inc., et al. 6 which involved the
same factual and legal milieu.
There are other considerations noted by
respondent Court which negate herein
petitioner's pretension that he was a partner
and not a mere employee indebted to the
present private respondent. Thus, in an action
for damages filed by herein private respondent
against the North Zamboanga Timber Co., Inc.
arising from the operations of the business,
herein petitioner did not ask to be joined as a
party plaintiff. Also, although he contends that
herein private respondent is the treasurer of
the alleged partnership, yet it is the latter who
is demanding an accounting. The advertence of
the Court of First Instance to the fact that the
casco bears the name of herein petitioner
disregards the finding of the respondent Court
that it was just a concession since it was he who
obtained the engine used in the Sardaco from
the Department of Local Government and
Community Development. Further, the use by
the parties of the pronoun "our" in referring to
"our basnig, our catch", "our deposit", or "our
boseros" was merely indicative of the
camaraderie and not evidentiary of a
partnership, between them.
The foregoing factual findings, which belie the
further claim that the aforesaid promissory
notes do not express the true intent and
agreement of the parties, are binding on Us
since there is no showing that they fall within
the exceptions to the rule limiting the scope of
appellate review herein to questions of law.
On the second issue, the pertinent rule on
actionable documents in Rule 8, for ready
reference, reads:
Sec. 8. How to contest genuineness of such
documents.—When an action or defense is
founded upon a written instrument, copied in
or attached to the corresponding pleading as
provided in the preceding section, the
genuineness and due execution of the
instrument shall be deemed admitted unless
the adverse party, under oath, specifically
denies them, and sets forth what he claims to
be the facts; but this provision does not apply
when the adverse party does not appear to be a
party to the instrument or when compliance
with an order for the inspection of the original
instrument is refused.
The record shows that herein petitioner did not
deny under oath in his answer the authenticity
and due execution of the promissory notes
which had been duly pleaded and attached to
the complaint, thereby admitting their
genuineness and due execution. Even in the
trial court, he did not at all question the fact
that he signed said promissory notes and that
the same were genuine. Instead, he presented
parol evidence to vary the import of the
promissory notes by alleging that they were
mere receipts of his contribution to the alleged
partnership.
His arguments on this score reflect a
misapprehension of the rule on parol evidence
as distinguished from the rule on actionable
documents. As the respondent Court correctly
explained to herein petitioner, what he
presented in the trial Court was testimonial
evidence that the promissory notes were
receipts of his supposed contributions to the
alleged partnership which testimony, in the
light of Section 7, Rule 130, could not be
admitted to vary or alter the explicit meaning
conveyed by said promissory notes. On the
other hand, the presumed genuineness and due
execution of said promissory notes were not
affected, pursuant to the provisions of Section
8, Rule 8, since such aspects were not at all
questioned but, on the contrary, were admitted
by herein petitioner.
Petitioner's invocation of the doctrines in Yu
Chuck, et al. vs. Kong Li Po, 7 which was
reiterated in Central Surety & Insurance Co. vs.
C. N. Hodges, et al. 8 does not sustain his thesis
that the herein private respondent had "waived
the mantle of protection given him by Rule 8,
Sec. 8". It is true that such implied admission of
genuineness and due execution may be waived
by a party but only if he acts in a manner
indicative of either an express or tacit waiver
thereof. Petitioner, however, either overlooked
or ignored the fact that, as held in Yu Chuck,
and the same is true in other cases of Identical
factual settings, such a finding of waiver is
proper where a case has been tried in complete
disregard of the rule and the plaintiff having
pleaded a document by copy, presents oral
evidence to prove the due execution of the
document and no objections are made to the
defendant's evidence in refutation. This
situation does not obtain in the present case
hence said doctrine is obviously inapplicable.
Neither did the failure of herein private
respondent to cross-examine herein petitioner
on the latter's sur-rebuttal testimony constitute
a waiver of the aforesaid implied admission. As
found by the respondent Court, said sur-
rebuttal testimony consisted solely of the denial
of the testimony of herein private respondent
and no new or additional matter was
introduced in that sur-rebuttal testimony to
exonerate herein petitioner from his obligations
under the aforesaid promissory notes.
On the foregoing premises and considerations,
the respondent Court correctly reversed and set
aside the appealed decision of the Court of First
Instance of Zamboanga del Norte and affirmed
in full the decision of the City Court of Dipolog
City in Civil Case No. A-1838, dated September
14, 1976.
Belatedly, in his motion for reconsideration of
said decision of the respondent Court, herein
petitioner, as the private respondent therein,
raised a third unresolved issue that the petition
for review therein should have been dismissed
for lack of jurisdiction since the lower Court's
decision did not affirm in full the judgment of
the City Court of Dipolog, and which he claimed
was a sine qua non for such a petition under the
law then in force. He raises the same point in
his present appeal and We will waive the
procedural technicalities in order to put this
issue at rest.
Parenthetically, in that same motion for
reconsideration he had sought affirmative relief
from the respondent Court praying that it
sustain the decision of the trial Court, thereby
invoking and submitting to its jurisdiction which
he would now assail. Furthermore, the
objection that he raises is actually not one of
jurisdiction but of procedure. 9
At any rate, it will be noted that petitioner
anchors his said objection on the provisions of
Section 29, Republic Act 296 as amended by
Republic Act 5433 effective September 9, 1968.
Subsequently, the procedure for appeal to the
Court of Appeals from decisions of the then
courts of first instance in the exercise of their
appellate jurisdiction over cases originating
from the municipal courts was provided for by
Republic Act 6031, amending Section 45 of the
Judiciary Act effective August 4, 1969. The
requirement for affirmance in full of the inferior
court's decision was not adopted or reproduced
in Republic Act 6031. Also, since Republic Act
6031 failed to provide for the procedure or
mode of appeal in the cases therein
contemplated, the Court of Appeals en banc
provided thereof in its Resolution of August 12,
1971, by requiring a petition for review but
which also did not require for its availability
that the judgment of the court of first instance
had affirmed in full that of the lower court. Said
mode of appeal and the procedural
requirements thereof governed the appeal
taken in this case from the aforesaid Court of
First Instance to the Court of Appeals in 1977.
10 Herein petitioner's plaint on this issue is,
therefore, devoid of merit.

WHEREFORE, the judgment of the respondent

Court of Appeals is AFFIRMED, with costs
against herein petitioner.

SO ORDERED.
DELUAO v. CASTEEL
G.R. No. L-21906; December 24, 1968
Ponente: J. Castro
FACTS:
In 1940 Nicanor Casteel unsuccessfully
registered a fishpond in a big tract of swampy
land, 178.76 hectares, in the then sitio of
Malalag, municipality of Padada, Davao for 3
consecutive times because the Bureau of
Fisheries did not act upon his previous
applications.
Despite the said rejection, Casteel did not lose
interest. Because of the threat poised upon his
position by the other 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. But lacking financial resources at that
time, he sought 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 a
protest. Consequently, two administrative cases
ensued involving the area in question.
However, despite the finding made in the
investigation of the above administrative cases,
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
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". On the same date the above
contract was entered into, Inocencia Deluao
executed a special power of attorney in favor of
Jesus Donesa
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 and
asked for reinvestigation of the application of
Nicanor Casteel over the subject fishpond.
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 the
latter's representative (encargado), Jesus
Donesa, from the premises.
ISSUE:
Whether the reinstatement of Casteel over the
subject land constitute a dissolution of the
partnership between him and Deluao
HELD:
Yes, the reinstatement of Casteel dissolved his
partnership with Deluao.
The Supreme Court ruled that the arrangement
under the so-called "contract of service"
continued until the decision both dated Sept.
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. 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 members to carry it on in
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.
Agad vs Mabato Held: Based on the copy of the public
instrument attached in the complaint, the
Facts: Petitioner Mauricio Agad claims that he partnership was established to operate a
and defendant Severino Mabato are partners in fishpond", and not to "engage in a fishpond
a fishpond business to which they contributed
business.” Thus, Mabato’s contention that “it is
P1000 each. As managing partner, Mabato really inconceivable how a partnership engaged
yearly rendered the accounts of the operations in the fishpond business could exist without
of the partnership. However, for the years said fishpond property (being) contributed to
1957-1963, defendant failed to render the the partnership” is without merit. Their
accounts despite repeated demands. Petitioner contributions were limited to P1000 each and
filed a complaint against Mabato to which a neither a fishpond nor a real right thereto was
copy of the public instrument evidencing their
contributed to the partnership.
partnership is attached. Aside from the share of
profits (P14,000) and attorney’s fees (P1000), Therefore, Article 1773 of the Civil Code finds
petitioner prayed for the dissolution of the no application in the case at bar. Case
partnership and winding up of its affairs. remanded to the lower court for further
proceedings.
Mabato denied the existence of the partnership
alleging that Agad failed to pay hisP1000
contribution. He then filed a motion to dismiss
on the ground of lack of cause of action. The
lower court dismissed the complaint finding a
failure to state a cause of action predicated
upon the theory that the contract of
partnership 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.

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.

Issue: Whether or not immovable property or

real rights have been contributed to the
partnership.
Commissioner of Internal Revenue vs. Carlos
Ledesma, Julieta Ledesma, Vicente Gustilo. Jr.
and Amparo Ledesma de Gustilo
G.R. No. L-17509 January 30, 1970
Facts:
On July 9, 1949, Carlos Ledesma, Julieta
Ledesma and the spouses Amparo Ledesma and
Vicente Gustilo, Jr., purchased from their
parents, the sugar plantation known as
"Hacienda Fortuna," consisting of 36 parcels of
land, which sugar quota was included in the
sale. By virtue of the purchase, respondents
owned one-third each of the undivided portion
of the plantation. After the purchase of the
plantation, herein respondents took over the
sugar cane farming on the plantation beginning
with the crop year 1948-1949. For the crop year
1948- 1949 the San Carlos Milling Co., Ltd.
credited the respondents with their shares in
the gross sugar production.
of general co-partnership were registered in the
commercial register of the office of the Register
of Deeds in Bacolod City, Negros Occidental, on
July 14, 1949. Paragraph 14 of the articles of
general partnership provides that the
agreement shall have retroactive effect as of
January 1, 1949.
Issue:
Whether or not respondent operated the
“Hacienda Fortuna” as partnership prior to the
execution of articles of co-partnership.
Ruling:
Yes. Respondents operated the "Hacienda
Fortuna" as a partnership prior to the execution
of the articles of general co-partnership based
on their intention as clearly shown in paragraph
14 of the articles of general co-partnership
which provides that the partnership agreement
"shall be retroactive as of January 1, 1949.

The respondents shared equally the expenses of

production, on the basis of their respective one-
third undivided portions of the plantation. In
their individual income tax returns for the year
1949 the respondents included as part of their
income their respective net profits derived from
their individual sugar production from the
"Hacienda Fortuna," as herein-above stated.

On July 11, 1949, the respondents organized

themselves into a general co-partnership under
the firm name "Hacienda Fortuna", for the
"production of sugar cane for conversion into
sugar, palay and corn and such other products
as may profitably be produced on said
hacienda, which products shall be sold or
otherwise disposed of for the purpose of
realizing profit for the partnership." The articles
FORTUNATA SOLIS v. MAXIMA BARROSO ET AL.
DECISION
53 Phil. 912
AVANCEÃ'A, C.J.:
The spouses Juan Lambino and Maria A. Barroso
begot three children named Alejo, Eugenia and
Marciana Lambino. On June 2, 1919 said
spouses made a donation of propter nuptias of
the lands described in the complaint in favor of
their son Alejo Lambino and Fortunata Solis in a
private document (Exhibit A) in consideration of
the marriage which the latter were about to
enter into. One of the conditions of this
donation is that in case of the donees, one-half
of these lands thus donated would revert to the
donora while the surviving donee would retain
the other half. On the 8th of the said month of
June 1919, Alejo Lambino and Fortunata Solis
were married and immediately thereafter the
donors delivered the possession of the donated
lands to them. On August 3,1919 donee Alejo
Lambino died. In the same year donor Juan
Lambino also died. After the latter's death, his
wife, Maxima Barroso recovered possession the
donated lands.
The surviving donee Fortunata Solis filed the
action, which is the subject matter of this
appeal, against the surviving donor Maxima
Barroso and Eugenia And Marcelina Lambino,
heirs of the deceased donor Juan Lambino, with
their respective husbands, demanding of the
defendants the execution of the proper deed of
donation according to law, transferring one-half
of the donated property, and moreover, to
"proceed to the partition of the donated
property and its fruits.
The court rendered judgment based upon
article 1279 of the Civil Code granting1
plaintiff's prayer and ordering the defendants to
execute a deed of donation in favor of the
plaintiff, adequate in form and substance to
transfer to the latter the legal title to the part of
the donated lands assigned to her in the original
donation.
We are of the opinion that article 1279 of the
Civil Cdde, relating to contracts, is not
applicable to the present case.
We are concerned with a donation propter
nuptias, which, according to article 1328 of the
Civil Code, must be governed by the rules
established in Title II, Book III of this Code, on
donations (articles 618 to 656). Article 633
provides that in order that a donation of real
property may be valid, it must be made in a
public instrument. This is the article applicable
to donation propter nuptias in so far as its
formal validity is concerned. The only
exceptions to this rule are onerous and
remuneratory donations, in so far as they do
not exceed the value of the charge imposed,
which are then governed by the rules on
contracts (art. 622), and those which are to take
effect upon the donor's death, which are
governed by the rules established for
testamentary successions (art. 620).
We have, therefore, a donation propter nuptias
which is not valid and did not create any right,
since it was not made in a public instrument,
and hence, article 1279 of the Civil Code which
the lower court applied is not applicable
thereto. The last named article provides that,
should the law require the execution of an
instrument or any other special form in order to
make the obligations of a contract effective, the
contracting parties may compel each other to
comply with such formality from the moment
that consent has been given, and the other
requirements for the validity of the contract
exist. Suffice it to state that this article refers to instituted, or if it were instituted after the lapse
.contracts, and is inapplicable to the donation in of the statutory period of prescription. This is
question, which must be governed by the rules so, because the marriage in a donation propter
on donations. It may further be noted, at first nuptias is rather a resolutory condition which,
sight, that this article presupposes the existence as such, presupposes the existence of the
of a valid contract and cannot possibly refer to obligation which may be resolved or revoked,
the form required in order to make it valid, and it is not a condition necessary for the birth
which it already has, but rather to that required of the obligation.
simply to make it effective, and for this reason,
it would, at all events, be inapplicable to the The judgment appealed from mentions the
donation in question, wherein the form is decision of this court in the case of Torres de
Villanueva vs. Standard Oil Co. of New York (34
required precisely to make it valid.
Phil., 370), which is inapplicable to this case.
But the lower court states in itsjudgment that That was a case of arras offered in 1875, and it
the present donation is onerous, and pursuant was held that its effects were to be determined
to article 622 of the Civil Code must be by the laws then in force, and not by the Civil
governed by the rules on contracts. This opinion Code, which became effective later.
is not well founded. Donations for valuable
consideration, as may be inferred from article The judgment appealed from is reversed and
the defendants are hereby absolved from the
619 of the Civil Code, are such as compensate
services which constitute debts recoverable complaint, without special pronouncement of
from the donor, or which impose a charge equal costs. So ordered.
to the amount of the donation upon the donee,
neither of which is true of the present donation,
which was made only in consideration of
marriage. The lower court insists that, by the
fact that this, is a donation propter nuptias, it is
based upon the marriage as a consideration,
and must be considered onerous. Neither is this
opinion well founded. In donations propter
nuptias, the marriage is really a consideration,
but not in the sense of being necessary to give
birth to the obligation. This may be clearly
inferred from article 1333, which makes the fact
that the marriage did not take place a cause for
the revocation of such donations, thus taking it
for granted that there may be a valid donation
propter nuptias, even without marriage, since
that which has not existed cannot be revoked.
And such a valid donation would be forever
valid, even if the marriage never took place, if
the proper action for revocation were not
ANTONIA TORRES, assisted by her husband,
ANGELO TORRES; and EMETERIA BARING,
petitioners,
vs.
COURT OF APPEALS and MANUEL TORRES,
respondents.
Facts:
Petitioners Torres and Baring entered into a
“joint venture agreement” with Respondent
Torres for the development of a parcel of land
into a subdivision. They executed a Deed of Sale
covering the said parcel of land in favor of
respondent Manual Torres, who then had it
registered in his name. By mortgaging the
property, respondent Manuel Torres obtained
from Equitable Bank a loan of P40,000, which
was supposed to be used for the development
of subdivision as per the JVA. However, the
project did not push through and the land was
subsequently foreclosed by the bank.
Petitioners Antonia Torres alleged that it was
due to respondent’s lack of funds/skills that
caused the project to fail, and that respondent
use the loan in the furtherance of his own
company. On the otherhand, respondent
Manuel Torres alleged that he used the loan to
implement the JVA – surveying and subdivision
of lots, approval of the project, advertisement,
and construction of roads and the likes, and
that he did all of these for a total of P85,000.
Petitioners filed a case for estafa against
respondent but failed. They then instituted a
civil case. CA held that the two parties formed a
partnership for the development of subdivision
and as such, they must bear the loss suffered by
the partnership in the same proportion as their
share in profits. Hence, the petition.
Issue #1:
Whether or not the transaction between
petitioner and respondent was that of joint
venture/partnership.
Held:
Yes. There formed a partnership between the
two on the basis of joint-venture agreement
and deed of sale. A reading of the terms of
agreement shows the existence of partnership
pursuant to Art 1767 of Civil Code, which states
“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.” In the 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.
Issue #2:
Whether or not the deed of sale between the
two was valid.
Held:

No. Petitioners were wrong in contending that

the JVA 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.

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.

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.
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.