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[G.R. No. 2484. April 11, 1906.] JOHN FORTIS, plaintiff-appellee, vs. GUTIERREZ HERMANOS, defendants-appellants.

Hartigan, Rohde & Gutierrez, for appellants. W. A. Kincaid, for appellee. SYLLABUS 1. CIVIL PROCEDURE, ERROR; JUDGMENT; REVERSAL. Error not prejudicial is no ground for the reversal of a judgment. (Sec. 503, Code of Civil Procedure.) 2. PARTNERSHIP; MANAGER; BOOKKEEPER; CONTRACT; VALIDITY. The general manager of a general partnership has authority to employ a bookkeeper, and a contract thus made in 1900 was valid, though not in writing. 3. CONTRACT; BOOKKEEPER; SALARY. By the terms of the contract the salary of the bookkeeper was to be 5 per cent of the net profits of the business: Held, That this contract did not make the bookkeeper a partner. 4. CIVIL PROCEDURE; ACTION; PARTNERSHIP. In an action against a partnership to recover a debt due from it to the plaintiff, section 383, paragraph 7, of the Code of Civil Procedure does not prohibit the plaintiff from testifying to a conversation between himself and a then partner who had died prior to the trial of the action. 5. AGENT; DISBURSEMENTS. In an action by an agent to recover the amount of certain disbursements and not compensation for service, the article of the Civil Code applicable to the case is article 1728, and not article 1711. DECISION WILLARD, J p: Plaintiff, an employee of defendants during the years 1900, 1901, and 1902, brought this action to recover a balance due him as salary for the year 1902. He alleged that he was entitled, as salary, to 5 per cent of the net profits of the business of the defendants for said year. The complaint also contained a cause of action for the sum of 600 pesos, money expended by plaintiff for the defendants during the year 1903. The court below, in its judgment, found that the contract had been made as claimed by the plaintiff; that 5 per cent of the net profits of the business for the year 1902 amounted to 26,378.68 pesos, Mexican currency; that the plaintiff had received on account of such salary 12,811.75 pesos, Mexican currency, and ordered judgment against the defendants for the sum 13,566.93 pesos, Mexican currency, with interest thereon from December 31, 1904. The court also ordered judgment against the defendants for the 600 pesos mentioned in the complaint, and interest thereon. The total judgment rendered against the defendants in favor of the

plaintiff, reduced to Philippine currency, amounted to P13,025.40. The defendants moved for a new trial, which was denied, and they have brought the case here by bill of exceptions. (1) The evidence is sufficient to support the finding of the court below to the effect that the plaintiff worked for the defendants during the year 1902 under a contract by which he was to receive as compensation 5 per cent of the net profits of the business. The contract was made on the part of the defendants by Miguel Alonzo Gutierrez. By the provisions of the articles of partnership he was made one of the managers of the company, with full power to transact all of the business thereof. As such manager he had authority to make a contract of employment with the plaintiff. (2) Before answering in the court below, the defendants presented a motion that the complaint be made more definite and certain. This motion was denied. To the order denying it the defendants excepted, and they have assigned as error such ruling of the court below. There is nothing in the record to show that the defendants were in any way prejudiced by this ruling of the court below. If it were error it was error without prejudice, and not ground for reversal. (Sec. 503, Code of Civil Procedure.) (3) It is claimed by the appellants that the contract alleged in the complaint made the plaintiff a copartner of the defendants in the business which they were carrying on. This contention can not 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 defendants in their business did not in any sense make by a partner therein. The articles of partnership between the defendants provided that the profits should be divided among the partners named in a certain proportion. The contract made between the plaintiff and the then manager of the defendant partnership did not in any way vary or modify this provision of the articles of partnership. The profits of the business could not be determined until all of the expenses had been paid. A part of the expenses to be paid for the year 1902 was the salary of the plaintiff. That salary had to be deducted before the net profits of the business, which were to be divided among the partners, could be ascertained. It was undoubtedly necessary in order to determine what the salary of the plaintiff was, to determine what the profits of the business were, after paying all of the expenses except his, but that determination was not the final determination of the net profits of the business. It was made for the purpose of fixing the basis upon which his compensation should be determined.

(4) It was no necessary that the contract between the plaintiff and the defendants should be made in writing. (Thunga Chui vs. Que Bentec, 1 1 Off. Gaz., 818, October 8, 1903.) (5) It appeared that Miguel Alonzo Gutierrez, with whom the plaintiff had made the contract, had died prior to the trial of the action, and the defendants claim that by reasons of the provisions of section 383, paragraph 7, of the Code of Civil Procedure, plaintiff could not be a witness at the trial. That paragraph provides that parties to an action against an executor or administrator upon a claim or demand against the estate of a deceased person can not testify as to any matter of fact occurring before the death of such deceased person. This action was not brought against the administrator of Miguel Alonzo, nor was it brought upon a claim against his estate. It was brought against a partnership which was in existence at the time of the trial of the action, and which was juridical person. The fact that Miguel Alonzo had been a partner in this company, and that his interest therein might be affected by the result of this suit, is not sufficient to bring the case within the provisions of the section above cited. (6) The plaintiff was allowed to testify against the objection and exception of the defendants, that he had been paid as salary for the year 1900 a part of the profits of the business. This evidence was competent for the purpose of corroborating the testimony of the plaintiff as to the existence of the contract set out in the complaint. (7) The plaintiff was allowed to testify as to the contents of a certain letter written by Miguel Gutierrez, one of the partners in the defendant company, to Miguel Alonzo Gutierrez, another partner, which letter was read to plaintiff by Miguel Alonzo. It is not necessary to inquire whether the court committed an error in admitting this evidence. The case already made by the plaintiff was in itself sufficient to prove the contract without reference to this letter. The error, if any there were, was not prejudicial, and is not ground for reversal. (Sec. 503, Code of Civil Procedure.) (8) For the purpose of proving what the profits of the defendants were for the year 1902, the plaintiff presented in evidence the ledger of defendants, which contained an entry made on the 31st of December, 1902, as follows: "Perdidas y Ganancias ...................................... a Varios Ps. 527,573.66 Utilidades liquidas obtenidas durante el ano y que abonamos conforme a la proporcion que hemos establecido segun el convenio de sociedad." The defendant presented as a witness on, the subject of profits Miguel Gutierrez, one of the defendants, who testified, among other things, that there were no profits during the year 1902, but, on the contrary, that the company suffered considerable loss during that

year. We do not think the evidence of this witness sufficiently definite and certain to overcome the positive evidence furnished by the books of the defendants themselves. (9) In reference to the cause of action relating to the 600 pesos, it appears that the plaintiff left the employ of the defendants on the 19th of March, 1903; that at their request he went to Hongkong, and was there for about two months looking after the business of the defendants in the matter of the repair of a certain steamship. The appellants in their brief say that the plaintiff is entitled to no compensation for his services thus rendered, because by the provisions of article 1711 of the Civil Code, in the absence of an agreement to the contrary, the contract of agency is supposed to be gratuitous. That article i not applicable to this case, because the amount of 600 pesos not claimed as compensation for services but as a reimbursement for money expended by the plaintiff in the business of the defendants. The article of the code that is applicable is article 1728. The judgment of the court below is affirmed, with the costs, of this instance against the appellants. After the expiration of twenty days from the date of this decision let final judgment be entered herein, and ten days thereafter let the case be remanded to the lower court for execution. So ordered.

[G.R. No. 55397. February 29, 1988.]

TAI TONG CHUACHE & CO., petitioner, vs. THE INSURANCE COMMISSION and TRAVELLERS MULTI-INDEMNITY CORPORATION, respondents. SYLLABUS 1. REMEDIAL LAW; CIVIL PROCEDURE; BURDEN OF PROOF; EACH PARTY MUST PROVE HIS OWN AFFIRMATIVE ALLEGATION BY PREPONDERANCE OF EVIDENCE. It is a well known postulate that the case of a party is constituted by his own affirmative allegations. Under Section 1, Rule 131 each party must prove his own affirmative allegations by the amount of evidence required by law which in civil cases as in the present case is preponderance of evidence. The party, whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of presenting at the trial such amount of evidence as required by law to obtain a favorable judgment. Thus, petitioner who is claiming a right over the insurance must prove its case. Likewise, respondent insurance company to avoid liability under the policy by setting up an affirmative defense of lack of insurable interest on the part of the petitioner must prove its own affirmative allegations. 2. ID.; ID.; ID.; CREDITOR IN POSSESSION OF DOCUMENT OF CREDIT NEED NOT PROVE NON-PAYMENT FOR IT IS PRESUMED. It has been held in a long line of cases that when the creditor is in possession of the document of credit, he need not prove nonpayment for it is presumed. The validity of the insurance policy taken by petitioner was not assailed by private respondent. Moreover, petitioner's claim that the loan extended to the Palomos has not yet been paid was corroborated by Azucena Palomo who testified that they are still indebted to herein petitioner. 3. ID.; CIVIL ACTIONS; MUST BE BROUGHT IN THE NAME OF THE REAL PARTY IN INTEREST; PARTNERSHIP MAY SUE AND BE SUED IN THE NAME OF ITS DULY AUTHORIZED REPRESENTATIVE. Citing Rule 3, Sec. 2 respondent pointed out that the action must be brought in the name of the real party in interest. We agree. However, it should be borne in mind that petitioner being a partnership may sue and be sued in its name or by its duly authorized representative. The fact that Arsenio Lopez Chua is the representative of petitioner is not questioned. Petitioner's declaration that Arsenio Lopez Chua acts as the managing partner of the partnership was corroborated by respondent insurance company. Thus Chua as the managing partner of the partnership may execute all acts of administration including the right to sue debtors of the partnership in case of their failure to pay their obligations when it became due and demandable. Or at the very least, Chua being a partner of petitioner Tai Tong Chuache & Company is an agent of the partnership. Being an agent, it is understood that he acted for and in

behalf of the firm. Public respondent's allegation that the civil case filed by Arsenio Chua was in his capacity as personal creditor of spouses Palomo has no basis. 4. MERCANTILE LAW; FIRE INSURANCE; TERMS AND CONDITIONS OF A VALID POLICY CONTRACT BINDING UPON INSURANCE COMPANY. The respondent insurance company having issued a policy in favor of herein petitioner which policy was of legal force and effect at the time of the fire, it is bound by its terms and conditions. Upon its failure to prove the allegation of lack of insurable interest on the part of the petitioner, respondent insurance company is and must be held liable. DECISION GANCAYCO, J p: This petition for review on certiorari seeks the reversal of the decision of the Insurance Commission in IC Case #367 1 dismissing the complaint 2 for recovery of the alleged unpaid balance of the proceeds of the Fire Insurance Policies issued by herein respondent insurance company in favor of petitioner-intervenor. The facts of the case as found by respondent Insurance Commission are as follows: "Complainants acquired from a certain Rolando Gonzales a parcel of land and a building located at San Rafael Village, Davao City. Complainants assumed the mortgage of the building in favor of S.S.S., which building was insured with respondent S.S.S. Accredited Group of Insurers for P25,000.00. On April 19, 1975, Azucena Palomo obtained a loan from Tai Tong Chuache, Inc. in the amount of P100,000.00. To secure the payment of the loan, a mortgage was executed over the land and the building in favor of Tai Tong Chuache & Co. (Exhibit "1" and "1-A"). On April 25, 1975, Arsenio Chua, representative of Thai Tong Chuache & Co. insured the latter's interest with Travellers Multi-Indemnity Corporation for P100,000.00 (P70,000.00 for the building and P30,000.00 for the contents thereof) (Exhibit "A-a," contents thereof) (Exhibit "A-a"). On June 11, 1975, Pedro Palomo secured a Fire Insurance Policy No. F-02500 (Exhibit "A"), covering the building for P50,000.00 with respondent Zenith Insurance Corporation. On July 16, 1975, another Fire Insurance Policy No. 8459 (Exhibit "B") was procured from respondent Philippine British Assurance Company, covering the same building for P50,000,00 and the contents thereof for P70,000.00. On July 31, 1975, the building and the contents were totally razed by fire. Adjustment Standard Corporation submitted a report as follow. xxx xxx xxx

. . . Thus the apportioned share of each company is as follows: Policy No. Company Risk Insures Pays MIRO/ Zenith Building P50,000 P17,610.93 F-02500 Insurance Corp. F-84590 Phil. Household 70,000 24,655.31 British Assco. Co. Inc. FFF & F5 50,000 39,186.10 Policy No. Company Risk Insures Pays FIC-15381 SSS Accredited Group of Insurers Building P25.000 P8,805.47 Totals P195,000 P90,257.81 We are showing hereunder another apportionment of the loss which includes the Travellers Multi-indemnity policy for reference purposes. Policy No. Company Risk Insures Pays MIRO/ Zenith F-02500 Insurance Corp. Building P50,000 11,877.14 F-84590 Phil. British Assco. Co. I-Building 70,000 16,628.00 II-Building FFF & P.E. 50,000 24,918.79 PVC-15181 SSS Accredited Group of Insurers Building 25,000 5,938.50 F-599 DV Insurers I-Ref 30,000 14,467.31 Multi II-Building 70.000 16.628.00

Totals P295,000 P90,257.81 Based on the computation of the loss, including the Travellers MultiIndemnity, respondents, Zenith Insurance, Phil. British Assurance and S.S.S. Accredited Group of Insurers, paid their corresponding shares of the loss. Complainants were paid the following: P41,546.79 by Philippine British Assurance Co., P11,877.14 by Zenith Insurance Corporation, and P5,936.57 by S.S.S. Group of Accredited Insurers (Par. 6. Amended Complaint). Demand was made from respondent Travellers Multi-Indemnity for its share in the loss but the same was refused. Hence, complainants demanded from the other three (3) respondents the balance of each share in the loss based on the computation of the Adjustment Standards Report excluding Travellers Multi-Indemnity in the amount of P30,894.31 (P5,732.79 Zenith Insurance: P22,294.62, Phil. British: and P2,866.90, SSS Accredited) but the same was refused, hence, this action. In their answers, Philippine British Assurance and Zenith Insurance Corporation admitted the material allegations in the complaint, but denied liability on the ground that the claim of the complainants had already been waived, extinguished or paid. Both companies set up counterclaim in the total amount of P91,546.79. Instead of filing an answer, SSS Accredited Group of Insurers informed the Commission in its letter of July 22, 1977 that the herein claim of complainants for the balance had been paid in the amount of P5,938.57 in full, based on the Adjustment Standards Corporation Report of September 22, 1975. Travellers Insurance, on its part, admitted the issuance of the Policy No. 599 DV and alleged as its special and affirmative defenses the following, to wit: that Fire Policy No. 599 DV, covering the furniture and building of complainants was secured by a certain Arsenio Chua, mortgage creditor, for the purpose of protecting his mortgage credit against the complainants; that the said policy was issued in the name of Azucena Palomo, only to indicate that she owns the insured premises; that the policy contains an endorsement in favor of Arsenio Chua as his mortgage interest may appear to indicate that insured was Arsenio Chua and the complainants; that the premiums due on said fire policy was paid by Arsenio Chua; that respondent Travellers is not liable to pay complainants. On May 31, 1977, Tai Tong Chuache & Co. filed a complaint in intervention claiming the proceeds of the fire Insurance Policy No. F559 DV, issued by respondent Travellers Multi-Indemnity. Travellers Insurance, in answer to the complaint in intervention, alleged that the Intervenor is not entitled to indemnity under its Fire Insurance Policy for lack of insurable interest before the loss of the insured premises and that the complainants, spouses Pedro and

Azucena Palomo, had already paid in full their mortgage indebtedness to the intervenor." 3 As adverted to above respondent Insurance Commission dismissed spouses Palomos' complaint on the ground that the insurance policy subject of the complaint was taken out by Tai Tong Chuache & Company, petitioner herein, for its own interest only as mortgagee of the insured property and thus complainant as mortgagors of the insured property have no right of action against herein respondent. It likewise dismissed petitioner's complaint in intervention in the following words: "We move on the issue of liability of respondent Travellers MultiIndemnity to the Intervenor-mortgagee. The complainant testified that she was still indebted to Intervenor in the amount of P100,000.00. Such allegation has not however, been sufficiently proven by documentary evidence. The certification (Exhibit `E-e') issued by the Court of First Instance of Davao, Branch 11, indicate that the complainant was Antonio Lopez Chua and not Tai Tong Chuache & Company." 4 From the above decision, only intervenor Tai Tong Chuache filed a motion for reconsideration but it was likewise denied hence, the present petition. It is the contention of the petitioner that respondent Insurance Commission decided an issue not raised in the pleadings of the parties in that it ruled that a certain Arsenio Lopez Chua is the one entitled to the insurance proceeds and not Tai Tong Chuache & Company. This Court cannot fault petitioner for the above erroneous interpretation of the decision appealed from considering the manner it was written. 5 As correctly pointed out by respondent insurance commission in their comment, the decision did not pronounce that it was Arsenio Lopez Chua who has insurable interest over the insured property. Perusal of the decision reveals however that it readily absolved respondent insurance company from liability on the basis of the commissioner's conclusion that at the time of the occurrence of the peril insured against petitioner as mortgagee had no more insurable interest over the insured property. It was based on the inference that the credit secured by the mortgaged property was already paid by the Palomos before the said property was gutted down by fire. The foregoing conclusion was arrived at on the basis of the certification issued by the then Court of First Instance of Davao, Branch II that in a certain civil action against the Palomos, Antonio Lopez Chua stands as the complainant and not petitioner Tai Tong Chuache & Company. We find the petition to be impressed with merit. It is a well known postulate that the case of a party is constituted by his own

affirmative allegations. Under Section 1, Rule 131 6 each party must prove his own affirmative allegations by the amount of evidence required by law which in civil cases as in the present case is preponderance of evidence. The party, whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of presenting at the trial such amount of evidence as required by law to obtain a favorable judgment. 7 Thus, petitioner who is claiming a right over the insurance must prove its case. Likewise, respondent insurance company to avoid liability under the policy by setting up an affirmative defense of lack of insurable interest on the part of the petitioner must prove its own affirmative allegations. It will be recalled that respondent insurance company did not assail the validity of the insurance policy taken out by petitioner over the mortgaged property. Neither did it deny that the said property was totally razed by fire within the period covered by the insurance. Respondent, as mentioned earlier advanced an affirmative defense of lack of insurable interest on the part of the petitioner alleging that before the occurrence of the peril insured against the Palomos had already paid their credit due the petitioner. Respondent having admitted the material allegations in the complaint, has the burden of proof to show that petitioner has no insurable interest over the insured property at the time the contingency took place. Upon that point, there is a failure of proof. Respondent, it will be noted, exerted no effort to present any evidence to substantiate its claim, while petitioner did. For said respondent's failure, the decision must be adverse to it. However, as adverted to earlier, respondent Insurance Commission absolved respondent insurance company from liability on the basis of the certification issued by the then Court of First Instance of Davao, Branch II, that in a certain civil action against the Palomos, Arsenio Lopez Chua stands as the complainant and not Tai Tong Chuache. From said evidence respondent commission inferred that the credit extended by herein petitioner to the Palomos secured by the insured property must have been paid Such is a glaring error which this Court cannot sanction. Respondent Commission's findings are based upon a mere inference. The record of the case shows that the petitioner to support its claim for the insurance proceeds offered as evidence the contract of mortgage (Exh. 1) which has not been cancelled nor released. It has been held in a long line of cases that when the creditor is in possession of the document of credit, he need not prove nonpayment for it is presumed. 8 The validity of the insurance policy taken by petitioner was not assailed by private respondent. Moreover, petitioner's claim that the loan extended to the Palomos

has not yet been paid was corroborated by Azucena Palomo who testified that they are still indebted to herein petitioner. 9 Public respondent argues however, that if the civil case really stemmed from the loan granted to Azucena Palomo by petitioner the same should have been brought by Tai Tong Chuache or by its representative in its own behalf. From the above premise respondent concluded that the obligation secured by the insured property must have been paid. The premise is correct but the conclusion is wrong. Citing Rule 3, Sec. 2 10 respondent pointed out that the action must be brought in the name of the real party in interest. We agree. However, it should be borne in mind that petitioner being a partnership may sue and be sued in its name or by its duly authorized representative. The fact that Arsenio Lopez Chua is the representative of petitioner is not questioned. Petitioner's declaration that Arsenio Lopez Chua acts as the managing partner of the partnership was corroborated by respondent insurance company. 11 Thus Chua as the managing partner of the partnership may execute all acts of administration 12 including the right to sue debtors of the partnership in case of their failure to pay their obligations when it became due and demandable. Or at the very least, Chua being a partner of petitioner Tai Tong Chuache & Company is an agent of the partnership. Being an agent, it is understood that he acted for and in behalf of the firm. 13 Public respondent's allegation that the civil case filed by Arsenio Chua was in his capacity as personal creditor of spouses Palomo has no basis. The respondent insurance company having issued a policy in favor of herein petitioner which policy was of legal force and effect at the time of the fire, it is bound by its terms and conditions. Upon its failure to prove the allegation of lack of insurable interest on the part of the petitioner, respondent insurance company is and must be held liable. IN VIEW OF THE FOREGOING, the decision appealed from is hereby SET ASIDE and ANOTHER judgment is rendered ordering private respondent Travellers Multi-Indemnity Corporation to pay petitioner the face value of Insurance Policy No. 599-DV in the amount of P100,000.00. Costs against said private respondent. SO ORDERED. Teehankee, C.J., Narvasa, Cruz and Grio-Aquino, JJ., concur.

[G.R. No. 55397. February 29, 1988.] PEDRO R. PALTING, petitioner, vs. SAN JOSE PETROLEUM INCORPORATED, respondent. SYLLABUS 1. CORPORATION; REGISTRATION AND SALE OF SECURITIES; RIGHT TO FILE AN OPPOSITION TO APPEAL FROM AN ADVERSE RULING OF THE SECURITIES AND EXCHANGE COMMISSION; PURPOSES OF BLUE SKY LAWS. The right to file an opposition to the registration of securities for sale in the Philippines, and, in case of an adverse order, ruling or decision by the Securities and Exchange Commission, to appeal to the Supreme Court, is not limited to issues, dealers or salesmen of securities. This is in consonance with the generally accepted principle that BLUE Sky Laws are enacted to protect investors and prospective purchasers and to prevent fraud and preclude the sale of securities which are worthless or worth substantially less than the asking price. Moreover, petitioner in the case at bar became to all intents and purposes a party to the proceedings. And under the New Rules of Court, which can be applied here pursuant to Rule 144, he can appeal from a final order, ruling or decision of the Securities and Exchange Commission. 2. ID.; ID., ID.; WHEN SECURITIES ARE DEEMED REGISTERED. The order under review allowing the registration and sale of respondent's securities is a final order that is appealable. This is so because the securities are deemed registered seven days after publication of the order (Section 7, Commonwealth Act 83, as amended). The mere fact that the authority may be later suspended or revoked, depending on future developments, does not give it the character of an interlocutory or provisional ruling. 3. ID.; ID.; WHEN INQUIRY AS TO THE WORTH OR LEGALITY OF SECURITIES CAN BE MADE. Where the securities are outstanding and are placed in the channels of trade and commerce, members of the investing public are entitled to have the question of the worth or legality of the securities resolved one way or another. The purpose of the inquiry on the matter is not fully served just because the securities has passed out of the hands of the issuers and its dealers. 4. CONSTITUTIONAL LAW; UTILIZATION, EXPLOITATION AND DEVELOPMENT OF NATURAL RESOURCES; PERSONS WHO CAN EXERCISE THE PRIVILEGE. The privilege to utilize, exploit and develop the natural resources of the Philippines was granted by Article XIII of the Constitution, to Filipino citizens or to corporations or associations 60% of the capital of which is owned by such citizens. With the Parity Amendment to the Constitution, the same right was extended to citizens of the United States and business enterprise owned or controlled, directly or indirectly, by citizens of the United States. There can be no serious doubt as to the meaning of the word

"citizens" used in the aforementioned provisions of the Constitution. The right was granted to two types of persons; natural persons (Filipino or American citizen) and juridical persons (corporations 60% of which capital is owned by Filipinos and business enterprises owned or controlled directly or indirectly by citizens of the United States). 5. ID.; ID.; ID.; SAN JOSE PETROLEUM INCORPORATED NOT AUTHORIZED TO EXERCISE PARITY PRIVILEGES. San Jose Petroleum Incorporated is not owned or controlled directly by citizens of the United States, because it is owned and controlled by Oil Investments, Inc., another foreign (Panamanian) corporation. Neither is it indirectly owned or controlled by American citizens through Oil Investments, Inc., which is owned and controlled, not by citizens of the United States, but by two foreign (Venezuelan) corporations. There is no showing that the stockholders in these two corporations are citizens of the United States. But even granting that they are, it is still necessary to establish that the different states of which they are citizens allow Filipino citizens or corporations or associations owned or controlled by Filipino citizens to engage in the exploitation, etc. of the natural resources of these states (par. 3, Art. VI of the Laurel-Langley Agreement). And even if these requirements are satisfied, to hold that the set-up disclosed in the present case, with a long chain of intervening foreign corporations, comes within the purview of the Parity Amendment regarding business enterprises indirectly owned or controlled by citizens of the United States, is to unduly stretch and strain the language and intent of the law. Hence, San Jose Petroleum. Incorporated as presently constituted, is not a business enterprise that is authorized to exercise the parity privilege under the Parity Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its tie-up with San Jose Oil Company, Inc. is consequently, illegal. DECISION BARRERA, J p: This is a petition for review of the order of August 29, 1958, later supplemented and amplified by another dated September 9, 1958, of the Securities and Exchange Commissioner denying the opposition to, and instead, granting the registration, and licensing the sale in the Philippines, of 5,000.000 shares of the capital stock of the respondent-appellee San Jose Petroleum, Inc. (hereafter referred to as SAN JOSE PETROLEUM), a corporation organized and existing in the Republic of Panama. On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine Securities and Exchange Commission a sworn registration statement, for the registration and licensing for sale in the Philippines Voting Trust Certificates representing 2,000,000 shares of

its capital stock with a par value of $0.35 a share, at P1.00 per share. It was alleged that the entire proceeds of the sale of said securities will be devoted or used exclusively to finance the operations of San Jose Oil Company, Inc. (a domestic mining corporation hereafter to be referred to as SAN JOSE OIL) which has 14 petroleum exploration concessions covering an area of a little less than 1,000,000 hectares, located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao and Agusan. It was the express condition of the sale that every purchaser of the securities shall not receive a stock certificate, but a registered or bearer-voting-trust certificate from the voting trustees named therein James L. Buckley and Austin G. E. Taylor, the first residing in Connecticut, U. S. A., and the second in New York City. While this application for registration was pending consideration by the Securities and Exchange Commission, SAN JOSE PETROLEUM filed an amended Statement on June 20, 1958, for registration of the sale in the Philippines of its shares of capital stock, which was increased from 2,000,000 to 5,000,000, at a reduced offering price of from P1.00 to P.70 per share. At this time the par value of the shares has also been reduced from $.35 to $.01 per share. 1 Pedro R. Palting and others, allegedly prospective investors in the shares of SAN JOSE PETROLEUM, filed with the Securities and Exchange Commission an opposition to the registration and licensing of the securities on the grounds that (1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian corporation, and SAN JOSE OIL, a domestic corporation, violates the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949; (2) the issuer has not been licensed to transact business in the Philippines; (3) the sale of the share of the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and (4) the issuer as an enterprise, as well as its business, is based upon unsound business principles. Answering the foregoing opposition of Palting, et al., the registrant SAN JOSE PETROLEUM claimed that it was a "business enterprise" enjoying parity rights under the ordinance appended to the Constitution, which parity right, with respect to mineral resources in the Philippines, may be exercised, pursuant to the Laurel-Langley Agreement, only through the medium of a corporation organized under the laws of the Philippines. Thus, registrant which is allegedly qualified to exercise rights under the Parity Amendment, had to do so through the medium of a domestic corporation, which is the SAN JOSE OIL. It refuted the contention that the Corporation Law was being violated, by alleging that Section 13 thereof applies only to foreign corporations doing business in the Philippines, and registrant was not doing business here. The mere fact that it was a holding company of SAN JOSE OIL and that

registrant undertook the financing of and giving technical assistance to said corporation did not constitute transaction of business in the Philippines. Registrant also denied that the offering for sale in the Philippines of its shares of capital stock was fraudulent or would work or tend to work fraud on the investors. On August 29, 1958, and on September 9, 1958 the Securities and Exchange Commissioner issued the orders object of the present appeal. The issues raised by the parties in this appeal are as follows: 1. Whether or not petitioner Pedro R. Palting, as a "prospective investor" in respondent's securities, has personality to file the present petition for review of the order of the Securities and Exchange Commissioner; 2. Whether or not the issue raised herein is already moot and academic; 3. Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a foreign corporation, and SAN JOSE OIL COMPANY, INC., a domestic mining corporation, is violative of the Constitution, the Laurel-Langley Agreement, the Petroleum Act of 1949, and the Corporation Law; and 4. Whether or not the sale of respondent's securities is fraudulent or would work or tend to work fraud to purchasers of such securities in the Philippines. 1. In answer to the notice and order of the Securities and Exchange Commissioner, published in 2 newspapers of general circulation in the Philippines, for "any person who is opposed" to the petition for registration and licensing of respondent's securities, to file his opposition in 7 days, herein petitioner so filed an opposition. And, the Commissioner, having denied his opposition and instead, directed the registration of the securities to be offered for sale, oppositor Palting instituted the present proceeding for review of said order. Respondent raises the question of the personality of petitioner to bring this appeal, contending that as a mere "prospective investor", he is not an "aggrieved" or "interested" person who may properly maintain the suit. Citing a 1931 ruling of Utah State supreme court, 2 it is claimed that the phrase "party aggrieved" used in the Securities Acts 3 and the Rules of Court 4 as having the right to appeal should refer only to issuers, dealers and salesmen of securities. It is true that in the cited case, it was ruled that the phrase "person aggrieved" is that party "aggrieved by the judgment or decree where it operates on his rights of property or bears directly upon his interest", that the word "aggrieved" refers to "a substantial grievance, a denial of some personal property right or the imposition upon a party of a burden or obligation." But a careful reading of the case would show that the appeal therein was dismissed because the

court held that an order of registration was not final and therefore not appealable. The foregoing pronouncement relied upon by herein respondent was made in construing the provision regarding an order of revocation which the court held was the one appealable. And since the law provides that in revoking the registration of any security, only the issuer and every registered dealer of the security are notified, excluding any person or group of persons having no such interest in the securities, said court concluded that the phrase "interested person" refers only to issuers, dealers or salesmen of securities. We cannot consider the foregoing ruling by the Utah State Court as controlling on the issue in this case. Our Securities Act in Section 7(c) thereof, requires the publication and notice of the registration statement. Pursuant thereto, the Securities and Exchange commissioner caused the publication of an order in part reading as follows: ". . . Any person who is opposed with this petition must file his written opposition with this Commission within said period (2 weeks) . . ." In other words, as construed by the administrative office entrusted with the enforcement of the Securities Act, any person (who may not be "aggrieved" or " interested" within the legal acceptation of the word) is allowed or permitted to file an opposition to the registration of securities for sale in the Philippines. And this is in consonance with the generally accepted principle that Blue Sky Laws are enacted to protect investors and prospective purchasers and to prevent fraud and preclude the sale of securities which are in fact worthless or worth substantially less than the asking price. It is for this purpose that herein petitioner duly filed his opposition giving grounds therefor. Respondent SAN JOSE PETROLEUM was required to reply to the opposition. Subsequently, both the petition and the opposition were set for hearing during which the petitioner was allowed to actively participate and did so by cross-examining the respondent's witnesses and filing his memorandum in support of his opposition. He therefore to all intents and purposes became a party to the proceedings. And under the New Rules of Court, 5 such a party can appeal from a final order, ruling or decision of the Securities and Exchange Commission. This new Rule eliminating the word "aggrieved" appearing in the old Rule, being procedural in nature, 6 and in view of the express provision of Rule 144 that the new rules made effective on January 1, 1964 shall govern not only cases brought after they took effect but all further proceedings in cases then pending, except to the extent that in the opinion of the Court their application would not be feasible or would work injustice, in which event the former procedure shall apply, we hold that the

present appeal is properly within the appellate jurisdiction of this Court. The order allowing the registration and sale of respondent's securities is clearly a final order that is appealable. The mere fact that such authority may be later suspended or revoked, depending on future developments, does not give it the character of an interlocutory or provisional ruling. And the fact that seven days after the publication of the order, the securities are deemed registered (Sec. 7, Com. Act 83, as amended), points to the finality of the order. Rights and obligations necessarily arise therefrom if not reviewed on appeal. Our position on this procedural matter that the order is appealable and the appeal taken here is proper is strengthened by the intervention of the Solicitor General, under Section 23 of Rule 3 of the Rules of Court, as the constitutional issues herein presented affect the validity of Section 13 of the Corporation Law, which, according to the respondent, conflicts with the Parity Ordinance and the Laurel-Langley Agreement recognizing, it is claimed, its right to exploit our petroleum resources notwithstanding said provisions of the Corporation Law. 2. Respondent likewise contends that since the order of Registration/Licensing dated September 9, 1958 took effect 30 days from September 3, 1958, and since no stay order has been issued by the Supreme Court, respondent's shares became registered and licensed under the law as of October 3, 1958. Consequently, it is asserted, the present appeal has become academic. Frankly, we are unable to follow respondent's argumentation. First it claims that the orders of August 29 and that of September 9, 1958 are not final orders and therefore are not appealable. Then when these orders, according to its theory, became final and were implemented, it argues that the orders can no longer be appealed as the question of registration and licensing became moot and academic. But the fact is that because of the authority to sell, the securities are, in all probabilities, still being traded in the open market. Consequently, the issue is much alive as to whether respondent's securities should continue to be the subject of sale. The purpose of the inquiry on this matter is not fully served just because the securities had passed out of the hands of the issuer and its dealers. Obviously, so long as the securities are outstanding and are placed in the channels of trade and commerce, members of the investing public are entitled to have the question of the worth or legality of the securities resolved one way or another. But more fundamental than this consideration, we agree with the late Senator Claro M. Recto, who appeared as amicus curiae in this case, that while apparently the immediate issue in this appeal is the

right of respondent SAN JOSE PETROLEUM to dispose of and sell its securities to the Filipino public, the real and ultimate controversy here would actually call for the construction of the constitutional provisions governing the disposition, utilization, exploitation and development of our natural resources. And certainly this is neither moot nor academic. 3. We now come to the meat of the controversy the "tie-up" between SAN JOSE OIL on the one hand, and the respondent SAN JOSE PETROLEUM and its associates, on the other. The relationship of these corporations involved or affected in this case is admitted and established through the papers and documents which are parts of the records: SAN JOSE OIL, is a domestic mining corporation, 90% of the outstanding capital stock of which is owned by respondent SAN JOSE PETROLEUM, a foreign (Panamanian) corporation, the majority interest of which is owned by OIL INVESTMENTS, INC., another foreign (Panamanian) company. This latter corporation in turn is wholly (100%) owned by PANTEPEC OIL COMPANY, C. A., and PANCOASTAL PETROLEUM COMPANY, C. A., both organized and existing under the laws of Venezuela. As of September 30, 1956, there were 9,979 stockholders of PANCOASTAL PETROLEUM found in 49 American states and U.S. territories, holding 3,476,988 shares of stock; whereas, as of November 30, 1956, PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by 12,373 stockholders scattered in 49 American states. In the two list of stockholders, there is no indication of the citizenship of these stockholders, 7 or of the total number of authorized stocks of each corporation for the purpose of determining the corresponding percentage of these listed stockholders in relation to the respective capital stock of said corporation. Petitioner, as well as the amicus curiae and the Solicitor General 8 contend that the relationship between herein respondent SAN JOSE PETROLEUM and its subsidiary, SAN JOSE OIL, violates the Petroleum Law of 1949, the Philippine Constitution, and Section 13 of the Corporation Law, which inhibits a mining corporation from acquiring an interest in another mining corporation. It is respondent's theory, on the other hand, that far from violating the Constitution, such relationship between the two corporations is in accordance with the Laurel-Langley Agreement which implemented the Ordinance Appended to the Constitution, and that Section 13 of the Corporation Law is not applicable because respondent is not licensed to do business, as it is not doing business, in the Philippines. Article XIII, Section 1 of the Philippine Constitution provides: "Sec. 1. All agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and other natural resources of the

Philippines belong to the State, and their disposition, exploitation, development, or utilization shall be limited to citizens of the Philippines or to corporations or associations of least sixty per centum of the capital of which is owned by such citizens, subject to any existing right, grant, lease or concession at the time of the inauguration of this Government established under this Constitution . . ." (Emphasis supplied) In the 1946 Ordinance Appended to the Constitution, this right (to utilize and exploit our natural resources) was extended to citizens of the United States, thus: "Notwithstanding the provisions of Section one, Article Thirteen, and section eight, Article Fourteen, of the foregoing Constitution, during the effectivity of the Executive Agreement entered into by the President of the Philippines with the President of the United States on the fourth of July, nineteen hundred and forty-six, pursuant to the provisions of Commonwealth Act numbered Seven hundred and Thirty-Three, but in no case to extend beyond the third of July, nineteen hundred and seventy-four, the disposition, exploitation, development, and utilization of all agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all sources of potential energy, and other natural resources of the Philippines, and the operation of public utilities shall, if open to any person, be open to citizens of the United States, and to all forms of business enterprise owned or controlled, directly or indirectly, by citizens of the United States in the same manner as to, and under the same conditions imposed upon citizens of the Philippines or Corporations or associations owned or controlled by citizens of the Philippines (Emphasis Supplied.) In the 1954 Revised Trade Agreement concluded between the United States and the Philippines, also known as the Laurel-Langley Agreement, embodied in Republic Act 1355, the following provisions appear: "ARTICLE VI "1. The disposition, exploitation, development and utilization of all agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces and of sources of potential energy, and other natural resources of either Party, and the operation of public utilities, shall, if open to any person, be open to citizens of the other Party and to all forms of business enterprise owned or controlled directly or indirectly, by citizens of such other Party in the same manner as to and under the same conditions imposed upon citizens or corporations or associations owned or controlled by citizens of the Party granting the right.

"2. The rights provided for in Paragraph 1 may be exercised, . . . in the case of citizens of the United States, with respect to natural resources in the public domain in the Philippines, only through the medium of a corporation organized under the laws of the Philippines and at least 60% of the capital stock of which is owned and controlled by citizens of the United States . . . "3. The United States of America reserves the rights of the several States of the United States to limit the extent to which citizens or corporations or associations owned or controlled by citizens of the Philippines may engage in the activities specified in this article. The Republic of the Philippines reserves the power to deny and of the rights specified in this Article to citizens of the United States who are citizens of States, or to corporations or associations at least 60% of whose capital stock or capital is owned or controlled by citizens of States, which deny like rights to citizens of the Philippines, or to corporations or associations which ore owned or controlled by citizens of the Philippines . . ." (Emphasis supplied.) Re-stated, the privilege to utilize, exploit, and develop the natural resources of this country was granted, by Article III of the Constitution, to Filipino citizens or to corporations or associations 60% of the capital of which is owned by such citizens. With the Parity Amendment to the Constitution, the same right was extended to citizens of the United States and business enterprises owned or controlled, directly or indirectly, by citizens of the United States. There could be no serious doubt as to the meaning of the word "citizens" used in the aforementioned provisions of the Constitution. The right was granted to 2 types of persons: natural persons (Filipino or American citizens) and juridical persons (corporations 60% of which capital is owned by Filipinos and business enterprises owned or controlled directly or indirectly, by citizens of the United States). In American law, "citizen" has been defined as "one who, under the constitution and laws of the United States, has a right to vote for representatives in congress and other public officers, and who is qualified to fill offices in the gift of the people." (1 Bouvier's Law Dictionary, p. 490.) A citizen is "One of the sovereign people. A constituent member of the sovereignty, synonymous with the people." (Scott vs. Sandford, 19 Ho. [U.S.]404, 15 L. Ed. 691.) "A member of the civil state entitled to all its privileges. (Cooley, Const. Lim. 77. See U.S. vs. Cruikshank, 92 U.S. 542, 23 L. Ed. 588; Minor vs. Happersett, 21 Wall. [U.S.]162, 22 L. Ed. 627.) These concepts clarified, is herein respondent SAN JOSE PETROLEUM an American business enterprise entitled to parity rights in the Philippines? The answer must be in the negative for the following reasons:

Firstly It is not owned or controlled directly by citizens of the United States, because it is owned and controlled by a corporation, the OIL INVESTMENTS, another foreign (Panamanian) corporation. Secondly Neither can it be said that it is indirectly owned and controlled by American citizens through the OIL INVESTMENTS, for this latter corporation is in turn owned and controlled, not by citizens of the United States, but still by two foreign (Venezuelan) corporations, the PANTEPEC OIL COMPANY and PANCOASTAL PETROLEUM. Thirdly Although it is claimed that these two last corporations are owned and controlled respectively by 12,373 and 9,979 stockholders residing in the different American states, there is no showing in the certification furnished by respondent that the stockholders of PANCOASTAL or those of them holding the controlling stock, are citizens of the United States. Fourthly Granting that these individual stockholders are American citizens, it is yet necessary to establish that the different states of which they are citizens, allow Filipino citizens or corporations or associations owned or controlled by Filipino citizens, to engage in the exploitation, etc. of the natural resources of those states (see paragraph 3, Article VI of the Laurel-Langley Agreement, supra.). Respondent has presented no proof to this effect. Fifthly But even if the requirements mentioned in the two immediately preceding paragraphs are satisfied, nevertheless to hold that the set-up disclosed in this case, with a long chain of intervening foreign corporations, comes within the purview of the Parity Amendment regarding business enterprises indirectly owned or controlled by citizens of the United States, is to unduly stretch and strain the language and intent of the law. For, to what extent must the word "indirectly" be carried? Must we trace the ownership or control of these various corporations ad infinitum for the purpose of determining whether the American ownership control-requirement is satisfied? Add to this the admitted fact that the shares of stock of the PANTEPEC and PANCOASTAL which are allegedly owned or controlled directly by citizens of the United States, are traded in the stock exchange in New York, and you have a situation where it becomes a practical impossibility to determine at any given time, the citizenship of the controlling stock required by the law. In the circumstances, we have to hold that the respondent SAN JOSE PETROLEUM, as presently constituted, is not a business enterprise that is authorized to exercise the parity privileges under the Parity Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently, illegal. What, then, would be the status of SAN JOSE OIL, about 90% of whose stock is owned by SAN JOSE PETROLEUM? This is a query

which we need not resolve in this case as SAN JOSE OIL is not a party and it is not necessary to do so to dispose of the present controversy. But it is a matter that probably the Solicitor General would want to look into. There is another issue which has been discussed extensively by the parties. This is whether or not an American mining corporation may lawfully "be in any wise interested in any other corporation (domestic or foreign) organized for the purpose of engaging in agriculture or in mining," in the Philippines or whether an American citizen owning stock in more than one corporation organized for the purpose of engaging in agriculture, or in mining, may own more than 15% of the capital stock then outstanding and entitled to vote, of each of such corporations, in view of the express prohibition contained in Section 13 of the Philippine Corporation Law. The petitioner in this case contends that provisions of the Corporation Law must be applied to American citizens and business enterprise otherwise entitled to exercise the parity privileges, because both the Laurel-Langley Agreement (Art. VI, par. 1) and the Petroleum Act of 1949 (Art. 31), specifically provide that the enjoyment by them of the same rights and obligations granted under the provisions of both laws shall be "in the same manner as to, and under the same conditions imposed upon, citizens of the Philippines or corporations or associations owned or controlled by citizens of the Philippines." The petitioner further contends that, as the enjoyment of the privilege of exploiting mineral resources in the Philippines by Filipino citizens or corporations owned or controlled by citizens of the Philippines (which corporation must necessarily be organized under the Corporation Law), is made subject to the limitations provided in Section 13 of the Corporation Law, so necessarily the exercise of the parity rights by citizens of the United States or business enterprise owned or controlled, directly or indirectly, by citizens of the United States, must equally be subject to the same limitations contained in the aforesaid Section 13 of the Corporation Law. In view of the conclusions we have already arrived at, we deem it not indispensable for us to pass upon this legal question, especially taking into account the statement of the respondent (SAN JOSE PETROLEUM) that it is essentially a holding company, and as found by the Securities and Exchange Commissioner, its principal activity is limited to the financing and giving technical assistance to SAN JOSE OIL. 4. Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed registration for sale in the Philippines, was incorporated under the laws of Panama in April, 1956, with an authorized capital of $500,000.00, American currency, divided into 50,000,000 shares at par value of $0.01 per share. By virtue of a 3-

party Agreement of June 14, 1956, respondent was supposed to have received from OIL INVESTMENTS 8,000,000 shares of the capital stock of SAN JOSE OIL (at par value of $0.01 per share), plus a note for $250,000.00 due in 6 months, for which respondent issued in favor of OIL INVESTMENTS 16,000,000 shares of its capital stock, at $0.01 per share or with a value of $160,000.00 plus a note for $230,297.97 maturing in 2 years at 6% per annum interest, 9 and the assumption of payment of the unpaid price of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL. On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased from $500,000.00 to $17,500,000.00 by increasing the par value of the same 50,000,000 shares, from $0.01 to $0.35. Without any additional consideration, the 16,000,000 shares of $0.01 previously issued at OIL INVESTMENTS with a total value of $160,000.00 were changed with 16,000,000 shares of the recapitalized stock, at $0.35 per share, or valued at $5,600,000.00. And, to make it appear that cash was received for these re-issued 16,000,000 shares, the board of directors of respondent corporation placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN JOSE OIL (still having par value of $0.10 per share) which were received from OIL INVESTMENTS as part-consideration for the 16,000,000 shares at $.01 per share. In the Balance Sheet of respondent, dated July 12, 1956, from the $5,900,000.00, supposedly the value of the 8,000,000 shares of SAN JOSE OIL, the sum of $5,100,000.00 was deducted, corresponding to the alleged difference between the "value" of the said shares and the subscription price thereof which is $800,000.00 (at $0.10 per share). From this $800,000.00, the subscription price of the SAN JOSE OIL shares, the amount of $319,702.03 was deducted, as allegedly unpaid subscription price, thereby giving a difference of $480,297.97, which was placed the amount allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL-shares. Then, by adding thereto the note receivable from OIL INVESTMENTS, for $250,000.00 (part-consideration for the 16,000,000 SAN JOSE PETROLEUM shares) and the sum of $6,516.21, as deferred expenses SAN JOSE PETROLEUM appeared to have assets in the sum of $736,814.18. These figures are highly questionable. Take the item $5,900,000.00 the valuation placed on the 8,000,000 shares of SAN JOSE OIL. There appears no basis for such valuation other than belief by the board of directors of respondent that "should San Jose Oil Company be granted the bulk of the concessions applied for upon reasonable terms, that it would have a reasonable value of approximately $10,000,000." 10 Then, of this amount, the subscription price of $800,000.00 was deducted and called it "difference between the

(above) valuation and the subscription price for the 8,000,000 shares." Of this $800,000.00 subscription price, they deducted the sum of $488,297.97 and the difference was placed as the unpaid portion of the subscription price. In other words, it was made to appear that they paid in $480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount ($480,297.97) was supposedly that $250,000.00 paid by OIL INVESTMENTS for 7,500,000 shares of SAN JOSE OIL, embodied in the June 14-Agreement, and a sum of $230,297.97 the amount expended or advanced by OIL INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among respondent's liabilities, for $230,297.97 appearing as note payable to Oil Investments, maturing in 2 years at 6% interest per annum. 11 As far as it appears from the records, for the 16,000,000 shares at $0.35 per share issued to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM received from OIL INVESTMENTS only the note for $250,000.00 plus 8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per share or a total of $1,050,000.00 - the only assets of the corporation. In other words, respondent actually lost $4,550,000.00, which was received by OIL INVESTMENTS. But this is not all. Some of the provisions of the Articles of Incorporation of respondent SAN JOSE PETROLEUM are noteworthy; viz: (1) the director of the Company need not be share-holders; (2) that in the meeting of the board of directors, any director may be represented and may vote through a proxy who also need not be a director or stockholder; and (3) that no contract or transaction between the corporation and any other association or partnership will be affected, except in case of fraud, by the fact that any of the directors or officers of the corporation is interested in, or is a director or officer of, such other association or partnership, and that no such contract or transaction of the corporation with any other person or persons, firm, association or partnership shall be affected by the fact that any director or officer of the corporation is a party to or has an interest in, such contract or transaction, or has in anyway connection with such other person or persons, firm, association or partnership; and finally, that all and any of the persons who may become director or officer of the corporation shall be relieved from all responsibility for which they may otherwise be liable by reason of any contract entered into with the corporation, whether it be for his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested. These provisions are in direct opposition to our corporation law and corporate practices in this country. These provisions alone would outlaw any corporation locally organized or doing business in this

jurisdiction. Consider the unique and unusual provision that no contract or transaction between the company and any other association or corporation shall be affected except in case of fraud, by the fact that any of the directors or officers of the company may be interested in or are directors or officers of such other association or corporation; and that none of such contracts or transactions of this company with any person or persons, firms, associations or corporations shall be affected by the fact that any director or officer of this company is a party to or has an interest in such contract or transaction or has any connection with such person or persons, firms, associations or corporations: and that any and all persons who may become directors or officers of this company are hereby relieved of all responsibility which they would otherwise incur by reason of any contract entered into which this company either for their own benefit, or for the benefit of any person, firm, association or corporation in which they may be interested. The impact of these provisions upon the traditional judiciary* relationship between the directors and the stockholders of a corporation is too obvious to escape notice by those who are called upon to protect the interest of investors. The directors and officers of the company can do anything, short of actual fraud, with the affairs of the corporation even to benefit themselves directly or other persons or entities in which they are interested, and with immunity because of the advance condonation or relief from responsibility by reason of such acts. This and the other provision which authorize the election of non-stockholders as directors, completely disassociate the stockholders from the government and management of the business in which they have invested. To cap it all on April 17, 1957, admittedly to assure continuity of the management and stability of SAN JOSE PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed stock of the former corporation and acting "on behalf of All future holders of voting trust certificates", entered into a voting trust agreement 12 with James L. Buckley and Austin E. Taylor whereby said Trustees were given authority to vote the shares represented by the outstanding trust certificate (including those that may henceforth be issued) in the following manner: (a) At all elections of directors, the Trustees will designate a suitable proxy or proxies 'to vote for the election of directors designated by the Trustees in their own discretion, having in mind the best interests of the holders of the voting trust certificates, it being understood that any and all of the Trustees shall be eligible for election as directors;

(b) On any proposition for removal of a director, the Trustees shall designate a suitable proxy or proxies to vote for or against such proposition as the Trustees their own discretion may determine, having in mind the best interest of the holders of the voting trust certificates; (c) With respect to all other matters arising at any meeting of stockholders, the Trustees will instruct such proxy or proxies attending each meetings to vote the shares of stock held by the Trustee in accordance with the written instructions of each holder of voting trust certificates. (Emphasis supplied.) It was also therein provided that the said Agreement shall be binding upon the parties thereto, their successors, and upon all holders of voting trust certificates. And these are the voting trust certificates that are offered to investors as authorized by the Security and Exchange Commissioner. It can not be doubted that the sale of respondent's securities would, to say the least, work or tend to work fraud to Philippine investors. FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to dismiss this appeal, is denied, and the orders of the Securities and Exchange Commissioner, allowing the registration of Respondent's securities and licensing their sale in the Philippines are hereby set aside. The case is remanded to the Securities and Exchange Commission for appropriate action in consonance with this decision. With costs. Let a copy of this decision be furnished the Solicitor General for whatever action he may deem advisable to take in the premises. So ordered. Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur. Castro, J., did not take part.

[G.R. No. L-5963. May 20, 1953.] THE LEYTE-SAMAR SALES CO., and RAYMUNDO TOMASSI, petitioners, vs. SULPICIO V. CEA, in his capacity as Judge of the Court of First Instance of Leyte and OLEGARIO LASTRILLA, respondents. Filomeno Montejo for petitioners. Sulpicio V. Cea in his own behalf. Olegario Lastrilla in his own behalf. SYLLABUS 1. PARTNERSHIP; PARTNER IS NOT CREDITOR OF PARTNERSHIP. The partner of a partnership is not a creditor of such partnership for the amount of his share. 2. ACTIONS; REMEDY OF OWNER OF PROPERTY WRONGFULLY SOLD. The remedy of the owner of a property wrongfully sold is to claim the property and not the proceeds of the sale. 3. PARTIES; WANT OF NECESSARY AND INDISPENSABLE PARTIES; EFFECT OF. A valid judgment cannot be rendered where there is a want of necessary parties, and a court cannot properly adjudicate matters involved in a suit when necessary and indispensable parties to the proceedings are not before it. 4. CERTIORARI; WHEN ACTION WILL LIE. Where the lower court has acted without jurisdiction over the subject matter, or where the order or judgment complained of is a patent nullity, the judgment should be set aside although an appeal was available but was not availed of. DECISION BENGZON, J p: Labeled "Certiorari and Prohibition with Preliminary Injunction" this petition actually prays for the additional writ of mandamus to compel the respondent judge to give due course to petitioners' appeal from his order taxing costs. However, inasmuch as according to the answer, petitioners through their attorney withdrew their cash appeal bond of P60 after the record on appeal had been rejected, the matter of mandamus may summarily be dropped without further comment. From the pleadings it appears that, In civil case No. 193 of the Court of First Instance of Leyte, which is a suit for damages by the Leyte-Samar Sales Co. (hereinafter called LESSCO) and Raymond Tomassi against the Far Eastern Lumber & Commercial Co. (unregistered commercial partnership hereinafter called FELCO), Arnold Hall, Fred Brown and Jean Roxas, judgment against defendants jointly and severally for the amount of P31,589.14 plus costs was rendered on October 29, 1948. The Court of Appeals confirmed the award in November 1950, minus P2,000 representing attorney's fees mistakenly included. The decision having become final, the sheriff sold at auction on June 9, 1951 to

Robert Dorfe and Pepito Asturias "all the rights, interests, titles and participation" of the defendants in certain buildings and properties described in the certificate, for a total price of eight thousand and one hundred pesos. But on June 4, 1951 Olegario Lastrilla filed in the case a motion, wherein he claimed to be the owner by purchase on September 29, 1949, of all the "shares and interests" of defendant Fred Brown in the FELCO, and requested "under the law of preference of credits" that the sheriff be required to retain in his possession so much of the proceeds of the auction sale as may be necessary "to pay his right". Over the plaintiffs' objection the judge in his order of June 13, 1951, granted Lastrilla's motion by requiring the sheriff to retain 17 per cent of the money "for delivery to the assignee, administrator or receiver" of the FELCO. And on motion of Lastrilla, the court on August 14, 1951, modified its order of delivery and merely declared that Lastrilla was entitled to 17 per cent of the properties sold, saying in part: ". . . el Juzgado ha encontrado que no se han respetado los derechos del Sr. Lastrilla en lo que se redere a su adquisicion de las acciones de C. Arnold Hall (Fred Brown) en la Far Eastern Lumber & Commercial Co. porque las mismas han sido incluidas en la subasta. "Es verdad que las acciones adquiridas por el Sr. Lastrilla representan el 17 por ciento del capital de la sociedad 'Far Eastern Lumber & Commercial Co., Inc., et al.' pero esto no quiere decir que su valor no esta sujeto a las fluctuaciones del negocio donde las invirtio. "Se vendieron propiedades de la corporacion 'Far Eastern Lumber & Commercial Co., Inc.', y de la venta solamente se obtuvo la cantidad de P8,100. "En su virtud, se declara que el 17 por ciento de las propiedades vendidas en publica subasta pertenece al Sr. O. Lastrilla y este tiene derecho a dicha porcion pero con la obligacion de pagar el 17 por ciento de los gastos por la conservacion de dichas propiedades por parte del Sheriff; . . . " (Annex K). It is from this declaration and the subsequent orders to enforce it 1 that the petitioners seek relief by certiorari, their position being that such orders were null and void for lack of jurisdiction. At their request a writ of preliminary injunction was issued here. The record is not very clear, but there are indications, and we shall assume for the moment, that Fred Brown (like Arnold Hall and Jean Roxas) was a partner of the FELCO, was defendant in Civil Case No. 193 as such partner, and that the properties sold at auction actually belonged to the FELCO partnership and the partners. We shall also assume that the sale made to Lastrilla on September 29, 1949, of all the shares of Fred Brown in the FELCO was valid. (Remember that

judgment in this case was entered in the court of first instance a year before.) The result then, is that on June 9, 1951 when the sale was effected of the properties of FELCO to Roberto Dorfe and Pepito Asturias, Lastrilla was already a partner of FELCO. Now, does Lastrilla have any proper claim to the proceeds of the sale? If he was a creditor of the FELCO, perhaps or maybe. But he was not. The partner of a partnership is not a creditor of such partnership for the amount of his shares. That is too elementary to need elaboration. Lastrilla's theory, and the lower court's, seems to be: inasmuch as Lastrilla had acquired the shares of Brown in September, 1949, i.e., before the auction sale, and he was not a party to the litigation, such shares could not have been transferred to Dorfe and Asturias. Granting, arguendo that the auction sale did not include the interest or portion of the FELCO properties corresponding to the shares of Lastrilla in the same partnership (17%), the resulting situation would be - at most - that the purchasers Dorfe and Asturias will have to recognize dominion of Lastrilla over 17 per cent of the properties awarded to them., 2 So Lastrilla acquired no right to demand any part of the money paid by Dorfe and Asturias to the sheriff for the benefit of FELCO and Tomassi, the plaintiffs in that case, for the reason that, as he says, his shares (acquired from Brown) could not have been and were not auctioned off to Dorfe and Asturias. Supposing however that Lastrilla's shares have been actually (but unlawfully) sold by the sheriff (at the instance of plaintiffs) to Dorfe and Asturias, what is his remedy? Section 15, Rule 39 furnishes the answer. Precisely, respondents argue, Lastrilla vindicated his claim by proper action, i.e., motion in the case. We ruled once that "action" in this section means action as defined in section 1, Rule 2. 3 Anyway his remedy is to claim "the property", not the proceeds of the sale, which the sheriff is directed by section 14, Rule 39 to deliver unto the judgment creditors. In other words, the owner of property wrongfully sold may not voluntarily come to court, and insist, "I approve the sale, therefore give me the proceeds because I am the owner". The reason is that the sale was made for the judgment creditor (who paid for the fees and notices), and not for anybody else. On this score the respondent judge's action on Lastrilla's motion should be declared as in excess of jurisdiction, which even amounted to want of jurisdiction, considering specially that Dorfe and Asturias, and the defendants themselves, had undoubtedly the right to be heard but they were not notified. 4

Why was it necessary to hear them on the merits of Lastrilla's motion? Because Dorfe and Asturias might be unwilling to recognize the validity of Lastrilla's purchase, or, if valid, they may want him not to forsake the partnership that might have some obligations in connection with the partnership properties. And what is more important, if the motion is granted, when the time for redemption comes, Dorfe and Asturias will receive from redemptioners seventeen per cent (17%) less than the amount they had paid for the same properties. The defendants Arnold Hall and Jean Roxas, eyeing Lastrilla's financial assets, might also oppose the substitution by Lastrilla of Fred Brown, the judgment against them being joint and several. They might entertain misgivings about Brown's slipping out of their common predicament through the disposal of his shares. Lastly, all the defendants would have reasonable motives to object to the delivery of 17 per cent of the proceeds to Lastrilla, because it is so much money deducted, and for which the plaintiffs might ask another levy on their other holdings or resources. Supposing of course, there was no fraudulent collusion among them. Now, these varied interests of necessity make Dorfe, Asturias and the defendants indispensable parties to the motion of Lastrilla granting it was a step allowable under our regulations on execution. Yet these parties were not notified, and obviously took no part in the proceedings on the motion. "A valid judgment cannot be rendered where there is a want of necessary parties, and a court cannot properly adjudicate matters involved in a suit when necessary and indispensable parties to the proceedings are not before it." (49 C.J.S., 67.) "Indispensable parties are those without whom the action cannot be finally determined. In a case for recovery of real property, the defendant alleged in his answer that he was occupying the property as a tenant of a third person. This third person is an indispensable party, for, without him, any judgment which the plaintiff might obtain against the tenant would have no effectiveness, for it would not be binding upon, and cannot be executed against, the defendant's landlord, against whom the plaintiff has to file another action if he desires to recover the property effectively. In an action for partition of property, each co-owner is an indispensable party, for without him no valid judgment for partition may be rendered." (Moran, Comments, 1952 ed. Vol. I, p. 56.) (Emphasis supplied.) Wherefore, the orders of the court recognizing Lastrilla's right and ordering payment to him of a part of the proceeds were patently erroneous, because promulgated in excess or outside of its jurisdiction. For this reason the respondents' argument resting on

plaintiffs' failure to appeal from the orders on time, although ordinarily decisive, carries no persuasive force in this instance. For as the former Chief Justice Dr. Moran has summarized in his Comments, 1952 ed. Vol. II, p. 168 " . . . And in those instances wherein the lower court has acted without jurisdiction over the subject-matter, or where the order or judgment complained of is a patent nullity, courts have gone even as far as to disregard completely the question of petitioner's fault, the reason being, undoubtedly, that acts performed with absolute want of jurisdiction over the subject-matter are void ab initio and cannot be validated by consent, express or implied, of the parties. Thus, the Supreme Court granted a petition for certiorari and set aside an order reopening a cadastral case five years after the judgment rendered therein had become final. In another case, the Court set aside an order amending a judgment six years after such judgment acquired a definitive character. And still in another case, an order granting a review of a decree of registration issued more than a year ago had been declared null and void. In all these cases the existence of the right to appeal has been disregarded. In a probate case, a judgment according to its own recitals was rendered without any trial or hearing, and the Supreme Court, in granting certiorari, said that the judgment was by its own recitals a patent nullity, which should be set aside though an appeal was available but was not availed of. . .." Invoking our ruling in Melocotones vs. Court of First Instance, (57 Phil., 144), wherein we applied the theory of laches to petitioners' 3year delay in requesting certiorari, the respondents point out that whereas the orders complained of herein were issued in June 13, 1951 and August 14, 1951 this special civil action was not filed until August 1952. It should be observed that the order of June 13 was superseded by that of August 14, 1951. The last order merely declared "que el 17 por ciento de las propiedades vendidas en pblica subasta pertenece al Sr. Lastrilla y este tiene derecho a dicha porcion." This does not necessarily mean that 17 per cent of the money had to be delivered to him. It could mean, as hereinbefore indicated, that the purchasers of the property (Dorfe and Asturias) had to recognize Lastrilla's ownership. It was only on April 16, 1952 (Annex N) that the court issued an order directing the sheriff "to turn over" to Lastrilla "17 per cent of the total proceeds of the auction sale". There is the order that actually prejudiced the petitioners herein, and they fought it until the last order of July 10, 1952 (Annex Q). Surely a month's delay may not be regarded as laches. In view of the foregoing, it is our opinion, and we so hold, that all orders of the respondent judge requiring delivery of 17 per cent of

the proceeds of the auction sale to respondent Olegario Lastrilla are null and void; and the costs of this suit shall be taxed against the latter. The preliminary injunction heretofore issued is made permanent. So ordered. Paras, C.J., Feria, Pablo, Tuason, Montemayor, Reyes, Jugo, Bautista Angelo and Labrador, JJ., concur.

[G.R. No. 59956. October 31, 1984.] ISABELO MORAN, JR., petitioner, vs. THE HON. COURT OF APPEALS and MARIANO E. PECSON, respondents. Prospero A. Crescini for petitioner. Britanico, Panganiban, Benitez, Africa and Lingsangan Law Office for private respondent. SYLLABUS 1. CIVIL LAW; PARTNERSHIP; CONTRIBUTIONS; PARTNER IS DEBTOR OF PARTNERSHIP FOR UNPAID CONTRIBUTIONS. The rule is, when a partner who has undertaken to contribute a sum of money fails to do so, he becomes a debtor of the partnership for whatever he may have promised to contribute (Art. 1786, Civil Code) and for interests and damages from the time he should have complied with his obligation (Art. 1788, Civil Code). Thus in Uy vs. Puzon (79 SCRA 598), which interpreted Art. 2200 of the Civil Code of the Philippines, the Court allowed a total of P200,000.00 compensatory damages in favor of the appellee because the appellant therein was remiss in his obligations as a partner and as prime contractor of the construction projects in question. 2. ID.; ID.; ID.; ID.; AWARD OF DAMAGES FOR NON-PAYMENT OF CONTRIBUTIONS; UY VS. PUZON (79 SCRA 598) DISTINGUISHED FROM CASE AT BAR. The Court awarded compensatory damages in the Uy case because there was a finding that the "constructing business is a profitable one and that the UP construction company derived some profits from its contractors in the construction of roads and bridges despite its deficient capital." Besides, there was evidence to show that the partnership made some profits during the periods from July 2,1956 to December 31, 1957 and from January 1, 1958 up to September 31, 1959. The profits on two government contracts worth P2,327,335.76 were not speculative. In the instant case, there is no evidence whatsoever that the partnership between the petitioner and the private respondent would have been a profitable venture. In fact, it was a failure doomed from the start. There is therefore no basis for the award of speculative damages in favor of the private respondent. Furthermore, in the Uy case. only Puzon failed to give his full contribution while Uy contributed much more than what was expected of him. In this case, however, there was mutual breach. Private respondent failed to give his entire contribution in the amount of P15,000.00. He contributed only P10,000.00. The petitioner likewise failed to give any of the amount expected of him. He further failed to comply with the agreement to print 95,000 copies of the posters. Instead, he printed only 2,000 copies.

3. ID.; ID.; PROFITS AND LOSSES SHARED BY EACH PARTNER. Being a contract of partnership, each partner must share in the profits and losses of the venture. That is the essence of a partnership. And even with an assurance made by one of the partners that they would earn a huge amount of profits in the absence of fraud, the other partner cannot claim a right to recover the highly speculative profits. It is rare business venture guaranteed to give 100% profits. 4. ID.; OBLIGATIONS AND CONTRACTS; INTERPRETATION OF CONTRACTS; OF CONTRACTS; FAILURE OF AGREEMENT TO STATE BASIS OF COMMISSION; EFFECT. The partnership agreement stipulated that the petitioner would give the private respondent a monthly commission of P1,000.00 from April 15, 1971 to December 15, 1971 for a total of eight (8) monthly commissions. The agreement does not state the basis of the commission. The payment of the commission could only have been predicated on relatively extravagant profits. The parties could not have intended the giving of a commission in spite of loss or failure of the venture. Since the venture was a failure, the private respondent is not entitled to the P8,000.00 commission. 5. REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; FINDINGS OF FACT OF APPELLATE COURT NOT SUBJECT TO REVIEW BY THE SUPREME COURT; CASE AT BAR. As a rule, the findings of facts of the Court of Appeals are final and conclusive and cannot be reviewed on appeal to this Court (Amigo v. Teves, 96 Phil. 252), provided they are borne out by the record or are based on substantial evidence (Alsua-Betts v. Court of Appeals, 92 SCRA 332). However, this rule admits of certain exceptions. Thus, in Carolina Industries Inc. vs. CMS stock Brokerage Inc., et al., (97 SCRA 734), we held that this Court retains the power to review and rectify the findings of fact of the Court of Appeals when (1) the conclusion is a finding grounded entirely on speculation. surmises and conjectures; (2) when the inference made is manifestly mistaken, absurd and impossible: (3) where there is grave abuse of discretion: 4) when the judgment is based on a misapprehension of facts; and (5) when the court, in making its findings went beyond the issues of the case and the same are contrary to the admissions of both the appellant and the appellee The respondent court erred when it concluded that the project never left the ground because the project did take place. Only it failed. It was the private respondent himself who presented a copy of the book entitled "Voice of the Veterans" in the lower court as Exhibit "L". Therefore, it would be error to state that the project never took place and on this basis decree the return of the private respondent's investments. As already mentioned. there are risks in any business venture and the failure of the undertaking cannot

entirely be blamed on the managing partner alone, specially if the latter exercised his best business Judgment. which seems to be true in this case. DECISION GUTIERREZ, JR., J p: This is a petition for review on certiorari of the decision of the respondent Court of Appeals which ordered petitioner Isabelo Moran, Jr. to pay damages to respondent Mariano E. Pecson. As found by the respondent Court of Appeals, the undisputed facts indicate that: xxx xxx xxx " . . . on February 22, 1971 Pecson and Moran entered into an agreement whereby both would contribute P15,000 each for the purpose of printing 95,000 posters (featuring the delegates to the 1971 Constitutional Convention), with Moran actually supervising the work; that Pecson would receive a commission of P1,000 a month starting on April 15, 1971 up to December 15, 1971; that on December 15, 1971, a liquidation of the accounts in the distribution and printing of the 95,000 posters would be made; that Pecson gave Moran P10,000 for which the latter issued a receipt; that only a few posters were printed; that on or about May 28, 1971, Moran executed in favor of Pecson a promissory note in the amount of P20,000 payable in two equal installments (P10,000 payable on or before June 15, 1971 and P10,000 payable on or before June 30, 1971), the whole sum becoming due upon default in the payment of the first installment on the date due, complete with the costs of collection." Private respondent Pecson filed with the Court of First Instance of Manila an action for the recovery of a sum of money and alleged in his complaint three (3) causes of action, namely: (1) on the alleged partnership agreement, the return of his contribution of P10,000.00, payment of his share in the profits that the partnership would have earned, and, payment of unpaid commission; (2) on the alleged promissory note, payment of the sum of P20,000.00; and, (3) moral and exemplary damages and attorney's fees. After the trial, the Court of First Instance held that: "From the evidence presented it is clear in the mind of the court that by virtue of the partnership agreement entered into by the parties plaintiff and defendant the plaintiff did contribute P10,000.00, and another sum of P7,000.00 for the Voice of the Veteran or Delegate Magazine. Of the expected 95,000 copies of the posters, the defendant was able to print 2,000 copies only all of which, however, were sold at P5.00 each. Nothing more was done after this and it can be said that the venture did not really get off the ground. On the

other hand, the plaintiff failed to give his full contribution of P15,000.00. Thus, each party is entitled to rescind the contract which right is implied in reciprocal obligations under Article 1385 of the Civil Code whereunder 'rescission creates the obligation to return the things which were the object of the contract . . . "WHEREFORE, the court hereby renders judgment ordering defendant Isabelo C. Moran, Jr. to return to plaintiff Mariano E. Pecson the sum of P17,000.00, with interest at the legal rate from the filing of the complaint on June 19, 1972, and the costs of the suit. "For insufficiency of evidence, the counterclaim is hereby dismissed." From this decision, both parties appealed to the respondent Court of Appeals. The latter likewise rendered a decision against the petitioner. The dispositive portion of the decision reads: LLpr "PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a new one is hereby rendered, ordering defendantappellant Isabelo C. Moran, Jr. to pay plaintiff-appellant Mariano E. Pecson: "(a) Forty-seven thousand five hundred (P47,500) (the amount that could have accrued to Pecson under their agreement); "(b) Eight thousand (P8,000), (the commission for eight months); "(c) Seven thousand (P7,000) (as a return of Pecson's investment for the Veteran's Project); "(d) Legal interest on (a), (b) and (c) from the date the complaint was filed (up to the time payment is made)". The petitioner contends that the respondent Court of Appeals decided questions of substance in a way not in accord with law and with Supreme Court decisions when it committed the following errors: I THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P47,500 AS THE SUPPOSED EXPECTED PROFITS DUE HIM. II THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P8,000, AS SUPPOSED COMMISSION IN THE PARTNERSHIP ARISING OUT OF PECSON'S INVESTMENT. III THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P7,000 AS A SUPPOSED RETURN OF INVESTMENT IN A MAGAZINE VENTURE. IV

ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT, THE HONORABLE COURT OF APPEALS DID NOT EVEN OFFSET PAYMENTS ADMITTEDLY RECEIVED BY PECSON FROM MORAN. V THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT GRANTING THE PETITIONER'S COMPULSORY COUNTERCLAIM FOR DAMAGES. The first question raised in this petition refers to the award of P47,500.00 as the private respondent's share in the unrealized profits of the partnership. The petitioner contends that the award is highly speculative. The petitioner maintains that the respondent court did not take into account the great risks involved in the business undertaking. We agree with the petitioner that the award of speculative damages has no basis in fact and law. There is no dispute over the nature of the agreement between the petitioner and the private respondent. It is a contract of partnership. The latter in his complaint alleged that he was induced by the petitioner to enter into a partnership with him under the following terms and conditions: LLjur "1. That the partnership will print colored posters of the delegates to the Constitutional Convention; "2. That they will invest the amount of Fifteen Thousand Pesos (P15,000.00) each; "3. That they will print Ninety Five Thousand (95,000) copies of the said posters; "4. That plaintiff will receive a commission of one Thousand Pesos (P1,000.00) a month starting April 15, 1971 up to December 15, 1971; "5. That upon the termination of the partnership on December 15, 1971, a liquidation of the account pertaining to the distribution and printing of the said 95,000 posters shall be made." The petitioner on the other hand admitted in his answer the existence of the partnership. The rule is, when a partner who has undertaken to contribute a sum of money fails to do so, he becomes a debtor of the partnership for whatever he may have promised to contribute (Art. 1786, Civil Code) and for interests and damages from the time he should have complied with his obligation (Art. 1788, Civil Code). Thus in Uy v. Puzon (19 SCRA 598), which interpreted Art. 2200 of the Civil Code of the Philippines, we allowed a total of P200,000.00 compensatory damages in favor of the appellee because the appellant therein was remiss in his obligations as a partner and as prime contractor of the construction projects in question. This case was decided on a

particular set of facts. We awarded compensatory damages in the Uy case because there was a finding that the "constructing business is a profitable one and that the UP construction company derived some profits from its contractors in the construction of roads and bridges despite its deficient capital." Besides, there was evidence to show that the partnership made some profits during the periods from July 2, 1956 to December 31, 1957 and from January 1, 1958 up to September 30, 1959. The profits on two government contracts worth P2,327,335.76 were not speculative. In the instant case, there is no evidence whatsoever that the partnership between the petitioner and the private respondent would have been a profitable venture. In fact, it was a failure doomed from the start. There is therefore no basis for the award of speculative damages in favor of the private respondent. Furthermore, in the Uy case, only Puzon failed to give his full contribution while Uy contributed much more than what was expected of him. In this case, however, there was mutual breach. Private respondent failed to give his entire contribution in the amount of P15,000.00. He contributed only P10,000.00. The petitioner likewise failed to give any of the amount expected of him. He further failed to comply with the agreement to print 95,000 copies of the posters. Instead, he printed only 2,000 copies. Article 1797 of the Civil Code provides: "The losses and profits shall be distributed in conformity with the agreement. If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion." Being a contract of partnership, each partner must share in the profits and losses of the venture. That is the essence of a partnership. And even with an assurance made by one of the partners that they would earn a huge amount of profits, in the absence of fraud, the other partner cannot claim a right to recover the highly speculative profits. It is a rare business venture guaranteed to give 100% profits. In this case, on an investment of P15,000.00, the respondent was supposed to earn a guaranteed P1,000.00 a month for eight months and around P142,500.00 on 95,000 posters costing P2.00 each but 2,000 of which were sold at P5.00 each. The fantastic nature of expected profits is obvious. We have to take various factors into account. The failure of the Commission on Elections to proclaim all the 320 candidates of the Constitutional Convention on time was a major factor. The petitioner used his best business judgment and felt that it would be a losing venture to go on with the printing of the agreed 95,000 copies of the posters. Hidden risks in any business venture have to be considered. LLpr

It does not follow however that the private respondent is not entitled to recover any amount from the petitioner. The records show that the private respondent gave P10,000.00 to the petitioner. The latter used this amount for the printing of 2,000 posters at a cost of P2.00 per poster or a total printing cost of P4,000.00. The records further show that the 2,000 copies were sold at P5.00 each. The gross income therefore was P10,000.00. Deducting the printing costs of P4,000.00 from the gross income of P10,000.00 and with no evidence on the cost of distribution, the net profits amount to only P6,000.00. This net profit of P6,000.00 should be divided between the petitioner and the private respondent. And since only P4,000.00 was used by the petitioner in printing the 2,000 copies, the remaining P6,000.00 should therefore be returned to the private respondent. Relative to the second alleged error, the petitioner submits that the award of P8,000.00 as Pecson's supposed commission has no justifiable basis in law. Again, we agree with the petitioner. The partnership agreement stipulated that the petitioner would give the private respondent a monthly commission of P1,000.00 from April 15, 1971 to December 15, 1971 for a total of eight (8) monthly commissions. The agreement does not state the basis of the commission. The payment of the commission could only have been predicated on relatively extravagant profits. The parties could not have intended the giving of a commission inspite of loss or failure of the venture. Since the venture was a failure, the private respondent is not entitled to the P8,000.00 commission. Anent the third assigned error, the petitioner maintains that the respondent Court of Appeals erred in holding him liable to the private respondent in the sum of P7,000.00 as a supposed return of investment in a magazine venture. In awarding P7,000.00 to the private respondent as his supposed return of investment in the "Voice of the Veterans" magazine venture, the respondent court ruled that: xxx xxx xxx " . . . Moran admittedly signed the promissory note of P20,000 in favor of Pecson. Moran does not question the due execution of said note. Must Moran therefore pay the amount of P20,000? The evidence indicates that the P20,000 was assigned by Moran to cover the following: "(a) 7,000 the amount of the PNB check given by Pecson to Moran representing Pecson's investment in Moran's other project (the publication and printing of the 'Voice of the Veterans'); "(b) P10,000 to cover the return of Pecson's contribution in the project of the Posters;

"(c) P3,000 representing Pecson's commission for three months (April, May, June, 1971). Of said P20,000 Moran has to pay P7,000 (as a return of Pecson's investment for the Veterans' project, for this project never left the ground) . . . " As a rule, the findings of facts of the Court of Appeals are final and conclusive and cannot be reviewed on appeal to this Court (Amigo v. Teves, 96 Phil. 262), provided they are borne out by the record or are based on substantial evidence (Alsua-Betts v. Court of Appeals, 92 SCRA 332). However, this rule admits of certain exceptions. Thus, in Carolina Industries Inc. v. CMS Stock Brokerage, Inc., et al., (97 SCRA 734), we held that this Court retains the power to review and rectify the findings of fact of the Court of Appeals when (1) the conclusion is a finding grounded entirely on speculation, surmises and conjectures; (2) when the inference made is manifestly mistaken, absurd and impossible; (3) where there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; and (5) when the court, in making its findings, went beyond the issues of the case and the same are contrary to the admissions of both the appellant and the appellee. In this case, there is misapprehension of facts. The evidence of the private respondent himself shows that his investment in the "Voice of Veterans" project amounted to only P3,000.00. The remaining P4,000.00 was the amount of profit that the private respondent expected to receive. The records show the following exhibits "E Xerox copy of PNB Manager's Check No. 234265 dated March 22, 1971 in favor of defendant. Defendant admitted the authenticity of this check and of his receipt of the proceeds thereof (t.s.n., pp. 34, Nov. 29, 1972). This exhibit is being offered for the purpose of showing plaintiff's capital investment in the printing of the 'Voice of the Veterans' for which he was promised a fixed profit of P8,000. This investment of P6,000.00 and the promised profit of P8,000 are covered by defendant's promissory note for P14,000 dated March 31, 1971 marked by defendant as Exhibit 2 (t.s.n., pp. 20-21, Nov. 29, 1972), and by plaintiff as Exhibit P. Later, defendant returned P3,000.00 of the P6,000.00 investment thereby proportionately reducing the promised profit to P4,000. With the balance of P3,000 (capital) and 14,000 (promised profit), defendant signed and executed the promissory note for P7,000 marked Exhibit 3 for the defendant and Exhibit M for plaintiff. Of this P7,000, defendant paid P4,000 representing full return of the capital investment and P1,000 partial payment of the promised profit. The P3,000 balance of the promised profit was made part consideration of the P20,000 promissory note (t.s.n., pp. 22-24, Nov. 29, 1972). It is, therefore,

being presented to show the consideration for the P20,000 promissory note. "F Xerox copy of PNB Manager's check dated May 29, 1971 for P7,000 in favor of defendant. The authenticity of the check and his receipt of the proceeds thereof were admitted by the defendant (t.s.n., pp. 3-4, Nov. 29, 1972). This P7,000 is part consideration, and in cash, of the P20,000 promissory note (t.s.n., p. 25, Nov. 29, 1972), and it is being presented to show the consideration for the P20,000 note and the existence and validity of the obligation. xxx xxx xxx "L Book entitled 'Voice of the Veterans' which is being offered for the purpose of showing the subject matter of the other partnership agreement and in which plaintiff invested the P6,000 (Exhibit E) which, together with the promised profit of P8,000 made up for the consideration of the P14,000 promissory note (Exhibit 2; Exhibit P). As explained in connection with Exhibit E, the P3,000 balance of the promised profit was later made part consideration of the P20,000 promissory note. "M Promissory note for P7,000 dated March 30, 1971. This is also defendant's Exhibit E. This document is being offered for the purpose of further showing the transaction as explained in connection with Exhibits E and L. "N Receipt of plaintiff dated March 30, 1971 for the return of his P3,000 out of his capital investment of P6,000 (Exh. E) in the P14,000 promissory note (Exh. 2; P). This is also defendant's Exhibit 4. This document is being offered in support of plaintiff's explanation in connection with Exhibits E, L, and M to show the transaction mentioned therein. xxx xxx xxx "P Promissory note for P14,000.00. This is also defendant's Exhibit 2. It is being offered for the purpose of showing the transaction as explained in connection with Exhibits E, L, M, and N above." Explaining the above-quoted exhibits, respondent Pecson testified that: "Q During the pre-trial of this case, Mr. Pecson, the defendant presented a promissory note in the amount of P14,000.00 which has been marked as Exhibit 2. Do you know this promissory note? "A Yes, sir. "Q What is this promissory note, in connection with your transaction with the defendant? "A This promissory note is for the printing of the 'Voice of the Veterans'. "Q What is this 'Voice of the Veterans', Mr. Pecson? "A It is a book." (T.S.N., p. 19, Nov. 29, 1972)

"Q And what does the amount of P14,000.00 indicated in the promissory note, Exhibit 2, represent? "A It represents the P6,000.00 cash which I gave to Mr. Moran, as evidenced by the Philippine National Bank Manager's check and the P8,000.00 profit assured me by Mr. Moran which I will derive from the printing of this 'Voice of the Veterans' book. "Q You said that the P6,000.00 of this P14,000.00 is covered by a Manager's check. I show you Exhibit E, is this the Manager's check that you mentioned? "A Yes, sir. "Q What happened to this promissory note of P14,000.00 which you said represented P6,000.00 of your investment and P8,000.00 promised profits? "A Latter, Mr. Moran returned to me P3,000.00 which represented one-half (1/2) of the P6,000.00 capital I gave to him. "Q As a consequence of the return by Mr. Moran of one-half (1/2) of the P6,000.00 capital you gave to him, what happened to the promised profit of P8,000.00? "A It was reduced to one-half (1/2) which is P4,000,00. "Q Was there any document executed by Mr. Moran in connection with the Balance of P3,000.00 of your capital investment and the P4,000.00 promised profits? "A Yes, sir, he executed a promissory note. "Q I show you a promissory note in the amount of P7,000.00 dated March 30, 1971 which for purposes of identification I request the same to be marked as Exhibit M . . . Court Mark it as Exhibit M. "Q (continuing) is this the promissory note which you said was executed by Mr. Moran in connection with your transaction regarding the printing of the 'Voice of the Veterans'? "A Yes, sir.(T.S.N., pp. 20-22, Nov. 29, 1972). "Q What happened to this promissory note executed by Mr. Moran, Mr. Pecson? "A Mr. Moran paid me P4,000.00 out of the P7,000.00 as shown by the promissory note. "Q Was there a receipt issued by you covering this payment of P4,000.00 in favor of Mr. Moran? "A Yes, sir." (T.S.N., p. 23, Nov. 29, 1972). "Q You stated that Mr. Moran paid the amount of P4,000.00 on account of the P7,000.00 covered by the promissory note, Exhibit M. What does this P4,000.00 covered by Exhibit N represent? "A This P4,000.00 represents the P3,000.00 which he has returned of my P6,000.00 capital investment and the P1,000.00

represents partial payment of the P4,000.00 profit that was promised to me by Mr. Moran. "Q And what happened to the balance of P3,000.00 under the promissory note, Exhibit M? "A The balance of P3,000.00 and the rest of the profit was applied as part of the consideration of the promissory note of P20,000.00." (T.S.N., pp. 23-24, Nov. 29, 1972). The respondent court erred when it concluded that the project never left the ground because the project did take place. Only it failed. It was the private respondent himself who presented a copy of the book entitled "Voice of the Veterans" in the lower court as Exhibit "L". Therefore, it would be error to state that the project never took place and on this basis decree the return of the private respondent's investment. LLjur As already mentioned, there are risks in any business venture and the failure of the undertaking cannot entirely be blamed on the managing partner alone, specially if the latter exercised his best business judgment, which seems to be true in this case. In view of the foregoing, there is no reason to pass upon the fourth and fifth assignments of errors raised by the petitioner. We likewise find no valid basis for the grant of the counterclaim. WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals (now Intermediate Appellate Court) is hereby SET ASIDE and a new one is rendered ordering the petitioner Isabelo Moran, Jr., to pay private respondent Mariano Pecson SIX THOUSAND (P6,000.00) PESOS representing the amount of the private respondent's contribution to the partnership but which remained unused; and THREE THOUSAND (P3,000.00) PESOS representing one-half (1/2) of the net profits gained by the partnership in the sale of the two thousand (2,000) copies of the posters, with interests at the legal rate on both amounts from the date the complaint was filed until full payment is made. SO ORDERED. Teehankee, Melencio-Herrera, Plana and Relova, JJ ., concur. De la Fuente, J ., took no part.

[G.R. No. L-4811. July 31, 1953.] CHARLES F. WOODHOUSE, plaintiff-appellant, vs. FORTUNATO F. HALILI, defendant-appellant. Taada, Pelaez & Teehankee for defendant and appellant. Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant. SYLLABUS 1. EVIDENCE; PAROL EVIDENCE RULE; INTEGRATION OF JURAL ACTS. Plaintiff entered into a written agreement with the defendant to the effect that they shall organize a partnership for the bottling and distribution of soft drinks, plaintiff to act as industrial partner or manager, and the defendant a capitalist furnishing the capital necessary therefor. The defendant claims that his consent to the agreement 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. The fraud and false representation is sought to be proven by means, among others, of the drafts of the agreement prior to the final one, which drafts are presumed to have already been integrated into the final agreement. Are those prior drafts excluded from the prohibition of the parol evidence rule? Held: The purpose of considering the drafts 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; 3 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. Where 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. The parol evidence rule expressly allows the evidence to be introduced when the validity of an instrument is put in issue by the pleadings (sec. 22-a of Rule 123). 2. ID.; INTERPRETATION OF DOCUMENTS. AS plaintiff knew what defendant believed about his (plaintiff's exclusive franchise, as he induced him to that belief, plaintiff may not be allowed to deny that defendant was induced by that belief (sec. 63 of Rule 123).

3. FRAUD; FALSE REPRESENTATION; DOLO CAUSANTE AND DOLO INCIDENTE; IT IS THE FORMER THAT VITIATES CONSENT. 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. In order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract (art. 1270, Span. Civ. Code; Hill vs. Veloso, 31 Phil., 160). In the case at bar, inasmuch as 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 false representation made by the plaintiff was not the casual consideration, or the principal inducement, that led the defendant to enter into the partnership agreement. 4. ID.; ID.; ID.; DAMAGES FOR DOLO INCIDENTE; PARTNERSHIP. While the representation that plaintiff had the exclusive franchise did not vitiate defendant' 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. (8 Manresa, 602.) 5. CONTRACTS AND OBLIGATIONS; CONSENT, NOT VITIATED BY DOLO INCIDENTE; PARTNERSHIP; AGREEMENT TO FORM PARTNERSHIP, CANNOT BE ENFORCED. Having arrived at the conclusion that the agreement to organize a partnership may not be declared null and void, may the agreement be carried out or executed? Held: 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. This is a very personal act (acto personalisimo) of which courts may not compel compliance, as it is considered as an act of violence to do so. (29 as it is considered as an act of violence to do so. (19 Scaevola, 428, 431-432.) 6. FALSE REPRESENTATION; DAMAGES FOR DOLO INCIDENTE. 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, the damage the defendant suffered by plaintiff's misrepresentation that he had the exclusive franchise, must be set off. (Art. 1101, Span. Civ. Code.) When the defendant learned, in Los Angeles, California, 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 the plaintiff's share from 30 per cent to 15 per cent only, to which reduction plaintiff appears to have readily given his assent. Held: By the misrepresentation of the plaintiff, he obtained a very high percentage (30%) of share in the profits. Upon learning of the misrepresentation, defendant reduced plaintiff's share to 15 per cent, to which defendant assented. The court can do no better than follow such appraisal of the damages as the parties themselves had adopted. DECISION LABRADOR, J p: On November 29, 1947, the plaintiff entered into 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 Mission 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 ingredients 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 to this request, plaintiff was given "a thirty days' option on exclusive bottling and distribution rights for the Philippines" (Exhibit H). 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 a 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 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 between the Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse, granting defendant the exclusive right, license, and authority to produce, bottle, distribute, and sell Mission 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 in operation, plaintiff demanded of defendant that the partnership papers be executed. At first defendant excused himself, saying there was no hurry. Then he promised to do so after the sales of the products 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 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 that plaintiff did not secure the franchise, but was given to defendant himself; (2) that defendant did not fail to carry out his undertakings, bus 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 counterclaim 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 per cent 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 the option; that defendant would not have gone to the United States without knowing what authority plaintiff had; that the drafts of the contract prior to the final one can not 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; xxx xxx xxx "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." xxx xxx xxx (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 plans. . . .. " 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 the 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 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, the 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 has held that in order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract. (Article 1270, Spanish

Civil Code; Hill vs. Veloso, 31 Phil. 160.) The record abounds with circumstances indicative of 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 per cent 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 full 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 was 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 concurriendo en el consentimiento, o precediendolo, no influyo para arrancar por si solo el consentimiento ni en la totalidad de la obligacion, sino en 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 fiat 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 personalisimo), 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 personalisimo. Tratamos de la ejecucion de las obligaciones de hacer en el solo caso de su incumplimiento por parte del deudor, y 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 por que medios. "Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el principio romano nemo potest precise cogi ad factum. Los que perciben la posibilidad de la destruccion de este principio, aaden que, aun cuando se pudiera obligar al deudor, no deberia hacerse, porque esto constituiria una violencia, y no es la violencia modo propio de cumplir las obligaciones (Bigot, Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo cuando decia que obligar por la violencia seria infringir la libertad e imponer una especie de esclavitud." xxx xxx xxx "En efecto; las obligaciones contractuales no se acomodan bien con el empleo de la fuerza fisica, no ya precisamente porque se constituya de este modo una especie de esclavitud, segun el dicho de Antonio Gomez, sino porque se supone que el acreedor tuvo en cuenta el caracter personalisimo del hecho ofrecido, y calculo sobre la posibilidad de que por alguna razon no se realizase. Repugna, ademas, a la conciencia social el empleo de la fuerza publica, mediante coaccion sobre las pesonas, en las relaciones puramente particulares; porque la evolucion de las ideas ha ido poniendo mas de relieve cada dia el respeto a la personalidad humana, y no se admite bien la violencia sobre el indivicuo la cual tiene caracter visiblemente penal, sino por motivos que interesen a la colectividad de ciudadanos. Es, pues, posible y licita esta violencia cuando se trata de las obligaciones que hemos llamado ex lege, que afectan al orden social y a la entidad de Estado, y aparecen impuestas sin consideracion a las conveniencias particulares, y sin que por este motivo puedan tampoco ser modificadas; pero no debe serlo cuando la obligacion reviste un interes puramente particular, como sucede en las contractuales, y cuando, por consecuencia, pareceria salirse el Estado de su esfera propia, entrado a dirimir, con apoyo de la 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 dao 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 the exclusive franchise, by which misrepresentation he 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 from 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. Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo and Bautista Angelo, JJ., concur.

[G.R. No. L-14606. April 28, 1960.] LAGUNA TRANSPORTATION CO. INC., petitioner-appellant, vs. SOCIAL SECURITY SYSTEM, respondent-appellee. Yatco & Yatco for appellant. Solicitor General Edilberto Barot, Solicitor Camilo Quiazon and Crispin Baizas for appellee. SYLLABUS 1. CORPORATIONS; CONCEPT OF SEPARATE AND DISTINCT PERSONALITY, WHEN DISREGARDED BY COURTS. Although a corporation once formed is conferred a juridical personality separate and distinct from the persons composing it, it is but a legal fiction introduced for purposes of convenience and to subserve the ends of justice. The concept cannot be extended to a point beyond its reasons and policy, and when invoked in support of an end subversive of this policy, will be disregarded by the courts. (13 Am. Jur. 160.)

administrative remedies. When the case was called for preliminary hearing, it was postponed by agreement of the parties. Subsequently, it was set for trial. On the date of the trial, the parties agreed to present, in lieu of any other evidence, a stipulation of facts, which they did on May 27, 1958, as follows: "1. That petitioner is a domestic corporation duly organized and existing under the laws of the Philippines, with principal place of business at Bian, Laguna; "2. That respondent is an agency created under Republic Act No. 1161, as amended by Republic Act No. 1792, with the principal place of business at the new GSIS Bldg., corner Arroceros and Concepcion Streets, Manila, where it may be served with summons; "3. That respondent has served notice upon the petitioner requiring it to register as member of the System and to remit the premiums due from all the employees of the petitioner and the contribution of the latter to the System beginning the month of September, 1957; 2. ID.; ID.; CORPORATE LIABILITY FOR PARTNERSHIP DEBTS. "4. That sometime in 1949, the Bian Transportation Co., a The weight of authority the view that where a corporation was corporation duly registered with the Securities and Exchange formed by, and consisted of members of partnership whose business Commission, sold part of the lines and equipment it operates to and property was conveyed and transferred to the corporation for Gonzalo Mercado, Artemio Mercado, Florentino Mata and Dominador the purpose of continuing its business, in payment for which Vera Cruz; corporate capital stock was issued, such corporation is presumed to "5. That after the sale, the said vendee formed an unregistered have assumed partnership debts, and is prima facie liable therefor. partnership under the name of Laguna Transportation Company (Stowell vs. Garden City News Corps., 57 P. 2d 12; Chicago Smelting which continued to operate the lines and equipment bought from the & Refining Corp. vs Sullivan, 246 Ill. App. 539; Ball vs. Bros., 83 June Bian Transportation Company, in addition to new lines which it was 19, N.Y. Supp. 692.) The reason for the rule is that the members of able to secure from the Public Service Commission; the partnership may be said to have simply put on a new coat, or "6. That the original partners forming the Laguna Transportation taken on a corporate cloak, and the corporation is a mere Company, with the addition of two new members, organized a continuation of the partnership. (8 Fletcher Cyclopedia Corporations corporation known as the Laguna Transportation Company, Inc., [Perm. Ed.] 402-411.) which was registered with the Securities and Exchange Commission DECISION on June 20, 1956, and which corporation is the plaintiff now in this BARRERA, J p: case; On January 24, 1958, petitioner Laguna Transportation Co., Inc. filed "7. That the incorporation of the Laguna Transportation with the Court of First Instance of Laguna a petition praying that an Company, Inc., and their corresponding shares are as follows: order be issued by the court declaring that it is not bound to register Name No. of Amount Amount as a member of respondent Social Security System and, therefore, Shares Subscribed Paid not obliged to pay to the latter the contributions required under the "Dominador Cruz 333 shares P33,330.00 P9,160.81 Social Security Act. 1 To this petition, respondent filed its answer on Maura Mendoza 333 shares 33,300.00 9,160.81 February 11, 1958 praying for its dismissal due to petitioner's failure Gonzalo Mercado 66 shares 6,600.00 1,822.49 to exhaust administrative remedies, and for a declaration that Artemio Mercado 94 shares 9,400.00 2,565.90 petitioner is covered by said Act, since the latter's business has been Florentino Mata 110 shares 11,000.00 3,021.54 in operation for at least 2 years prior to September 1, 1957. Sabina Borja 64 shares 6,400.00 1,750.00 On February 11, 1958, respondent filed a motion for preliminary _________ _________ ________ hearing on its defense that petitioner failed to exhaust 1,000 shares P100,000.00 P27,481.55

"8. That the corporation continued the same transportation business of the unregistered partnership; "9. That the plaintiff filed on August 30, 1957 an Employee's Data Record . . . and a supplemental Information Sheet . . .; "10. That prior to November 11, 1957, plaintiff requested for exemption from coverage by the System on the ground that it started operation only on June 20, 1956, when it was registered with the Securities and Exchange Commission but on November 11, 1957, the Social Security System notified plaintiff that it was covered; "11. On November 14, 1957, plaintiff through counsel sent a letter to the Social Security System contesting the claim of the System that plaintiff was covered, . . .; "12. On November 27, 1957, Carlos Sanchez, Manager of the Production Department of the respondent System for and in behalf of the Acting Administrator, informed plaintiff that plaintiff's business has been in actual operation for at least two years, . . .;" On the basis of the foregoing stipulation of facts, the court, on August 15, 1958, rendered a decision the dispositive part of which reads: "Wherefore, the Court is of the opinion and so declares that the petitioner was an employer engaged in business as common carrier which had been in operation for at least two years prior to the enactment of Republic Act No. 1161, as amended by Republic Act 1792 and by virtue thereof, it was subject to compulsory coverage under said law. . . .." From this decision, petitioner appealed directly to us, raising purely questions of law. Petitioner claims that the lower court erred in holding that it is an employer engaged in business as a common carrier which had been in operation for at least 2 years prior to the enactment of the Social Security Act and, therefore, subject to compulsory coverage thereunder. Section 9 of the Social Security Act, in part, provides: "SEC. 9. Compulsory Coverage. Coverage in the System shall be compulsory upon all employees between the ages of sixteen and sixty years, inclusive, if they have been for at least six months in the service of an employer who is a member of the System. Provided, That the Commission may not compel any employer to became a member of the System unless he shall have been in operation for at least two years . . . ." (Emphasis supplied.) It is not disputed that the Laguna Transportation Company, an unregistered partnership composed of Gonzalo Mercado, Artemio Mercado, Florentina Mata, and Dominador Vera Cruz, commenced the operation of its business as a common carrier on April 1, 1949. These 4 original partners, with 2 others (Maura Mendoza and Sabina Borja) later converted the partnership into a corporate entity, by

registering its articles of incorporation with the Securities and Exchange Commission on June 20, 1956. The firm name "Laguna Transportation Company" was not altered, except with the addition of the word "Inc." to indicate that petitioner was duly incorporated under existing laws. The corporation continued the same transportation business of the unregistered partnership, using the same lines and equipment. There was, in effect, only a change in the form of the organization of the entity engaged in the business of transportation of passengers. Hence, said entity as an employer engaged in business, was already in operation for at least 3 years prior to the enactment of the Social Security Act on June 18, 1954 and for at least two years prior to the passage of the amendatory act on June 21, 1957. Petitioner argues that, since it was registered as a corporation with the Securities and Exchange Commission only on June 20, 1956, it must be considered to have been in operation once formed is conferred a juridical personality separate and distinct from the persons composing it, it is but a legal fiction introduced for purposes of convenience and to subserve the ends of justice. The concept cannot be extended to a point beyond its reasons and policy, and when invoked in support of an end subversive of this policy, will be disregarded by the courts. (13 Am. Jur. 160.) "If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons." (1 Fletcher Cyclopedia Corporations [Perm. Ed.] 135-136; U.S. Milwankee Refrigeration Transit Co., 142 Fed. 247, cited Koppel Philippines, Inc. vs. Yatco, 43 Off. Gaz., 4604.) To adopt petitioner's argument would defeat, rather than promote, the ends for which the Social Security Act was enacted. An employer could easily circumvent the statute by simply changing his form of organization every other year, and then claim exemption from contribution to the System as required, on the theory that, as a new entity, it has not been in operation for a period of at least 2 years. The door to fraudulent circumvention of the statute would, thereby, be opened. Moreover, petitioner admitted that as an employer engaged in the business of a common carrier, its operation commenced on April 1, 1949 while it was a partnership and continued by the corporation upon its formation on June 20, 1956. Unlike in the conveyance made by the Bian Transportation Company to the partners Gonzalo Mercado, Artemio Mercado, Florentino Mata, and Dominador Vera Cruz, no mention whatsoever is made either in the pleadings or in

the stipulation of facts that the lines and equipment of the unregistered partnership had been sold and transferred to the corporation, petitioner herein. This omission, to our mind, clearly indicates that there was, in fact, no transfer of interest, but a mere change in the form of the organization of the employer engaged in the transportation business, i.e., from an unregistered partnership to that of a corporation. As a rule, courts will look to the substance and not to the form. (Colonial Trust Co. vs. Montollo Eric Works, 172 Fed. 310; Metropolitan Holding Co. vs. Snyder, 79 F. 2d 263, 103 A.L.R. 612; Arnold vs. Willits, et al., 44 Phil., 634; 1 Fletcher Cyclopedia Corporations [Perm. Ed.] 139-140.) Finally, the weight of authority supports the view that where a corporation was formed by, and consisted of members of a partnership whose business and property was conveyed and transferred to the corporation for the purpose of continuing its business, in payment for which corporate capital stock was issued, such corporation is presumed to have assumed partnership debts, and is prima facie liable therefor. (Stowell vs. Garden City News Corps., 57 P. 2d 12; Chicago Smelting & Refining Corp. vs. Sullivan, 246 IU, App. 538; Ball vs. Bros, 83 June 19, N.Y. Supp. 692.) The reason for the rule is that the members of the partnership may be said to have simply put on a new coat, or taken on a corporate cloak, and the corporation is a mere continuation of the partnership. (8 Fletcher Cyclopedia Corporations [Perm. Ed.] 402-411.) Wherefore, finding no error in the judgment of the court a quo, the same is hereby affirmed, with costs against petitioner-appellant. So ordered. Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcin, and Gutierrez David, JJ., concur.