FIRST DIVISION

[G.R. No. 127405. October 4, 2000]

MARJORIE TOCAO and WILLIAM T. BELO, petitioners, vs. COURT OF APPEALS and NENITA A. ANAY, respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

This is a petition for review of the Decision of the Court of Appeals in CA-G.R. CV No. 41616,[1] affirming the Decision of the Regional Trial Court of Makati, Branch 140, in Civil Case No. 88-509.[2]

Fresh from her stint as marketing adviser of Technolux in Bangkok, Thailand, private respondent Nenita A. Anay met petitioner William T. Belo, then the vice-president for operations of Ultra Clean Water Purifier, through her former employer in Bangkok. Belo introduced Anay to petitioner Marjorie Tocao, who conveyed her desire to enter into a joint venture with her for the importation and local distribution of kitchen cookwares. Belo volunteered to finance the joint venture and assigned to Anay the job of marketing the product considering her experience and established relationship with West Bend Company, a manufacturer of kitchen wares in Wisconsin, U.S.A. Under the joint venture, Belo acted as capitalist, Tocao as president and general manager, and Anay as head of the marketing department and later, vice-president for sales. Anay organized the administrative staff and sales force while Tocao hired and fired employees, determined commissions and/or salaries of the employees, and assigned them to different branches. The parties agreed that Belo’s name should not appear in any documents relating to their transactions with West Bend Company. Instead, they agreed to use Anay’s name in securing distributorship of cookware from that company. The parties agreed further that Anay would be entitled to: (1) ten percent (10%) of the annual net profits of the business; (2) overriding commission of six percent (6%) of the overall weekly production; (3) thirty percent (30%) of the sales she would make; and (4) two percent (2%) for her demonstration services. The agreement was not reduced to writing on the strength of Belo’s assurances that he was sincere, dependable and honest when it came to financial commitments.

Anay having secured the distributorship of cookware products from the West Bend Company and organized the administrative staff and the sales force, the cookware business took off successfully. They operated under the name of Geminesse Enterprise, a sole proprietorship registered in Marjorie Tocao’s name, with office at 712 Rufino Building, Ayala Avenue, Makati City. Belo made good his monetary commitments to Anay. Thereafter, Roger Muencheberg of West Bend Company invited Anay to the distributor/dealer meeting in West Bend, Wisconsin, U.S.A., from July 19 to 21, 1987 and to the southwestern regional convention in Pismo Beach, California, U.S.A., from July 25-26, 1987. Anay accepted the invitation with the consent of Marjorie Tocao who, as president and general manager of Geminesse Enterprise, even wrote a letter to the Visa Section of the U.S. Embassy in Manila on July 13, 1987. A portion of the letter reads:

“Ms. Nenita D. Anay (sic), who has been patronizing and supporting West Bend Co. for twenty (20) years now, acquired the distributorship of Royal Queen cookware for Geminesse Enterprise, is the Vice President Sales Marketing and a business partner of our company, will attend in response to the invitation.” (Italics supplied.)[3]

Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook the task of saving the business on account of the unsatisfactory sales record in the Makati and Cubao offices. On August 31, 1987, she received a plaque of appreciation from the administrative and sales people through Marjorie Tocao[4] for her excellent job performance. On October 7, 1987, in the presence of Anay, Belo signed a memo[5] entitling her to a thirty-seven percent (37%) commission for her personal sales "up Dec 31/87.” Belo explained to her that said commission was apart from her ten percent (10%) share in the profits. On October 9, 1987, Anay learned that Marjorie Tocao had signed a letter[6] addressed to the Cubao sales office to the effect that she was no longer the vice-president of Geminesse Enterprise. The following day, October 10, she received a note from Lina T. Cruz, marketing manager, that Marjorie Tocao had barred her from holding office and conducting demonstrations in both Makati and Cubao offices.[7] Anay attempted to contact Belo. She wrote him twice to demand her overriding commission for the period of January 8, 1988 to February 5, 1988 and the audit of the company to determine her share in the net profits. When her letters were not answered, Anay consulted her lawyer, who, in turn, wrote Belo a letter. Still, that letter was not answered.

Anay still received her five percent (5%) overriding commission up to December 1987. The following year, 1988, she did not receive the same commission although the company netted a gross sales of P13,300,360.00.

On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum of money with damages[8] against Marjorie D. Tocao and William Belo before the Regional Trial Court of Makati, Branch 140.

In her complaint, Anay prayed that defendants be ordered to pay her, jointly and severally, the following: (1) P32,00.00 as unpaid overriding commission from January 8, 1988 to February 5, 1988; (2) P100,000.00 as moral damages, and (3) P100,000.00 as exemplary damages. The plaintiff also prayed for an audit of the finances of Geminesse Enterprise from the inception of its business operation until she was “illegally dismissed” to determine her ten percent (10%) share in the net profits. She further prayed that she be paid the five percent (5%) “overriding commission“ on the remaining 150 West Bend cookware sets before her “dismissal.”

In their answer,[9] Marjorie Tocao and Belo asserted that the “alleged agreement” with Anay that was “neither reduced in writing, nor ratified,” was “either unenforceable or void or inexistent.” As far as Belo was concerned, his only role was to introduce Anay to Marjorie Tocao. There could not have been a partnership because, as Anay herself admitted, Geminesse Enterprise was the sole proprietorship of Marjorie Tocao. Because Anay merely acted as marketing demonstrator of Geminesse Enterprise for an agreed remuneration, and her complaint referred to either her compensation or dismissal, such complaint should have been lodged with the Department of Labor and not with the regular court.

Petitioners (defendants therein) further alleged that Anay filed the complaint on account of “ill-will and resentment” because Marjorie Tocao did not allow her to “lord it over in the Geminesse Enterprise.” Anay had acted like she owned the enterprise because of her experience and expertise. Hence, petitioners were the ones who suffered actual damages “including unreturned and unaccounted stocks of Geminesse Enterprise,” and “serious anxiety, besmirched reputation in the business world, and various damages not less than P500,000.00.” They also alleged that, to “vindicate their names,” they had to hire counsel for a fee of P23,000.00.

At the pre-trial conference, the issues were limited to: (a) whether or not the plaintiff was an employee or partner of Marjorie Tocao and Belo, and (b) whether or not the parties are entitled to damages.[10]

In their defense, Belo denied that Anay was supposed to receive a share in the profit of the business. He, however, admitted that the two had agreed that Anay would receive a three to four percent (3-4%) share in the gross sales of the cookware. He denied contributing capital to the business or receiving a share in its profits as he merely served as a guarantor of Marjorie Tocao, who was new in the business. He attended and/or presided over business meetings of the venture in his capacity as a guarantor but he

never participated in decision-making. He claimed that he wrote the memo granting the plaintiff thirty-seven percent (37%) commission upon her dismissal from the business venture at the request of Tocao, because Anay had no other income.

For her part, Marjorie Tocao denied having entered into an oral partnership agreement with Anay. However, she admitted that Anay was an expert in the cookware business and hence, they agreed to grant her the following commissions: thirty-seven percent (37%) on personal sales; five percent (5%) on gross sales; two percent (2%) on product demonstrations, and two percent (2%) for recruitment of personnel. Marjorie denied that they agreed on a ten percent (10%) commission on the net profits. Marjorie claimed that she got the capital for the business out of the sale of the sewing machines used in her garments business and from Peter Lo, a Singaporean friend-financier who loaned her the funds with interest. Because she treated Anay as her “co-equal,” Marjorie received the same amounts of commissions as her. However, Anay failed to account for stocks valued at P200,000.00.

On April 22, 1993, the trial court rendered a decision the dispositive part of which is as follows:

“WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. Ordering defendants to submit to the Court a formal account as to the partnership affairs for the years 1987 and 1988 pursuant to Art. 1809 of the Civil Code in order to determine the ten percent (10%) share of plaintiff in the net profits of the cookware business;

2. Ordering defendants to pay five percent (5%) overriding commission for the one hundred and fifty (150) cookware sets available for disposition when plaintiff was wrongfully excluded from the partnership by defendants;

3. Ordering defendants to pay plaintiff overriding commission on the total production which for the period covering January 8, 1988 to February 5, 1988 amounted to P32,000.00;

4. Ordering defendants to pay P100,000.00 as moral damages and P100,000.00 as exemplary damages, and

5. Ordering defendants to pay P50,000.00 as attorney’s fees and P20,000.00 as costs of suit.

SO ORDERED.”

The trial court held that there was indeed an “oral partnership agreement between the plaintiff and the defendants,” based on the following: (a) there was an intention to create a partnership; (b) a common fund was established through contributions consisting of money and industry, and (c) there was a joint interest in the profits. The testimony of Elizabeth Bantilan, Anay’s cousin and the administrative officer of Geminesse Enterprise from August 21, 1986 until it was absorbed by Royal International, Inc., buttressed the fact that a partnership existed between the parties. The letter of Roger Muencheberg of West Bend Company stating that he awarded the distributorship to Anay and Marjorie Tocao because he was convinced that with Marjorie’s financial contribution and Anay’s experience, the combination of the two would be invaluable to the partnership, also supported that conclusion. Belo’s claim that he was merely a “guarantor” has no basis since there was no written evidence thereof as required by Article 2055 of the Civil Code. Moreover, his acts of attending and/or presiding over meetings of Geminesse Enterprise plus his issuance of a memo giving Anay 37% commission on personal sales belied this. On the contrary, it demonstrated his involvement as a partner in the business.

The trial court further held that the payment of commissions did not preclude the existence of the partnership inasmuch as such practice is often resorted to in business circles as an impetus to bigger sales volume. It did not matter that the agreement was not in writing because Article 1771 of the Civil Code provides that a partnership may be “constituted in any form.” The fact that Geminesse Enterprise was registered in Marjorie Tocao’s name is not determinative of whether or not the business was managed and operated by a sole proprietor or a partnership. What was registered with the Bureau of Domestic Trade was merely the business name or style of Geminesse Enterprise.

The trial court finally held that a partner who is excluded wrongfully from a partnership is an innocent partner. Hence, the guilty partner must give him his due upon the dissolution of the partnership as well as damages or share in the profits “realized from the appropriation of the partnership business and goodwill.” An innocent partner thus possesses “pecuniary interest in every existing contract that was incomplete and in the trade name of the co-partnership and assets at the time he was wrongfully expelled.”

Petitioners’ appeal to the Court of Appeals[11] was dismissed, but the amount of damages awarded by the trial court were reduced to P50,000.00 for moral damages and P50,000.00 as exemplary damages. Their Motion for Reconsideration was denied by the Court of Appeals for lack of merit.[12]Petitioners Belo and Marjorie Tocao are now before this Court on a petition for review on certiorari, asserting that there was no business partnership between them and herein private respondent Nenita A. Anay who

is, therefore, not entitled to the damages awarded to her by the Court of Appeals.

Petitioners Tocao and Belo contend that the Court of Appeals erroneously held that a partnership existed between them and private respondent Anay because Geminesse Enterprise “came into being” exactly a year before the “alleged partnership” was formed, and that it was very unlikely that petitioner Belo would invest the sum of P2,500,000.00 with petitioner Tocao contributing nothing, without any “memorandum whatsoever regarding the alleged partnership.”[13]

The issue of whether or not a partnership exists is a factual matter which are within the exclusive domain of both the trial and appellate courts. This Court cannot set aside factual findings of such courts absent any showing that there is no evidence to support the conclusion drawn by the court a quo.[14]In this case, both the trial court and the Court of Appeals are one in ruling that petitioners and private respondent established a business partnership. This Court finds no reason to rule otherwise.

To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or more persons bind themselves to contribute money, property or industry to a common fund; and (2) intention on the part of the partners to divide the profits among themselves.[15] It may be constituted in any form; a public instrument is necessary only where immovable property or real rights are contributed thereto.[16] This implies that since a contract of partnership is consensual, an oral contract of partnership is as good as a written one. Where no immovable property or real rights are involved, what matters is that the parties have complied with the requisites of a partnership. The fact that there appears to be no record in the Securities and Exchange Commission of a public instrument embodying the partnership agreement pursuant to Article 1772 of the Civil Code[17] did not cause the nullification of the partnership. The pertinent provision of the Civil Code on the matter states:

Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of article 1772, first paragraph.

Petitioners admit that private respondent had the expertise to engage in the business of distributorship of cookware. Private respondent contributed such expertise to the partnership and hence, under the law, she was the industrial or managing partner. It was through her reputation with the West Bend Company that the partnership was able to open the business of distributorship of that company’s cookware products; it was through the same efforts that the business was propelled to financial success. Petitioner Tocao

herself admitted private respondent’s indispensable role in putting up the business when, upon being asked if private respondent held the positions of marketing manager and vice-president for sales, she testified thus:

“A: No, sir at the start she was the marketing manager because there were no one to sell yet, it’s only me there then her and then two (2) people, so about four (4). Now, after that when she recruited already Oscar Abella and Lina Torda-Cruz these two (2) people were given the designation of marketing managers of which definitely Nita as superior to them would be the Vice President.”[18]

By the set-up of the business, third persons were made to believe that a partnership had indeed been forged between petitioners and private respondents. Thus, the communication dated June 4, 1986 of Missy Jagler of West Bend Company to Roger Muencheberg of the same company states:

“Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the operations. Marge does not have cookware experience. Nita Anay has started to gather former managers, Lina Torda and Dory Vista. She has also gathered former demonstrators, Betty Bantilan, Eloisa Lamela, Menchu Javier. They will continue to gather other key people and build up the organization. All they need is the finance and the products to sell.”[19]

On the other hand, petitioner Belo’s denial that he financed the partnership rings hollow in the face of the established fact that he presided over meetings regarding matters affecting the operation of the business. Moreover, his having authorized in writing on October 7, 1987, on a stationery of his own business firm, Wilcon Builders Supply, that private respondent should receive thirty-seven (37%) of the proceeds of her personal sales, could not be interpreted otherwise than that he had a proprietary interest in the business. His claim that he was merely a guarantor is belied by that personal act of proprietorship in the business. Moreover, if he was indeed a guarantor of future debts of petitioner Tocao under Article 2053 of the Civil Code,[20] he should have presented documentary evidence therefor. While Article 2055 of the Civil Code simply provides that guaranty must be “express,” Article 1403, the Statute of Frauds, requires that “a special promise to answer for the debt, default or miscarriage of another” be in writing.[21]

Petitioner Tocao, a former ramp model,[22] was also a capitalist in the partnership. She claimed that she herself financed the business. Her and petitioner Belo’s roles as both capitalists to the partnership with private respondent are buttressed by petitioner Tocao’s admissions that petitioner Belo was her boyfriend and that the partnership was not their only business

venture together. They also established a firm that they called “Wiji,” the combination of petitioner Belo’s first name, William, and her nickname, Jiji.[23] The special relationship between them dovetails with petitioner Belo’s claim that he was acting in behalf of petitioner Tocao. Significantly, in the early stage of the business operation, petitioners requested West Bend Company to allow them to “utilize their banking and trading facilities in Singapore” in the matter of importation and payment of the cookware products.[24] The inevitable conclusion, therefore, was that petitioners merged their respective capital and infused the amount into the partnership of distributing cookware with private respondent as the managing partner.

The business venture operated under Geminesse Enterprise did not result in an employer-employee relationship between petitioners and private respondent. While it is true that the receipt of a percentage of net profits constitutes only prima facie evidence that the recipient is a partner in the business,[25] the evidence in the case at bar controverts an employer-employee relationship between the parties. In the first place, private respondent had a voice in the management of the affairs of the cookware distributorship,[26] including selection of people who would constitute the administrative staff and the sales force. Secondly, petitioner Tocao’s admissions militate against an employer-employee relationship. She admitted that, like her who owned Geminesse Enterprise,[27] private respondent received only commissions and transportation and representation allowances[28] and not a fixed salary.[29] Petitioner Tocao testified:

“Q: Of course. Now, I am showing to you certain documents already marked as Exhs. ‘X’ and ‘Y.’ Please go over this. Exh. ‘Y’ is denominated `Cubao overrides’ 8-21-87 with ending August 21, 1987, will you please go over this and tell the Honorable Court whether you ever came across this document and know of your own knowledge the amount ---

A: Yes, sir this is what I am talking about earlier. That’s the one I am telling you earlier a certain percentage for promotions, advertising, incentive.

Q: I see. Now, this promotion, advertising, incentive, there is a figure here and words which I quote: ‘Overrides Marjorie Ann Tocao P21,410.50’ this means that you have received this amount?

A: Oh yes, sir.

Q: I see. And, by way of amplification this is what you are saying as one representing commission, representation, advertising and promotion?

A: Yes, sir.

Q: I see. Below your name is the words and figure and I quote ‘Nita D. Anay P21,410.50’, what is this?

A: That’s her overriding commission.

Q: Overriding commission, I see. Of course, you are telling this Honorable Court that there being the same P21,410.50 is merely by coincidence?

A: No, sir, I made it a point that we were equal because the way I look at her kasi, you know in a sense because of her expertise in the business she is vital to my business. So, as part of the incentive I offer her the same thing.

Q: So, in short you are saying that this you have shared together, I mean having gotten from the company P21,140.50 is your way of indicating that you were treating her as an equal?

A: As an equal.

Q: As an equal, I see. You were treating her as an equal?

A: Yes, sir.

Q: I am calling again your attention to Exh. ‘Y’ ‘Overrides Makati the other one is ---

A: That is the same thing, sir.

Q: With ending August 21, words and figure ‘Overrides Marjorie Ann Tocao P15,314.25’ the amount there you will acknowledge you have received that?

A: Yes, sir.

Q: Again in concept of commission, representation, promotion, etc.?

A: Yes, sir.

Q: Okey. Below your name is the name of Nita Anay P15,314.25 that is also an indication that she received the same amount?

A: Yes, sir.

Q: And, as in your previous statement it is not by coincidence that these two (2) are the same?

A: No, sir.

Q: It is again in concept of you treating Miss Anay as your equal?

A: Yes, sir.” (Italics supplied.)[30]

If indeed petitioner Tocao was private respondent’s employer, it is difficult to believe that they shall receive the same income in the business. In a partnership, each partner must share in the profits and losses of the venture, except that the industrial partner shall not be liable for the losses.[31] As an industrial partner, private respondent had the right to demand for a formal accounting of the business and to receive her share in the net profit.[32]

The fact that the cookware distributorship was operated under the name of Geminesse Enterprise, a sole proprietorship, is of no moment. What was registered with the Bureau of Domestic Trade on August 19, 1987 was merely the name of that enterprise.[33] While it is true that in her undated application for renewal of registration of that firm name, petitioner Tocao indicated that it would be engaged in retail of “kitchenwares, cookwares, utensils, skillet,”[34]she also admitted that the enterprise was only “60% to 70% for the cookware business,” while 20% to 30% of its business activity was devoted to the sale of water sterilizer or purifier.[35] Indubitably then, the business name Geminesse Enterprise was used only for practical reasons - it was utilized as the common name for petitioner Tocao’s various business activities, which included the distributorship of cookware.

Petitioners underscore the fact that the Court of Appeals did not return the “unaccounted and unremitted stocks of Geminesse Enterprise amounting to P208,250.00.”[36] Obviously a ploy to offset the damages awarded to private respondent, that claim, more than anything else, proves the existence of a partnership between them. In Idos v. Court of Appeals, this Court said:

“The best evidence of the existence of the partnership, which was not yet terminated (though in the winding up stage), were the unsold goods and uncollected receivables, which were presented to the trial court. Since the partnership has not been terminated, the petitioner and private complainant remained as co-partners. x x x.”[37]

It is not surprising then that, even after private respondent had been unceremoniously booted out of the partnership in October 1987, she still received her overriding commission until December 1987.

Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the partnership to reap for herself and/or for petitioner Belo financial gains resulting from private respondent’s efforts to make the business venture a success. Thus, as petitioner Tocao became adept in the business operation, she started to assert herself to the extent that she would even shout at private respondent in front of other people.[38] Her instruction to Lina Torda Cruz, marketing manager, not to allow private respondent to hold office in both the Makati and Cubao sales offices concretely spoke of her

perception that private respondent was no longer necessary in the business operation,[39] and resulted in a falling out between the two. However, a mere falling out or misunderstanding between partners does not convert the partnership into a sham organization.[40] The partnership exists until dissolved under the law.Since the partnership created by petitioners and private respondent has no fixed term and is therefore a partnership at will predicated on their mutual desire and consent, it may be dissolved by the will of a partner. Thus:

“x x x. The right to choose with whom a person wishes to associate himself is the very foundation and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of that mutual resolve, along with each partner’s capability to give it, and the absence of cause for dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership but that it can result in a liability for damages.”[41]

An unjustified dissolution by a partner can subject him to action for damages because by the mutual agency that arises in a partnership, the doctrine ofdelectus personae allows the partners to have the power, although not necessarily the right to dissolve the partnership.[42]

In this case, petitioner Tocao’s unilateral exclusion of private respondent from the partnership is shown by her memo to the Cubao office plainly stating that private respondent was, as of October 9, 1987, no longer the vice-president for sales of Geminesse Enterprise.[43] By that memo, petitioner Tocao effected her own withdrawal from the partnership and considered herself as having ceased to be associated with the partnership in the carrying on of the business. Nevertheless, the partnership was not terminated thereby; it continues until the winding up of the business.[44]

The winding up of partnership affairs has not yet been undertaken by the partnership. This is manifest in petitioners’ claim for stocks that had been entrusted to private respondent in the pursuit of the partnership business.

The determination of the amount of damages commensurate with the factual findings upon which it is based is primarily the task of the trial court.[45]The Court of Appeals may modify that amount only when its factual findings are diametrically opposed to that of the lower court,[46] or the award is palpably or scandalously and unreasonably excessive.[47] However, exemplary damages that are awarded “by way of example or correction for the public good,”[48]should be reduced to P50,000.00, the amount correctly awarded by the Court of Appeals. Concomitantly, the award of moral

damages of P100,000.00 was excessive and should be likewise reduced to P50,000.00. Similarly, attorney’s fees that should be granted on account of the award of exemplary damages and petitioners’ evident bad faith in refusing to satisfy private respondent’s plainly valid, just and demandable claims,[49] appear to have been excessively granted by the trial court and should therefore be reduced to P25,000.00.

WHEREFORE, the instant petition for review on certiorari is DENIED. The partnership among petitioners and private respondent is ordered dissolved, and the parties are ordered to effect the winding up and liquidation of the partnership pursuant to the pertinent provisions of the Civil Code. This case is remanded to the Regional Trial Court for proper proceedings relative to said dissolution. The appealed decisions of the Regional Trial Court and the Court of Appeals are AFFIRMED with MODIFICATIONS, as follows ---

1. Petitioners are ordered to submit to the Regional Trial Court a formal account of the partnership affairs for the years 1987 and 1988, pursuant to Article 1809 of the Civil Code, in order to determine private respondent’s ten percent (10%) share in the net profits of the partnership;

2. Petitioners are ordered, jointly and severally, to pay private respondent five percent (5%) overriding commission for the one hundred and fifty (150) cookware sets available for disposition since the time private respondent was wrongfully excluded from the partnership by petitioners;

3. Petitioners are ordered, jointly and severally, to pay private respondent overriding commission on the total production which, for the period covering January 8, 1988 to February 5, 1988, amounted to P32,000.00;

4. Petitioners are ordered, jointly and severally, to pay private respondent moral damages in the amount of P50,000.00, exemplary damages in the amount of P50,000.00 and attorney’s fees in the amount of P25,000.00.

SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-4935 May 28, 1954

J. M. TUASON & CO., INC., represented by it Managing PARTNER, GREGORIA ARANETA, INC., plaintiff-appellee, vs. QUIRINO BOLAÑOS, defendant-appellant.

Araneta and Araneta for appellee. Jose A. Buendia for appellant.

REYES, J.:

This is an action originally brought in the Court of First Instance of Rizal, Quezon City Branch, to recover possesion of registered land situated in barrio Tatalon, Quezon City.

Plaintiff's complaint was amended three times with respect to the extent and description of the land sought to be recovered. The original complaint described the land as a portion of a lot registered in plaintiff's name under Transfer Certificate of Title No. 37686 of the land record of Rizal Province and as containing an area of 13 hectares more or less. But the complaint was amended by reducing the area of 6 hectares, more or less, after the defendant had indicated the plaintiff's surveyors the portion of land claimed and occupied by him. The second amendment became necessary and was allowed following the testimony of plaintiff's surveyors that a portion of the area was embraced in another certificate of title, which was plaintiff's Transfer Certificate of Title No. 37677. And still later, in the course of trial, after defendant's surveyor and witness, Quirino Feria, had testified that the area occupied and claimed by defendant was about 13 hectares, as shown in his Exhibit 1, plaintiff again, with the leave of court, amended its complaint to make its allegations conform to the evidence.

Defendant, in his answer, sets up prescription and title in himself thru "open, continuous, exclusive and public and notorious possession (of land in dispute) under claim of ownership, adverse to the entire world by defendant and his predecessor in interest" from "time in-memorial". The answer further alleges that registration of the land in dispute was obtained by plaintiff or its

predecessors in interest thru "fraud or error and without knowledge (of) or interest either personal or thru publication to defendant and/or predecessors in interest." The answer therefore prays that the complaint be dismissed with costs and plaintiff required to reconvey the land to defendant or pay its value.

After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without any right to the land in question and ordering him to restore possession thereof to plaintiff and to pay the latter a monthly rent of P132.62 from January, 1940, until he vacates the land, and also to pay the costs.

Appealing directly to this court because of the value of the property involved, defendant makes the following assignment or errors:

I. The trial court erred in not dismissing the case on the ground that the case was not brought by the real property in interest.

II. The trial court erred in admitting the third amended complaint.

III. The trial court erred in denying defendant's motion to strike.

IV. The trial court erred in including in its decision land not involved in the litigation.

V. The trial court erred in holding that the land in dispute is covered by transfer certificates of Title Nos. 37686 and 37677.

Vl. The trial court erred in not finding that the defendant is the true and lawful owner of the land.

VII. The trial court erred in finding that the defendant is liable to pay the plaintiff the amount of P132.62 monthly from January, 1940, until he vacates the premises.

VIII. The trial court erred in not ordering the plaintiff to reconvey the land in litigation to the defendant.

As to the first assigned error, there is nothing to the contention that the present action is not brought by the real party in interest, that is, by J. M. Tuason and Co., Inc. What the Rules of Court require is that an action be brought in the name of, but not necessarily by, the real party in interest. (Section 2, Rule 2.) In fact the practice is for an attorney-at-law to bring the action, that is to file the complaint, in the name of the plaintiff. That practice appears to have been followed in this case, since the complaint is signed by

the law firm of Araneta and Araneta, "counsel for plaintiff" and commences with the statement "comes now plaintiff, through its undersigned counsel." It is true that the complaint also states that the plaintiff is "represented herein by its Managing Partner Gregorio Araneta, Inc.", another corporation, but there is nothing against one corporation being represented by another person, natural or juridical, in a suit in court. The contention that Gregorio Araneta, Inc. can not act as managing partner for plaintiff on the theory that it is illegal for two corporations to enter into a partnership is without merit, for the true rule is that "though a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter." (Wyoming-Indiana Oil Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp., 1082.) There is nothing in the record to indicate that the venture in which plaintiff is represented by Gregorio Araneta, Inc. as "its managing partner" is not in line with the corporate business of either of them.

Errors II, III, and IV, referring to the admission of the third amended complaint, may be answered by mere reference to section 4 of Rule 17, Rules of Court, which sanctions such amendment. It reads:

Sec. 4. Amendment to conform to evidence. — When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects, as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at my time, even of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall be so freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice him in maintaining his action or defense upon the merits. The court may grant a continuance to enable the objecting party to meet such evidence.

Under this provision amendment is not even necessary for the purpose of rendering judgment on issues proved though not alleged. Thus, commenting on the provision, Chief Justice Moran says in this Rules of Court:

Under this section, American courts have, under the New Federal Rules of Civil Procedure, ruled that where the facts shown entitled plaintiff to relief other than that asked for, no amendment to the complaint is necessary, especially where defendant has himself

raised the point on which recovery is based, and that the appellate court treat the pleadings as amended to conform to the evidence, although the pleadings were not actually amended. (I Moran, Rules of Court, 1952 ed., 389-390.)

Our conclusion therefore is that specification of error II, III, and IV are without merit..

Let us now pass on the errors V and VI. Admitting, though his attorney, at the early stage of the trial, that the land in dispute "is that described or represented in Exhibit A and in Exhibit B enclosed in red pencil with the name Quirino Bolaños," defendant later changed his lawyer and also his theory and tried to prove that the land in dispute was not covered by plaintiff's certificate of title. The evidence, however, is against defendant, for it clearly establishes that plaintiff is the registered owner of lot No. 4-B-3-C, situate in barrio Tatalon, Quezon City, with an area of 5,297,429.3 square meters, more or less, covered by transfer certificate of title No. 37686 of the land records of Rizal province, and of lot No. 4-B-4, situated in the same barrio, having an area of 74,789 square meters, more or less, covered by transfer certificate of title No. 37677 of the land records of the same province, both lots having been originally registered on July 8, 1914 under original certificate of title No. 735. The identity of the lots was established by the testimony of Antonio Manahan and Magno Faustino, witnesses for plaintiff, and the identity of the portion thereof claimed by defendant was established by the testimony of his own witness, Quirico Feria. The combined testimony of these three witnesses clearly shows that the portion claimed by defendant is made up of a part of lot 4-B-3-C and major on portion of lot 4-B-4, and is well within the area covered by the two transfer certificates of title already mentioned. This fact also appears admitted in defendant's answer to the third amended complaint.

As the land in dispute is covered by plaintiff's Torrens certificate of title and was registered in 1914, the decree of registration can no longer be impugned on the ground of fraud, error or lack of notice to defendant, as more than one year has already elapsed from the issuance and entry of the decree. Neither court the decree be collaterally attacked by any person claiming title to, or interest in, the land prior to the registration proceedings. (Soroñgon vs. Makalintal,1 45 Off. Gaz., 3819.) Nor could title to that land in derogation of that of plaintiff, the registered owner, be acquired by prescription or adverse possession. (Section 46, Act No. 496.) Adverse, notorious and continuous possession under claim of ownership for the period fixed by law is ineffective against a Torrens title. (Valiente vs. Judge of CFI of Tarlac,2 etc., 45 Off. Gaz., Supp. 9, p. 43.) And it is likewise settled that the right to secure possession under a decree of registration does not prescribed. (Francisco vs.

Cruz, 43 Off. Gaz., 5105, 5109-5110.) A recent decision of this Court on this point is that rendered in the case of Jose Alcantara et al., vs. Mariano et al., 92 Phil., 796. This disposes of the alleged errors V and VI.

As to error VII, it is claimed that `there was no evidence to sustain the finding that defendant should be sentenced to pay plaintiff P132.62 monthly from January, 1940, until he vacates the premises.' But it appears from the record that that reasonable compensation for the use and occupation of the premises, as stipulated at the hearing was P10 a month for each hectare and that the area occupied by defendant was 13.2619 hectares. The total rent to be paid for the area occupied should therefore be P132.62 a month. It is appears from the testimony of J. A. Araneta and witness Emigdio Tanjuatco that as early as 1939 an action of ejectment had already been filed against defendant. And it cannot be supposed that defendant has been paying rents, for he has been asserting all along that the premises in question 'have always been since time immemorial in open, continuous, exclusive and public and notorious possession and under claim of ownership adverse to the entire world by defendant and his predecessors in interest.' This assignment of error is thus clearly without merit.

Error No. VIII is but a consequence of the other errors alleged and needs for further consideration.

During the pendency of this case in this Court appellant, thru other counsel, has filed a motion to dismiss alleging that there is pending before the Court of First Instance of Rizal another action between the same parties and for the same cause and seeking to sustain that allegation with a copy of the complaint filed in said action. But an examination of that complaint reveals that appellant's allegation is not correct, for the pretended identity of parties and cause of action in the two suits does not appear. That other case is one for recovery of ownership, while the present one is for recovery of possession. And while appellant claims that he is also involved in that order action because it is a class suit, the complaint does not show that such is really the case. On the contrary, it appears that the action seeks relief for each individual plaintiff and not relief for and on behalf of others. The motion for dismissal is clearly without merit.

Wherefore, the judgment appealed from is affirmed, with costs against the plaintiff.

SECOND DIVISION

[G.R. No. 127347. November 25, 1999]

ALFREDO N. AGUILA, JR, petitioner, vs. HONORABLE COURT OF APPEALS and FELICIDAD S. VDA. DE ABROGAR,respondents.

D E C I S I O N

MENDOZA, J.:

This is a petition for review on certiorari of the decision[1] of the Court of Appeals, dated November 29, 1990, which reversed the decision of the Regional Trial Court, Branch 273, Marikina, Metro Manila, dated April 11, 1995. The trial court dismissed the petition for declaration of nullity of a deed of sale filed by private respondent Felicidad S. Vda. de Abrogar against petitioner Alfredo N. Aguila, Jr.

The facts are as follows:

Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in lending activities. Private respondent and her late husband, Ruben M. Abrogar, were the registered owners of a house and lot, covered by Transfer Certificate of Title No. 195101, in Marikina, Metro Manila. On April 18, 1991, private respondent, with the consent of her late husband, and A.C. Aguila & Sons, Co., represented by petitioner, entered into a Memorandum of Agreement, which provided:

(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy the above-described property from the FIRST PARTY [Felicidad S. Vda. de Abrogar], and pursuant to this agreement, a Deed of Absolute Sale shall be executed by the FIRST PARTY conveying the property to the SECOND PARTY for and in consideration of the sum of Two Hundred Thousand Pesos (P200,000.00), Philippine Currency;

(2) The FIRST PARTY is hereby given by the SECOND PARTY the option to repurchase the said property within a period of ninety (90) days from the execution of this memorandum of agreement effective April 18, 1991, for the amount of TWO HUNDRED THIRTY THOUSAND PESOS (P230,000.00);

(3) In the event that the FIRST PARTY fail to exercise her option to repurchase the said property within a period of ninety (90) days, the FIRST PARTY is obliged to deliver peacefully the possession of the property to the SECOND PARTY within fifteen (15) days after the expiration of the said 90 day grace period;

(4) During the said grace period, the FIRST PARTY obliges herself not to file any lis pendens or whatever claims on the property nor shall be cause the annotation of say claim at the back of the title to the said property;

(5) With the execution of the deed of absolute sale, the FIRST PARTY warrants her ownership of the property and shall defend the rights of the SECOND PARTY against any party whom may have any interests over the property;

(6) All expenses for documentation and other incidental expenses shall be for the account of the FIRST PARTY;

(7) Should the FIRST PARTY fail to deliver peaceful possession of the property to the SECOND PARTY after the expiration of the 15-day grace period given in paragraph 3 above, the FIRST PARTY shall pay an amount equivalent to Five Percent of the principal amount of TWO HUNDRED PESOS (P200.00) or P10,000.00 per month of delay as and for rentals and liquidated damages;

(8) Should the FIRST PARTY fail to exercise her option to repurchase the property within ninety (90) days period above-mentioned, this memorandum of agreement shall be deemed cancelled and the Deed of Absolute Sale, executed by the parties shall be the final contract considered as entered between the parties and the SECOND PARTY shall proceed to transfer ownership of the property above described to its name free from lines and encumbrances.[2]

On the same day, April 18, 1991, the parties likewise executed a deed of absolute sale,[3] dated June 11, 1991, wherein private respondent, with the consent of her late husband, sold the subject property to A.C. Aguila & Sons, Co., represented by petitioner, for P200,000.00. In a special power of attorney dated the same day, April 18, 1991, private respondent authorized petitioner to cause the cancellation of TCT No. 195101 and the issuance of a new certificate of title in the name of A.C. Aguila and Sons, Co., in the event she failed to redeem the subject property as provided in the Memorandum of Agreement.[4]

Private respondent failed to redeem the property within the 90-day period as provided in the Memorandum of Agreement. Hence, pursuant to the special power of attorney mentioned above, petitioner caused the cancellation of TCT No. 195101 and the issuance of a new certificate of title in the name of A.C. Aguila and Sons, Co.[5]

Private respondent then received a letter dated August 10, 1991 from Atty. Lamberto C. Nanquil, counsel for A.C. Aguila & Sons, Co., demanding that she vacate the premises within 15 days after receipt of the letter and surrender its possession peacefully to A.C. Aguila & Sons, Co. Otherwise, the latter would bring the appropriate action in court.[6]

Upon the refusal of private respondent to vacate the subject premises, A.C. Aguila & Sons, Co. filed an ejectment case against her in the Metropolitan Trial Court, Branch 76, Marikina, Metro Manila. In a decision, dated April 3, 1992, the Metropolitan Trial Court ruled in favor of A.C. Aguila & Sons, Co. on the ground that private respondent did not redeem the subject property before the expiration of the 90-day period provided in the Memorandum of Agreement. Private respondent appealed first to the Regional Trial Court, Branch 163, Pasig, Metro Manila, then to the Court of Appeals, and later to this Court, but she lost in all the cases.

Private respondent then filed a petition for declaration of nullity of a deed of sale with the Regional Trial Court, Branch 273, Marikina, Metro Manila on December 4, 1993. She alleged that the signature of her husband on the deed of sale was a forgery because he was already dead when the deed was supposed to have been executed on June 11, 1991.

It appears, however, that private respondent had filed a criminal complaint for falsification against petitioner with the Office of the Prosecutor of Quezon City which was dismissed in a resolution, dated February 14, 1994.

On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:

Plaintiff’s claim therefore that the Deed of Absolute Sale is a forgery because they could not personally appear before Notary Public Lamberto C. Nanquil on June 11, 1991 because her husband, Ruben Abrogar, died on May 8, 1991 or one month and 2 days before the execution of the Deed of Absolute Sale, while the plaintiff was still in the Quezon City Medical Center recuperating from wounds which she suffered at the same vehicular accident on May 8, 1991, cannot be sustained. The Court is convinced that the three required documents, to wit: the Memorandum of Agreement, the Special Power of Attorney, and the Deed of Absolute Sale were all signed by the parties on the same date on April 18, 1991. It is a common and accepted business practice of those engaged in money lending to prepare an undated

absolute deed of sale in loans of money secured by real estate for various reasons, foremost of which is the evasion of taxes and surcharges. The plaintiff never questioned receiving the sum of P200,000.00 representing her loan from the defendant. Common sense dictates that an established lending and realty firm like the Aguila & Sons, Co. would not part with P200,000.00 to the Abrogar spouses, who are virtual strangers to it, without the simultaneous accomplishment and signing of all the required documents, more particularly the Deed of Absolute Sale, to protect its interest.

. . . .

WHEREFORE, foregoing premises considered, the case in caption is hereby ORDERED DISMISSED, with costs against the plaintiff.

On appeal, the Court of Appeals reversed. It held:

The facts and evidence show that the transaction between plaintiff-appellant and defendant-appellee is indubitably an equitable mortgage. Article 1602 of the New Civil Code finds strong application in the case at bar in the light of the following circumstances.

First: The purchase price for the alleged sale with right to repurchase is unusually inadequate. The property is a two hundred forty (240) sq. m. lot. On said lot, the residential house of plaintiff-appellant stands. The property is inside a subdivision/village. The property is situated in Marikina which is already part of Metro Manila. The alleged sale took place in 1991 when the value of the land had considerably increased.

For this property, defendant-appellee pays only a measly P200,000.00 or P833.33 per square meter for both the land and for the house.

Second: The disputed Memorandum of Agreement specifically provides that plaintiff-appellant is obliged to deliver peacefully the possession of the property to the SECOND PARTY within fifteen (15) days after the expiration of the said ninety (90) day grace period. Otherwise stated, plaintiff-appellant is to retain physical possession of the thing allegedly sold.

In fact, plaintiff-appellant retained possession of the property “sold” as if they were still the absolute owners. There was no provision for maintenance or expenses, much less for payment of rent.

Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the property “sold”. It is well-known that payment of taxes accompanied

by actual possession of the land covered by the tax declaration, constitute evidence of great weight that a person under whose name the real taxes were declared has a claim of right over the land.

It is well-settled that the presence of even one of the circumstances in Article 1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase an equitable mortgage.

Considering that plaintiff-appellant, as vendor, was paid a price which is unusually inadequate, has retained possession of the subject property and has continued paying the realty taxes over the subject property, (circumstances mentioned in par. (1) (2) and (5) of Article 1602 of the New Civil Code), it must be conclusively presumed that the transaction the parties actually entered into is an equitable mortgage, not a sale with right to repurchase. The factors cited are in support to the finding that the Deed of Sale/Memorandum of Agreement with right to repurchase is in actuality an equitable mortgage.

Moreover, it is undisputed that the deed of sale with right of repurchase was executed by reason of the loan extended by defendant-appellee to plaintiff-appellant. The amount of loan being the same with the amount of the purchase price.

. . . .

Since the real intention of the party is to secure the payment of debt, now deemed to be repurchase price: the transaction shall then be considered to be an equitable mortgage.

Being a mortgage, the transaction entered into by the parties is in the nature of a pactum commissorium which is clearly prohibited by Article 2088 of the New Civil Code. Article 2088 of the New Civil Code reads:

ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged and

mortgaged in the event of non-payment of the principal obligation within the stipulated period.

In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiff-appellant secured by a mortgage on the property of plaintiff-appellant. The loan was payable within ninety (90) days, the period within which plaintiff-appellant can repurchase the property. Plaintiff-appellant will pay P230,000.00 and not P200,000.00, the P30,000.00 excess is the interest for the loan extended. Failure of plaintiff-appellee to pay the P230,000,00 within the ninety (90) days period, the property shall automatically belong to defendant-appellee by virtue of the deed of sale executed.

Clearly, the agreement entered into by the parties is in the nature of pactum commissorium. Therefore, the deed of sale should be declared void as we hereby so declare to be invalid, for being violative of law.

. . . .

WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET ASIDE. The questioned Deed of Sale and the cancellation of the TCT No. 195101 issued in favor of plaintiff-appellant and the issuance of TCT No. 267073 issued in favor of defendant-appellee pursuant to the questioned Deed of Sale is hereby declared VOID and is hereby ANNULLED. Transfer Certificate of Title No. 195101 of the Registry of Marikina is hereby ordered REINSTATED. The loan in the amount of P230,000.00 shall be paid within ninety (90) days from the finality of this decision. In case of failure to pay the amount of P230,000.00 from the period therein stated, the property shall be sold at public auction to satisfy the mortgage debt and costs and if there is an excess, the same is to be given to the owner.

Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila & Co., against which this case should have been brought; (2) the judgment in the ejectment case is a bar to the filing of the complaint for declaration of nullity of a deed of sale in this case; and (3) the contract between A.C. Aguila & Sons, Co. and private respondent is a pacto de retro sale and not an equitable mortgage as held by the appellate court.

The petition is meritorious.

Rule 3, §2 of the Rules of Court of 1964, under which the complaint in this case was filed, provided that “every action must be prosecuted and defended in the name of the real party in interest.” A real party in interest is one who would be benefited or injured by the judgment, or who is entitled to

the avails of the suit.[7] This ruling is now embodied in Rule 3, §2 of the 1997 Revised Rules of Civil Procedure. Any decision rendered against a person who is not a real party in interest in the case cannot be executed.[8] Hence, a complaint filed against such a person should be dismissed for failure to state a cause of action.[9]

Under Art. 1768 of the Civil Code, a partnership “has a juridical personality separate and distinct from that of each of the partners.” The partners cannot be held liable for the obligations of the partnership unless it is shown that the legal fiction of a different juridical personality is being used for fraudulent, unfair, or illegal purposes.[10] In this case, private respondent has not shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is being used for fraudulent, unfair, or illegal purposes. Moreover, the title to the subject property is in the name of A.C. Aguila & Sons, Co. and the Memorandum of Agreement was executed between private respondent, with the consent of her late husband, and A. C. Aguila & Sons, Co., represented by petitioner. Hence, it is the partnership, not its officers or agents, which should be impleaded in any litigation involving property registered in its name. A violation of this rule will result in the dismissal of the complaint.[11] We cannot understand why both the Regional Trial Court and the Court of Appeals sidestepped this issue when it was squarely raised before them by petitioner.

Our conclusion that petitioner is not the real party in interest against whom this action should be prosecuted makes it unnecessary to discuss the other issues raised by him in this appeal.

WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the complaint against petitioner is DISMISSED.

SO ORDERED.

Republic of the Philippines SUPREME COURT

SECOND DIVISION

G.R. No. 126881 October 3, 2000

HEIRS OF TAN ENG KEE, petitioners, vs. COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President TAN ENG LAY,respondents.

DE LEON, JR., J.:

In this petition for review on certiorari, petitioners pray for the reversal of the Decision1 dated March 13, 1996 of the former Fifth Division2 of the Court of Appeals in CA-G.R. CV No. 47937, the dispositive portion of which states:

THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the complaint dismissed.

The facts are:

Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law spouse of the decedent, joined by their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio, collectively known as herein petitioners HEIRS OF TAN ENG KEE, filed suit against the decedent's brother TAN ENG LAY on February 19, 1990. The complaint,3 docketed as Civil Case No. 1983-R in the Regional Trial Court of Baguio City was for accounting, liquidation and winding up of the alleged partnership formed after World War II between Tan Eng Kee and Tan Eng Lay. On March 18, 1991, the petitioners filed an amended complaint4 impleading private respondent herein BENGUET LUMBER COMPANY, as represented by Tan Eng Lay. The amended complaint was admitted by the trial court in its Order dated May 3, 1991.5

The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan Eng Lay, pooling their resources and industry together, entered into a partnership engaged in the business of selling lumber and hardware and construction supplies. They named their enterprise "Benguet Lumber" which they jointly managed until Tan Eng Kee's death. Petitioners herein averred that the business prospered due to the hard work and thrift of the alleged partners. However, they claimed that in 1981, Tan

Eng Lay and his children caused the conversion of the partnership "Benguet Lumber" into a corporation called "Benguet Lumber Company." The incorporation was purportedly a ruse to deprive Tan Eng Kee and his heirs of their rightful participation in the profits of the business. Petitioners prayed for accounting of the partnership assets, and the dissolution, winding up and liquidation thereof, and the equal division of the net assets of Benguet Lumber.

After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment6 on April 12, 1995, to wit:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

a) Declaring that Benguet Lumber is a joint venture which is akin to a particular partnership;

b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or partners in a business venture and/or particular partnership called Benguet Lumber and as such should share in the profits and/or losses of the business venture or particular partnership;

c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet Lumber Co. Inc. and as such the heirs or legal representatives of the deceased Tan Eng Kee have a legal right to share in said assets;

d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as partner in a particular partnership have descended to the plaintiffs who are his legal heirs.

e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of Benguet Lumber Company Inc. to render an accounting of all the assets of Benguet Lumber Company, Inc. so the plaintiffs know their proper share in the business;

f) Ordering the appointment of a receiver to preserve and/or administer the assets of Benguet Lumber Company, Inc. until such time that said corporation is finally liquidated are directed to submit the name of any person they want to be appointed as receiver failing in which this Court will appoint the Branch Clerk of Court or another one who is qualified to act as such.

g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in filing the instant case.

h) Dismissing the counter-claim of the defendant for lack of merit.

SO ORDERED.

Private respondent sought relief before the Court of Appeals which, on March 13, 1996, rendered the assailed decision reversing the judgment of the trial court. Petitioners' motion for reconsideration7 was denied by the Court of Appeals in a Resolution8 dated October 11, 1996.

Hence, the present petition.

As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and Wilborn Tan for the use of allegedly falsified documents in a judicial proceeding. Petitioners complained that Exhibits "4" to "4-U" offered by the defendants before the trial court, consisting of payrolls indicating that Tan Eng Kee was a mere employee of Benguet Lumber, were fake, based on the discrepancy in the signatures of Tan Eng Kee. They also filed Criminal Cases Nos. 78857-78870 against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan, for alleged falsification of commercial documents by a private individual. On March 20, 1999, the Municipal Trial Court of Baguio City, Branch 1, wherein the charges were filed, rendered judgment9 dismissing the cases for insufficiency of evidence.

In their assignment of errors, petitioners claim that:

I

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS NO FIRM ACCOUNT; (B) THERE WAS NO FIRM LETTERHEADS SUBMITTED AS EVIDENCE; (C) THERE WAS NO CERTIFICATE OF PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO PROFITS AND LOSSES; AND (E) THERE WAS NO TIME FIXED FOR THE DURATION OF THE PARTNERSHIP (PAGE 13, DECISION).

II

THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING TESTIMONY OF RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A SOLE PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY AN EMPLOYEE THEREOF.

III

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING FACTS WHICH WERE DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT SUPPORT THE EXISTENCE OF A PARTNERSHIP JUST BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP DULY RECORDED BEFORE THE SECURITIES AND EXCHANGE COMMISSION:

a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE BENGUET LUMBER COMPOUND;

b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE EMPLOYEES OF BENGUET LUMBER;

c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE EMPLOYEES THEREIN;

d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING THE PRICES OF STOCKS TO BE SOLD TO THE PUBLIC; AND

e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS TO THE SUPPLIERS (PAGE 18, DECISION).

IV

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP JUST BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO TAN AND VERONICA CHOI, TOGETHER WITH THEIR WITNESS BEATRIZ TANDOC, ADMITTED THAT THEY DO NOT KNOW WHEN THE ESTABLISHMENT KNOWN IN BAGUIO CITY AS BENGUET

LUMBER WAS STARTED AS A PARTNERSHIP (PAGE 16-17, DECISION).

V

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE THE PRESENT CAPITAL OR ASSETS OF BENGUET LUMBER IS DEFINITELY MORE THAN P3,000.00 AND AS SUCH THE EXECUTION OF A PUBLIC INSTRUMENT CREATING A PARTNERSHIP SHOULD HAVE BEEN MADE AND NO SUCH PUBLIC INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17, DECISION).

As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not be disturbed on appeal if such are supported by the evidence.10 Our jurisdiction, it must be emphasized, does not include review of factual issues. Thus:

Filing of petition with Supreme Court. — A party desiring to appeal by certiorari from a judgment or final order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The petition shall raise only questions of law which must be distinctly set forth.11 [emphasis supplied]

Admitted exceptions have been recognized, though, and when present, may compel us to analyze the evidentiary basis on which the lower court rendered judgment. Review of factual issues is therefore warranted:

(1) when the factual findings of the Court of Appeals and the trial court are contradictory;

(2) when the findings are grounded entirely on speculation, surmises, or conjectures;

(3) when the inference made by the Court of Appeals from its findings of fact is manifestly mistaken, absurd, or impossible;

(4) when there is grave abuse of discretion in the appreciation of facts;

(5) when the appellate court, in making its findings, goes beyond the issues of the case, and such findings are contrary to the admissions of both appellant and appellee;

(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;

(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered, will justify a different conclusion;

(8) when the findings of fact are themselves conflicting;

(9) when the findings of fact are conclusions without citation of the specific evidence on which they are based; and

(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence but such findings are contradicted by the evidence on record.12

In reversing the trial court, the Court of Appeals ruled, to wit:

We note that the Court a quo over extended the issue because while the plaintiffs mentioned only the existence of a partnership, the Court in turn went beyond that by justifying the existence of a joint venture.

When mention is made of a joint venture, it would presuppose parity of standing between the parties, equal proprietary interest and the exercise by the parties equally of the conduct of the business, thus:

xxx xxx xxx

We have the admission that the father of the plaintiffs was not a partner of the Benguet Lumber before the war. The appellees however argued that (Rollo, p. 104; Brief, p. 6) this is because during the war, the entire stocks of the pre-war Benguet Lumber were confiscated if not burned by the Japanese. After the war, because of the absence of capital to start a lumber and hardware business, Lay and Kee pooled the proceeds of their individual businesses earned from buying and selling military supplies, so that the common fund would be enough to form a partnership, both in the lumber and hardware business. That Lay and Kee actually established the Benguet Lumber in Baguio City, was even testified to by witnesses. Because of the pooling of resources, the post-war Benguet Lumber

was eventually established. That the father of the plaintiffs and Lay were partners, is obvious from the fact that: (1) they conducted the affairs of the business during Kee's lifetime, jointly, (2) they were the ones giving orders to the employees, (3) they were the ones preparing orders from the suppliers, (4) their families stayed together at the Benguet Lumber compound, and (5) all their children were employed in the business in different capacities.

xxx xxx xxx

It is obvious that there was no partnership whatsoever. Except for a firm name, there was no firm account, no firm letterheads submitted as evidence, no certificate of partnership, no agreement as to profits and losses, and no time fixed for the duration of the partnership. There was even no attempt to submit an accounting corresponding to the period after the war until Kee's death in 1984. It had no business book, no written account nor any memorandum for that matter and no license mentioning the existence of a partnership [citation omitted].

Also, the exhibits support the establishment of only a proprietorship. The certification dated March 4, 1971, Exhibit "2", mentioned co-defendant Lay as the only registered owner of the Benguet Lumber and Hardware. His application for registration, effective 1954, in fact mentioned that his business started in 1945 until 1985 (thereafter, the incorporation). The deceased, Kee, on the other hand, was merely an employee of the Benguet Lumber Company, on the basis of his SSS coverage effective 1958, Exhibit "3". In the Payrolls, Exhibits "4" to "4-U", inclusive, for the years 1982 to 1983, Kee was similarly listed only as an employee; precisely, he was on the payroll listing. In the Termination Notice, Exhibit "5", Lay was mentioned also as the proprietor.

xxx xxx xxx

We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in any form, but when an immovable is constituted, the execution of a public instrument becomes necessary. This is equally true if the capitalization exceeds P3,000.00, in which case a public instrument is also necessary, and which is to be recorded with the Securities and Exchange Commission. In this case at bar, we can easily assume that the business establishment, which from the language of the appellees, prospered (pars. 5 & 9, Complaint), definitely exceeded P3,000.00, in addition to the

accumulation of real properties and to the fact that it is now a compound. The execution of a public instrument, on the other hand, was never established by the appellees.

And then in 1981, the business was incorporated and the incorporators were only Lay and the members of his family. There is no proof either that the capital assets of the partnership, assuming them to be in existence, were maliciously assigned or transferred by Lay, supposedly to the corporation and since then have been treated as a part of the latter's capital assets, contrary to the allegations in pars. 6, 7 and 8 of the complaint.

These are not evidences supporting the existence of a partnership:

1) That Kee was living in a bunk house just across the lumber store, and then in a room in the bunk house in Trinidad, but within the compound of the lumber establishment, as testified to by Tandoc; 2) that both Lay and Kee were seated on a table and were "commanding people" as testified to by the son, Elpidio Tan; 3) that both were supervising the laborers, as testified to by Victoria Choi; and 4) that Dionisio Peralta was supposedly being told by Kee that the proceeds of the 80 pieces of the G.I. sheets were added to the business.

Partnership presupposes the following elements [citation omitted]: 1) a contract, either oral or written. However, if it involves real property or where the capital is P3,000.00 or more, the execution of a contract is necessary; 2) the capacity of the parties to execute the contract; 3) money property or industry contribution; 4) community of funds and interest, mentioning equality of the partners or one having a proportionate share in the benefits; and 5) intention to divide the profits, being the true test of the partnership. The intention to join in the business venture for the purpose of obtaining profits thereafter to be divided, must be established. We cannot see these elements from the testimonial evidence of the appellees.

As can be seen, the appellate court disputed and differed from the trial court which had adjudged that TAN ENG KEE and TAN ENG LAY had allegedly entered into a joint venture. In this connection, we have held that whether a partnership exists is a factual matter; consequently, since the appeal is brought to us under Rule 45, we cannot entertain inquiries relative to the correctness of the assessment of the evidence by the court a quo.13 Inasmuch as the Court of Appeals and the trial court had reached

conflicting conclusions, perforce we must examine the record to determine if the reversal was justified.

The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet Lumber. A contract of partnership is defined by law as one where:

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

Two or more persons may also form a partnership for the exercise of a profession.14

Thus, in order to constitute a partnership, it must be established that (1) two or more persons bound themselves to contribute money, property, or industry to a common fund, and (2) they intend to divide the profits among themselves.15 The agreement need not be formally reduced into writing, since statute allows the oral constitution of a partnership, save in two instances: (1) when immovable property or real rights are contributed,16 and (2) when the partnership has a capital of three thousand pesos or more.17 In both cases, a public instrument is required.18 An inventory to be signed by the parties and attached to the public instrument is also indispensable to the validity of the partnership whenever immovable property is contributed to the partnership.19

The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture, which it said is akin to a particular partnership.20 A particular partnership is distinguished from a joint adventure, to wit:

(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal partnership, with no firm name and no legal personality. In a joint account, the participating merchants can transact business under their own name, and can be individually liable therefor.

(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the business of pursuing to a successful termination may continue for a number of years; a partnership generally relates to a continuing business of various transactions of a certain kind.21

A joint venture "presupposes generally a parity of standing between the joint co-ventures or partners, in which each party has an equal proprietary interest in the capital or property contributed, and where each party exercises equal rights in the conduct of the business."22 Nonetheless, in Aurbach, et. al. v. Sanitary Wares Manufacturing Corporation, et. al.,23 we expressed the view that a joint venture may be likened to a particular partnership, thus:

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

Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of partnership but there is none. The alleged partnership, though, was never formally organized. In addition, petitioners point out that the New Civil Code was not yet in effect when the partnership was allegedly formed sometime in 1945, although the contrary may well be argued that nothing prevented the parties from complying with the provisions of the New Civil Code when it took effect on August 30, 1950. But all that is in the past. The net effect, however, is that we are asked to determine whether a partnership existed based purely on circumstantial evidence. A review of the

record persuades us that the Court of Appeals correctly reversed the decision of the trial court. The evidence presented by petitioners falls short of the quantum of proof required to establish a partnership.

Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could have expounded on the precise nature of the business relationship between them. In the absence of evidence, we cannot accept as an established fact that Tan Eng Kee allegedly contributed his resources to a common fund for the purpose of establishing a partnership. The testimonies to that effect of petitioners' witnesses is directly controverted by Tan Eng Lay. It should be noted that it is not with the number of witnesses wherein preponderance lies;24 the quality of their testimonies is to be considered. None of petitioners' witnesses could suitably account for the beginnings of Benguet Lumber Company, except perhaps for Dionisio Peralta whose deceased wife was related to Matilde Abubo.25 He stated that when he met Tan Eng Kee after the liberation, the latter asked the former to accompany him to get 80 pieces of G.I. sheets supposedly owned by both brothers.26Tan Eng Lay, however, denied knowledge of this meeting or of the conversation between Peralta and his brother.27 Tan Eng Lay consistently testified that he had his business and his brother had his, that it was only later on that his said brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or co-possession (specifically here, of the G.I. sheets) is not an indicium of the existence of a partnership.28

Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in existence, Tan Eng Kee never asked for an accounting. The essence of a partnership is that the partners share in the profits and losses.29 Each has the right to demand an accounting as long as the partnership exists.30 We have allowed a scenario wherein "[i]f excellent relations exist among the partners at the start of the business and all the partners are more interested in seeing the firm grow rather than get immediate returns, a deferment of sharing in the profits is perfectly plausible."31 But in the situation in the case at bar, the deferment, if any, had gone on too long to be plausible. A person is presumed to take ordinary care of his concerns.32 As we explained in another case:

In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second place, she did not furnish any help or intervention in the management of the theatre. In the third place, it does not appear that she has even demanded from defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concern should have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnings were correct, etc. She was

absolutely silent with respect to any of the acts that a partner should have done; all that she did was to receive her share of P3,000.00 a month, which cannot be interpreted in any manner than a payment for the use of the premises which she had leased from the owners. Clearly, plaintiff had always acted in accordance with the original letter of defendant of June 17, 1945 (Exh. "A"), which shows that both parties considered this offer as the real contract between them.33 [emphasis supplied]

A demand for periodic accounting is evidence of a partnership.34 During his lifetime, Tan Eng Kee appeared never to have made any such demand for accounting from his brother, Tang Eng Lay.

This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of payrolls purporting to show that Tan Eng Kee was an ordinary employee of Benguet Lumber, as it was then called. The authenticity of these documents was questioned by petitioners, to the extent that they filed criminal charges against Tan Eng Lay and his wife and children. As aforesaid, the criminal cases were dismissed for insufficiency of evidence. Exhibits "4" to "4-U" in fact shows that Tan Eng Kee received sums as wages of an employee. In connection therewith, Article 1769 of the Civil Code provides:

In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons;

(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property which the returns are derived;

(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:

(a) As a debt by installment or otherwise;

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

(c) As an annuity to a widow or representative of a deceased partner;

(d) As interest on a loan, though the amount of payment vary with the profits of the business;

(e) As the consideration for the sale of a goodwill of a business or other property by installments or otherwise.

In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an employee, not a partner. Even if the payrolls as evidence were discarded, petitioners would still be back to square one, so to speak, since they did not present and offer evidence that would show that Tan Eng Kee received amounts of money allegedly representing his share in the profits of the enterprise. Petitioners failed to show how much their father, Tan Eng Kee, received, if any, as his share in the profits of Benguet Lumber Company for any particular period. Hence, they failed to prove that Tan Eng Kee and Tan Eng Lay intended to divide the profits of the business between themselves, which is one of the essential features of a partnership.

Nevertheless, petitioners would still want us to infer or believe the alleged existence of a partnership from this set of circumstances: that Tan Eng Lay and Tan Eng Kee were commanding the employees; that both were supervising the employees; that both were the ones who determined the price at which the stocks were to be sold; and that both placed orders to the suppliers of the Benguet Lumber Company. They also point out that the families of the brothers Tan Eng Kee and Tan Eng Lay lived at the Benguet Lumber Company compound, a privilege not extended to its ordinary employees.

However, private respondent counters that:

Petitioners seem to have missed the point in asserting that the above enumerated powers and privileges granted in favor of Tan Eng Kee, were indicative of his being a partner in Benguet Lumber for the following reasons:

(i) even a mere supervisor in a company, factory or store gives orders and directions to his subordinates. So long, therefore, that an employee's position is higher in rank, it is not unusual that he orders around those lower in rank.

(ii) even a messenger or other trusted employee, over whom confidence is reposed by the owner, can order materials from suppliers for and in behalf of Benguet Lumber. Furthermore, even a partner does not necessarily have to perform this particular task. It is, thus, not an indication that Tan Eng Kee was a partner.

(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this privilege was not accorded to other employees, the undisputed fact remains that Tan Eng Kee is the brother of Tan Eng Lay. Naturally, close personal relations existed between them. Whatever privileges Tan Eng Lay gave his brother, and which were not given the other employees, only proves the kindness and generosity of Tan Eng Lay towards a blood relative.

(iv) and even if it is assumed that Tan Eng Kee was quarreling with Tan Eng Lay in connection with the pricing of stocks, this does not adequately prove the existence of a partnership relation between them. Even highly confidential employees and the owners of a company sometimes argue with respect to certain matters which, in no way indicates that they are partners as to each other.35

In the instant case, we find private respondent's arguments to be well-taken. Where circumstances taken singly may be inadequate to prove the intent to form a partnership, nevertheless, the collective effect of these circumstances may be such as to support a finding of the existence of the parties' intent.36 Yet, in the case at bench, even the aforesaid circumstances when taken together are not persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was involved in the operations of Benguet Lumber, but in what capacity is unclear. We cannot discount the likelihood that as a member of the family, he occupied a niche above the rank-and-file employees. He would have enjoyed liberties otherwise unavailable were he not kin, such as his residence in the Benguet Lumber Company compound. He would have moral, if not actual, superiority over his fellow employees, thereby entitling him to exercise powers of supervision. It may even be that among his duties is to place orders with suppliers. Again, the circumstances proffered by petitioners do not provide a logical nexus to the conclusion desired; these are not inconsistent with the powers and duties of a manager, even in a business organized and run as informally as Benguet Lumber Company.

There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of. Hence, the petition must fail.

WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is herebyAFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners, vs. THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the National Internal Revenue Code 1 that the unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045. In due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the decision and action taken by respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact formed by petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of this case, although there might in fact be a co-ownership between the petitioners, there was no adequate basis for the conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS

IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their own personal funds they used in buying several real properties. They appointed their brother to manage their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants for several years and they gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded the payment of income tax on a corporation, among others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to the tax on corporations, the issue hinges on the meaning of the terms corporation and partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding taxable year from all

sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized but not including duly registered general co-partnerships (companies collectives), a tax upon such income equal to the sum of the following: ...

Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include duly registered general co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

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

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real estate for

P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transcations undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the property acquired by petitioners in February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of petitioners herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelists became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to, or on the causes for its continued existence. They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances were

present in the cases cited by petitioners herein, and, hence, those cases are not in point. 5

In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The business was under the management of one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived;

From the above it appears that the fact that those who agree to form a co- ownership share or do not share any profits made by the use of the property held in common does not convert their venture into a partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. This only means that, aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear intent to form a partnership, the existence of a juridical personality different from that of the individual partners, and the freedom to transfer or assign any interest in the property by one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)

It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock or capital, and no community of interest as principal proprietors in the business itself which the proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an agreement to share the profits and losses on the sale of land create a partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as tenants in

common, and to divide the profits of disposing of it, the brother and the other not being entitled to share in plaintiffs commission, no partnership existed as between the three parties, whatever their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally participating in both profits and losses; (c) and such a community of interest, as far as third persons are concerned as enables each party to make contract, manage the business, and dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners, though they may use it for the purpose of making gains; and they may, without becoming partners, agree among themselves as to the management, and use of such property and the application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have been formed, since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid obligation of the partnership p. 7 However, as petitioners have availed of the benefits of tax

amnesty as individual taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the corporate income tax liability in this case, without pronouncement as to costs.

SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners, vs. THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and Special Attorney Purificacion Ureta for respondent.

BARREDO, J.:p

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above, holding that petitioners have constituted an unregistered partnership and are, therefore, subject to the payment of the deficiency corporate income taxes assessed against them by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of Republic Act No. 2343 and the costs of the suit, 1 as well as the resolution of said court denying petitioners' motion for reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila for the settlement of her estate. Later, Lorenzo T. Oña the surviving spouse was appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator

submitted the project of partition, which was approved by the Court on May 16, 1949 (See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oña, were still minors when the project of partition was approved, Lorenzo T. Oña, their father and administrator of the estate, filed a petition in Civil Case No. 9637 of the Court of First Instance of Manila for appointment as guardian of said minors. On November 14, 1949, the Court appointed him guardian of the persons and property of the aforenamed minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have undivided one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses with a total assessed value of P17,590.00 and an undetermined amount to be collected from the War Damage Commission. Later, they received from said Commission the amount of P50,000.00, more or less. This amount was not divided among them but was used in the rehabilitation of properties owned by them in common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were acquired after the death of the decedent with money borrowed from the Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).

The project of partition also shows that the estate shares equally with Lorenzo T. Oña, the administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).

Although the project of partition was approved by the Court on May 16, 1949, no attempt was made to divide the properties therein listed. Instead, the properties remained under the management of Lorenzo T. Oña who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners' properties and investments gradually increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned from the following year-end balances:

Year Investment Land Building

Account Account Account

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as profits from installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of account kept by Lorenzo T. Oña where the corresponding shares of the petitioners in the net income for the year are also known. Every year, petitioners returned for income tax purposes their shares in the net income derived from said properties and securities and/or from transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income was always left in the hands of Lorenzo T. Oña who, as heretofore pointed out, invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that petitioners formed an unregistered partnership and therefore, subject to the corporate income tax, pursuant to Section 24, in relation

to Section 84(b), of the Tax Code. Accordingly, he assessed against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against the assessment and asked for reconsideration of the ruling of respondent that they have formed an unregistered partnership. Finding no merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for Respondent, June 12, 1961).

The original assessment was as follows:

1955

Net income as per investigation ................ P40,209.89 Income tax due thereon ............................... 8,042.00 25% surcharge .............................................. 2,010.50 Compromise for non-filing .......................... 50.00 Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00 25% surcharge .............................................. 3,462.25 Compromise for non-filing .......................... 50.00 Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned assessment refers solely to the income tax proper for the years 1955 and 1956 and the "Compromise for non-filing," the latter item obviously referring to the compromise in lieu of the criminal liability for failure of petitioners to file the corporate income tax returns for said years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)

Petitioners have assigned the following as alleged errors of the Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM (sic);

III.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;

V .

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the Court of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from the deceased Julia Buñales and the profits derived from transactions involving the same, or, must they be deemed to have formed an unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2) Assuming they have formed an unregistered partnership, should this not be only in the sense that they invested as a common fund the profits earned by the properties owned by them in common and the loans granted to them upon the security of the said properties, with the result that as far as their respective shares in the inheritance are concerned, the total income thereof should be considered as that of co-owners and not of the unregistered partnership? And (3) assuming again that they are taxable as an unregistered partnership, should not the various amounts already paid by them for the same years 1955 and 1956 as individual income taxes on their respective shares of the profits accruing from the properties they owned in common be deducted from the deficiency corporate taxes, herein involved, assessed against such unregistered partnership by the respondent Commissioner?

Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as early as May 16, 1949, and presumably petitioners have been holding their respective shares in their inheritance since those dates admittedly under the administration or management of the head of the family, the widower and father Lorenzo T. Oña, the assessment in question refers to the later years 1955 and 1956. We believe this point to be important because, apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he considered them as having formed an unregistered partnership. At least, there is nothing in the record indicating that an earlier assessment had already been made. Such being the case, and We see no reason how it could be otherwise, it is easily understandable why petitioners' position that they are co-owners and not unregistered co-partners, for the purposes of the impugned assessment, cannot be upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed earlier by the Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to the project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oña who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceed from the sales thereof in real

properties and securities," as a result of which said properties and investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956. And all these became possible because, admittedly, petitioners never actually received any share of the income or profits from Lorenzo T. Oña and instead, they allowed him to continue using said shares as part of the common fund for their ventures, even as they paid the corresponding income taxes on the basis of their respective shares of the profits of their common business as reported by the said Lorenzo T. Oña.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided among petitioners proportionately in accordance with their respective shares in the inheritance. In these circumstances, it is Our considered view that from the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oña as a common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of the above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the partition and distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs, obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-owners continues until the inheritance is actually and physically distributed among the heirs, for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding said shares under the common management of the administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the appellants therein to be unregistered co-partners for tax purposes, that their common fund "was not something they found already in existence" and that "it was not a property inherited by them pro indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in all instances where an inheritance is not actually divided, there can be no unregistered co-partnership. As already indicated, for tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for this is simple. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived," and, for that matter, on any other provision of said code on partnerships is unavailing. In Evangelista, supra, this Court clearly differentiated the concept of partnerships under the Civil Code from that of unregistered partnerships which are considered as "corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for instance, section

24 of said Code exempts from the aforementioned tax "duly registered general partnerships," which constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in confirmity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporation. Again, pursuant to said section 84(b),the term "corporation" includes, among others, "joint accounts,(cuentas en participacion)" and "associations", none of which has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a condition essential to the existence of the partnerships therein referred to. In fact, as above stated, "duly registered general co-partnerships" — which are possessed of the aforementioned personality — have been expressly excluded by law (sections 24 and 84[b]) from the connotation of the term "corporation." ....

xxx xxx xxx

Similarly, the American Law

... provides its own concept of a partnership. Under the term "partnership" it includes not only a partnership as known in common law but, as well, a syndicate, group, pool, joint venture, or other unincorporated organization which carries on any business, financial operation, or venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. ... . (7A Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on. ... . (8

Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis ours.)

For purposes of the tax on corporations, our National Internal Revenue Code includes these partnerships — with the exception only of duly registered general copartnerships — within the purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of the corporate taxes in question, of their inherited properties from those acquired by them subsequently, We consider as justified the following ratiocination of the Tax Court in denying their motion for reconsideration:

In connection with the second ground, it is alleged that, if there was an unregistered partnership, the holding should be limited to the business engaged in apart from the properties inherited by petitioners. In other words, the taxable income of the partnership should be limited to the income derived from the acquisition and sale of real properties and corporate securities and should not include the income derived from the inherited properties. It is admitted that the inherited properties and the income derived therefrom were used in the business of buying and selling other real properties and corporate securities. Accordingly, the partnership income must include not only the income derived from the purchase and sale of other properties but also the income of the inherited properties.

Besides, as already observed earlier, the income derived from inherited properties may be considered as individual income of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but the moment their respective known shares are used as part of the common assets of the heirs to be used in making profits, it is but proper that the income of such shares should be considered as the part of

the taxable income of an unregistered partnership. This, We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court. Pertinently, the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this Honorable Court that the herein petitioners have formed an unregistered partnership and, therefore, have to be taxed as such, it might be recalled that the petitioners in their individual income tax returns reported their shares of the profits of the unregistered partnership. We think it only fair and equitable that the various amounts paid by the individual petitioners as income tax on their respective shares of the unregistered partnership should be deducted from the deficiency income tax found by this Honorable Court against the unregistered partnership. (page 7, Memorandum for the Petitioner in Support of Their Motion for Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the partnership must be reduced by the amounts of income tax paid by each petitioner on his share of partnership profits. This is not correct; rather, it should be the other way around. The partnership profits distributable to the partners (petitioners herein) should be reduced by the amounts of income tax assessed against the partnership. Consequently, each of the petitioners in his individual capacity overpaid his income tax for the years in question, but the income tax due from the partnership has been correctly assessed. Since the individual income tax liabilities of petitioners are not in issue in this proceeding, it is not proper for the Court to pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as individual income tax cannot be credited as

part payment of the taxes herein in question. It is argued that to sanction the view of the Tax Court is to oblige petitioners to pay double income tax on the same income, and, worse, considering the time that has lapsed since they paid their individual income taxes, they may already be barred by prescription from recovering their overpayments in a separate action. We do not agree. As We see it, the case of petitioners as regards the point under discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the failure to pay the corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be reimbursed what he has erroneously paid, but the law is very clear that the claim and action for such reimbursement are subject to the bar of prescription. And since the period for the recovery of the excess income taxes in the case of herein petitioners has already lapsed, it would not seem right to virtually disregard prescription merely upon the ground that the reason for the delay is precisely because the taxpayers failed to make the proper return and payment of the corporate taxes legally due from them. In principle, it is but proper not to allow any relaxation of the tax laws in favor of persons who are not exactly above suspicion in their conduct vis-a-vis their tax obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with costs against petitioners.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-45425 April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants, vs. THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

Guillermo B. Reyes for appellants. Office of the Solicitor-General Tuason for appellee.

IMPERIAL, J.:

The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum of P1,863.44, with legal interest thereon, which they paid under protest by way of income tax. They appealed from the decision rendered in the case on October 23, 1936 by the Court of First Instance of the City of Manila, which dismissed the action with the costs against them.

The case was submitted for decision upon the following stipulation of facts:

Come now the parties to the above-mentioned case, through their respective undersigned attorneys, and hereby agree to respectfully submit to this Honorable Court the case upon the following statement of facts:

1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that defendant is the Collector of Internal Revenue of the Philippines;

2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the amounts as follows:

1. Jose Gatchalian ....................................................................................................

P0.18

2. Gregoria Cristobal ............................................................................................... .18

3. Saturnina Silva ....................................................................................................

.08

4. Guillermo Tapia ...................................................................................................

.13

5. Jesus Legaspi ......................................................................................................

.15

6. Jose Silva .............................................................................................................

.07

7. Tomasa Mercado ................................................................................................ .08

8. Julio Gatchalian ...................................................................................................

.13

9. Emiliana Santiago ................................................................................................ .13

10. Maria C. Legaspi ............................................................................................... .16

11. Francisco Cabral ............................................................................................... .13

12. Gonzalo Javier ....................................................................................................

.14

13. Maria Santiago ...................................................................................................

.17

14. Buenaventura Guzman .13

......................................................................................

15. Mariano Santos ................................................................................................. .14

Total .................................................................................................

.......

2.00

3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased, in the ordinary course of business, from one of the duly authorized agents of the National Charity Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2) and that the said ticket was registered in the name of Jose Gatchalian and Company;

4. That as a result of the drawing of the sweepstakes on December 15, 1934, the above-mentioned ticket bearing No. 178637 won one of the third prizes in the amount of P50,000 and that the corresponding check covering the above-mentioned prize of P50,000 was drawn by the National Charity Sweepstakes Office in favor of Jose Gatchalian & Company against the Philippine National Bank, which check was cashed during the latter part of December, 1934 by Jose Gatchalian & Company;

5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner Alfredo David to file the corresponding income tax return covering the prize won by Jose Gatchalian & Company and that on December 29, 1934, the said return was signed by Jose Gatchalian, a copy of which return is enclosed as Exhibit A and made a part hereof;

6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian & Company requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan, giving to said Jose Gatchalian & Company until January 20, 1935 within which to pay the said amount of P1,499.94, a copy of which letter marked Exhibit B is enclosed and made a part hereof;

7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a copy of which marked Exhibit C is attached and made a part hereof, requesting exemption from payment of the income tax to which reply there were enclosed fifteen

(15) separate individual income tax returns filed separately by each one of the plaintiffs, copies of which returns are attached and marked Exhibit D-1 to D-15, respectively, in order of their names listed in the caption of this case and made parts hereof; a statement of sale signed by Jose Gatchalian showing the amount put up by each of the plaintiffs to cover up the attached and marked as Exhibit E and made a part hereof; and a copy of the affidavit signed by Jose Gatchalian dated December 29, 1934 is attached and marked Exhibit F and made part thereof;

8. That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G is enclosed, denied plaintiffs' request of January 20, 1935, for exemption from the payment of tax and reiterated his demand for the payment of the sum of P1,499.94 as income tax and gave plaintiffs until February 10, 1935 within which to pay the said tax;

9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the defendant, notwithstanding subsequent demand made by defendant upon the plaintiffs through their attorney on March 23, 1935, a copy of which marked Exhibit H is enclosed, defendant on May 13, 1935 issued a warrant of distraint and levy against the property of the plaintiffs, a copy of which warrant marked Exhibit I is enclosed and made a part hereof;

10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs, the said plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi, paid under protest the sum of P601.51 as part of the tax and penalties to the municipal treasurer of Pulilan, Bulacan, as evidenced by official receipt No. 7454879 which is attached and marked Exhibit J and made a part hereof, and requested defendant that plaintiffs be allowed to pay under protest the balance of the tax and penalties by monthly installments;

11. That plaintiff's request to pay the balance of the tax and penalties was granted by defendant subject to the condition that plaintiffs file the usual bond secured by two solvent persons to guarantee prompt payment of each installments as it becomes due;

12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is enclosed and made a part hereof, to guarantee the payment of the balance of the alleged tax liability by monthly

installments at the rate of P118.70 a month, the first payment under protest to be effected on or before July 31, 1935;

13. That on July 16, 1935 the said plaintiffs formally protested against the payment of the sum of P602.51, a copy of which protest is attached and marked Exhibit L, but that defendant in his letter dated August 1, 1935 overruled the protest and denied the request for refund of the plaintiffs;

14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance with the terms and conditions of bond filed by them, the defendant in his letter dated July 23, 1935, copy of which is attached and marked Exhibit M, ordered the municipal treasurer of Pulilan, Bulacan to execute within five days the warrant of distraint and levy issued against the plaintiffs on May 13, 1935;

15. That in order to avoid annoyance and embarrassment arising from the levy of their property, the plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria Santiago and Emiliano Santiago, paid under protest to the municipal treasurer of Pulilan, Bulacan the sum of P1,260.93 representing the unpaid balance of the income tax and penalties demanded by defendant as evidenced by income tax receipt No. 35811 which is attached and marked Exhibit N and made a part hereof; and that on September 3, 1936, the plaintiffs formally protested to the defendant against the payment of said amount and requested the refund thereof, copy of which is attached and marked Exhibit O and made part hereof; but that on September 4, 1936, the defendant overruled the protest and denied the refund thereof; copy of which is attached and marked Exhibit P and made a part hereof; and

16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand eight hundred and sixty three pesos and forty-four centavos (P1,863.44) paid under protest by them but that defendant refused and still refuses to refund the said amount notwithstanding the plaintiffs' demands.

17. The parties hereto reserve the right to present other and additional evidence if necessary.

Exhibit E referred to in the stipulation is of the following tenor:

To whom it may concern:

I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the 11th day of August, 1934, I sold parts of my shares on ticket No. 178637 to the persons and for the amount indicated below and the part of may share remaining is also shown to wit:

Purchaser Amount Address

1. Mariano Santos ........................................... P0.14 Pulilan,

Bulacan.

2. Buenaventura Guzman ............................... .13 - Do -

3. Maria Santiago ............................................ .17 - Do -

4. Gonzalo Javier .............................................. .14 - Do -

5. Francisco Cabral .......................................... .13 - Do -

6. Maria C. Legaspi .......................................... .16 - Do -

7. Emiliana Santiago ......................................... .13 - Do -

8. Julio Gatchalian ............................................ .13 - Do -

9. Jose Silva ...................................................... .07 - Do -

10. Tomasa Mercado ....................................... .08 - Do -

11. Jesus Legaspi ............................................. .15 - Do -

12. Guillermo Tapia ........................................... .13 - Do -

13. Saturnina Silva ............................................ .08 - Do -

14. Gregoria Cristobal ....................................... .18 - Do -

15. Jose Gatchalian ............................................ .18 - Do -

2.00 Total cost of said

ticket; and that, therefore, the persons named above are entitled to the parts of whatever prize that might be won by said ticket.

Pulilan, Bulacan, P.I.

(Sgd.) JOSE GATCHALIAN

And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:

RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED JANUARY 19, 1935 SUBMITTED TO THE

COLLECTOR OF INTERNAL REVENUE.

Name Exhibit No.

Purchase

Price

Price

Won

Expenses

Net prize

1. Jose Gatchalian ..........................................

D-1 P0.18 P4,425 P 480 3,9

45

2. Gregoria Cristobal ...................................... D-2 .18 4,57

5 2,000 2,575

3. Saturnina Silva .............................................

D-3 .08 1,875 360 1,5

15

4. Guillermo Tapia D-4 .13 3,32 360 2,9

.......................................

... 5 65

5. Jesus Legaspi by Maria Cristobal ......... D-5 .15 3,82

5 720 3,105

6. Jose Silva ....................................................

D-6 .08 1,875 360 1,5

15

7. Tomasa Mercado ....................................... D-7 .07 1,87

5 360 1,515

8. Julio Gatchalian by Beatriz Guzman ....... D-8 .13 3,15

0 240 2,910

9. Emiliana Santiago ...................................... D-9 .13 3,32

5 360 2,965

10. Maria C. Legaspi ...................................... D-10 .16 4,10

0 960 3,140

11. Francisco Cabral ...................................... D-11 .13 3,32

5 360 2,965

12. Gonzalo Javier ..........................................

D-12 .14 3,325 360 2,9

65

13. Maria Santiago ..........................................

D-13 .17 4,350 360 3,9

90

14. Buenaventura Guzman ...........................

D-14 .13 3,325 360 2,9

65

15. Mariano Santos ........................................

D-15 .14 3,325 360 2,9

65

2.00

50,000

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The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to the two following: (1) Whether the plaintiffs formed a partnership, or merely a community of property without a personality of its own; in the first case it is admitted that the partnership thus formed is liable for the payment of income tax, whereas if there was merely a community of property, they are exempt from such payment; and (2) whether they should pay the tax collectively or whether the latter should be prorated among them and paid individually.

The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last amended by section 2 of Act No. 3761, reading as follows:

SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all sources by every corporation, joint-stock company, partnership, joint account (cuenta en participacion), association or insurance company, organized in the Philippine Islands, no matter how created or organized, but not including duly registered general copartnership (compañias colectivas), a tax of three per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all sources within the Philippine Islands by every corporation, joint-stock company, partnership, joint account (cuenta en participacion), association, or insurance company organized, authorized, or existing under the laws of any foreign country, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or

otherwise: Provided, however, That nothing in this section shall be construed as permitting the taxation of the income derived from dividends or net profits on which the normal tax has been paid.

The gain derived or loss sustained from the sale or other disposition by a corporation, joint-stock company, partnership, joint account (cuenta en participacion), association, or insurance company, or property, real, personal, or mixed, shall be ascertained in accordance with subsections (c) and (d) of section two of Act Numbered Two thousand eight hundred and thirty-three, as amended by Act Numbered Twenty-nine hundred and twenty-six.

The foregoing tax rate shall apply to the net income received by every taxable corporation, joint-stock company, partnership, joint account (cuenta en participacion), association, or insurance company in the calendar year nineteen hundred and twenty and in each year thereafter.

There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt from the payment of income tax under the law. But according to the stipulation facts the plaintiffs organized a partnership of a civil nature because each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the amount of P50,000 (article 1665, Civil Code). The partnership was not only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize, the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said partner, in the same capacity, collected the said check. All these circumstances repel the idea that the plaintiffs organized and formed a community of property only.

Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as amended by section 2 of Act No. 3761. There is no merit in plaintiff's contention that the tax should be prorated among them and paid individually, resulting in their exemption from the tax.

In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the plaintiffs appellants. So ordered.

Republic of the Philippines SUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and sisters, petitioners vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Demosthenes B. Gadioma for petitioners.

AQUINO, J.:

This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had acquired from their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to build their residences. The company sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to

individual income tax on their shares thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.

Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a mere capital gain of which ½ is taxable) and required them to pay deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.

Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented. Hence, the instant appeal.

We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit among themselves.

To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. Castan Tobeñas says:

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad presupone necesariamente la convencion, mentras que la comunidad puede existir y existe ordinariamente sin ela; y por razon del fin objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es solo mantener en su integridad la cosa comun y favorecer su conservacion.

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica señala como nota fundamental de diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme, la finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an unregistered partnership.

The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Oña vs.

** This view is supported by the following rulings of respondent Commissioner:

Co-owership distinguished from partnership.—We find that the case at bar is fundamentally similar to the De Leon case.

Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in questionpro-indiviso from their deceased parents; they did not contribute or invest additional ' capital to increase or expand the inherited properties; they merely continued dedicating the property to the use to which it had been put by their forebears; they individually reported in their tax returns their corresponding shares in the income and expenses of the 'hacienda', and they continued for many years the status of co-ownership in order, as conceded by respondent, 'to preserve its (the 'hacienda') value and to continue the existing contractual relations with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653, July 31, 1963).

All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Arañas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was held that they were taxable as an unregistered partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son purchased a lot and building, entrusted the administration of the building to an administrator and divided equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership.

In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the petitioners and whether he

paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.

SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-9996 October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner. Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor Felicisimo R. Rosete for Respondents.

CONCEPCION, J.:

This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a decision of the Court of Tax Appeals, the dispositive part of which reads:

FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent's assessment for the same in the total amount of P6,878.34, which is hereby affirmed and the petition for review filed by petitioner is hereby dismissed with costs against petitioners.

It appears from the stipulation submitted by the parties:

1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together with their personal monies was used by them for the purpose of buying real properties,.

2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq. m. including improvements thereon from the sum of P100,000.00; this property has an assessed value of P57,517.00 as of 1948;

3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this property has an assessed value of P82,255.00 as of 1948;

4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m. including improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1948;

5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including improvements thereon for P237,234.34. This property has an assessed value of P59,140.00 as of 1948;

6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to 'manage their properties with full power to lease; to collect and receive rents; to issue receipts therefor; in default of such payment, to bring suits against the defaulting tenants; to sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit all notes and checks for them;

7. That after having bought the above-mentioned real properties the petitioners had the same rented or leases to various tenants;

8. That from the month of March, 1945 up to an including December, 1945, the total amount collected as rents on their real properties was P9,599.00 while the expenses amounted to P3,650.00 thereby leaving them a net rental income of P5,948.33;

9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount was deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental income of P7,498.13;

10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35.

It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949, computed, according to assessment made by said officer, as follows:

INCOME TAXES

1945 14.84

1946 1,144.71

1947 10.34

1948 1,912.30

1949 1,575.90

Total including surcharge and compromise P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946 P37.50

1947 150.00

1948 150.00

1949 150.00

Total including penalty P527.00

RESIDENCE TAXES OF CORPORATION

1945 P38.75

1946 38.75

1947 38.75

1948 38.75

1949 38.75

Total including surcharge P193.75

TOTAL TAXES DUE P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved from the payment of the taxes in question, with costs against the respondent.

After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the respondent, and a petition for reconsideration and new trial having been subsequently denied, the case is now before Us for review at the instance of the petitioners.

The issue in this case whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers fixed tax. With respect to the tax on corporations, the issue hinges on the meaning of the terms "corporation" and "partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:

SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized but not including duly registered general co-partnerships (compañias colectivas), a tax upon such income equal to the sum of the following: . . .

SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations or insurance companies, but

does not include duly registered general copartnerships. (compañias colectivas).

Article 1767 of the Civil Code of the Philippines provides:

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

Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the property acquired by the petitioners in February, 1943. In other words, one cannot but perceive a character of habitually peculiar to business transactions engaged in the purpose of gain.

3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties were leased separately to several persons, who, from 1945 to 1948

inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business and enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to, or on the causes for its continued existence. They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances were present in the cases cited by petitioners herein, and, hence, those cases are not in point.

Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts performed by them, a legal entity, with a personality independent of that of its members, did not come into existence, and some of the characteristics of partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly registered general partnerships which constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in

section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes, among other, joint accounts, (cuentas en participation)" and "associations," none of which has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a condition essential to the existence of the partnerships therein referred to. In fact, as above stated, "duly registered general copartnerships" — which are possessed of the aforementioned personality — have been expressly excluded by law (sections 24 and 84 [b] from the connotation of the term "corporation" It may not be amiss to add that petitioners' allegation to the effect that their liability in connection with the leasing of the lots above referred to, under the management of one person — even if true, on which we express no opinion — tends to increase the similarity between the nature of their venture and that corporations, and is, therefore, an additional argument in favor of the imposition of said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from "partnerships". By specific provisions of said laws, such "corporations" include "associations, joint-stock companies and insurance companies." However, the term "association" is not used in the aforementioned laws.

. . . in any narrow or technical sense. It includes any organization, created for the transaction of designed affairs, or the attainment of some object, which like a corporation, continues notwithstanding that its members or participants change, and the affairs of which, like corporate affairs, are conducted by a single individual, a committee, a board, or some other group, acting in a representative capacity. It is immaterial whether such organization is created by an agreement, a declaration of trust, a statute, or otherwise. It includes a voluntary association, a joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the management type), an interinsuarance exchange operating through an attorney in fact, a partnership association, and any other type of organization (by whatever name known) which is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A Mertens Law of Federal Income Taxation, p. 788; emphasis supplied.).

Similarly, the American Law.

. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a partnership as known at common law but, as well, a syndicate, group, pool, joint venture or other unincorporated organizations which carries on any business financial operation, or venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's Law of Federal Income taxation, p. 789; emphasis supplied.)

The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis supplied.) .

For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships — with the exception only of duly registered general copartnerships — within the purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned and are subject to the income tax for corporations.

As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:

Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of five pesos and an annual additional tax which in no case, shall exceed one thousand pesos, in accordance with the following schedule: . . .

The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account (cuentas en participacion), association or insurance company, no matter how created or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and "partnership" are used

in both statutes with substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for corporations.

Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to section 194 (s) thereof:

'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing, or renting property or his own account as principal and holding himself out as a full or part time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year. . . (emphasis supplied.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners herein. It is so ordered.

THIRD DIVISION

[G.R. No. 112675. January 25, 1999]

AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER INSURANCE CO., INC.; CIBELES INSURANCE CORPORATION; COMMONWEALTH INSURANCE COMPANY; CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT INSURANCE & SURETY CORPORATION; DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES; EASTERN ASSURANCE COMPANY & SURETY CORP.; EMPIRE INSURANCE COMPANY; EQUITABLE INSURANCE CORPORATION; FEDERAL INSURANCE CORPORATION INC.; FGU INSURANCE CORPORATION; FIDELITY & SURETY COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS’ INSURANCE CO., INC.; GOVERNMENT SERVICE INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH INSURANCE CO., INC.; MERCANTILE INSURANCE CO., INC.; METROPOLITAN INSURANCE COMPANY; METRO-TAISHO INSURANCE CORPORATION; NEW ZEALAND INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE CORPORATION; PARAMOUNT INSURANCE CORPORATION; PEOPLE’S TRANS-EAST ASIA INSURANCE CORPORATION; PERLA COMPANIA DE SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL INSURANCE CORPORATION; PROVIDENT INSURANCE COMPANY OF THE PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE SURETY & INSURANCE COMPANY; RIZAL SURETY & INSURANCE COMPANY; SANPIRO INSURANCE CORPORATION; SEABOARD-EASTERN INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY & INSURANCE CO., INC.; STATE BONDING & INSURANCE CO., INC.; SUMMA INSURANCE CORPORATION; TABACALERA INSURANCE CO., INC.—all assessed as “POOL OF MACHINERY INSURERS,” petitioners, vs. COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

D E C I S I O N

PANGANIBAN, J.:

Pursuant to “reinsurance treaties,” a number of local insurance firms formed themselves into a “pool” in order to facilitate the handling of business contracted with a nonresident foreign reinsurance company. May the “clearing house” or “insurance pool” so formed be deemed a partnership or an association that is taxable as a corporation under the National Internal Revenue Code (NIRC)? Should the pool’s remittances to the member companies and to the said foreign firm be taxable as dividends? Under the facts of this case, has the government’s right to assess and collect said tax prescribed?

The Case

These are the main questions raised in the Petition for Review on Certiorari before us, assailing the October 11, 1993 Decision[1] of the Court of Appeals[2]in CA-GR SP 29502, which dismissed petitioners’ appeal of the October 19, 1992 Decision[3] of the Court of Tax Appeals[4] (CTA) which had previously sustained petitioners’ liability for deficiency income tax, interest and withholding tax. The Court of Appeals ruled:

“WHEREFORE, the petition is DISMISSED, with costs against petitioners.”[5]

The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution[6] denying reconsideration.

The Facts

The antecedent facts,[7] as found by the Court of Appeals, are as follows:

“The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors’ All Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance treaties

required petitioners to form a [p]ool. Accordingly, a pool composed of the petitioners was formed on the same day.

“On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an “Information Return of Organization Exempt from Income Tax” for the year ending in 1975, on the basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These assessments were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co.

“On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the petitioners, assessed as “Pool of Machinery Insurers,” to pay deficiency income tax, interest, and with[h]olding tax, itemized as follows:

Net income per information return P3,737,370.00

=========== Income tax due thereon P1,298,080.00 Add: 14% Int. fr. 4/15/76 to 4/15/79 545,193.60 TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE ===========

Dividend paid to Munich Reinsurance Company P3,728,412.00

===========

35% withholding tax at source due thereon P1,304,944.20 Add: 25% surcharge 326,236.05 14% interest from 1/25/76 to 1/25/79 137,019.14 Compromise penalty- non-filing of return 300.00 late payment 300.00 TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========

Dividend paid to Pool Members P 655,636.00 ===========

10% withholding tax at source due thereon P 65,563.60 Add: 25% surcharge 16,390.90 14% interest from 1/25/76 to 1/25/79 6,884.18 Compromise penalty- non-filing of return 300.00 late payment 300.00 TOTAL AMOUNT DUE & P 89,438.68

COLLECTIBLE ===========“[8]

The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation, and that the latter’s collection of premiums on behalf of its members, the ceding companies, was taxable income. It added that prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the taxes due, because “the taxpayer cannot be located at the address given in the information return filed.” Hence, this Petition for Review before us.[9]

The Issues

Before this Court, petitioners raise the following issues:

“1.Whether or not the Clearing House, acting as a mere agent and performing strictly administrative functions, and which did not insure or assume any risk in its own name, was a partnership or association subject to tax as a corporation;

“2.Whether or not the remittances to petitioners and MUNICHRE of their respective shares of reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were “dividends” subject to tax; and

“3.Whether or not the respondent Commissioner’s right to assess the Clearing House had already prescribed.”[10]

The Court’s Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable as a corporation, and that the government’s right to assess and collect the taxes had not prescribed.

First Issue: Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house was an informal partnership, which was taxable as a corporation under the NIRC. They point out that the reinsurance policies were written by them “individually and separately,” and that their liability was limited to the extent of their allocated share in the original risks thus reinsured.[11] Hence, the pool did not act or earn income as a reinsurer.[12] Its role was limited to its principal function of “allocating and distributing the risk(s) arising from the original insurance among the signatories to the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as records, maintenance, collection and custody of funds, etc.”[13]

Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share the same risk or solidary liability;[14] (2) there was no common fund;[15] (3) the executive board of the pool did not exercise control and management of its funds, unlike the board of directors of a corporation;[16] and (4) the pool or clearing house “was not and could not possibly have engaged in the business of reinsurance from which it could have derived income for itself.”[17]

The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency tasked with the enforcement of tax laws, is accorded much weight and even finality, when there is no showing that it is patently wrong,[18] particularly in this case where the findings and conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and the Court of Appeals.[19] Indeed,

“[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of its authority.”[20]

This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the internal revenue commissioner, committed no reversible error. Section 24 of the NIRC, as worded in the year ending 1975, provides:

“SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized, but not including duly registered general co-partnership (compañias colectivas), general professional partnerships, private educational institutions, and building and loan associations xxx.”

Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Parenthetically, the NLRC’s inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of 1997,[21] which amended the Tax Code. Pertinent provisions of the new law read as follows:

“SEC. 27. Rates of Income Tax on Domestic Corporations. --

(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22 (B) of this Code, and taxable under this Title as a corporation xxx.”

“SEC. 22. -- Definition. -- When used in this Title:

xxx xxx xxx

(B) The term ‘corporation’ shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships [or] a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract without the Government. ‘General professional partnerships’ are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

xxx xxx xxx."

Thus, the Court in Evangelista v. Collector of Internal Revenue[22] held that Section 24 covered these unregistered partnerships and even associations or joint accounts, which had no legal personalities apart from their individual members.[23] The Court of Appeals astutely applied Evangelista:[24]

“xxx Accordingly, a pool of individual real property owners dealing in real estate business was considered a corporation for purposes of the tax in sec. 24 of the Tax Code inEvangelista v. Collector of Internal Revenue, supra. The Supreme Court said:

‘The term ‘partnership’ includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on. * * * (8 Merten’s Law of Federal Income Taxation, p. 562 Note 63)’”

Article 1767 of the Civil Code recognizes the creation of a contract of partnership when “two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.”[25] Its requisites are: “(1) mutual contribution to a common stock, and (2) a joint interest in the profits.”[26] In other words, a partnership is formed when persons contract “to devote to a common purpose either money, property, or labor with the intention of dividing the profits between themselves.”[27] Meanwhile, an association implies associates who enter into a “joint enterprise x x x for the transaction of business.”[28]

In the case before us, the ceding companies entered into a Pool Agreement[29] or an association[30] that would handle all the insurance businesses covered under their quota-share reinsurance treaty[31] and surplus reinsurance treaty[32]with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC:

(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool.[33] This common fund pays for the administration and operation expenses of the pool.[34]

(2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies.[35]

(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial and economically useful to the business of the ceding

companies and Munich, because without it they would not have received their premiums. The ceding companies share “in the business ceded to the pool” and in the “expenses” according to a “Rules of Distribution” annexed to the Pool Agreement.[36] Profit motive or business is, therefore, the primordial reason for the pool’s formation. As aptly found by the CTA:

“xxx The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that of the pool being used in the transaction of business for profit. It is apparent, and petitioners admit, that their association or coaction was indispensable [to] the transaction of the business. x x x If together they have conducted business, profit must have been the object as, indeed, profit was earned. Though the profit was apportioned among the members, this is only a matter of consequence, as it implies that profit actually resulted.”[37]

The petitioners’ reliance on Pascual v. Commissioner[38] is misplaced, because the facts obtaining therein are not on all fours with the present case. In Pascual, there was no unregistered partnership, but merely a co-ownership which took up only two isolated transactions.[39] The Court of Appeals did not err in applying Evangelista,which involved a partnership that engaged in a series of transactions spanning more than ten years, as in the case before us.

Second Issue: Pool’s Remittances Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not dividends subject to tax. They insist that taxing such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and “would be tantamount to an illegal double taxation, as it would result in taxing the same premium income twice in the hands of the same taxpayer.”[40] Moreover, petitioners argue that since Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot be deemed dividends.[41] They add that even if such remittances were treated as dividends, they would have been exempt under the previously mentioned sections of the 1977 NIRC,[42] as well as Article 7 of paragraph 1[43] and Article 5 of paragraph 5[44] of the RP-West German Tax Treaty.[45]

Petitioners are clutching at straws. Double taxation means taxing the same property twice when it should be taxed only once. That is, “xxx taxing

the same person twice by the same jurisdiction for the same thing.”[46] In the instant case, the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends received by the said companies. Clearly, there is no double taxation here.

The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, “exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right.”[47] Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable, because these were not yet in effect when the income was earned and when the subject information return for the year ending 1975 was filed.

Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the exemptions claimed. Section 255 provides that no tax shall “xxx be paid upon reinsurance by any company that has already paid the tax xxx.” This cannot be applied to the present case because, as previously discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the latter cannot individually claim the income tax paid by the former as their own.

On the other hand, Section 24 (b) (1)[48] pertains to tax on foreign corporations; hence, it cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption based solely on this provision of the Tax Code, because the same subsection specifically taxes dividends, the type of remittances forwarded to it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of the ceding companies in the entity formed, pursuant to their reinsurance treaties which required the creation of said pool.

Under its pool arrangement with the ceding companies, Munich shared in their income and loss. This is manifest from a reading of Articles 3[49] and 10[50] of the Quota Share Reinsurance Treaty and Articles 3[51] and 10[52] of the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption claimed must be expressed in a language too plain to be mistaken.[53]

Finally, the petitioners’ claim that Munich is tax-exempt based on the RP-West German Tax Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in effect.[54]Although petitioners omitted in

their pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect only later, on December 14, 1984.[55]

Third Issue: Prescription

Petitioners also argue that the government’s right to assess and collect the subject tax had prescribed. They claim that the subject information return was filed by the pool on April 14, 1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that the five-year statute of limitations then provided in the NIRC had already lapsed, and that the internal revenue commissioner was already barred by prescription from making an assessment.[56]

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

Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the pool changed its address, for they stated that the pool’s information return filed in 1980 indicated therein its “present address.” The Court finds that this falls short of the requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law clearly states that the said period will be suspended only “if the taxpayer informs the Commissioner of Internal Revenue of any change in the address.”

WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated October 11, 1993 and November 15, 1993 are hereby AFFIRMED. Costs against petitioners.

SO ORDERED.

THIRD DIVISION

[G.R. No. 136448. November 3, 1999]

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

D E C I S I O N

PANGANIBAN, J.:

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

The Case

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

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

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

“WHEREFORE, the Court rules:

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

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as hereinafter made by reason of the special and unique facts and circumstances and the proceedings that transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the Agreement plus P68,000.00 representing the unpaid price of the floats not covered by said Agreement;

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

i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990;

ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990;

c. P50,000.00 as and for attorney’s fees, plus P8,500.00 representing P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of auction sale);

e. Cost of suit.

“With respect to the joint liability of defendants for the principal obligation or for the unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total amount of P600,045.00, this Court noted that these items were attached to guarantee any judgment that may be rendered in favor of the plaintiff but, upon agreement of the parties, and, to avoid further deterioration of the nets during the pendency of this case, it was ordered sold at public auction for not less thanP900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount ofP900,000.00 replaced the attached property as a guaranty for any judgment that plaintiff may be able to secure in this case with the ownership and possession of the nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in the public auction sale. It has also been

noted that ownership of the nets [was] retained by the plaintiff until full payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff attached its own properties. It [was] for this reason also that this Court earlier ordered the attachment bond filed by plaintiff to guaranty damages to defendants to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor of defendants.

“From the foregoing, it would appear therefore that whatever judgment the plaintiff may be entitled to in this case will have to be satisfied from the amount of P900,000.00 as this amount replaced the attached nets and floats. Considering, however, that the total judgment obligation as computed above would amount to only P840,216.92, it would be inequitable, unfair and unjust to award the excess to the defendants who are not entitled to damages and who did not put up a single centavo to raise the amount ofP900,000.00 aside from the fact that they are not the owners of the nets and floats. For this reason, the defendants are hereby relieved from any and all liabilities arising from the monetary judgment obligation enumerated above and for plaintiff to retain possession and ownership of the nets and floats and for the reimbursement of the P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED.” [3]

The Facts

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

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought against the three in their capacities as general partners, on the allegation that “Ocean Quest Fishing Corporation” was a nonexistent corporation as shown by a Certification from the Securities and Exchange Commission.[5] On September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by

attaching the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.

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

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

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the three[9] in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e) damages.[10] The Compromise Agreement provided:

“a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong Lim;

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

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

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint liability could be presumed from the equal distribution of the profit and loss.[12]

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

Ruling of the Court of Appeals

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

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

Hence, petitioner brought this recourse before this Court.[14]

The Issues

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

“I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.

“II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.

“III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER LIM’S GOODS.”

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

This Court’s Ruling

The Petition is devoid of merit.

First and Second Issues: Existence of a Partnership and Petitioner's Liability

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

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

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

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

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

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

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance the venture.

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

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

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

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

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

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

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing business, which they started by buying boats worthP3.35 million, financed by a loan secured from Jesus Lim who was petitioner’s brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term “common fund” under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an

intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership.

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

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

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

Compromise Agreement Not the Sole Basis of Partnership

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

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

Petitioner Was a Partner, Not a Lessor

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

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

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

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

Corporation by Estoppel

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

Section 21 of the Corporation Code of the Philippines provides:

“Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort

committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.

“One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.”

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

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

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

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it sold. The only question here is whether petitioner should be held jointly[18] liable with Chua and Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Since his name does not appear on any of the contracts and since he never directly transacted with the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier been proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the Writ has effectively stopped his use of the fishing vessel.

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

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

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

Third Issue: Validity of Attachment

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

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

SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-24193 June 28, 1968

MAURICIO AGAD, plaintiff-appellant, vs. SEVERINO MABATO and MABATO and AGAD COMPANY, defendants-appellees.

Angeles, Maskarino and Associates for plaintiff-appellant. Victorio S. Advincula for defendants-appellees.

CONCEPCION, C.J.:

In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of the Court of First Instance of Davao, we are called upon to determine the applicability of Article 1773 of our Civil Code to the contract of partnership on which the complaint herein is based.

Alleging that he and defendant Severino Mabato are — pursuant to a public instrument dated August 29, 1952, copy of which is attached to the complaint as Annex "A" — partners in a fishpond business, to the capital of which Agad contributed P1,000, with the right to receive 50% of the profits; that from 1952 up to and including 1956, Mabato who handled the partnership funds, had yearly rendered accounts of the operations of the partnership; and that, despite repeated demands, Mabato had failed and refused to render accounts for the years 1957 to 1963, Agad prayed in his complaint against Mabato and Mabato & Agad Company, filed on June 9, 1964, that judgment be rendered sentencing Mabato to pay him (Agad) the sum of P14,000, as his share in the profits of the partnership for the period from 1957 to 1963, in addition to P1,000 as attorney's fees, and ordering the dissolution of the partnership, as well as the winding up of its affairs by a receiver to be appointed therefor.

In his answer, Mabato admitted the formal allegations of the complaint and denied the existence of said partnership, upon the ground that the contract therefor had not been perfected, despite the execution of Annex "A", because

Agad had allegedly failed to give his P1,000 contribution to the partnership capital. Mabato prayed, therefore, that the complaint be dismissed; that Annex "A" be declared void ab initio; and that Agad be sentenced to pay actual, moral and exemplary damages, as well as attorney's fees.

Subsequently, Mabato filed a motion to dismiss, upon the ground that the complaint states no cause of action and that the lower court had no jurisdiction over the subject matter of the case, because it involves principally the determination of rights over public lands. After due hearing, the court issued the order appealed from, granting the motion to dismiss the complaint for failure to state a cause of action. This conclusion was predicated upon the theory that the contract of partnership, Annex "A", is null and void, pursuant to Art. 1773 of our Civil Code, because an inventory of the fishpond referred in said instrument had not been attached thereto. A reconsideration of this order having been denied, Agad brought the matter to us for review by record on appeal.

Articles 1771 and 1773 of said Code provide:

Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.

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

The issue before us hinges on whether or not "immovable property or real rights" have been contributed to the partnership under consideration. Mabato alleged and the lower court held that the answer should be in the affirmative, because "it is really inconceivable how a partnership engaged in the fishpond business could exist without said fishpond property (being) contributed to the partnership." It should be noted, however, that, as stated in Annex "A" the partnership was established "to operate a fishpond", not to "engage in a fishpond business". Moreover, none of the partners contributed either a fishpond or a real right to any fishpond. Their contributions were limited to the sum of P1,000 each. Indeed, Paragraph 4 of Annex "A" provides:

That the capital of the said partnership is Two Thousand (P2,000.00) Pesos Philippine Currency, of which One Thousand (P1,000.00) pesos has been contributed by Severino Mabato and One Thousand (P1,000.00) Pesos has been contributed by Mauricio Agad.

x x x x x x x x x

The operation of the fishpond mentioned in Annex "A" was the purpose of the partnership. Neither said fishpond nor a real right thereto was contributed to the partnership or became part of the capital thereof, even if a fishpond or a real right thereto could become part of its assets.

WHEREFORE, we find that said Article 1773 of the Civil Code is not in point and that, the order appealed from should be, as it is hereby set aside and the case remanded to the lower court for further proceedings, with the costs of this instance against defendant-appellee, Severino Mabato. It is so ordered.

Republic of the Philippines SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 97212 June 30, 1993

BENJAMIN YU, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS COMPANY LIMITED, WILLY CO, RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN JENG and CHEN HO-FU, respondents.

Jose C. Guico for petitioner.

Wilfredo Cortez for private respondents.

FELICIANO, J.:

Petitioner Benjamin Yu was formerly the Assistant General Manager of the marble quarrying and export business operated by a registered partnership with the firm name of "Jade Mountain Products Company Limited" ("Jade Mountain"). The partnership was originally organized on 28 June 1984 with Lea Bendal and Rhodora Bendal as general partners and Chin Shian Jeng, Chen Ho-Fu and Yu Chang, all citizens of the Republic of China (Taiwan), as limited partners. The partnership business consisted of exploiting a marble deposit found on land owned by the Sps. Ricardo and Guillerma Cruz, situated in Bulacan Province, under a Memorandum Agreement dated 26 June 1984 with the Cruz spouses. 1 The partnership had its main office in Makati, Metropolitan Manila.

Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant General Manager with a monthly salary of P4,000.00. According to petitioner Yu, however, he actually received only half of his stipulated monthly salary, since he had accepted the promise of the partners that the balance would be paid when the firm shall have secured additional operating funds from abroad. Benjamin Yu actually managed the operations and finances of the business; he had overall supervision of the workers at the

marble quarry in Bulacan and took charge of the preparation of papers relating to the exportation of the firm's products.

Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and Rhodora Bendal sold and transferred their interests in the partnership to private respondent Willy Co and to one Emmanuel Zapanta. Mr. Yu Chang, a limited partner, also sold and transferred his interest in the partnership to Willy Co. Between Mr. Emmanuel Zapanta and himself, private respondent Willy Co acquired the great bulk of the partnership interest. The partnership now constituted solely by Willy Co and Emmanuel Zapanta continued to use the old firm name of Jade Mountain, though they moved the firm's main office from Makati to Mandaluyong, Metropolitan Manila. A Supplement to the Memorandum Agreement relating to the operation of the marble quarry was entered into with the Cruz spouses in February of 1988. 2 The actual operations of the business enterprise continued as before. All the employees of the partnership continued working in the business, all, save petitioner Benjamin Yu as it turned out.

On 16 November 1987, having learned of the transfer of the firm's main office from Makati to Mandaluyong, petitioner Benjamin Yu reported to the Mandaluyong office for work and there met private respondent Willy Co for the first time. Petitioner was informed by Willy Co that the latter had bought the business from the original partners and that it was for him to decide whether or not he was responsible for the obligations of the old partnership, including petitioner's unpaid salaries. Petitioner was in fact not allowed to work anymore in the Jade Mountain business enterprise. His unpaid salaries remained unpaid. 3

On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid salaries accruing from November 1984 to October 1988, moral and exemplary damages and attorney's fees, against Jade Mountain, Mr. Willy Co and the other private respondents. The partnership and Willy Co denied petitioner's charges, contending in the main that Benjamin Yu was never hired as an employee by the present or new partnership. 4

In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner had been illegally dismissed. The Labor Arbiter decreed his reinstatement and awarded him his claim for unpaid salaries, backwages and attorney's fees. 5

On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the Labor Arbiter and dismissed petitioner's complaint in a Resolution dated 29 November 1990. The NLRC held that a new partnership

consisting of Mr. Willy Co and Mr. Emmanuel Zapanta had bought the Jade Mountain business, that the new partnership had not retained petitioner Yu in his original position as Assistant General Manager, and that there was no law requiring the new partnership to absorb the employees of the old partnership. Benjamin Yu, therefore, had not been illegally dismissed by the new partnership which had simply declined to retain him in his former managerial position or any other position. Finally, the NLRC held that Benjamin Yu's claim for unpaid wages should be asserted against the original members of the preceding partnership, but these though impleaded had, apparently, not been served with summons in the proceedings before the Labor Arbiter. 6

Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set aside and annul the Resolution of the NLRC as a product of grave abuse of discretion amounting to lack or excess of jurisdiction.

The basic contention of petitioner is that the NLRC has overlooked the principle that a partnership has a juridical personality separate and distinct from that of each of its members. Such independent legal personality subsists, petitioner claims, notwithstanding changes in the identities of the partners. Consequently, the employment contract between Benjamin Yu and the partnership Jade Mountain could not have been affected by changes in the latter's membership. 7

Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the partnership which had hired petitioner Yu as Assistant General Manager had been extinguished and replaced by a new partnerships composed of Willy Co and Emmanuel Zapanta; and (2) if indeed a new partnership had come into existence, whether petitioner Yu could nonetheless assert his rights under his employment contract as against the new partnership.

In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal effect of the changes in the membership of the partnership was the dissolution of the old partnership which had hired petitioner in 1984 and the emergence of a new firm composed of Willy Co and Emmanuel Zapanta in 1987.

The applicable law in this connection — of which the NLRC seemed quite unaware — is found in the Civil Code provisions relating to partnerships. Article 1828 of the Civil Code provides as follows:

Art. 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to

be associated in the carrying on as distinguished from the winding up of the business. (Emphasis supplied)

Article 1830 of the same Code must also be noted:

Art. 1830. Dissolution is caused:

(1) without violation of the agreement between the partners;

xxx xxx xxx

(b) by the express will of any partner, who must act in good faith, when no definite term or particular undertaking is specified;

xxx xxx xxx

(2) in contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this article, by the express will of any partner at any time;

xxx xxx xxx

(Emphasis supplied)

In the case at bar, just about all of the partners had sold their partnership interests (amounting to 82% of the total partnership interest) to Mr. Willy Co and Emmanuel Zapanta. The record does not show what happened to the remaining 18% of the original partnership interest. The acquisition of 82% of the partnership interest by new partners, coupled with the retirement or withdrawal of the partners who had originally owned such 82% interest, was enough to constitute a new partnership.

The occurrence of events which precipitate the legal consequence of dissolution of a partnership do not, however, automatically result in the

termination of the legal personality of the old partnership. Article 1829 of the Civil Code states that:

[o]n dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.

In the ordinary course of events, the legal personality of the expiring partnership persists for the limited purpose of winding up and closing of the affairs of the partnership. In the case at bar, it is important to underscore the fact that the business of the old partnership was simply continued by the new partners, without the old partnership undergoing the procedures relating to dissolution and winding up of its business affairs. In other words, the new partnership simply took over the business enterprise owned by the preceeding partnership, and continued using the old name of Jade Mountain Products Company Limited, without winding up the business affairs of the old partnership, paying off its debts, liquidating and distributing its net assets, and then re-assembling the said assets or most of them and opening a new business enterprise. There were, no doubt, powerful tax considerations which underlay such an informal approach to business on the part of the retiring and the incoming partners. It is not, however, necessary to inquire into such matters.

What is important for present purposes is that, under the above described situation, not only the retiring partners (Rhodora Bendal, et al.) but also the new partnership itself which continued the business of the old, dissolved, one, are liable for the debts of the preceding partnership. In Singson, et al. v. Isabela Saw Mill, et al, 8 the Court held that under facts very similar to those in the case at bar, a withdrawing partner remains liable to a third party creditor of the old partnership. 9 The liability of the new partnership, upon the other hand, in the set of circumstances obtaining in the case at bar, is established in Article 1840 of the Civil Code which reads as follows:

Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of the person or partnership continuing the business:

(1) When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative of the deceased partner assigns) his rights in partnership property to two or more of the partners, or to one or more of the partners and one or more third persons, if the business is continued without liquidation of the partnership affairs;

(2) When all but one partner retire and assign (or the representative of a deceased partner assigns) their rights in partnership property to the remaining partner, who continues the business without liquidation of partnership affairs, either alone or with others;

(3) When any Partner retires or dies and the business of the dissolved partnership is continued as set forth in Nos. 1 and 2 of this Article, with the consent of the retired partners or the representative of the deceased partner, but without any assignment of his right in partnership property;

(4) When all the partners or their representatives assign their rights in partnership property to one or more third persons who promise to pay the debts and who continue the business of the dissolved partnership;

(5) When any partner wrongfully causes a dissolution and remaining partners continue the businessunder the provisions of article 1837, second paragraph, No. 2, either alone or with others, andwithout liquidation of the partnership affairs;

(6) When a partner is expelled and the remaining partners continue the business either alone or with others without liquidation of the partnership affairs;

The liability of a third person becoming a partner in the partnership continuing the business, under this article, to the creditors of the dissolved partnership shall be satisfied out of the partnership property only, unless there is a stipulation to the contrary.

When the business of a partnership after dissolution is continued under any conditions set forth in this article the creditors of the retiring or deceased partner or the representative of the deceased partner, have a prior right to any claim of the retired partner or the representative of the deceased partner against the person or partnership continuing the business on account of the retired or deceased partner's interest in the dissolved partnership or on account of any consideration promised for such interest or for his right in partnership property.

Nothing in this article shall be held to modify any right of creditors to set assignment on the ground of fraud.

xxx xxx xxx

(Emphasis supplied)

Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade Mountain which continued the business of the old one without liquidation of the partnership affairs. Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin Yu in respect of his claim for unpaid wages, is entitled to priority vis-a-visany claim of any retired or previous partner insofar as such retired partner's interest in the dissolved partnership is concerned. It is not necessary for the Court to determine under which one or mare of the above six (6) paragraphs, the case at bar would fall, if only because the facts on record are not detailed with sufficient precision to permit such determination. It is, however, clear to the Court that under Article 1840 above, Benjamin Yu is entitled to enforce his claim for unpaid salaries, as well as other claims relating to his employment with the previous partnership, against the new Jade Mountain.

It is at the same time also evident to the Court that the new partnership was entitled to appoint and hire a new general or assistant general manager to run the affairs of the business enterprise take over. An assistant general manager belongs to the most senior ranks of management and a new partnership is entitled to appoint a top manager of its own choice and confidence. The non-retention of Benjamin Yu as Assistant General Manager did not therefore constitute unlawful termination, or termination without just or authorized cause. We think that the precise authorized cause for termination in the case at bar was redundancy. 10 The new partnership had its own new General Manager, apparently Mr. Willy Co, the principal new owner himself, who personally ran the business of Jade Mountain. Benjamin Yu's old position as Assistant General Manager thus became superfluous or redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation pay at the rate of one month's pay for each year of service that he had rendered to the old partnership, a fraction of at least six (6) months being considered as a whole year.

While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its employ, we consider that Benjamin Yu was very shabbily treated by the new partnership. The old partnership certainly benefitted from the services of Benjamin Yu who, as noted, previously ran the whole marble quarrying, processing and exporting enterprise. His work constituted value-added to the business itself and therefore, the new partnership similarly

benefitted from the labors of Benjamin Yu. It is worthy of note that the new partnership did not try to suggest that there was any cause consisting of some blameworthy act or omission on the part of Mr. Yu which compelled the new partnership to terminate his services. Nonetheless, the new Jade Mountain did not notify him of the change in ownership of the business, the relocation of the main office of Jade Mountain from Makati to Mandaluyong and the assumption by Mr. Willy Co of control of operations. The treatment (including the refusal to honor his claim for unpaid wages) accorded to Assistant General Manager Benjamin Yu was so summary and cavalier as to amount to arbitrary, bad faith treatment, for which the new Jade Mountain may legitimately be required to respond by paying moral damages. This Court, exercising its discretion and in view of all the circumstances of this case, believes that an indemnity for moral damages in the amount of P20,000.00 is proper and reasonable.

In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of six percent (6%) per annum on the amount of unpaid wages, and of his separation pay, computed from the date of promulgation of the award of the Labor Arbiter. Finally, because the new Jade Mountain compelled Benjamin Yu to resort to litigation to protect his rights in the premises, he is entitled to attorney's fees in the amount of ten percent (10%) of the total amount due from private respondent Jade Mountain.

WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the Comment filed by private respondents is treated as their Answer to the Petition for Certiorari, and the Decision of the NLRC dated 29 November 1990 is hereby NULLIFIED and SET ASIDE. A new Decision is hereby ENTERED requiring private respondent Jade Mountain Products Company Limited to pay to petitioner Benjamin Yu the following amounts:

(a) for unpaid wages which, as found by the Labor Arbiter, shall be computed at the rate of P2,000.00 per month multiplied by thirty-six (36) months (November 1984 to December 1987) in the total amount of P72,000.00;

(b) separation pay computed at the rate of P4,000.00 monthly pay multiplied by three (3) years of service or a total of P12,000.00;

(c) indemnity for moral damages in the amount of P20,000.00;

(d) six percent (6%) per annum legal interest computed on items (a) and (b) above, commencing on 26 December 1989 and until fully paid; and

(e) ten percent (10%) attorney's fees on the total amount due from private respondent Jade Mountain.

Costs against private respondents.

SO ORDERED.

SECOND DIVISION

[G.R. No. 30616 : December 10, 1990.]

192 SCRA 110

EUFRACIO D. ROJAS, Plaintiff-Appellant, vs. CONSTANCIO B. MAGLANA,Defendant-Appellee.

D E C I S I O N

PARAS, J.:

This is a direct appeal to this Court from a decision ** of the then Court of First Instance of Davao, Seventh Judicial District, Branch III, in Civil Case No. 3518, dismissing appellant's complaint.

As found by the trial court, the antecedent facts of the case are as follows:

On January 14, 1955, Maglana and Rojas executed their Articles of Co-Partnership (Exhibit "A") called Eastcoast Development Enterprises (EDE) with only the two of them as partners. The partnership EDE with an indefinite term of existence was duly registered on January 21, 1955 with the Securities and Exchange Commission.

One of the purposes of the duly-registered partnership was to "apply or secure timber and/or minor forests products licenses and concessions over public and/or private forest lands and to operate, develop and promote such forests rights and concessions." (Rollo, p. 114).

A duly registered Articles of Co-Partnership was filed together with an application for a timber concession covering the area located at Cateel and Baganga, Davao with the Bureau of Forestry which was approved and Timber License No. 35-56 was duly issued and became the basis of subsequent renewals made for and in behalf of the duly registered partnership EDE.

Under the said Articles of Co-Partnership, appellee Maglana shall manage the business affairs of the partnership, including marketing and handling of cash and is authorized to sign all papers and instruments relating to the partnership, while appellant Rojas shall be the logging superintendent and shall manage the logging operations of the partnership. It is also provided in the said articles of co-partnership that all profits and losses of the partnership shall be divided share and share alike between the partners.

During the period from January 14, 1955 to April 30, 1956, there was no operation of said partnership (Record on Appeal [R.A.] p. 946).

Because of the difficulties encountered, Rojas and Maglana decided to avail of the services of Pahamotang as industrial partner.

On March 4, 1956, Maglana, Rojas and Agustin Pahamotang executed their Articles of Co-Partnership (Exhibit "B" and Exhibit "C") under the firm name EASTCOAST DEVELOPMENT ENTERPRISES (EDE). Aside from the slight difference in the purpose of the second partnership which is to hold and secure renewal of timber license instead of to secure the license as in the first partnership and the term of the second partnership is fixed to thirty (30) years, everything else is the same.

The partnership formed by Maglana, Pahamotang and Rojas started operation on May 1, 1956, and was able to ship logs and realize profits. An income was derived from the proceeds of the logs in the sum of P643,633.07 (Decision, R.A. 919).

On October 25, 1956, Pahamotang, Maglana and Rojas executed a document entitled "CONDITIONAL SALE OF INTEREST IN THE PARTNERSHIP, EASTCOAST DEVELOPMENT ENTERPRISE" (Exhibits "C" and "D") agreeing among themselves that Maglana and Rojas shall purchase the interest, share and participation in the Partnership of Pahamotang assessed in the amount of P31,501.12. It was also agreed in the said instrument that after payment of the sum of P31,501.12 to Pahamotang including the amount of loan secured by Pahamotang in favor of the partnership, the two (Maglana and Rojas) shall become the owners of all equipment contributed by Pahamotang and the EASTCOAST DEVELOPMENT ENTERPRISES, the name also given to the second partnership, be dissolved. Pahamotang was paid in fun on August 31, 1957. No other rights and obligations accrued in the name of the second partnership (R.A. 921).

After the withdrawal of Pahamotang, the partnership was continued by Maglana and Rojas without the benefit of any written agreement or reconstitution of their written Articles of Partnership (Decision, R.A. 948).

On January 28, 1957, Rojas entered into a management contract with another logging enterprise, the CMS Estate, Inc. He left and abandoned the partnership (Decision, R.A. 947).

On February 4, 1957, Rojas withdrew his equipment from the partnership for use in the newly acquired area (Decision, R.A. 948).

The equipment withdrawn were his supposed contributions to the first partnership and was transferred to CMS Estate, Inc. by way of chattel mortgage (Decision, R.A. p. 948).

On March 17, 1957, Maglana wrote Rojas reminding the latter of his obligation to contribute, either in cash or in equipment, to the capital investments of the partnership as well as his obligation to perform his duties as logging superintendent.

Two weeks after March 17, 1957, Rojas told Maglana that he will not be able to comply with the promised contributions and he will not work as logging superintendent. Maglana then told Rojas that the latter's share will just be 20% of the net profits. Such was the sharing from 1957 to 1959 without complaint or dispute (Decision, R.A. 949).: nad

Meanwhile, Rojas took funds from the partnership more than his contribution. Thus, in a letter dated February 21, 1961 (Exhibit "10") Maglana notified Rojas that he dissolved the partnership (R.A. 949).

On April 7, 1961, Rojas filed an action before the Court of First Instance of Davao against Maglana for the recovery of properties, accounting, receivership and damages, docketed as Civil Case No. 3518 (Record on Appeal, pp. 1-26).

Rojas' petition for appointment of a receiver was denied (R.A. 894).

Upon motion of Rojas on May 23, 1961, Judge Romero appointed commissioners to examine the long and voluminous accounts of the Eastcoast Development Enterprises (Ibid., pp. 894-895).

The motion to dismiss the complaint filed by Maglana on June 21, 1961 (Ibid., pp. 102-114) was denied by Judge Romero for want of merit (Ibid., p. 125). Judge Romero also required the inclusion of the entire year 1961 in the report to be submitted by the commissioners (Ibid., pp. 138-143). Accordingly, the commissioners started examining the records and supporting papers of the partnership as well as the information furnished them by the parties, which were compiled in three (3) volumes.

On May 11, 1964, Maglana filed his motion for leave of court to amend his answer with counterclaim, attaching thereto the amended answer (Ibid., pp. 26-336), which was granted on May 22, 1964 (Ibid., p. 336).

On May 27, 1964, Judge M.G. Reyes approved the submitted Commissioners' Report (Ibid., p. 337).

On June 29, 1965, Rojas filed his motion for reconsideration of the order dated May 27, 1964 approving the report of the commissioners which was opposed by the appellee.

On September 19, 1964, appellant's motion for reconsideration was denied (Ibid., pp. 446-451).

A mandatory pre-trial was conducted on September 8 and 9, 1964 and the following issues were agreed upon to be submitted to the trial court:

(a) The nature of partnership and the legal relations of Maglana and Rojas after the dissolution of the second partnership;

(b) Their sharing basis: whether in proportion to their contribution or share and share alike;

(c) The ownership of properties bought by Maglana in his wife's name;

(d) The damages suffered and who should be liable for them; and

(e) The legal effect of the letter dated February 23, 1961 of Maglana dissolving the partnership (Decision, R.A. pp. 895-896).- nad

After trial, the lower court rendered its decision on March 11, 1968, the dispositive portion of which reads as follows:

"WHEREFORE, the above facts and issues duly considered, judgment is hereby rendered by the Court declaring that:

"1. The nature of the partnership and the legal relations of Maglana and Rojas after Pahamotang retired from the second partnership, that is, after August 31, 1957, when Pahamotang was finally paid his share — the partnership of the defendant and the plaintiff is one of a de facto and at will;

"2. Whether the sharing of partnership profits should be on the basis of computation, that is the ratio and proportion of their respective contributions, or on the basis of share and share alike — this covered by actual contributions of the plaintiff and the defendant and by their verbal agreement; that the sharing of profits and losses is on the basis of actual contributions; that from 1957 to 1959, the sharing is on the basis of 80% for the defendant and 20% for the plaintiff of the profits, but from 1960 to the date of dissolution, February 23, 1961, the plaintiff's share will be on the basis of his actual contribution and, considering his indebtedness to the partnership, the plaintiff is not entitled to any share in the profits of the said partnership;

"3. As to whether the properties which were bought by the defendant and placed in his or in his wife's name were acquired with partnership funds or with funds of the defendant and — the Court declares that there is no evidence that these properties were acquired by the partnership funds, and therefore the same should not belong to the partnership;

"4. As to whether damages were suffered and, if so, how much, and who caused them and who should be liable for them — the Court declares that neither parties is entitled to damages, for as already

stated above it is not a wise policy to place a price on the right of a person to litigate and/or to come to Court for the assertion of the rights they believe they are entitled to;

"5. As to what is the legal effect of the letter of defendant to the plaintiff dated February 23, 1961; did it dissolve the partnership or not — the Court declares that the letter of the defendant to the plaintiff dated February 23, 1961, in effect dissolved the partnership;

"6. Further, the Court relative to the canteen, which sells foodstuffs, supplies, and other merchandise to the laborers and employees of the Eastcoast Development Enterprises, — the COURT DECLARES THE SAME AS NOT BELONGING TO THE PARTNERSHIP;

"7. That the alleged sale of forest concession Exhibit 9-B, executed by Pablo Angeles David — is VALID AND BINDING UPON THE PARTIES AND SHOULD BE CONSIDERED AS PART OF MAGLANA'S CONTRIBUTION TO THE PARTNERSHIP;

"8. Further, the Court orders and directs plaintiff Rojas to pay or turn over to the partnership the amount of P69,000.00 the profits he received from the CMS Estate, Inc. operated by him;

"9. The claim that plaintiff Rojas should be ordered to pay the further sum of P85,000.00 which according to him he is still entitled to receive from the CMS Estate, Inc. is hereby denied considering that it has not yet been actually received, and further the receipt is merely based upon an expectancy and/or still speculative;

"10. The Court also directs and orders plaintiff Rojas to pay the sum of P62,988.19 his personal account to the partnership;

"11. The Court also credits the defendant the amount of P85,000.00 the amount he should have received as logging superintendent, and which was not paid to him, and this should be considered as part of Maglana's contribution likewise to the partnership; and

"12. The complaint is hereby dismissed with costs against the plaintiff.: rd

"SO ORDERED." Decision, Record on Appeal, pp. 985-989).

Rojas interposed the instant appeal.

The main issue in this case is the nature of the partnership and legal relationship of the Maglana-Rojas after Pahamotang retired from the second partnership.

The lower court is of the view that the second partnership superseded the first, so that when the second partnership was dissolved there was no written

contract of co-partnership; there was no reconstitution as provided for in the Maglana, Rojas and Pahamotang partnership contract. Hence, the partnership which was carried on by Rojas and Maglana after the dissolution of the second partnership was a de facto partnership and at will. It was considered as a partnership at will because there was no term, express or implied; no period was fixed, expressly or impliedly (Decision, R.A. pp. 962-963).

On the other hand, Rojas insists that the registered partnership under the firm name of Eastcoast Development Enterprises (EDE) evidenced by the Articles of Co-Partnership dated January 14, 1955 (Exhibit "A") has not been novated, superseded and/or dissolved by the unregistered articles of co-partnership among appellant Rojas, appellee Maglana and Agustin Pahamotang, dated March 4, 1956 (Exhibit "C") and accordingly, the terms and stipulations of said registered Articles of Co-Partnership (Exhibit "A") should govern the relations between him and Maglana. Upon withdrawal of Agustin Pahamotang from the unregistered partnership (Exhibit "C"), the legally constituted partnership EDE (Exhibit "A") continues to govern the relations between them and it was legal error to consider a de facto partnership between said two partners or a partnership at will. Hence, the letter of appellee Maglana dated February 23, 1961, did not legally dissolve the registered partnership between them, being in contravention of the partnership agreement agreed upon and stipulated in their Articles of Co-Partnership (Exhibit "A"). Rather, appellant is entitled to the rights enumerated in Article 1837 of the Civil Code and to the sharing profits between them of "share and share alike" as stipulated in the registered Articles of Co-Partnership (Exhibit "A").

After a careful study of the records as against the conflicting claims of Rojas and Maglana, it appears evident that it was not the intention of the partners to dissolve the first partnership, upon the constitution of the second one, which they unmistakably called an "Additional Agreement" (Exhibit "9-B") (Brief for Defendant-Appellee, pp. 24-25). Except for the fact that they took in one industrial partner; gave him an equal share in the profits and fixed the term of the second partnership to thirty (30) years, everything else was the same. Thus, they adopted the same name, EASTCOAST DEVELOPMENT ENTERPRISES, they pursued the same purposes and the capital contributions of Rojas and Maglana as stipulated in both partnerships call for the same amounts. Just as important is the fact that all subsequent renewals of Timber License No. 35-36 were secured in favor of the First Partnership, the original licensee. To all intents and purposes therefore, the First Articles of Partnership were only amended, in the form of Supplementary Articles of Co-Partnership (Exhibit "C") which was never registered (Brief for Plaintiff-Appellant, p. 5). Otherwise stated, even during the existence of the second partnership, all business transactions were carried out under the duly

registered articles. As found by the trial court, it is an admitted fact that even up to now, there are still subsisting obligations and contracts of the latter (Decision, R.A. pp. 950-957). No rights and obligations accrued in the name of the second partnership except in favor of Pahamotang which was fully paid by the duly registered partnership (Decision, R.A., pp. 919-921).

On the other hand, there is no dispute that the second partnership was dissolved by common consent. Said dissolution did not affect the first partnership which continued to exist. Significantly, Maglana and Rojas agreed to purchase the interest, share and participation in the second partnership of Pahamotang and that thereafter, the two (Maglana and Rojas) became the owners of equipment contributed by Pahamotang. Even more convincing, is the fact that Maglana on March 17, 1957, wrote Rojas, reminding the latter of his obligation to contribute either in cash or in equipment, to the capital investment of the partnership as well as his obligation to perform his duties as logging superintendent. This reminder cannot refer to any other but to the provisions of the duly registered Articles of Co-Partnership. As earlier stated, Rojas replied that he will not be able to comply with the promised contributions and he will not work as logging superintendent. By such statements, it is obvious that Roxas understood what Maglana was referring to and left no room for doubt that both considered themselves governed by the articles of the duly registered partnership.

Under the circumstances, the relationship of Rojas and Maglana after the withdrawal of Pahamotang can neither be considered as a De Facto Partnership, nor a Partnership at Will, for as stressed, there is an existing partnership, duly registered.

As to the question of whether or not Maglana can unilaterally dissolve the partnership in the case at bar, the answer is in the affirmative.

Hence, as there are only two parties when Maglana notified Rojas that he dissolved the partnership, it is in effect a notice of withdrawal.

Under Article 1830, par. 2 of the Civil Code, even if there is a specified term, one partner can cause its dissolution by expressly withdrawing even before the expiration of the period, with or without justifiable cause. Of course, if the cause is not justified or no cause was given, the withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm. With his withdrawal, the number of members is decreased, hence, the dissolution. And in whatever way he may view the situation, the conclusion is inevitable that Rojas and Maglana shall be guided in the liquidation of the partnership by the provisions of its duly registered Articles of Co-Partnership; that is, all profits and losses of the partnership shall be divided "share and share alike" between the partners.

But an accounting must first be made and which in fact was ordered by the trial court and accomplished by the commissioners appointed for the purpose.

On the basis of the Commissioners' Report, the corresponding contribution of the partners from 1956-1961 are as follows: Eufracio Rojas who should have contributed P158,158.00, contributed only P18,750.00 while Maglana who should have contributed P160,984.00, contributed P267,541.44 (Decision, R.A. p. 976). It is a settled rule that 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 (Article 1786, Civil Code) and for interests and damages from the time he should have complied with his obligation (Article 1788, Civil Code) (Moran, Jr. v. Court of Appeals, 133 SCRA 94 [1984]). Being a contract of partnership, each partner must share in the profits and losses of the venture. That is the essence of a partnership (Ibid., p. 95).

Thus, as reported in the Commissioners' Report, Rojas is not entitled to any profits. In their voluminous reports which was approved by the trial court, they showed that on 50-50% basis, Rojas will be liable in the amount of P131,166.00; on 80-20%, he will be liable for P40,092.96 and finally on the basis of actual capital contribution, he will be liable for P52,040.31.

Consequently, except as to the legal relationship of the partners after the withdrawal of Pahamotang which is unquestionably a continuation of the duly registered partnership and the sharing of profits and losses which should be on the basis of share and share alike as provided for in the duly registered Articles of Co-Partnership, no plausible reason could be found to disturb the findings and conclusions of the trial court.: nad

As to whether Maglana is liable for damages because of such withdrawal, it will be recalled that after the withdrawal of Pahamotang, Rojas entered into a management contract with another logging enterprise, the CMS Estate, Inc., a company engaged in the same business as the partnership. He withdrew his equipment, refused to contribute either in cash or in equipment to the capital investment and to perform his duties as logging superintendent, as stipulated in their partnership agreement. The records also show that Rojas not only abandoned the partnership but also took funds in an amount more than his contribution (Decision, R.A., p. 949).

In the given situation Maglana cannot be said to be in bad faith nor can he be liable for damages.

PREMISES CONSIDERED, the assailed decision of the Court of First Instance of Davao, Branch III, is hereby MODIFIED in the sense that the duly registered partnership of Eastcoast Development Enterprises continued to exist until liquidated and that the sharing basis of the partners should be on

share and share alike as provided for in its Articles of Partnership, in accordance with the computation of the commissioners. We also hereby AFFIRM the decision of the trial court in all other respects.: nad

SO ORDERED.

THIRD DIVISION

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

FERNANDO SANTOS, petitioner, vs. Spouses ARSENIO and NIEVES REYES, respondents.

D E C I S I O N

PANGANIBAN, J.:

As a general rule, the factual findings of the Court of Appeals affirming those of the trial court are binding on the Supreme Court. However, there are several exceptions to this principle. In the present case, we find occasion to apply both the rule and one of the exceptions.

The Case

Before us is a Petition for Review on Certiorari assailing the November 28, 1997 Decision,[1] as well as the August 17, 1998 and the October 9, 1998 Resolutions,[2]issued by the Court of Appeals (CA) in CA-GR CV No. 34742. The Assailed Decision disposed as follows:

“WHEREFORE, the decision appealed from is AFFIRMED save as for the counterclaim which is hereby DISMISSED. Costs against [petitioner].”[3]

Resolving respondent’s Motion for Reconsideration, the August 17, 1998 Resolution ruled as follows:

“WHEREFORE, [respondents’] motion for reconsideration is GRANTED. Accordingly, the court’s decision dated November 28, 1997 is hereby MODIFIED in that the decision appealed from is AFFIRMED in toto, with costs against [petitioner].”[4]

The October 9, 1998 Resolution denied “for lack of merit” petitioner’s Motion for Reconsideration of the August 17, 1998 Resolution.[5]

The Facts

The events that led to this case are summarized by the CA as follows:

“Sometime in June, 1986, [Petitioner] Fernando Santos and [Respondent] Nieves Reyes were introduced to each other by one Meliton Zabat regarding a lending business venture proposed by Nieves. It was verbally agreed that [petitioner would] act as financier while [Nieves] and Zabat [would] take charge of solicitation of members and collection of loan payments. The venture was launched on June 13, 1986, with the understanding that [petitioner] would receive 70% of the profits while x x x Nieves and Zabat would earn 15% each.

“In July, 1986, x x x Nieves introduced Cesar Gragera to [petitioner]. Gragera, as chairman of the Monte Maria Development Corporation[6] (Monte Maria, for brevity), sought short-term loans for members of the corporation. [Petitioner] and Gragera executed an agreement providing funds for Monte Maria’s members. Under the agreement, Monte Maria, represented by Gragera, was entitled to P1.31 commission per thousand paid daily to [petitioner] (Exh. ‘A’). x x x Nieves kept the books as representative of [petitioner] while [Respondent] Arsenio, husband of Nieves, acted as credit investigator.

“On August 6, 1986, [petitioner], x x x [Nieves] and Zabat executed the ‘Article of Agreement’ which formalized their earlier verbal arrangement.

“[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in the same lending business in competition with their partnership[.] Zabat was thereby expelled from the partnership. The operations with Monte Maria continued.

“On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money and damages. [Petitioner] charged [respondents], allegedly in their capacities as employees of [petitioner], with having misappropriated funds intended for Gragera for the period July 8, 1986 up to March 31, 1987. Upon Gragera’s complaint that his commissions were inadequately remitted, [petitioner] entrusted P200,000.00 to x x x Nieves to be given to Gragera. x x x Nieves allegedly failed to account for the amount. [Petitioner] asserted that after examination of the records, he found that of the total amount of P4,623,201.90 entrusted to [respondents], only P3,068,133.20 was remitted to Gragera, thereby leaving the balance of P1,555,065.70 unaccounted for.

“In their answer, [respondents] asserted that they were partners and not mere employees of [petitioner]. The complaint, they alleged, was filed to preempt and prevent them from claiming their rightful share to the profits of the partnership.

“x x x Arsenio alleged that he was enticed by [petitioner] to take the place of Zabat after [petitioner] learned of Zabat’s activities. Arsenio resigned from his job at the Asian Development Bank to join the partnership.

“For her part, x x x Nieves claimed that she participated in the business as a partner, as the lending activity with Monte Maria originated from her initiative. Except for the limited period of July 8, 1986 through August 20, 1986, she did not handle sums intended for Gragera. Collections were turned over to Gragera because he guaranteed 100% payment of all sums loaned by Monte Maria. Entries she made on worksheets were based on this assumptive 100% collection of all loans. The loan releases were made less Gragera’s agreed commission. Because of this arrangement, she neither received payments from borrowers nor remitted any amount to Gragera. Her job was merely to make worksheets (Exhs. ‘15’ to ‘15-DDDDDDDDDD’) to convey to [petitioner] how much he would earn if all the sums guaranteed by Gragera were collected.

“[Petitioner] on the other hand insisted that [respondents] were his mere employees and not partners with respect to the agreement with Gragera. He claimed that after he discovered Zabat’s activities, he ceased infusing funds, thereby causing the extinguishment of the partnership. The agreement with Gragera was a distinct partnership [from] that of [respondent] and Zabat. [Petitioner] asserted that [respondents] were hired as salaried employees with respect to the partnership between [petitioner] and Gragera.

“[Petitioner] further asserted that in Nieves’ capacity as bookkeeper, she received all payments from which Nieves deducted Gragera’s commission. The commission would then be remitted to Gragera. She likewise determined loan releases.

“During the pre-trial, the parties narrowed the issues to the following points: whether [respondents] were employees or partners of [petitioner], whether [petitioner] entrusted money to [respondents] for delivery to Gragera, whether the P1,555,068.70 claimed under the complaint was actually remitted to Gragera and whether [respondents] were entitled to their counterclaim for share in the profits.”[7]

Ruling of the Trial Court

In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere employees, of petitioner. It further ruled that Gragera was only a commission agent of petitioner, not his partner. Petitioner moreover failed to prove that he had entrusted any money to Nieves. Thus, respondents’ counterclaim for their share in the partnership and for damages was granted. The trial court disposed as follows:

“39. WHEREFORE, the Court hereby renders judgment as follows:

39.1. THE SECOND AMENDED COMPLAINT dated July 26, 1989 is DISMISSED.

39.2. The [Petitioner] FERNANDO J. SANTOS is ordered to pay the [Respondent] NIEVES S. REYES, the following:

39.2.1. P3,064,428.00 - The 15 percent share of the [respondent] NIEVES S. REYES in the profits of

her joint venture with the [petitioner].

39.2.2. Six (6) percent of - As damages from P3,064,428.00 August 3, 1987 until theP3,064,428.00 is fully paid.

39.2.3. P50,000.00 - As moral damages

39.2.4. P10,000.00 - As exemplary damages

39.3. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondent] ARSENIO REYES, the following:

39.3.1. P2,899,739.50 - The balance of the 15 percent share of the [respondent] ARSENIO REYES in the profits of his joint venture with the [petitioner].

39.3.2. Six (6) percent of

- As damages from P2,899,739.50 August 3, 1987 until theP2,899,739.50 is fully paid.

39.3.3. P25,000.00 - As moral damages

39.3.4. P10,000.00 - As exemplary damages

39.4. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondents]:

39.4.1. P50,000.00 - As attorney’s fees; and

39.4.2 The cost of the suit.”[8]

Ruling of the Court of Appeals

On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents was dismissed. Upon the latter’s Motion for Reconsideration, however, the trial court’s Decision was reinstated in toto. Subsequently, petitioner’s own Motion for Reconsideration was denied in the CA Resolution of October 9, 1998.

The CA ruled that the following circumstances indicated the existence of a partnership among the parties: (1) it was Nieves who broached to petitioner the idea of starting a money-lending business and introduced him to Gragera; (2) Arsenio received “dividends” or “profit-shares” covering the period July 15 to August 7, 1986 (Exh. “6”); and (3) the partnership contract was executed

after the Agreement with Gragera and petitioner and thus showed the parties’ intention to consider it as a transaction of the partnership. In their common venture, petitioner invested capital while respondents contributed industry or services, with the intention of sharing in the profits of the business.

The CA disbelieved petitioner’s claim that Nieves had misappropriated a total of P200,000 which was supposed to be delivered to Gragera to cover unpaid commissions. It was his task to collect the amounts due, while hers was merely to prepare the daily cash flow reports (Exhs. “15-15DDDDDDDDDD”) to keep track of his collections.

Hence, this Petition.[9]

Issue

Petitioner asks this Court to rule on the following issues:[10]

“Whether or not Respondent Court of Appeals acted with grave abuse of discretion tantamount to excess or lack of jurisdiction in:

1. Holding that private respondents were partners/joint venturers and not employees of Santos in connection with the agreement between Santos and Monte Maria/Gragera;

2. Affirming the findings of the trial court that the phrase ‘Received by’ on documents signed by Nieves Reyes signified receipt of copies of the documents and not of the sums shown thereon;

3. Affirming that the signature of Nieves Reyes on Exhibit ‘E’ was a forgery;

4. Finding that Exhibit ‘H’ [did] not establish receipt by Nieves Reyes of P200,000.00 for delivery to Gragera;

5. Affirming the dismissal of Santos’ [Second] Amended Complaint;

6. Affirming the decision of the trial court, upholding private respondents’ counterclaim;

7. Denying Santos’ motion for reconsideration dated September 11, 1998.”

Succinctly put, the following were the issues raised by petitioner: (1) whether the parties’ relationship was one of partnership or of employer-employee; (2) whether Nieves misappropriated the sums of money allegedly

entrusted to her for delivery to Gragera as his commissions; and (3) whether respondents were entitled to the partnership profits as determined by the trial court.

The Court’s Ruling

The Petition is partly meritorious.

First Issue:

Business Relationship

Petitioner maintains that he employed the services of respondent spouses in the money-lending venture with Gragera, with Nieves as bookkeeper and Arsenio as credit investigator. That Nieves introduced Gragera to Santos did not make her a partner. She was only a witness to the Agreement between the two. Separate from the partnership between petitioner and Gragera was that which existed among petitioner, Nieves and Zabat, a partnership that was dissolved when Zabat was expelled.

On the other hand, both the CA and the trial court rejected petitioner’s contentions and ruled that the business relationship was one of partnership. We quote from the CA Decision, as follows:

“[Respondents] were industrial partners of [petitioner]. x x x Nieves herself provided the initiative in the lending activities with Monte Maria. In consonance with the agreement between appellant, Nieves and Zabat (later replaced by Arsenio), [respondents] contributed industry to the common fund with the intention of sharing in the profits of the partnership. [Respondents] provided services without which the partnership would not have [had] the wherewithal to carry on the purpose for which it was organized and as such [were] considered industrial partners (Evangelista v. Abad Santos, 51 SCRA 416 [1973]).

“While concededly, the partnership between [petitioner,] Nieves and Zabat was technically dissolved by the expulsion of Zabat therefrom, the remaining partners simply continued the business of the partnership without undergoing the procedure relative to dissolution. Instead, they invited Arsenio to participate as a partner in their operations. There was therefore, no intent to

dissolve the earlier partnership. The partnership between [petitioner,] Nieves and Arsenio simply took over and continued the business of the former partnership with Zabat, one of the incidents of which was the lending operations with Monte Maria.

x x x x x x x x x

“Gragera and [petitioner] were not partners. The money-lending activities undertaken with Monte Maria was done in pursuit of the business for which the partnership between [petitioner], Nieves and Zabat (later Arsenio) was organized. Gragera who represented Monte Maria was merely paid commissions in exchange for the collection of loans. The commissions were fixed on gross returns, regardless of the expenses incurred in the operation of the business. The sharing of gross returns does not in itself establish a partnership.”[11]

We agree with both courts on this point. By the contract of partnership, two or more persons bind themselves to contribute money, property or industry to a common fund, with the intention of dividing the profits among themselves.[12] The “Articles of Agreement” stipulated that the signatories shall share the profits of the business in a 70-15-15 manner, with petitioner getting the lion’s share.[13] This stipulation clearly proved the establishment of a partnership.

We find no cogent reason to disagree with the lower courts that the partnership continued lending money to the members of the Monte Maria Community Development Group, Inc., which later on changed its business name to Private Association for Community Development, Inc. (PACDI). Nieves was not merely petitioner’s employee. She discharged her bookkeeping duties in accordance with paragraphs 2 and 3 of the Agreement, which states as follows:

“2. That the SECOND PARTY and THIRD PARTY shall handle the solicitation and screening of prospective borrowers, and shall x x x each be responsible in handling the collection of the loan payments of the borrowers that they each solicited.

“3. That the bookkeeping and daily balancing of account of the business operation shall be handled by the SECOND PARTY.”[14]

The “Second Party” named in the Agreement was none other than Nieves Reyes. On the other hand, Arsenio’s duties as credit investigator are subsumed under the phrase “screening of prospective borrowers.” Because of this Agreement and the disbursement of monthly “allowances” and “profit

shares” or “dividends” (Exh. “6”) to Arsenio, we uphold the factual finding of both courts that he replaced Zabat in the partnership.

Indeed, the partnership was established to engage in a money-lending business, despite the fact that it was formalized only after the Memorandum of Agreement had been signed by petitioner and Gragera. Contrary to petitioner’s contention, there is no evidence to show that a different business venture is referred to in this Agreement, which was executed on August 6, 1986, or about a month after the Memorandum had been signed by petitioner and Gragera on July 14, 1986. The Agreement itself attests to this fact:

“WHEREAS, the parties have decided to formalize the terms of their business relationship in order that their respective interests may be properly defined and established for their mutual benefit and understanding.”[15]

Second Issue:

No Proof of Misappropriation of Gragera’s Unpaid Commission

Petitioner faults the CA finding that Nieves did not misappropriate money intended for Gragera’s commission. According to him, Gragera remitted his daily collection to Nieves. This is shown by Exhibit “B” (the “Schedule of Daily Payments”), which bears her signature under the words “received by.” For the period July 1986 to March 1987, Gragera should have earned a total commission of P4,282,429.30. However, only P3,068,133.20 was received by him. Thus, petitioner infers that she misappropriated the difference of P1,214,296.10, which represented the unpaid commissions. Exhibit “H” is an untitled tabulation which, according to him, shows that Gragera was also entitled to a commission of P200,000, an amount that was never delivered by Nieves.[16]

On this point, the CA ruled that Exhibits “B,” “F,” “E” and “H” did not show that Nieves received for delivery to Gragera any amount from which the P1,214,296.10 unpaid commission was supposed to come, and that such exhibits were insufficient proof that she had embezzled P200,000. Said the CA:

“The presentation of Exhibit “D” vaguely denominated as ‘members ledger’ does not clearly establish that Nieves received amounts from Monte Maria’s members. The document does not clearly state what amounts the entries thereon represent. More importantly, Nieves made the entries for the limited

period of January 11, 1987 to February 17, 1987 only while the rest were made by Gragera’s own staff.

“Neither can we give probative value to Exhibit ‘E’ which allegedly shows acknowledgment of the remittance of commissions to Verona Gonzales. The document is a private one and its due execution and authenticity have not been duly proved as required in [S]ection 20, Rule 132 of the Rules of Court which states:

‘Sec. 20. Proof of Private Document – Before any private document offered as authentic is received in evidence, its due execution and authenticity must be proved either:

(a) By anyone who saw the document executed or written; or

(b) By evidence of the genuineness of the signature or handwriting of the maker.

‘Any other private document need only be identified as that which it is claimed to be.’

“The court a quo even ruled that the signature thereon was a forgery, as it found that:

‘x x x. But NIEVES denied that Exh. E-1 is her signature; she claimed that it is a forgery. The initial stroke of Exh. E-1 starts from up and goes downward. The initial stroke of the genuine signatures of NIEVES (Exhs. A-3, B-1, F-1, among others) starts from below and goes upward. This difference in the start of the initial stroke of the signatures Exhs. E-1 and of the genuine signatures lends credence to Nieves’ claim that the signature Exh. E-1 is a forgery.’

x x x x x x x x x

“Nieves’ testimony that the schedules of daily payment (Exhs. ‘B’ and ‘F’) were based on the predetermined 100% collection as guaranteed by Gragera is credible and clearly in accord with the evidence. A perusal of Exhs. “B” and “F” as well as Exhs. ‘15’ to 15-DDDDDDDDDD’ reveal that the entries were indeed based on the 100% assumptive collection guaranteed by Gragera. Thus, the total amount recorded on Exh. ‘B’ is exactly the number of borrowers multiplied by the projected collection ofP150.00 per borrower. This holds true for Exh. ‘F.’

“Corollarily, Nieves’ explanation that the documents were pro forma and that she signed them not to signify that she collected the amounts but that she received the documents themselves is more believable than [petitioner’s] assertion that she actually handled the amounts.

“Contrary to [petitioner’s] assertion, Exhibit ‘H’ does not unequivocally establish that x x x Nieves received P200,000.00 as commission for Gragera. As correctly stated by the court a quo, the document showed a liquidation of P240,000.00 and not P200,000.00.

“Accordingly, we find Nieves’ testimony that after August 20, 1986, all collections were made by Gragera believable and worthy of credence. Since Gragera guaranteed a daily 100% payment of the loans, he took charge of the collections. As [petitioner’s] representative, Nieves merely prepared the daily cash flow reports (Exh. ‘15’ to ’15 DDDDDDDDDD’) to enable [petitioner] to keep track of Gragera’s operations. Gragera on the other hand devised the schedule of daily payment (Exhs. ‘B’ and ‘F’) to record the projected gross daily collections.

“As aptly observed by the court a quo:

‘26.1. As between the versions of SANTOS and NIEVES on how the commissions of GRAGERA [were] paid to him[,] that of NIEVES is more logical and practical and therefore, more believable. SANTOS’ version would have given rise to this improbable situation: GRAGERA would collect the daily amortizations and then give them to NIEVES; NIEVES would get GRAGERA’s commissions from the amortizations and then give such commission to GRAGERA.’”[17]

These findings are in harmony with the trial court’s ruling, which we quote below:

“21. Exh. H does not prove that SANTOS gave to NIEVES and the latter received P200,000.00 for delivery to GRAGERA. Exh. H shows under its sixth column ‘ADDITIONAL CASH’ that the additional cash was P240,000.00. If Exh. H were the liquidation of the P200,000.00 as alleged by SANTOS, then his claim is not true. This is so because it is a liquidation of the sum of P240,000.00.

“21.1. SANTOS claimed that he learned of NIEVES’ failure to give the P200,000.00 to GRAGERA when he received the latter’s letter complaining of its delayed release. Assuming as true SANTOS’ claim that he gave P200,000.00 to GRAGERA, there is no competent evidence that

NIEVES did not give it to GRAGERA. The only proof that NIEVES did not give it is the letter. But SANTOS did not even present the letter in evidence. He did not explain why he did not.

“21.2. The evidence shows that all money transactions of the money-lending business of SANTOS were covered by petty cash vouchers. It is therefore strange why SANTOS did not present any voucher or receipt covering the P200,000.00.”[18]

In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70 from the partnership. She did not remit P1,214,296.10 to Gragera, because he had deducted his commissions before remitting his collections. Exhibits “B” and “F” are merely computations of what Gragera should collect for the day; they do not show that Nieves received the amounts stated therein. Neither is there sufficient proof that she misappropriated P200,000, because Exhibit “H” does not indicate that such amount was received by her; in fact, it shows a different figure.

Petitioner has utterly failed to demonstrate why a review of these factual findings is warranted. Well-entrenched is the basic rule that factual findings of the Court of Appeals affirming those of the trial court are binding and conclusive on the Supreme Court.[19] Although there are exceptions to this rule, petitioner has not satisfactorily shown that any of them is applicable to this issue.

Third Issue:

Accounting of Partnership

Petitioner refuses any liability for respondents’ claims on the profits of the partnership. He maintains that “both business propositions were flops,” as his investments were “consumed and eaten up by the commissions orchestrated to be due Gragera” – a situation that “could not have been rendered possible without complicity between Nieves and Gragera.”

Respondent spouses, on the other hand, postulate that petitioner instituted the action below to avoid payment of the demands of Nieves, because sometime in March 1987, she “signified to petitioner that it was about time to get her share of the profits which had already accumulated to some P3 million.” Respondents add that while the partnership has not declared dividends or liquidated its earnings, the profits are already reflected on paper. To prove the counterclaim of Nieves, the spouses show that from

June 13, 1986 up to April 19, 1987, the profit totaled P20,429,520 (Exhs. “10” et seq. and “15” et seq.). Based on that income, her 15 percent share under the joint venture amounts to P3,064,428 (Exh. “10-I-3”); and Arsenio’s, P2,026,000 minus the P30,000 which was already advanced to him (Petty Cash Vouchers, Exhs. “6, 6-A to 6-B”).

The CA originally held that respondents’ counterclaim was premature, pending an accounting of the partnership. However, in its assailed Resolution of August 17, 1998, it turned volte face. Affirming the trial court’s ruling on the counterclaim, it held as follows:

“We earlier ruled that there is still need for an accounting of the profits and losses of the partnership before we can rule with certainty as to the respective shares of the partners. Upon a further review of the records of this case, however, there appears to be sufficient basis to determine the amount of shares of the parties and damages incurred by [respondents]. The fact is that the court a quo already made such a determination [in its] decision dated August 13, 1991 on the basis of the facts on record.”[20]

The trial court’s ruling alluded to above is quoted below:

“27. The defendants’ counterclaim for the payment of their share in the profits of their joint venture with SANTOS is supported by the evidence.

“27.1. NIEVES testified that: Her claim to a share in the profits is based on the agreement (Exhs. 5, 5-A and 5-B). The profits are shown in the working papers (Exhs. 10 to 10-I, inclusive) which she prepared. Exhs. 10 to 10-I (inclusive) were based on the daily cash flow reports of which Exh. 3 is a sample. The originals of the daily cash flow reports (Exhs. 3 and 15 to 15-D (10) were given to SANTOS. The joint venture had a net profit of P20,429,520.00 (Exh. 10-I-1), from its operations from June 13, 1986 to April 19, 1987 (Exh. 1-I-4). She had a share of P3,064,428.00 (Exh. 10-I-3) and ARSENIO, about P2,926,000.00, in the profits.

“27.1.1 SANTOS never denied NIEVES’ testimony that the money-lending business he was engaged in netted a profit and that the originals of the daily case flow reports were furnished to him. SANTOS however alleged that the money-lending operation of his joint venture with NIEVES and ZABAT resulted in a loss of about half a million pesos to him. But such loss, even if true, does not negate NIEVES’ claim that overall, the joint venture among them – SANTOS, NIEVES and ARSENIO – netted a profit. There is no reason for the Court to doubt the veracity of [the testimony of] NIEVES.

“27.2 The P26,260.50 which ARSENIO received as part of his share in the profits (Exhs. 6, 6-A and 6-B) should be deducted from his total share.”[21]

After a close examination of respondents’ exhibits, we find reason to disagree with the CA. Exhibit “10-I”[22] shows that the partnership earned a “total income” ofP20,429,520 for the period June 13, 1986 until April 19, 1987. This entry is derived from the sum of the amounts under the following column headings: “2-Day Advance Collection,” “Service Fee,” “Notarial Fee,” “Application Fee,” “Net Interest Income” and “Interest Income on Investment.” Such entries represent the collections of the money-lending business or its gross income.

The “total income” shown on Exhibit “10-I” did not consider the expenses sustained by the partnership. For instance, it did not factor in the “gross loan releases” representing the money loaned to clients. Since the business is money-lending, such releases are comparable with the inventory or supplies in other business enterprises.

Noticeably missing from the computation of the “total income” is the deduction of the weekly allowance disbursed to respondents. Exhibits “I” et seq. and “J” et seq.[23]show that Arsenio received allowances from July 19, 1986 to March 27, 1987 in the aggregate amount of P25,500; and Nieves, from July 12, 1986 to March 27, 1987 in the total amount of P25,600. These allowances are different from the profit already received by Arsenio. They represent expenses that should have been deducted from the business profits. The point is that all expenses incurred by the money-lending enterprise of the parties must first be deducted from the “total income” in order to arrive at the “net profit” of the partnership. The share of each one of them should be based on this “net profit” and not from the “gross income” or “total income” reflected in Exhibit “10-I,” which the two courts invariably referred to as “cash flow” sheets.

Similarly, Exhibits “15” et seq.,[24] which are the “Daily Cashflow Reports,” do not reflect the business expenses incurred by the parties, because they show only the daily cash collections. Contrary to the rulings of both the trial and the appellate courts, respondents’ exhibits do not reflect the complete financial condition of the money-lending business. The lower courts obviously labored over a mistaken notion that Exhibit “10-I-1” represented the “net profits” earned by the partnership.

For the purpose of determining the profit that should go to an industrial partner (who shares in the profits but is not liable for the losses), the gross income from all the transactions carried on by the firm must be added together, and from this sum must be subtracted the expenses or the losses sustained in the business. Only in the difference representing the net profits

does the industrial partner share. But if, on the contrary, the losses exceed the income, the industrial partner does not share in the losses.[25]

When the judgment of the CA is premised on a misapprehension of facts or a failure to notice certain relevant facts that would otherwise justify a different conclusion, as in this particular issue, a review of its factual findings may be conducted, as an exception to the general rule applied to the first two issues.[26]

The trial court has the advantage of observing the witnesses while they are testifying, an opportunity not available to appellate courts. Thus, its assessment of the credibility of witnesses and their testimonies are accorded great weight, even finality, when supported by substantial evidence; more so when such assessment is affirmed by the CA. But when the issue involves the evaluation of exhibits or documents that are attached to the case records, as in the third issue, the rule may be relaxed. Under that situation, this Court has a similar opportunity to inspect, examine and evaluate those records, independently of the lower courts. Hence, we deem the award of the partnership share, as computed by the trial court and adopted by the CA, to be incomplete and not binding on this Court.

WHEREFORE, the Petition is partly GRANTED. The assailed November 28, 1997 Decision is AFFIRMED, but the challenged Resolutions dated August 17, 1998 and October 9, 1998 are REVERSED and SET ASIDE. No costs.

SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila

FIRST DIVISION

G.R. No. L-59956 October 31, 1984

ISABELO MORAN, JR., petitioner, vs. THE HON. COURT OF APPEALS and MARIANO E. PECSON, respondents.

GUTIERREZ, JR., J.:ñé+.£ªwph!1

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: têñ.£îhqwâ£

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 P l,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: têñ.£îhqwâ£

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 authorized 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: têñ.£îhqwâ£

PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a new one is hereby rendered, ordering defendant-appellant 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: têñ.£îhqwâ£

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 (79 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: têñ.£îhqwâ£

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 undesirable 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.

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 undesirable 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 Pl,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: têñ.£îhqwâ£

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: têñ.£îhqwâ£

(a) P 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. 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. 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- têñ.£îhqwâ£

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. 3-4, 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 P4,000 (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 P 7,000 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: têñ.£îhqwâ£

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.têñ.£îhqwâ£

(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 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 têñ.£îhqwâ£

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.

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.

1äwphï1.ñëtRepublic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-35840 March 31, 1933

FRANCISCO BASTIDA, plaintiff-appellee, vs. MENZI & Co., INC., J.M. MENZI and P.C. SCHLOBOHM, defendants. MENZI & CO., appellant.

Romualdez Brothers and Harvey and O'Brien for appellant. Jose M. Casal, Alberto Barretto and Gibbs and McDonough for appellee.

VICKERS, J.:

This is an appeal by Menzi & Co., Inc., one of the defendants, from a decision of the Court of First Instance of Manila. The case was tried on the amended complaint dated May 26, 1928 and defendants' amended answer thereto of September 1, 1928. For the sake of clearness, we shall incorporate herein the principal allegations of the parties.

FIRST CAUSE OF ACTION

Plaintiff alleged:

I

That the defendant J.M. Menzi, together with his wife and daughter, owns ninety-nine per cent (99%) of the capital stock of the defendant Menzi & Co., Inc., that the plaintiff has been informed and therefore believes that the defendant J.M. Menzi, his wife and daughter, together with the defendant P.C. Schlobohm and one Juan Seiboth, constitute the board of directors of the defendant, Menzi & Co., Inc.;

II

That on April 27, 1922, the defendant Menzi & Co., Inc. through its president and general manager, J.M. Menzi, under the authority of the board of directors, entered into a contract with the plaintiff to engage in the business

of exploiting prepared fertilizers, as evidenced by the contract marked Exhibit A, attached to the original complaint as a part thereof, and likewise made a part of the amended complaint, as if it were here copied verbatim;

III

That in pursuance of said contract, plaintiff and defendant Menzi & Co., Inc., began to manufacture prepared fertilizers, the former superintending the work of actual preparation, and the latter, through defendants J.M. Menzi and P. C. Schlobohm, managing the business and opening an account entitled "FERTILIZERS" on the books of the defendant Menzi & Co., Inc., where all the accounts of the partnership business were supposed to be kept; the plaintiff had no participation in the making of these entries, which were wholly in the defendants' charge, under whose orders every entry was made;

IV

That according to paragraph 7 of the contract Exhibit A, the defendant Menzi & Co., Inc., was obliged to render annual balance sheets to be plaintiff upon the 30th day of June of each year; that the plaintiff had no intervention in the preparation of these yearly balances, nor was he permitted to have any access to the books of account; and when the balance sheets were shown him, he, believing in good faith that they contained the true statement of the partnership business, and relying upon the good faith of the defendants, Menzi & Co., Inc., J.M. Menzi, and P.C. Schlobohm, accepted and signed them, the last balance sheet having been rendered in the year 1926;

V

That by reason of the foregoing facts and especially those set forth in the preceding paragraph, the plaintiff was kept in ignorance of the defendants' acts relating to the management of the partnership funds, and the keeping of accounts, until he was informed and so believes and alleges, that the defendants had conspired to conceal from him the true status of the business, and to his damage and prejudice made false entries in the books of account and in the yearly balance sheets, the exact nature and amount of which it is impossible to ascertain, even after the examination of the books of the business, due to the defendants' refusal to furnish all the books and data required for the purpose, and the constant obstacles they have placed in the way of the examination of the books of account and vouchers;

VI

That when the plaintiff received the information mentioned in the preceding paragraph, he demanded that the defendants permit him to examine the books and vouchers of the business, which were in their possession, in order to ascertain the truth of the alleged false entries in the books and balance sheets submitted for his approval, but the defendants refused, and did not consent to the examination until after the original complaint was filed in this case; but up to this time they have refused to furnish all the books, data, and vouchers necessary for a complete and accurate examination of all the partnership's accounts; and

VII

That as a result of the partial examination of the books of account of the business, the plaintiff has, through his accountants, discovered that the defendants, conspiring and confederating together, presented to the plaintiff during the period covered by the partnership contract false and incorrect accounts,

(a) For having included therein undue interest;

(b) For having entered, as a charge to fertilizers, salaries and wages which should have been paid and were in fact paid by the defendant Menzi & Co., Inc.;

(c) For having collected from the partnership the income tax which should have been paid for its own account by Menzi & Co., Inc.;

(d) For having collected, to the damage and prejudice of the plaintiff, commissions on the purchase of materials for the manufacture of fertilizers;

(e) For having appropriated, to the damage and prejudice of the plaintiff, the profits obtained from the sale of fertilizers belonging to the partnership and bought with its own funds; and

(f) For having appropriated to themselves all rebates for freight insurance, taxes, etc., upon materials for fertilizer bought abroad, no entries of said rebates having been made on the books to the credit of the partnership.

Upon the strength of the facts set out in this first cause of action, the plaintiff prays the court:

1. To prohibit the defendants, each and every one of them, from destroying and concealing the books and papers of the partnership constituted between the defendant Menzi & Co., Inc., and the plaintiff;

2. To summon each and every defendant to appear and give a true account of all facts relating to the partnership between the plaintiff and the defendant Menzi & Co., Inc., and of each and every act and transaction connected with the business of said partnership from the beginning to April 27, 1927, and a true statement of all merchandise of whatever description, purchased for said partnership, and of all the expenditures and sale of every kind, together with the true amount thereof, besides the sums received by the partnership from every source together with their exact nature, and a true and complete account of the vouchers for all sums paid by the partnership, and of the salaries paid to its employees;

3. To declare null and void the yearly balances submitted by the defendants to the plaintiff from 1922 to 1926, both inclusive;

4. To order the defendants to give a true statement of all receipts and disbursements of the partnership during the period of its existence, besides granting the plaintiff any other remedy that the court may deem just and equitable.

EXHIBIT A

CONTRATO

que se celebra entre los Sres. Menzi y Compañia, de Manila, como Primera Parte, y D. Francisco Bastada, tambien de Manila, como Segunda Parte, bajo las siguientes

CONDICIONES

1.ª El objeto de este contrato es la explotacion del negocio de Abonos o Fertilizantes Preparados, para diversas aplicaciones agricolas;

2.ª La duracion de este contrato sera de cinco años, a contrar desde la fecha de su firma;

3.ª La Primera Parte se compromete a facilitar la ayuda financiera necesaria para el negocio;

4.ª La Segunda Parte se compromete a poner su entero tiempo y toda su experiencia a la disposicion del negocio;

5.ª La Segunda Parte no podra, directa o indirectamente, dedicarse por si sola ni en sociedad con otras personas, o de manera alguna que no sea con la Primera Parte, al negecio de Abonos, simples o preparados, o de materia alguna que se aplique comunmente a la fertilizacion de suelos y plantas, durante la vigencia de este contrato, a menos que obtenga autorizacion expresa de la Primera Parte para ello;

6.ª La Primera Parte no podra dedicarse, por si sola ni en sociedad o combinacion con otras personas o entidades, ni de otro modo que en sociedad con la Segunda Parte, al negocio de Abonos o Fertilizantes preparados, ya sean ellos importados, ya preparados en las Islas Fllipinas; tampoco podra dedicarse a la venta o negocio de materias o productos que tengan aplicacion como fertilizantes, o que se usen en la composicion de fertilizantes o abonos, si ellos son productos de suelo de la manufactura filipinos, pudiendo sin embargo vender o negociar en materim fertilizantes simples importados de los Estados Unidos o del Extranjero;

7.ª La Primera Parte se obliga a ceder y a hacer efectivo a la Segunda Parte el 35 por ciento (treinta y cinco por ciento) de las utilidades netas del negocio de abonos, liquidables el 30 de junio de cada año;

8.ª La Primera Parte facilitara la Segunda, mensualmente, la cantidad de P300 (trescientos pesos), a cuenta de su parte de beneficios.

9.ª Durante el año 1923 la Parte concedera a la Segunda permiso para que este se ausente de Filipinas por un periodo de tiempo que no exceda de un año, sin menoscabo para derechos de la Segunda Parte con arreglo a este contrato.

En testimonio de lo cual firmamos el presente en la Ciudad de Manila, I. F., a veintisiete de abril de 1922.

MENZI & CO., INC. Por (Fdo.) J. MENZI

General Manager Primera Parte

(Fdo.) F. BASTIDA Segunda Parte

MENZI & CO., INC. (Fdo.) MAX KAEGI Acting Secretary

Defendants denied all the allegations of the amended complaint, except the formal allegations as to the parties, and as a special defense to the first cause of action alleged:

1. That the defendant corporation, Menzi & Co., Inc., has been engaged in the general merchandise business in the Philippine Islands since its organization in October, 1921, including the importation and sale of all kinds of goods, wares, and merchandise, and especially simple fertilizer and fertilizer ingredients, and as a part of that business, it has been engaged since its organization in the manufacture and sale of prepared fertilizers for agricultural purposes, and has used for that purpose trade-marks belonging to it;

2. That on or about November, 1921, the defendant, Menzi & CO., Inc., made and entered into an employment agreement with the plaintiff, who represented that he had had much experience in the mixing of fertilizers, to superintend the mixing of the ingredients in the manufacture of prepared fertilizers in its fertilizer department and to obtain orders for such prepared fertilizers subject to its approval, for a compensation of 50 per cent of the net profits which it might derive from the sale of the fertilizers prepared by him, and that said Francisco Bastida worked under said agreement until April 27, 1922, and received the compensation agreed upon for his services; that on the said 27th of April, 1922, the said Menzi & Co., Inc., and the said Francisco Bastida made and entered into the written agreement, which is marked Exhibit A, and made a part of the amended complaint in this case, whereby they mutually agreed that the employment of the said Francisco Bastida by the said Menzi & Co., Inc., in the capacity stated, should be for a definite period of five years from that date and under the other terms and conditions stated therein, but with the understanding and agreement that the said Francisco Bastida should receive as compensation for his said

services only 35 per cent of the net profits derived from the sale of the fertilizers prepared by him during the period of the contract instead of 50 per cent of such profits, as provided in his former agreement; that the said Francisco Bastida was found to be incompetent to do anything in relation to its said fertilizer business with the exception of over-seeing the mixing of the ingredients in the manufacture of the same, and on or about the month of December, 1922, the defendant, Menzi & Inc., in order to make said business successful, was obliged to and actually did assume the full management and direction of said business;

3. That the accounts of the business of the said fertilizer department of Menzi & Co., Inc., were duly kept in the regular books of its general business, in the ordinary course thereof, up to June 30, 1923, and that after that time and during the remainder of the period of said agreement, for the purpose of convenience in determining the amount of compensation due to the plaintiff under his agreement, separate books of account for its said fertilizer business were duly, kept in the name of 'Menzi & Co., Inc., Fertilizer', and used exclusively for that purpose and it was mutually agreed between the said Francisco Bastida and the said Menzi & Co., Inc., that the yearly balances for the determination of the net profits of said business due to the said plaintiff as compensation for his services under said agreement would be made as of December 31st, instead of June 30th, of each year, during the period of said agreement; that the accounts of the business of its said fertilizer department, as recorded in its said books, and the vouchers and records supporting the same, for each year of said business have been duly audited by Messrs. White, Page & Co., certified public accountants, of Manila, who, shortly after the close of business at the end of each year up to and including the year 1926, have prepared therefrom a manufacturing and profit and loss account and balance sheet, showing the status of said business and the share of the net profits pertaining to the plaintiff as his compensation under said agreement; that after the said manufacturing and profit and the loss account and balance sheet for each year of the business of its said fertilizer department up to and including the year 1926, had been prepared by the said auditors and certified by them, they were shown to and examined by the plaintiff, and duly accepted, and approved by him, with full knowledge of their contents, and as evidence of such approval, he signed his name on each of them, as shown on the copies of said manufacturing and profit and loss account and balance sheet for each year up to and including the year 1926, which are attached to the record of this case, and which are hereby referred to and made a

part of this amended answer, and in accordance therewith, the said plaintiff has actually received the portion of the net profits of its said business for those years pertaining to him for his services under said agreement; that at no time during the course of said fertilizer business and the liquidation thereof has the plaintiff been in any way denied access to the books and records pertaining thereto, but on the contrary, said books and records have been subject to his inspection and examination at any time during business hours, and even since the commencement of this action, the plaintiff and his accountants, Messrs. Haskins & Sells, of Manila, have been going over and examining said books and records for months and the defendant, Menzi & Co. Inc., through its officers, have turned over to said plaintiff and his accountant the books and records of said business and even furnished them suitable accommodations in its own office to examine the same;

4. That prior to the termination of the said agreement, Exhibit A, the defendant, Menzi & Co., Inc., duly notified the plaintiff that it would not under any conditions renew his said agreement or continue his said employment with it after its expiration, and after the termination of said agreement of April 27, 1927, the said Menzi & Co., Inc., had the certified public accountants, White, Page & Co., audit the accounts of the business of its said fertilizer department for the four months of 1927 covered by plaintiff's agreement and prepare a manufacturing and profit and loss account and balance sheet of said business showing the status of said business at the termination of said agreement, a copy of which was shown to and explained to the plaintiff; that at that time there were accounts receivable to be collected for business covered by said agreement of over P100,000, and there was guano, ashes, fine tobacco and other fertilizer ingredients on hand of over P75,000, which had to be disposed of by Menzi & Co., Inc., or valued by the parties, before the net profits of said business for the period of the agreement could be determined; that Menzi & Co., Inc., offered to take the face value of said accounts and the cost value of the other properties for the purpose of determining the profits of said business for that period, and to pay to the plaintiff at that time his proportion of such profits on that basis, which the plaintiff refused to accept, and being disgruntled because the said Menzi & Co., Inc., would not continue him in its service, the said plaintiff commenced this action, including therein not only Menzi & Co. Inc., but also it managers J.M. Menzi and P.C. Schlobohm, wherein he knowingly make various false and malicious allegations against the defendants; that since that time the said Menzi & Co., Inc., has been collecting the accounts receivable and disposing of

the stocks on hand, and there is still on hand old stock of approximately P25,000, which it has been unable to dispose of up to this time; that as soon as possible a final liquidation and amounting of the net profits of the business covered by said agreement for the last four months thereof will be made and the share thereof appertaining to the plaintiff will be paid to him; that the plaintiff has been informed from time to time as to the status of the disposition of such properties, and he and his auditors have fully examined the books and records of said business in relation thereto.

SECOND CAUSE OF ACTION

As a second cause of action plaintiff alleged:

I. That the plaintiff hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.

II. That the examination made by the plaintiff's auditors of some of the books of the partnership that were furnished by the defendants disclosed the fact that said defendants had charged to "purchases" of the business, undue interest, the amount of which the plaintiff is unable to determine, as he has never had at his disposal the books and vouchers necessary for that purpose, and especially, owning to the fact that the partnership constituted between the plaintiff and the defendant Menzi & Co., Inc., never kept its own cash book, but that its funds were maliciously included in the private funds of the defendant entity, neither was there a separate BANK ACCOUNT of the partnership, such account being included in the defendant's bank account.

III. That from the examination of the partnership books as aforesaid, the plaintiff estimates that the partnership between himself and the defendant Menzi & Co., Inc., has been defrauded by the defendants by way of interest in an amount of approximately P184,432.51, of which 35 per cent, or P64,551.38, belongs to the plaintiff exclusively.

Wherefore, the plaintiff prays the court to render judgment ordering the defendants jointly and severally to pay him the sum of P64,551.38, or any amount which may finally appear to be due and owing from the defendants to the plaintiff upon this ground, with legal interest from the filing of the original complaint until payment.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the special defense to the first cause of action in this amended answer;

2. That under the contract of employment, Exhibit A, of the amended complaint, the defendant, Menzi & Co., Inc., only undertook and agreed to facilitate financial aid in carrying on the said fertilizer business, as it had been doing before the plaintiff was employed under the said agreement; that the said defendant, Menzi & Co., Inc., in the course of the said business of its fertilizer department, opened letters of credit through the banks of Manila, accepted and paid drafts drawn upon it under said letters of credit, and obtained loans and advances of moneys for the purchase of materials to be used in mixing and manufacturing its fertilizers and in paying the expenses of said business; that such drafts and loans naturally provided for interest at the banking rate from the dates thereof until paid, as is the case in all, such business enterprises, and that such payments of interest as were actually made on such drafts, loans and advances during the period of the said employment agreement constituted legitimate expenses of said business under said agreement.

THIRD CAUSE OF ACTION

As third cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.

II. That under the terms of the contract Exhibit A, neither the defendants J.M. Menzi and P.C. Schlobohm, nor the defendant Menzi & Co., Inc., had a right to collect for itself or themselves any amount whatsoever by way of salary for services rendered to the partnership between the plaintiff and the defendant, inasmuch as such services were compensated with the 65% of the net profits of the business constituting their share.

III. That the plaintiff has, on his on account and with his own money, paid all the employees he has placed in the service of the partnership, having expended for their account, during the period of the contract, over P88,000, without ever having made any claim upon the defendants for this sum because it was included in the compensation of 35 per cent which he was to receive in accordance with the contract Exhibit A.

IV. That the defendants J.M. Menzi and P.C. Schlobohm, not satisfied with collecting undue and excessive salaries for themselves, have made the partnership, or the fertilizer business, pay the salaries of a number of the employees of the defendant Menzi & Co., Inc.

V. That under this item of undue salaries the defendants have appropriated P43,920 of the partnership funds, of which 35 per cent, or P15,372 belongs exclusively to the plaintiff.

Wherefore, the plaintiff prays the court to render judgment ordering the defendants to pay jointly and severally to the plaintiff the amount of P15,372, with legal interest from the date of the filing of the original complaint until the date of payment.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4 of the special defense the first cause of action in this amended answer;

2. That the defendant, Menzi & Co., Inc., through its manager, exclusively managed and conducted its said fertilizer business, in which the plaintiff was to receive 35 percent of the net profits as compensation for this services, as hereinbefore alleged, from on or about January 1, 1923, when its other departments had special experienced Europeans in charge thereof, who received not only salaries but also a percentage of the net profits of such departments; that its said fertilizer business, after its manager took charge of it, became very successful, and owing to the large volume of business transacted, said business required great deal of time and attention, and actually consumed at least one-half of the time of the manager and certain employees of Menzi & Co., Inc., in carrying it on; that the said Menzi & Co., furnished office space, stationery and other incidentals, for said business, and had its employees perform the duties of cashiers, accountants, clerks, messengers, etc., for the same, and for that reason the said Menzi & Co., Inc., charged each year, from and after 1922, as expenses of said business, which pertained to the fertilizer department, as certain amount as salaries and wages to cover the proportional part of the overhead expenses of Menzi & Co., Inc.; that the same method is followed in each of the several departments of the business of Menzi & Co., Inc., that each and every year from and after 1922, a just proportion of said overhead expenses were charged to said fertilizer departments and entered on the books thereof, with the knowledge and consent of the

plaintiff, and included in the auditors' reports, which were examined, accepted and approved by him, and he is now estopped from saying that such expenses were not legitimate and just expenses of said business.

FOURTH CAUSE OF ACTION

As fourth cause of action, the plaintiff alleged:

I. That he hereby reproduces paragraph I, II, III, IV, and V of the first cause of action.

II. That the defendant Menzi & Co., Inc., through the defendant J. M. Menzi and P. C. Schlobohm, has paid, with the funds of the partnership between the defendant entity and the plaintiff, the income tax due from said defendant entity for the fertilizer business, thereby defrauding the partnership in the amount of P10,361.72 of which 35 per cent belongs exclusively to the plaintiff, amounting to P3,626.60.

III. That the plaintiff has, during the period of the contract, paid with his own money the income tax corresponding to his share which consists in 35 per cent of the profits of the fertilizer business, expending about P5,000 without ever having made any claim for reimbursement against the partnership, inasmuch as it has always been understood among the partners that each of them would pay his own income tax.

Wherefore, the plaintiff prays the court to order the defendants jointly and severally to pay the plaintiff the sum of P3,362.60, with legal interest from the date of the filing of the original complaint until its payment.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the special defense to the first cause of action in this amended answer;

2. That under the Income Tax Law Menzi & Co., Inc., was obliged to and did make return to the Government of the Philippine Islands each year during the period of the agreement, Exhibit A, of the income of its whole business, including its fertilizer department; that the proportional share of such income taxes found to be due on the business of the fertilizer department was charged as a proper and

legitimate expense of that department, in the same manner as was done in the other departments of its business; that inasmuch as the agreement with the plaintiff was an employment agreement, he was required to make his own return under the Income Tax Law and to pay his own income taxes, instead of having them paid at the source, as might be done under the law, so that he would be entitled to the personal exemptions allowed by the law; that the income taxes paid by the said Menzi & Co., Inc., pertaining to the business, were duly entered on the books of that department, and included in the auditors' reports hereinbefore referred to, which reports were examined, accepted and approved by the plaintiff, with full knowledge of their contents, and he is now estopped from saying that such taxes are not a legitimate expense of said business.

FIFTH CAUSE OF ACTION

As fifth cause of action, plaintiff alleged:

I. That hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.

II. That the plaintiff has discovered that the defendants Menzi & Co., Inc., had been receiving, during the period of the contract Exhibit A, from foreign firms selling fertilizing material, a secret commission equivalent to 5 per cent of the total value of the purchases of fertilizing material made by the partnership constituted between the plaintiff and the defendant Menzi Co., Inc., and that said 5 per cent commission was not entered by the defendants in the books of the business, to the credit and benefit of the partnership constituted between the plaintiff and the defendant, but to the credit of the defendant Menzi Co., Inc., which appropriated it to itself.

III. That the exact amount, or even the approximate amount of the fraud thus suffered by the plaintiff cannot be determined, because the entries referring to these items do not appear in the partnership books, although the plaintiff believes and alleges that they do appear in the private books of the defendant Menzi & Co., Inc., which the latter has refused to furnish, notwithstanding the demands made therefore by the auditors and the lawyers of the plaintiff.

IV. That taking as basis the amount of the purchases of some fertilizing material made by the partnership during the first four years of the contract Exhibit A, the plaintiff estimates that this 5 per cent

commission collected by the defendant Menzi Co., Inc., to the damage and prejudice of the plaintiff, amounts to P127,375.77 of which 35 per cent belongs exclusively to the plaintiff.

Wherefore, the plaintiff prays the court to order the defendants to pay jointly and severally to the plaintiff the amount of P44,581.52, or the exact amount owed upon this ground, after both parties have adduced their evidence upon the point.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraph 1, 2, 3 and 4, of the special defense to the first cause of action in this amended answer;

2. That the defendant, Menzi & Co., Inc., did have during the period of said agreement, Exhibit A, and has now what is called a "Propaganda Agency Agreement" which the Deutsches Kalesyndikat, G.M.B., of Berlin, which is a manufacturer of potash, by virtue of which said Menzi & Co., Inc., was to receive for its propaganda work in advertising and bringing about sales of its potash a commission of 5 per cent on all orders of potash received by it from the Philippine Islands; that during the period of said agreement, Exhibit A, orders were sent to said concern for potash, through C. Andre & Co., of Hamburg, as the agent of the said Menzi & Co., Inc., upon which the said Menzi & Co., Inc., received a 5 per cent commission, amounting in all to P2,222.32 for the propaganda work which it did for said firm in the Philippine Islands; that said commissioners were not in any sense discounts on the purchase price of said potash, and have no relation to the fertilizer business of which the plaintiff was to receive a share of the net profits for his services, and consequently were not credited to that department;

3. That in going over the books of Menzi Co., Inc., it has been found that there are only two items of commissions, which were received from the United Supply Co., of San Francisco, in the total of sum $66.51, which through oversight, were not credited on the books of the fertilizer department of Menzi & Co., Inc., but due allowance has now been given to the department for such item.

SIXTH CAUSE OF ACTION

As sixth cause of action, plaintiff alleged:

I. That hereby reproduces paragraphs I, II, III, IV and V, of the first cause of action.

II. That the defendant Menzi Co., Inc., in collusion with and through the defendants J.M. Menzi and P.C. Schlobohm and their assistants, has tampered with the books of the business making fictitious transfers in favor of the defendant Menzi & Co., Inc., of merchandise belonging to the partnership, purchased with the latter's money, and deposited in its warehouses, and then sold by Menzi & Co., Inc., to third persons, thereby appropriating to itself the profits obtained from such resale.

III. That it is impossible to ascertain the amount of the fraud suffered by the plaintiff in this respect as the real amount obtained from such sales can only be ascertained from the examination of the private books of the defendant entity, which the latter has refused to permit notwithstanding the demand made for the purpose by the auditors and the lawyers of the plaintiff, and no basis of computation can be established, even approximately, to ascertain the extent of the fraud sustained by the plaintiff in this respect, by merely examining the partnership books.

Wherefore, the plaintiff prays the court to order the defendants J.M. Menzi and P.C. Schlobohm, to make a sworn statement as to all the profits received from the sale to third persons of the fertilizers pertaining to the partnership, and the profits they have appropriated, ordering them jointly and severally to pay 35 per cent of the net amount, with legal interest from the filing of the original complaint until the payment thereof.

Defendant alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the special defense to the first cause of action in this amended answer:

2. That under the express terms of the employment agreement, Exhibit A, the defendant, Menzi & Co., Inc., had the right to import into the Philippine Islands in the course of its fertilizer business and sell fro its exclusive account and benefit simple fertilizer ingredients; that the only materials imported by it and sold during the period of said agreement were simple fertilizer ingredients, which had nothing whatever to do with the business of mixed fertilizers, of which the

plaintiff was to receive a share of the net profits as a part of his compensation.

SEVENTH CAUSE OF ACTION

As seventh cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.

II. That during the existence of the contract Exhibit A, the defendant Menzi & Co., Inc., for the account of the partnership constituted between itself and the plaintiff, and with the latter's money, purchased from a several foreign firms various simple fertilizing material for the use of the partnership.

III. That in the paid invoices for such purchases there are charged, besides the cost price of the merchandise, other amounts for freight, insurance, duty, etc., some of which were not entirely thus spent and were later credited by the selling firms to the defendant Menzi & Co., Inc.

IV. That said defendant Menzi & Co., Inc., through and in collusion with the defendants J.M. Menzi and P.C. Schlobohm upon receipt of the credit notes remitted by the selling firms of fertilizing material, for rebates upon freight, insurance, duty, etc., charged in the invoice but not all expended, did not enter them upon the books to the credit of the partnership constituted between the defendant and the plaintiff, but entered or had them entered to the credit on Menzi & Co., Inc., thereby defrauding the plaintiff of 35 per cent of the value of such reductions.

V. That the total amount, or even the approximate amount of this fraud cannot be ascertained without an examination of the private books of Menzi & Co., Inc., which the latter has refused to permit notwithstanding the demand to this effect made upon them by the auditors and the lawyers of the plaintiff.

Wherefore, the plaintiff prays the court to order the defendants J.M. Menzi and P.C. Schlobohm, to make a sworn statement as to the total amount of such rebates, and to sentence the defendants to pay the plaintiff jointly and severally 35 per cent of the net amount.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the special defense to the first cause of action in this amended answer:

2. That during the period of said employment agreement, Exhibit A, the defendant, Menzi & Co., Inc., received from its agent, C. Andre & Co., of Hamburg, certain credits pertaining to the fertilizer business in the profits of which the plaintiff was interested, by way of refunds of German Export Taxes, in the total sum of P1,402.54; that all of department as received, but it has just recently been discovered that through error an additional sum of P216.22 was credited to said department, which does not pertain to said business in the profits of which the plaintiff is interested.

EIGHT CAUSE OF ACTION

A eighth cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV and V of the first cause of action.

II. That on or about April 21, 1927, that is, before the expiration of the contract Exhibit A of the complaint, the defendant Menzi & Co., Inc., acting as manager of the fertilizer business constituted between said defendant and the plaintiff, entered into a contract with the Compañia General de Tabacos de Filipinas for the sale of said entity of three thousand tons of fertilizers of the trade mark "Corona No. 1", at the rate of P111 per ton, f. o. b. Bais, Oriental Negros, to be delivered, as they were delivered, according to information received by the plaintiff, during the months of November and December, 1927, and January, February, March, and April, 1928.

III. That both the contract mentioned above and the benefits derived therefrom, which the plaintiff estimates at P90,000, Philippine currency, belongs to the fertilizer business constituted between the plaintiff and the defendant, of which 35 per cent, or P31,500, belongs to said plaintiff.

IV. That notwithstanding the expiration of the partnership contract Exhibit A, on April 27, 1927, the defendants have not rendered a true accounting of the profits obtained by the business during the last four

months thereof, as the purposed balance submitted to the plaintiff was incorrect with regard to the inventory of merchandise, transportation equipment, and the value of the trade marks, for which reason such proposed balance did not represent the true status of the business of the partnership on April 30, 1927.

V. That the proposed balance submitted to the plaintiff with reference to the partnership operations during the last four months of its existence, was likewise incorrect, inasmuch as it did not include the profit realized or to be realized from the contract entered into with the Compañia General de Tabacos de Filipinas, notwithstanding the fact that this contract was negotiated during the existence of the partnership, and while the defendant Menzi & Co., Inc., was the manager thereof.

VI. That the defendant entity now contends that the contract entered into with the Compañia General de Tabacos de Filipinas belongs to it exclusively, and refuses to give the plaintiff his share consisting in 35 per cent of the profits produced thereby.

Wherefore, the plaintiff prays the honorable court to order the defendants to render a true and detailed account of the business during the last four months of the existence of the partnership, i. e., from January 1, 1927 to April 27, 1927, and to sentence them likewise to pay the plaintiff 35 per cent of the net profits.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the special defense to the first cause of action in this amended answer;

2. That the said order for 3,000 tons of mixed fertilizer, received by Menzi & Co., Inc., from the Compañia General de Tabacos Filipinas on April 21, 1927, was taken by it in the regular course of its fertilizer business, and was to be manufactured and delivered in December, 1927, and up to April, 1928; that the employment agreement of the plaintiff expired by its own terms on April 27, 1927, and he has not been in any way in the service of the defendant, Menzi & Co., Inc., since that time, and he cannot possibly have any interest in the fertilizers manufactured and delivered by the said Menzi & Co., Inc., after the expiration of his contract for any service rendered to it.

NINTH CAUSE OF ACTION

As ninth cause of action, plaintiff alleged:

I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.

II. That during the period of the contract Exhibit A, the partnership constituted thereby registered in the Bureau of Commerce and Industry the trade marks "CORONA NO. 1", CORONA NO. 2", "ARADO", and "HOZ", the plaintiff and the defendant having by their efforts succeeded in making them favorably known in the market.

III. That the plaintiff and the defendant, laboring jointly, have succeeded in making the fertilizing business a prosperous concern to such an extent that the profits obtained from the business during the five years it has existed, amount to approximately P1,000,000, Philippine currency.

IV. That the value of the good will and the trade marks of a business of this nature amounts to at least P1,000,000, of which sum 35 per cent belongs to the plaintiff, or, P350,000.

V. That at the time of the expiration of the contract Exhibit A, the defendant entity, notwithstanding and in spite of the plaintiff's insistent opposition, has assumed the charge of liquidating the fertilizing business, without having rendered a monthly account of the state of the liquidation, as required by law, thereby causing the plaintiff damages.

VI. That the damages sustained by the plaintiff, as well as the amount of his share in the remaining property of the plaintiff, and may only be truly and correctly ascertained by compelling the defendants J. M. Menzi and P. C. Schlobohm to declare under oath and explain to the court in detail the sums obtained from the sale of the remaining merchandise, after the expiration of the partnership contract.

VII. That after the contract Exhibit A had expired, the defendant continued to use for its own benefit the good-will and trade marks belonging to the partnership, as well as its transportation equipment and other machinery, thereby indicating its intention to retain such good-will, trade marks, transportation equipment and machinery, for

the manufacture of fertilizers, by virtue of which the defendant is bound to pay the plaintiff 35 per cent of the value of said property.

VIII. That the true value of the transportation equipment and machinery employed in the preparation of the fertilizers amounts of P20,000, 35 per cent of which amount to P7,000.

IX. That the plaintiff has repeatedly demanded that the defendant entity render a true and detailed account of the state of the liquidation of the partnership business, but said defendants has ignored such demands, so that the plaintiff does not, and this date, know whether the liquidation of the business has been finished, or what the status of it is at present.

Wherefore, the plaintiff prays the Honorable Court:

1. To order the defendants J.M. Menzi and P.C. Schlobohm to render a true and detailed account of the status of business in liquidation, that is, from April 28, 1927, until it is finished, ordering all the defendants to pay the plaintiff jointly and severally 35 per cent of the net amount.

2. To order the defendants to pay the plaintiff jointly and severally the amount of P350,000, which is 35 per cent of the value of the goodwill and the trade marks of the fertilizer business;

3. To order the defendants to pay the plaintiff jointly and severally the amount of P7,000 which is 35 per cent of the value of the transportation equipment and machinery of the business; and

4. To order the defendants to pay the costs of this trial, and further, to grant any other remedy that this Honorable Court may deem just and equitable.

Defendants alleged:

1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the special defense to the first cause of action in this amended answer;

2. That the good-will, if any, of said fertilizer business of the defendant, Menzi & Co., Inc., pertains exclusively to it, and the plaintiff can have no interest therein of any nature under his said

employment agreement; that the trade-marks mentioned by the plaintiff in his amended complaint, as a part of such good-will, belonged to and have been used by the said Menzi & Co., Inc., in its fertilizer business from and since its organization, and the plaintiff can have no rights to or interest therein under his said employment agreement; that the transportation equipment pertains to the fertilizer department of Menzi & Co., Inc., and whenever it has been used by the said Menzi & Co., Inc., in its own business, due and reasonable compensation for its use has been allowed to said business; that the machinery pertaining to the said fertilizer business was destroyed by fire in October, 1926, and the value thereof in the sum of P20,000 was collected from the Insurance Company, and the plaintiff has been given credit for 35 per cent of that amount; that the present machinery used by Menzi & Co., Inc., was constructed by it, and the costs thereof was not charged to the fertilizer department, and the plaintiff has no right to have it taken into consideration in arriving at the net profits due to him under his said employment agreement.

The dispositive part of the decision of the trial court is as follows:

Wherefore, let judgment be entered:

(a) Holding that the contract entered into by the parties, evidenced by Exhibit A, as a contract of general regular commercial partnership, wherein Menzi & Co., Inc., was the capitalist, and the plaintiff, the industrial partner;

(b) Holding the plaintiff, by the mere fact of having signed and approved the balance sheets, Exhibits C to C-8, is not estopped from questioning the statements of the accounts therein contained;

(c) Ordering Menzi & Co., Inc., upon the second ground of action, to pay the plaintiff the sum of P 60,385.67 with legal interest from the date of the filing of the original complaint until paid;

(d) Dismissing the third cause of action;

(e) Ordering Menzi & Co., Inc., upon the fourth cause of action, to pay the plaintiff the sum of P3,821.41, with legal interest from the date of the filing of the original until paid;

(f ) Dismissing the fifth cause of action;

(g) Dismissing the sixth cause of action;

(h) Dismissing the seventh cause of action;

(i) Ordering the defendant Menzi & Co., Inc., upon the eighth cause of action, to pay the plaintiff the sum of P6,578.38 with legal interest from January 1, 1929, the date of the liquidation of the fertilizer business, until paid;

(j ) Ordering Menzi & Co., Inc., upon the ninth cause of action to pay the plaintiff the sum of P196,709.20 with legal interest from the date of the filing of the original complaint until paid;

(k) Ordering the said defendant corporation, in view of the plaintiff's share of the profits of the business accruing from January 1, 1927 to December 31, 1928, to pay the plaintiff 35 per cent of the net balance shown in Exhibits 51 and 51-A, after deducting the item of P2,410 for income tax, and any other sum charged for interest under the entry "Purchases";

(l) Ordering the defendant corporation, in connection with the final liquidation set in Exhibit 52 and 52-A, to pay the plaintiff the sum of P17,463.54 with legal interest from January 1, 1929, until fully paid;

(m) Dismissing the case with reference to the other defendants, J. M. Menzi and P. C. Schlobohm; and

(n) Menzi & Co., Inc., shall pay the costs of the trial.

The appellant makes the following assignment of error:

I. The trial court erred in finding and holding that the contract Exhibit A constitutes a regular collective commercial copartnership between the defendant corporation, Menzi & Co., Inc., and the plaintiff, Francisco Bastida, and not a contract of employment.

II. The trial court erred in finding and holding that the defendant, Menzi & Co., Inc., had wrongfully charged to the fertilizer business in question the sum of P10,918.33 as income taxes partners' balances, foreign drafts, local drafts, and on other credit balances in the sum of P172,530.49, and that 35 per cent thereof, or the sum of P60,358.67, with legal interest thereon from the date of filing his complaint, corresponds to the plaintiff.

III. The trial court erred finding and holding that the defendant, Menzi & Co., Inc., had wrongfully charged to the fertilizer business in question the sum of P10,918.33 as income taxes for the years 1923, 1924, 1925 and 1926, and that the plaintiff is entitled to 35 per cent thereof, or the sum of P3,821.41, with legal interest thereon from the date of filing his complaint, and in disallowing the item of P2,410 charged as income tax in the liquidation in Exhibits 51 and 51 A for the period from January 1 to April 27, 1927.

IV. The trial court erred in refusing to find and hold under the evidence in this case that the contract, Exhibit A was daring the whole period thereof considered by the parties and performed by them as a contract of employment in relation to the fertilizer business of the defendant, and that the accounts of said business were kept by the defendant, Menzi & Co., Inc., on that theory with the knowledge and consent of the plaintiff, and that at the end of each year for five years a balance sheet and profit and loss statement of said business were prepared from the books of account of said business on the same theory and submitted to the plaintiff, and that each year said balance sheet and profit and loss statement were examined, approved and signed by said contract in accordance therewith with full knowledge of the manner in which said business was conducted and the charges for interest and income taxes made against the same and that by reason of such facts, the plaintiff is now estopped from raising any question as to the nature of said contract or the propriety of such charges.

V. The trial court erred in finding and holding that the plaintiff, Francisco Bastida, is entitled to 35 per cent of the net profits in the sum of P18,795.38 received by the defendant, Menzi & Co., Inc., from its contract with the Compañia General de Tabacos de Filipinas, or the sum of P6.578.38, with legal interest thereon from January 1, 1929, the date upon which the liquidation of said business was terminated.

VI. The trial court erred in finding and holding that the value of the good-will of the fertilizer business in question was P562,312, and that the plaintiff, Francisco Bastida, was entitled to 35 per cent of such valuation, or the sum of P196,709.20, with legal interest thereon from the date of filing his complaint.

VII. The trial court erred in rendering judgment in favor of the plaintiff and against defendant, Menzi & Co., Inc., (a) on the second cause of action, for the sum of P60,385.67, with legal interest thereon from the

date of filing the complaint; (b) on the fourth cause of action, for the sum of P3,821.41, with legal interest thereon from the date of filing the complaint; (c) on the eight cause of action, for the sum of P6,578.38, with legal interest thereon from January 1, 1929; and (d) on the ninth cause of action, for the sum of P196,709.20, with legal interest thereon from the date of filing the original complaint; and (e) for the costs of the action, and in not approving the final liquidation of said business, Exhibits 51 and 51-A and 52 and 52-A, as true and correct, and entering judgment against said defendant only for the amounts admitted therein as due the plaintiff with legal interest, with the costs against the plaintiff.

VIII. The trial court erred in overruling the defendants' motion for a new trial.

It appears from the evidence that the defendants corporation was organized in 1921 for purpose of importing and selling general merchandise, including fertilizers and fertilizer ingredients. It appears through John Bordman and the Menzi-Bordman Co. the good-will, trade-marks, business, and other assets of the old German firm of Behn, Meyer & Co., Ltd., including its fertilizer business with its stocks and trade-marks. Behn, Meyer & Co., Ltd., had owned and carried on this fertilizer business from 1910 until that firm was taken over the Alien Property Custodian in 1917. Among the trade-marks thus acquired by the appellant were those known as the "ARADO", "HOZ", and "CORONA". They were registered in the Bureau of Commerce and Industry in the name of Menzi & Co. The trade marks "ARADO" and "HOZ" had been used by Behn, Meyer & Co., Ltd., in the sale of its mixed fertilizers, and the trade mark "CORONA" had been used in its other business. The "HOZ" trade-mark was used by John Bordman and the Menzi-Bordman Co. in the continuation of the fertilizer business that had belonged to Behn, Meyer & Co., Ltd.

The business of Menzi & Co., Inc., was divided into several different departments, each of which was in charge of a manager, who received a fixed salary and a percentage of the profits. The corporation had to borrow money or obtain credits from time to time and to pay interest thereon. The amount paid for interest was charged against the department concerned, and the interest charges were taken into account in determining the net profits of each department. The practice of the corporation was to debit or credit each department with interest at the bank rate on its daily balance. The fertilizer business of Menzi & Co., Inc., was carried on in accordance with this practice under the "Sundries Department" until July, 1923, and after that as a separate department.

In November, 1921, the plaintiff, who had had some experience in mixing and selling fertilizer, went to see Toehl, the manager of the sundries department of Menzi & Co., Inc., and told him that he had a written contract with the Philippine Sugar Centrals Agency for 1,250 tons of mixed fertilizers, and that he could obtain other contracts, including one from the Calamba Sugar Estates for 450 tons, but the he did not have the money to buy the ingredients to fill the order and carry on the on the business. He offered to assign to Menzi & Co., Inc., his contract with the Philippine Sugar Centrals Agency and to supervise the mixing of the fertilizer and to obtain other orders for fifty per cent of the net profits that Menzi & Co., might derive therefrom. J.M. Menzi, the general manager of Menzi & Co., accepted plaintiff's offer. Plaintiff assigned to Menzi & Co., Inc., his contract with the Sugar Centrals Agency, and the defendant corporation proceeded to fill the order. Plaintiff supervised the mixing of the fertilizer.

On January 10, 1922 the defendant corporation at plaintiff's request gave him the following letter, Exhibit B:

MANILA, 10 de enero de 1922

Sr. FRANCISCO BASTIDA Manila

MUY SR. NUESTRO: Interin formalizamos el contrato que, en principio, tenemos convenido para la explotacion del negocio de abono y fertilizantes, por la presente venimos en confirmar su derecho de 50 por ciento de las untilidades que se deriven del contrato obtenido por Vd. de la Philippine Sugar Centrals (por 1250 tonel.) y del contrato con la Calamba Sugar Estates, asi como de cuantos contratos se cierren con definitiva de nuestro contrato mutuo, lo que formalizacion definitiva de nuestro contrato mutuo, lo que hacemos para garantia y seguridad de Vd.

MENZI & CO., Por (Fdo.) W. TOEHL

Menzi & Co., Inc., continued to carry on its fertilizer business under this arrangement with the plaintiff. It ordered ingredients from the United States and other countries, and the interest on the drafts for the purchase of these materials was changed to the business as a part of the cost of the materials. The mixed fertilizers were sold by Menzi & Co., Inc., between January 19 and April 1, 1922 under its "CORONA" brand. Menzi & Co., Inc., had only one bank account for its whole business. The fertilizer business had no separate capital. A fertilizer account was opened in the general ledger, and interest at

the rate charged by the Bank of the Philippine Islands was debited or credited to that account on the daily balances of the fertilizer business. This was in accordance with appellant's established practice, to which the plaintiff assented.

On or about April 24, 1922 the net profits of the business carried on under the oral agreement were determined by Menzi & Co., Inc., after deducting interest charges, proportional part of warehouse rent and salaries and wages, and the other expenses of said business, and the plaintiff was paid some twenty thousand pesos in full satisfaction of his share of the profits.

Pursuant to the aforementioned verbal agreement, confirmed by the letter, Exhibit B, the defendant corporation April 27, 1922 entered a written contract with the plaintiff, marked Exhibit A, which is the basis of the present action.

The fertilizer business was carried on by Menzi & Co., Inc., after the execution of Exhibit A in practically the same manner as it was prior thereto. The intervention of the plaintiff was limited to supervising the mixing of the fertilizers in Menzi & Co.'s, Inc., bodegas.

The trade-marks used in the sale of the fertilizer were registered in the Bureau of Commerce & Industry in the name of Menzi & Co., Inc., and the fees were paid by that company. They were not changed to the fertilizer business, in which the plaintiff was interested. Only the fees for registering the formulas in the Bureau of Science were charged to the fertilizer business, and the total amount thereof was credited to this business in the final liquidation on April 27, 1927.

On May 3, 1924 the plaintiff made a contract with Menzi & Co., Inc., to furnish it all the stems and scraps to tobacco that it might need for its fertilizer business either in the Philippine Islands or for export to other countries. This contract is rendered to in the record as the "Vastago Contract". Menzi & Co., Inc., advanced the plaintiff, paying the salaries of his employees, and other expenses in performing his contract.

White, Page & Co., certified public accountants, audited the books of Menzi & Co., Inc., every month, and at the end of each year they prepared a balance sheet and a profit and loss statement of the fertilizer business. These statements were delivered to the plaintiff for examination, and after he had had an opportunity of verifying them he approved them without objection and returned them to Menzi & Co., Inc.

Plaintiff collected from Menzi Co., Inc., as his share or 35 per cent of the net profits of the fertilizer business the following amounts:

1922 . . . . . . . . . . . . . . . . . . . . . P1,874.73

1923 . . . . . . . . . . . . . . . . . . . . . 30,212.62

1924 . . . . . . . . . . . . . . . . . . . . . 101,081.56

1925 . . . . . . . . . . . . . . . . . . . . . 35,665.03

1926 . . . . . . . . . . . . . . . . . . . . . 27,649.98

Total . . . . . . . . . . . . . . . . . . . .

P196,483.92

To this amount must be added plaintiff's share of the net profits from January 1 to April 27, 1927, amounting to P34,766.87, making a total of P231,250.79.

Prior to the expiration of the contract, Exhibit A, the manager of Menzi & Co. Inc., notified the plaintiff that the contract for his services would not be renewed.

When plaintiff's contract expired on April 27, 1927, the fertilizer department of Menzi & Co., Inc., had on hand materials and ingredients and two Ford trucks of the book value of approximately P75,000, and accounts receivable amounting to P103,000. There were claims outstanding and bills to pay. Before the net profits could be finally determined, it was necessary to dispose of the materials and equipment, collect the outstanding accounts for Menzi & Co., Inc., prepared a balance sheet and a profit and loss statement for the period from January 1 to April 27, 1927 as a basis of settlement, but the plaintiff refused to accept it, and filed the present action.

Menzi & Co., Inc., then proceeded to liquidate fertilizer business in question. In October, 1927 it proposed to the plaintiff that the old and damaged stocks on hand having a book value of P40,000, which the defendant corporation had been unable to dispose of, be sold at public or private sale, or divided between the parties. The plaintiff refused to agree to this. The defendant corporation then applied to the trial court for an order for the sale of the remaining property at public auction, but apparently the court did not act on the petition.

The old stocks were taken over by Menzi & Co., Inc., and the final liquidation of the fertilizer business was completed in December, 1928 and a final balance sheet and a profit and loss statement were submitted to the plaintiff during the trial. During the liquidation the books of Menzi & Co., Inc., for the whole period of the contract in question were reaudited by White, Page & Co.., certain errors of bookkeeping were discovered by them. After making the corrections they found the balance due the plaintiff to be P21,633.20.

Plaintiff employed a certified public accountant, Vernon Thompson, to examine the books and vouchers of Menzi & Co. Thompson assumed the plaintiff and Menzi & Co., Inc., to be partners, and that Menzi & Co., Inc., was obliged to furnish free of charge all the capital the partnership should need. He naturally reached very different conclusions from those of the auditors of Menzi Co., Inc.

We come now to a consideration of appellant's assignment of error. After considering the evidence and the arguments of counsel, we are unanimously of the opinion that under the facts of this case the relationship established between Menzi & Co. and by the plaintiff was to receive 35 per cent of the net profits of the fertilizer business of Menzi & Co., Inc., in compensation for his services of supervising the mixing of the fertilizers. Neither the provisions of the contract nor the conduct of the parties prior or subsequent to its execution justified the finding that it was a contract of copartnership. Exhibit A, as appears from the statement of facts, was in effect a continuation of the verbal agreement between the parties, whereby the plaintiff worked for the defendant corporation for one-half of the net profits derived by the corporation from certain fertilizer contracts. Plaintiff was paid his share of the profits from those transactions after Menzi & Co., Inc., had deducted the same items of expense which he now protests. Plaintiff never made any objection to defendant's manner of keeping the accounts or to the charges. The business was continued in the same manner under the written agreement, Exhibit A, and for four years the plaintiff never made any objection. On the contrary he approved and signed every year the balance sheet and the profit and loss statement. It was only when plaintiff's contract was about to expire and the defendant corporation had notified him that it would not renew it that the plaintiff began to make objections.

The trial court relied on article 116 of the Code of Commerce, which provides that articles of association by which two or more persons obligate themselves to place in a common fund any property, industry, or any of these things, in order to obtain profit, shall be commercial, no matter what its class may be, provided it has been established in accordance with the provisions of this Code; but in the case at bar there was no common fund, that is, a fund belonging to the parties as joint owners or partners. The business belonged

to Menzi & Co., Inc. The plaintiff was working for Menzi & Co., Inc. Instead of receiving a fixed salary or a fixed salary and a small percentage of the net profits, he was to receive 35 per cent of the net profits as compensation for his services. Menzi & Co., Inc., was to advanced him P300 a month on account of his participation in the profits. It will be noted that no provision was made for reimbursing Menzi & Co., Inc., in case there should be no net profits at the end of the year. It is now well settled that the old rule that sharing profits as profits made one a partner is overthrown. (Mechem, second edition, p. 89.)

It is nowhere stated in Exhibit A that the parties were establishing a partnership or intended to become partners. Great stress in laid by the trial judge and plaintiff's attorneys on the fact that in the sixth paragraph of Exhibit A the phrase "en sociedad con" is used in providing that defendant corporation not engage in the business of prepared fertilizers except in association with the plaintiff (en sociedad con). The fact is that en sociedad con as there used merely means en reunion con or in association with, and does not carry the meaning of "in partnership with".

The trial judge found that the defendant corporation had not always regarded the contract in question as an employment agreement, because in its answer to the original complaint it stated that before the expiration of Exhibit A it notified the plaintiff that it would not continue associated with him in said business. The trial judge concluded that the phrase "associated with", used by the defendant corporation, indicated that it regarded the contract, Exhibit A, as an agreement of copartnership.

In the first place, the complaint and answer having been superseded by the amended complaint and the answer thereto, and the answer to the original complaint not having been presented in evidence as an exhibit, the trial court was not authorized to take it into account. "Where amended pleadings have been filed, allegations in the original pleadings are held admissible, but in such case the original pleadings can have no effect, unless formally offered in evidence." (Jones on Evidence, sec. 273; Lucido vs. Calupitan, 27 Phil., 148.)

In the second place, although the word "associated" may be related etymologically to the Spanish word "socio", meaning partner, it does not in its common acceptation imply any partnership relation.

The 7th, 8th, and 9th paragraphs of Exhibit A, whereby the defendant corporation obligated itself to pay to the plaintiff 35 per cent of the net profits of the fertilizer business, to advance to him P300 a month on account of his share of the profits, and to grant him permission during 1923 to absent

himself from the Philippines for not more than one year are utterly incompatible with the claim that it was the intention of the parties to form a copartnership. Various other reasons for holding that the parties were not partners are advanced in appellant's brief. We do not deem it necessary to discuss them here. We merely wish to add that in the Vastago contract, Exhibit A, the plaintiff clearly recognized Menzi & Co., Inc., as the owners of the fertilizer business in question.

As to the various items of the expense rejected by the trial judge, they were in our opinion proper charges and erroneously disallowed, and this would true even if the parties had been partners. Although Menzi & Co., Inc., agreed to furnish the necessary financial aid for the fertilizer business, it did not obligate itself to contribute any fixed sum as capital or to defray at its own expense the cost of securing the necessary credit. Some of the contentions of the plaintiff and his expert witness Thompson are so obviously without merit as not to merit serious consideration. For instance, they objected to the interest charges on draft for materials purchased abroad. Their contention is that the corporation should have furnished the money to purchase these materials for cash, overlooking the fact that the interest was added to the cost price, and that the plaintiff was not prejudiced by the practice complained of. It was also urged, and this seems to us the height of absurdity, that the defendant corporation should have furnished free of charge such financial assistance as would have made it unnecessary to discount customers' notes, thereby enabling the business to reap the interest. In other words, the defendant corporation should have enabled the fertilizer department to do business on a credit instead of a cash basis.

The charges now complained of, as we have already stated, are the same as those made under the verbal agreement, upon the termination of which the parties made a settlement; the charges in question were acquiesced in by the plaintiff for years, and it is now too late for him to contest them. The decision of this court in the case of Kriedt vs. E.C. McCullough & Co. (37 Phil., 474), is in point. A portion of the syllabus of that case reads as follows:

1. CONTRACTS; INTERPRETATION; CONTEMPORANEOUS ACTS OF PARTIES. — Acts done by the parties to a contract in the course of its performance are admissible in evidence upon the question of its meaning, as being their own contemporaneous interpretation of its terms.

2. ID, ID; ACTION OF PARTIES UNDER PRIOR CONTRACT. — In an action upon a contract containing a provision a doubtful application it appeared that under a similar prior contract the parties had, upon the termination of said contract, adjusted their rights and

made a settlement in which the doubtful clause had been given effect in conformity with the interpretation placed thereon by one of the parties. Held: That this action of the parties under the prior contract could properly be considered upon the question of the interpretation of the same clause in the later contract.

3. ID.; ID.; ACQUIESCENCE. — Where one of the parties to a contract acquiesces in the interpretation placed by the other upon a provision of doubtful application, the party so acquiescing is bound by such interpretation.

4. ID.; ID.; ILLUSTRATION. — One of the parties to a contract, being aware at the time of the execution thereof that the other placed a certain interpretation upon a provision of doubtful application, nevertheless proceeded, without raising any question upon the point, to perform the services which he was bound to render under the contract. Upon the termination of the contract by mutual consent a question was raised as to the proper interpretation of the doubtful provision. Held: That the party raising such question had acquiesced in the interpretation placed upon the contract by the other party and was bound thereby.

The trial court held that the plaintiff was entitled to P6,578.38 or 35 per cent of the net profits derived by Menzi & Co., Inc., from its contract for fertilizers with the Tabacalera. This finding in our opinion is not justified by the evidence. This contract was obtained by Menzi & Co., Inc., shortly before plaintiff's contract with the defendant corporation expired. Plaintiff tried to get the Tabacalera contract for himself. When this contract was filled, plaintiff had ceased to work for Menzi & Co., Inc., and he has no right to participate in the profits derived therefrom.

Appellant's sixth assignment of error is that the trial court erred in finding the value of the good-will of the fertilizer business in question to be P562,312, and that the plaintiff was entitled to 35 per cent thereof or P196,709.20. In reaching this conclusion the trial court unfortunately relied on the opinion of the accountant, Vernon Thompson, who assumed, erroneously as we have seen, that the plaintiff and Menzi & Co., Inc., were partners; but even if they had been partners there would have been no good-will to dispose of. The defendant corporation had a fertilizer business before it entered into any agreement with the plaintiff; plaintiff's agreement was for a fixed period, five years, and during that time the business was carried on in the name of Menzi & Co., Inc., and in Menzi & Co.'s warehouses and after the expiration of plaintiff's contract Menzi & Co., Inc., continued its fertilizer business, as it had a perfect right to do. There was really nothing to which any good-will could

attach. Plaintiff maintains, however, that the trade-marks used in the fertilizer business during the time that he was connected with it acquired great value, and that they have been appropriated by the appellant to its own use. That seems to be the only basis of the alleged good-will, to which a fabulous valuation was given. As we have seen, the trade- marks were not new. They had been used by Behn, Meyer & Co. in its business for other goods and one of them for fertilizer. They belonged to Menzi & Co., Inc., and were registered in its name; only the expense of registering the formulas in the Bureau of Science was charged to the business in which the plaintiff was interested. These trade-marks remained the exclusive property of Menzi & Co., and the plaintiff had no interest therein on the expiration of his contract.

The balance due the plaintiff, as appears from Exhibit 52, is P21,633.20. We are satisfied by the evidence that said balance is correct.

For the foregoing reasons, the decision appealed from is modified and the defendant corporation is sentenced to pay the plaintiff twenty-one thousand, six hundred and thirty-three pesos and twenty centavos (P21,633.20), with legal interest thereon from the date of the filing of the complaint on June 17, 1927, without a special finding as to costs.

Street, Villamor, and Villa-Real, JJ., concur.

Republic of the Philippines SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 142293 February 27, 2003

VICENTE SY, TRINIDAD PAULINO, 6B’S TRUCKING CORPORATION, and SBT1 TRUCKING CORPORATION,petitioners, vs. HON. COURT OF APPEALS and JAIME SAHOT, respondents.

D E C I S I O N

QUISUMBING, J.:

This petition for review seeks the reversal of the decision2 of the Court of Appeals dated February 29, 2000, in CA-G.R. SP No. 52671, affirming with modification the decision3 of the National Labor Relations Commission promulgated on June 20, 1996 in NLRC NCR CA No. 010526-96. Petitioners also pray for the reinstatement of the decision4 of the Labor Arbiter in NLRC NCR Case No. 00-09-06717-94.

Culled from the records are the following facts of this case:

Sometime in 1958, private respondent Jaime Sahot5 started working as a truck helper for petitioners’ family-owned trucking business named Vicente Sy Trucking. In 1965, he became a truck driver of the same family business, renamed T. Paulino Trucking Service, later 6B’s Trucking Corporation in 1985, and thereafter known as SBT Trucking Corporation since 1994. Throughout all these changes in names and for 36 years, private respondent continuously served the trucking business of petitioners.

In April 1994, Sahot was already 59 years old. He had been incurring absences as he was suffering from various ailments. Particularly causing him pain was his left thigh, which greatly affected the performance of his task as a driver. He inquired about his medical and retirement benefits with the Social Security System (SSS) on April 25, 1994, but discovered that his premium payments had not been remitted by his employer.

Sahot had filed a week-long leave sometime in May 1994. On May 27th, he was medically examined and treated for EOR, presleyopia, hypertensive

retinopathy G II (Annexes "G-5" and "G-3", pp. 48, 104, respectively),6 HPM, UTI, Osteoarthritis (Annex "G-4", p. 105),7 and heart enlargement (Annex G, p. 107).8 On said grounds, Belen Paulino of the SBT Trucking Service management told him to file a formal request for extension of his leave. At the end of his week-long absence, Sahot applied for extension of his leave for the whole month of June, 1994. It was at this time when petitioners allegedly threatened to terminate his employment should he refuse to go back to work.

At this point, Sahot found himself in a dilemma. He was facing dismissal if he refused to work, But he could not retire on pension because petitioners never paid his correct SSS premiums. The fact remained he could no longer work as his left thigh hurt abominably. Petitioners ended his dilemma. They carried out their threat and dismissed him from work, effective June 30, 1994. He ended up sick, jobless and penniless.

On September 13, 1994, Sahot filed with the NLRC NCR Arbitration Branch, a complaint for illegal dismissal, docketed as NLRC NCR Case No. 00-09-06717-94. He prayed for the recovery of separation pay and attorneys fees against Vicente Sy and Trinidad Paulino-Sy, Belen Paulino, Vicente Sy Trucking, T. Paulino Trucking Service, 6B’s Trucking and SBT Trucking, herein petitioners.

For their part, petitioners admitted they had a trucking business in the 1950s but denied employing helpers and drivers. They contend that private respondent was not illegally dismissed as a driver because he was in fact petitioner’s industrial partner. They add that it was not until the year 1994, when SBT Trucking Corporation was established, and only then did respondent Sahot become an employee of the company, with a monthly salary that reached P4,160.00 at the time of his separation.

Petitioners further claimed that sometime prior to June 1, 1994, Sahot went on leave and was not able to report for work for almost seven days. On June 1, 1994, Sahot asked permission to extend his leave of absence until June 30, 1994. It appeared that from the expiration of his leave, private respondent never reported back to work nor did he file an extension of his leave. Instead, he filed the complaint for illegal dismissal against the trucking company and its owners.

Petitioners add that due to Sahot’s refusal to work after the expiration of his authorized leave of absence, he should be deemed to have voluntarily resigned from his work. They contended that Sahot had all the time to extend his leave or at least inform petitioners of his health condition. Lastly, they cited NLRC Case No. RE-4997-76, entitled "Manuelito Jimenez et al. vs. T.

Paulino Trucking Service," as a defense in view of the alleged similarity in the factual milieu and issues of said case to that of Sahot’s, hence they are in pari material and Sahot’s complaint ought also to be dismissed.

The NLRC NCR Arbitration Branch, through Labor Arbiter Ariel Cadiente Santos, ruled that there was no illegal dismissal in Sahot’s case. Private respondent had failed to report to work. Moreover, said the Labor Arbiter, petitioners and private respondent were industrial partners before January 1994. The Labor Arbiter concluded by ordering petitioners to pay "financial assistance" of P15,000 to Sahot for having served the company as a regular employee since January 1994 only.

On appeal, the National Labor Relations Commission modified the judgment of the Labor Arbiter. It declared that private respondent was an employee, not an industrial partner, since the start. Private respondent Sahot did not abandon his job but his employment was terminated on account of his illness, pursuant to Article 2849 of the Labor Code. Accordingly, the NLRC ordered petitioners to pay private respondent separation pay in the amount of P60,320.00, at the rate of P2,080.00 per year for 29 years of service.

Petitioners assailed the decision of the NLRC before the Court of Appeals. In its decision dated February 29, 2000, the appellate court affirmed with modification the judgment of the NLRC. It held that private respondent was indeed an employee of petitioners since 1958. It also increased the amount of separation pay awarded to private respondent to P74,880, computed at the rate of P2,080 per year for 36 years of service from 1958 to 1994. It decreed:

WHEREFORE, the assailed decision is hereby AFFIRMED with MODIFICATION. SB Trucking Corporation is hereby directed to pay complainant Jaime Sahot the sum of SEVENTY-FOUR THOUSAND EIGHT HUNDRED EIGHTY (P74,880.00) PESOS as and for his separation pay.10

Hence, the instant petition anchored on the following contentions:

I

RESPONDENT COURT OF APPEALS IN PROMULGATING THE QUESTION[ED] DECISION AFFIRMING WITH MODIFICATION THE DECISION OF NATIONAL LABOR RELATIONS COMMISSION DECIDED NOT IN ACCORD WITH LAW AND PUT AT NAUGHT ARTICLE 402 OF THE CIVIL CODE.11

II

RESPONDENT COURT OF APPEALS VIOLATED SUPREME COURT RULING THAT THE NATIONAL LABOR RELATIONS COMMISSION IS BOUND BY THE FACTUAL FINDINGS OF THE LABOR ARBITER AS THE LATTER WAS IN A BETTER POSITION TO OBSERVE THE DEMEANOR AND DEPORTMENT OF THE WITNESSES IN THE CASE OF ASSOCIATION OF INDEPENDENT UNIONS IN THE PHILIPPINES VERSUS NATIONAL CAPITAL REGION (305 SCRA 233).12

III

PRIVATE RESPONDENT WAS NOT DISMISS[ED] BY RESPONDENT SBT TRUCKING CORPORATION.13

Three issues are to be resolved: (1) Whether or not an employer-employee relationship existed between petitioners and respondent Sahot; (2) Whether or not there was valid dismissal; and (3) Whether or not respondent Sahot is entitled to separation pay.

Crucial to the resolution of this case is the determination of the first issue. Before a case for illegal dismissal can prosper, an employer-employee relationship must first be established.14

Petitioners invoke the decision of the Labor Arbiter Ariel Cadiente Santos which found that respondent Sahot was not an employee but was in fact, petitioners’ industrial partner.15 It is contended that it was the Labor Arbiter who heard the case and had the opportunity to observe the demeanor and deportment of the parties. The same conclusion, aver petitioners, is supported by substantial evidence.16 Moreover, it is argued that the findings of fact of the Labor Arbiter was wrongly overturned by the NLRC when the latter made the following pronouncement:

We agree with complainant that there was error committed by the Labor Arbiter when he concluded that complainant was an industrial partner prior to 1994. A computation of the age of complainant shows that he was only twenty-three (23) years when he started working with respondent as truck helper. How can we entertain in our mind that a twenty-three (23) year old man, working as a truck helper, be considered an industrial partner. Hence we rule that complainant was only an employee, not a partner of respondents from the time complainant started working for respondent.17

Because the Court of Appeals also found that an employer-employee relationship existed, petitioners aver that the appellate court’s decision gives an "imprimatur" to the "illegal" finding and conclusion of the NLRC.

Private respondent, for his part, denies that he was ever an industrial partner of petitioners. There was no written agreement, no proof that he received a share in petitioners’ profits, nor was there anything to show he had any participation with respect to the running of the business.18

The elements to determine the existence of an employment relationship are: (a) the selection and engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employer’s power to control the employee’s conduct. The most important element is the employer’s control of the employee’s conduct, not only as to the result of the work to be done, but also as to the means and methods to accomplish it.19

As found by the appellate court, petitioners owned and operated a trucking business since the 1950s and by their own allegations, they determined private respondent’s wages and rest day.20 Records of the case show that private respondent actually engaged in work as an employee. During the entire course of his employment he did not have the freedom to determine where he would go, what he would do, and how he would do it. He merely followed instructions of petitioners and was content to do so, as long as he was paid his wages. Indeed, said the CA, private respondent had worked as a truck helper and driver of petitioners not for his own pleasure but under the latter’s control.

Article 176721 of the Civil Code states that in a contract of partnership two or more persons bind themselves to contribute money, property or industry to a common fund, with the intention of dividing the profits among themselves.22 Not one of these circumstances is present in this case. No written agreement exists to prove the partnership between the parties. Private respondent did not contribute money, property or industry for the purpose of engaging in the supposed business. There is no proof that he was receiving a share in the profits as a matter of course, during the period when the trucking business was under operation. Neither is there any proof that he had actively participated in the management, administration and adoption of policies of the business. Thus, the NLRC and the CA did not err in reversing the finding of the Labor Arbiter that private respondent was an industrial partner from 1958 to 1994.

On this point, we affirm the findings of the appellate court and the NLRC. Private respondent Jaime Sahot was not an industrial partner but an employee of petitioners from 1958 to 1994. The existence of an employer-

employee relationship is ultimately a question of fact23 and the findings thereon by the NLRC, as affirmed by the Court of Appeals, deserve not only respect but finality when supported by substantial evidence. Substantial evidence is such amount of relevant evidence which a reasonable mind might accept as adequate to justify a conclusion.24

Time and again this Court has said that "if doubt exists between the evidence presented by the employer and the employee, the scales of justice must be tilted in favor of the latter."25 Here, we entertain no doubt. Private respondent since the beginning was an employee of, not an industrial partner in, the trucking business.

Coming now to the second issue, was private respondent validly dismissed by petitioners?

Petitioners contend that it was private respondent who refused to go back to work. The decision of the Labor Arbiter pointed out that during the conciliation proceedings, petitioners requested respondent Sahot to report back for work. However, in the same proceedings, Sahot stated that he was no longer fit to continue working, and instead he demanded separation pay. Petitioners then retorted that if Sahot did not like to work as a driver anymore, then he could be given a job that was less strenuous, such as working as a checker. However, Sahot declined that suggestion. Based on the foregoing recitals, petitioners assert that it is clear that Sahot was not dismissed but it was of his own volition that he did not report for work anymore.

In his decision, the Labor Arbiter concluded that:

While it may be true that respondents insisted that complainant continue working with respondents despite his alleged illness, there is no direct evidence that will prove that complainant’s illness prevents or incapacitates him from performing the function of a driver. The fact remains that complainant suddenly stopped working due to boredom or otherwise when he refused to work as a checker which certainly is a much less strenuous job than a driver.26

But dealing the Labor Arbiter a reversal on this score the NLRC, concurred in by the Court of Appeals, held that:

While it was very obvious that complainant did not have any intention to report back to work due to his illness which incapacitated him to perform his job, such intention cannot be construed to be an abandonment. Instead, the same should have been considered as one of those falling under the just

causes of terminating an employment. The insistence of respondent in making complainant work did not change the scenario.

It is worthy to note that respondent is engaged in the trucking business where physical strength is of utmost requirement (sic). Complainant started working with respondent as truck helper at age twenty-three (23), then as truck driver since 1965. Complainant was already fifty-nine (59) when the complaint was filed and suffering from various illness triggered by his work and age.

x x x27

In termination cases, the burden is upon the employer to show by substantial evidence that the termination was for lawful cause and validly made.28 Article 277(b) of the Labor Code puts the burden of proving that the dismissal of an employee was for a valid or authorized cause on the employer, without distinction whether the employer admits or does not admit the dismissal.29 For an employee’s dismissal to be valid, (a) the dismissal must be for a valid cause and (b) the employee must be afforded due process.30

Article 284 of the Labor Code authorizes an employer to terminate an employee on the ground of disease, viz:

Art. 284. Disease as a ground for termination- An employer may terminate the services of an employee who has been found to be suffering from any disease and whose continued employment is prohibited by law or prejudicial to his health as well as the health of his co-employees: xxx

However, in order to validly terminate employment on this ground, Book VI, Rule I, Section 8 of the Omnibus Implementing Rules of the Labor Code requires:

Sec. 8. Disease as a ground for dismissal- Where the employee suffers from a disease and his continued employment is prohibited by law or prejudicial to his health or to the health of his co-employees, the employer shall not terminate his employment unless there is a certification by competent public health authority that the disease is of such nature or at such a stage that it cannot be cured within a period of six (6) months even with proper medical treatment. If the disease or ailment can be cured within the period, the employer shall not terminate the employee but shall ask the employee to take a leave. The employer shall reinstate such employee to his former position immediately upon the restoration of his normal health. (Italics supplied).

As this Court stated in Triple Eight integrated Services, Inc. vs. NLRC,31 the requirement for a medical certificate under Article 284 of the Labor Code cannot be dispensed with; otherwise, it would sanction the unilateral and arbitrary determination by the employer of the gravity or extent of the employee’s illness and thus defeat the public policy in the protection of labor.

In the case at bar, the employer clearly did not comply with the medical certificate requirement before Sahot’s dismissal was effected. In the same case of Sevillana vs. I.T. (International) Corp., we ruled:

Since the burden of proving the validity of the dismissal of the employee rests on the employer, the latter should likewise bear the burden of showing that the requisites for a valid dismissal due to a disease have been complied with. In the absence of the required certification by a competent public health authority, this Court has ruled against the validity of the employee’s dismissal. It is therefore incumbent upon the private respondents to prove by the quantum of evidence required by law that petitioner was not dismissed, or if dismissed, that the dismissal was not illegal; otherwise, the dismissal would be unjustified. This Court will not sanction a dismissal premised on mere conjectures and suspicions, the evidence must be substantial and not arbitrary and must be founded on clearly established facts sufficient to warrant his separation from work.32

In addition, we must likewise determine if the procedural aspect of due process had been complied with by the employer.

From the records, it clearly appears that procedural due process was not observed in the separation of private respondent by the management of the trucking company. The employer is required to furnish an employee with two written notices before the latter is dismissed: (1) the notice to apprise the employee of the particular acts or omissions for which his dismissal is sought, which is the equivalent of a charge; and (2) the notice informing the employee of his dismissal, to be issued after the employee has been given reasonable opportunity to answer and to be heard on his defense.33 These, the petitioners failed to do, even only for record purposes. What management did was to threaten the employee with dismissal, then actually implement the threat when the occasion presented itself because of private respondent’s painful left thigh.

All told, both the substantive and procedural aspects of due process were violated. Clearly, therefore, Sahot’s dismissal is tainted with invalidity.

On the last issue, as held by the Court of Appeals, respondent Jaime Sahot is entitled to separation pay. The law is clear on the matter. An employee who is terminated because of disease is entitled to "separation pay equivalent to at least one month salary or to one-half month salary for every year of service, whichever is greater xxx."34Following the formula set in Art. 284 of the Labor Code, his separation pay was computed by the appellate court at P2,080 times 36 years (1958 to 1994) or P74,880. We agree with the computation, after noting that his last monthly salary was P4,160.00 so that one-half thereof is P2,080.00. Finding no reversible error nor grave abuse of discretion on the part of appellate court, we are constrained to sustain its decision. To avoid further delay in the payment due the separated worker, whose claim was filed way back in 1994, this decision is immediately executory. Otherwise, six percent (6%) interest per annum should be charged thereon, for any delay, pursuant to provisions of the Civil Code.

WHEREFORE, the petition is DENIED and the decision of the Court of Appeals dated February 29, 2000 is AFFIRMED. Petitioners must pay private respondent Jaime Sahot his separation pay for 36 years of service at the rate of one-half monthly pay for every year of service, amounting to P74,880.00, with interest of six per centum (6%) per annum from finality of this decision until fully paid.

Costs against petitioners.

SO ORDERED.

Republic of the Philippines Supreme Court

Manila

THIRD DIVISION

HEIRS OF JOSE LIM, represented by ELENITO LIM,

Petitioners,

- versus - JULIET VILLA LIM,

Respondent.

G.R. No. 172690 Present: CORONA, J., Chairperson, VELASCO, JR., NACHURA, DEL CASTILLO,* and MENDOZA, JJ. Promulgated: March 3, 2010

x------------------------------------------------------------------------------------x DECISION

NACHURA, J.: Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil Procedure, assailing the Court of Appeals (CA) Decision[2] dated June 29, 2005, which reversed and set aside the decision[3] of the Regional Trial Court (RTC) of Lucena City, dated April 12, 2004.

The facts of the case are as follows: Petitioners are the heirs of the late Jose Lim (Jose), namely: Jose's widow Cresencia Palad (Cresencia); and their children Elenito, Evelia, Imelda, Edelyna and Edison, all surnamed Lim (petitioners), represented by Elenito Lim (Elenito). They filed a Complaint[4] for Partition, Accounting and Damages against respondent Juliet Villa Lim (respondent), widow of the late Elfledo Lim (Elfledo), who was the eldest son of Jose and Cresencia.

Petitioners alleged that Jose was the liaison officer of Interwood Sawmill in Cagsiay, Mauban, Quezon. Sometime in 1980, Jose, together with his friends Jimmy Yu (Jimmy) and Norberto Uy (Norberto), formed a partnership to engage in the trucking business. Initially, with a contribution of P50,000.00 each, they purchased a truck to be used in the hauling and transport of lumber of the sawmill. Jose managed the operations of this trucking business until his death on August 15, 1981. Thereafter, Jose's heirs, including Elfledo, and partners agreed to continue the business under the management of Elfledo. The shares in the partnership profits and income that formed part of the estate of Jose were held in trust by Elfledo, with petitioners' authority for Elfledo to use, purchase or acquire properties using said funds. Petitioners also alleged that, at that time, Elfledo was a fresh commerce graduate serving as his father’s driver in the trucking business. He was never a partner or an investor in the business and merely supervised the purchase of additional trucks using the income from the trucking business of the partners. By the time the partnership ceased, it had nine trucks, which were all registered in Elfledo's name. Petitioners asseverated that it was also through Elfledo’s management of the partnership that he was able to purchase numerous real properties by using the profits derived therefrom, all of which were registered in his name and that of respondent. In addition to the nine trucks, Elfledo also acquired five other motor vehicles. On May 18, 1995, Elfledo died, leaving respondent as his sole surviving heir. Petitioners claimed that respondent took over the administration of the aforementioned properties, which belonged to the estate of Jose, without their consent and approval. Claiming that they are co-owners of the properties, petitioners required respondent to submit an accounting of all income, profits and rentals received from the estate of Elfledo, and to surrender the administration thereof. Respondent refused; thus, the filing of this case.

Respondent traversed petitioners' allegations and claimed that Elfledo was himself a partner of Norberto and Jimmy. Respondent also claimed that per testimony of Cresencia, sometime in 1980, Jose gave Elfledo P50,000.00 as the latter's capital in an informal partnership with Jimmy and Norberto. When Elfledo and respondent got married in 1981, the partnership only had one truck; but through the efforts of Elfledo, the business flourished. Other than this trucking business, Elfledo, together with respondent, engaged in other business ventures. Thus, they were able to buy real properties and to put up their own car assembly and repair business. When Norberto was ambushed and killed on July 16, 1993, the trucking business started to falter. When Elfledo died on May 18, 1995 due to a heart attack, respondent talked to Jimmy and to the heirs of Norberto, as she could no longer run the business. Jimmy suggested that three out of the nine trucks be given to him as his share, while the other three trucks be given to the heirs of Norberto. However, Norberto's wife, Paquita Uy, was not interested in the vehicles. Thus, she sold the same to respondent, who paid for them in installments. Respondent also alleged that when Jose died in 1981, he left no known assets, and the partnership with Jimmy and Norberto ceased upon his demise. Respondent also stressed that Jose left no properties that Elfledo could have held in trust. Respondent maintained that all the properties involved in this case were purchased and acquired through her and her husband’s joint efforts and hard work, and without any participation or contribution from petitioners or from Jose. Respondent submitted that these are conjugal partnership properties; and thus, she had the right to refuse to render an accounting for the income or profits of their own business. Trial on the merits ensued. On April 12, 2004, the RTC rendered its decision in favor of petitioners, thus:

WHEREFORE, premises considered, judgment is hereby rendered: 1) Ordering the partition of the above-mentioned properties equally between the plaintiffs and heirs of Jose Lim and the defendant Juliet Villa-Lim; and 2) Ordering the defendant to submit an accounting of all incomes, profits and rentals received by her from said properties. SO ORDERED.

Aggrieved, respondent appealed to the CA. On June 29, 2005, the CA reversed and set aside the RTC's decision, dismissing petitioners' complaint for lack of merit. Undaunted, petitioners filed their Motion for Reconsideration,[5] which the CA, however, denied in its Resolution[6] dated May 8, 2006. Hence, this Petition, raising the sole question, viz.:

IN THE APPRECIATION BY THE COURT OF THE EVIDENCE SUBMITTED BY THE PARTIES, CAN THE TESTIMONY OF ONE OF THE PETITIONERS BE GIVEN GREATER WEIGHT THAN THAT BY A FORMER PARTNER ON THE ISSUE OF THE IDENTITY OF THE OTHER PARTNERS IN THE PARTNERSHIP?[7]

In essence, petitioners argue that according to the testimony of Jimmy, the sole surviving partner, Elfledo was not a partner; and that he and Norberto entered into a partnership with Jose. Thus, the CA erred in not giving that testimony greater weight than that of Cresencia, who was merely the spouse of Jose and not a party to the partnership.[8] Respondent counters that the issue raised by petitioners is not proper in a petition for review on certiorari under Rule 45 of the Rules of Civil Procedure, as it would entail the review, evaluation, calibration, and re-weighing of the factual findings of the CA. Moreover, respondent invokes the rationale of the CA decision that, in light of the admissions of Cresencia and Edison and the testimony of respondent, the testimony of Jimmy was effectively refuted; accordingly, the CA's reversal of the RTC's findings was fully justified.[9] We resolve first the procedural matter regarding the propriety of the instant Petition. Verily, the evaluation and calibration of the evidence necessarily involves consideration of factual issues — an exercise that is not appropriate for a petition for review on certiorari under Rule 45. This rule provides that the parties may raise only questions of law, because the Supreme Court is not a trier of facts. Generally, we are not duty-bound to analyze again and

weigh the evidence introduced in and considered by the tribunals below.[10] When supported by substantial evidence, the findings of fact of the CA are conclusive and binding on the parties and are not reviewable by this Court, unless the case falls under any of the following recognized exceptions:

(1) When the conclusion is a finding grounded entirely on speculation, surmises and conjectures; (2) When the inference made is manifestly mistaken, absurd or impossible; (3) Where there is a grave abuse of discretion; (4) When the judgment is based on a misapprehension of facts; (5) When the findings of fact are conflicting; (6) When the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) When the findings are contrary to those of the trial court; (8) When the findings of fact are conclusions without citation of specific evidence on which they are based; (9) When the facts set forth in the petition as well as in the petitioners' main and reply briefs are not disputed by the respondents; and (10) When the findings of fact of the Court of Appeals are premised on the supposed absence of evidence and contradicted by the evidence on record.[11]

We note, however, that the findings of fact of the RTC are contrary to those of the CA. Thus, our review of such findings is warranted.

On the merits of the case, we find that the instant Petition is bereft of merit. A partnership exists when two or more persons agree to place their money, effects, labor, and skill in lawful commerce or business, with the understanding that there shall be a proportionate sharing of the profits and losses among them. A contract of partnership is defined by the Civil Code as one where two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.[12] Undoubtedly, the best evidence would have been the contract of partnership or the articles of partnership. Unfortunately, there is none in this case, because the alleged partnership was never formally organized. Nonetheless, we are asked to determine who between Jose and Elfledo was the “partner” in the trucking business. A careful review of the records persuades us to affirm the CA decision. The evidence presented by petitioners falls short of the quantum of proof required to establish that: (1) Jose was the partner and not Elfledo; and (2) all the properties acquired by Elfledo and respondent form part of the estate of Jose, having been derived from the alleged partnership. Petitioners heavily rely on Jimmy's testimony. But that testimony is just one piece of evidence against respondent. It must be considered and weighed along with petitioners' other evidence vis-à-vis respondent's contrary evidence. In civil cases, the party having the burden of proof must establish his case by a preponderance of evidence. "Preponderance of evidence" is the weight, credit, and value of the aggregate evidence on either side and is usually considered synonymous with the term "greater weight of the evidence" or "greater weight of the credible evidence." "Preponderance of evidence" is a phrase that, in the last analysis, means probability of the truth. It is evidence that is more convincing to the court as worthy of belief than that which is offered in opposition thereto.[13] Rule 133, Section 1 of the Rules of Court provides the guidelines in determining preponderance of evidence, thus:

SECTION I. Preponderance of evidence, how determined. In civil cases, the party having burden of proof must establish his case by a preponderance of evidence. In determining where the preponderance or superior weight of evidence on the issues involved lies, the court may consider all the facts and circumstances of the case, the witnesses' manner of testifying, their intelligence, their means and

opportunity of knowing the facts to which they are testifying, the nature of the facts to which they testify, the probability or improbability of their testimony, their interest or want of interest, and also their personal credibility so far as the same may legitimately appear upon the trial. The court may also consider the number of witnesses, though the preponderance is not necessarily with the greater number.

At this juncture, our ruling in Heirs of Tan Eng Kee v. Court of Appeals[14] is enlightening. Therein, we cited Article 1769 of the Civil Code, which provides:

Art. 1769. In determining whether a partnership exists, these rules shall apply: (1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons; (2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property; (3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived;

(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:

(a) As a debt by installments or otherwise; (b) As wages of an employee or rent to a landlord; (c) As an annuity to a widow or representative of a deceased partner; (d) As interest on a loan, though the amount of payment vary with the profits of the business; (e) As the consideration for the sale of a goodwill of a business or other property by installments or otherwise.

Applying the legal provision to the facts of this case, the following circumstances tend to prove that Elfledo was himself the partner of Jimmy and Norberto: 1) Cresencia testified that Jose gave Elfledo P50,000.00, as share in the partnership, on a date that coincided with the payment of the initial capital in the partnership;[15] (2) Elfledo ran the affairs of the partnership, wielding absolute control, power and authority, without any intervention or opposition whatsoever from any of petitioners herein;[16] (3) all of the properties, particularly the nine trucks of the partnership, were registered in the name of Elfledo; (4) Jimmy testified that Elfledo did not receive wages or salaries from the partnership, indicating that what he actually received were shares of the profits of the business;[17] and (5) none of the petitioners, as heirs of Jose, the alleged partner, demanded periodic accounting from Elfledo during his lifetime. As repeatedly stressed in Heirs of Tan Eng Kee,[18]a demand for periodic accounting is evidence of a partnership. Furthermore, petitioners failed to adduce any evidence to show that the real and personal properties acquired and registered in the names of Elfledo and respondent formed part of the estate of Jose, having been derived from Jose's alleged partnership with Jimmy and Norberto. They failed to refute respondent's claim that Elfledo and respondent engaged in other businesses. Edison even admitted that Elfledo also sold Interwood lumber as a sideline.[19] Petitioners could not offer any credible evidence other than their bare assertions. Thus, we apply the basic rule of evidence that between documentary and oral evidence, the former carries more weight.[20] Finally, we agree with the judicious findings of the CA, to wit:

The above testimonies prove that Elfledo was not just a hired help but one of the partners in the trucking business, active and visible in the running of its affairs from day one until this ceased operations upon his demise. The extent of his control, administration and management of the partnership and its business, the fact that its properties were placed in his name, and that he was not paid salary or other compensation by the partners, are indicative of the fact that Elfledo was a partner and a controlling one at that. It is apparent that the other partners only contributed in the initial capital but had no say thereafter on how the business was ran. Evidently it was through Elfredo’s efforts and hard work that the partnership was able to acquire more trucks and otherwise prosper. Even the appellant participated in the affairs of the partnership by acting as the bookkeeper sans salary. It is notable too that Jose Lim died when the partnership was barely a year old, and the partnership and its business not only continued but also flourished. If it were true that it was Jose Lim and not Elfledo who was the partner, then upon his death the partnership should have been dissolved and its assets liquidated. On the contrary, these were not done but instead its operation continued under the helm of Elfledo and without any participation from the heirs of Jose Lim. Whatever properties appellant and her husband had acquired, this was through their own concerted efforts and hard work. Elfledo did not limit himself to the business of their partnership but engaged in other lines of businesses as well.

In sum, we find no cogent reason to disturb the findings and the ruling of the CA as they are amply supported by the law and by the evidence on record. WHEREFORE, the instant Petition is DENIED. The assailed Court of Appeals Decision dated June 29, 2005 is AFFIRMED. Costs against petitioners.

SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. 31057 September 7, 1929

ADRIANO ARBES, ET AL., plaintiffs-appellees, vs. VICENTE POLISTICO, ET AL., defendants-appellants.

Marcelino Lontok and Manuel dela Rosa for appellants. Sumulong & Lavides for appellees.

VILLAMOR, J.:

This is an action to bring about liquidation of the funds and property of the association called "Turnuhan Polistico & Co." The plaintiffs were members or shareholders, and the defendants were designated as president-treasurer, directors and secretary of said association.

It is well to remember that this case is now brought before the consideration of this court for the second time. The first one was when the same plaintiffs appeared from the order of the court below sustaining the defendant's demurrer, and requiring the former to amend their complaint within a period, so as to include all the members of "Turnuhan Polistico & Co.," either as plaintiffs or as a defendants. This court held then that in an action against the officers of a voluntary association to wind up its affairs and enforce an accounting for money and property in their possessions, it is not necessary that all members of the association be made parties to the action. (Borlasa vs. Polistico, 47 Phil., 345.) The case having been remanded to the court of origin, both parties amend, respectively, their complaint and their answer, and by agreement of the parties, the court appointed Amadeo R. Quintos, of the Insular Auditor's Office, commissioner to examine all the books, documents, and accounts of "Turnuhan Polistico & Co.," and to receive whatever evidence the parties might desire to present.

The commissioner rendered his report, which is attached to the record, with the following resume:

Income:

Member's shares............................ 97,263.70

Credits paid................................ 6,196.55

Interest received........................... 4,569.45

Miscellaneous............................... 1,891.00

P109,620.70

Expenses:

Premiums to members....................... 68,146.25

Loans on real-estate....................... 9,827.00

Loans on promissory notes.............. 4,258.55

Salaries.................................... 1,095.00

Miscellaneous............................... 1,686.10

85,012.90

Cash on hand........................................ 24,607.80

The defendants objected to the commissioner's report, but the trial court, having examined the reasons for the objection, found the same sufficiently explained in the report and the evidence, and accepting it, rendered judgment, holding that the association "Turnuhan Polistico & Co." is unlawful, and sentencing the defendants jointly and severally to return the amount of P24,607.80, as well as the documents showing the uncollected credits of the association, to the plaintiffs in this case, and to the rest of the members of the said association represented by said plaintiffs, with costs against the defendants.

The defendants assigned several errors as grounds for their appeal, but we believe they can all be reduced to two points, to wit: (1) That not all persons having an interest in this association are included as plaintiffs or defendants; (2) that the objection to the commissioner's report should have been admitted by the court below.

As to the first point, the decision on the case of Borlasa vs. Polistico, supra, must be followed.

With regard to the second point, despite the praiseworthy efforts of the attorney of the defendants, we are of opinion that, the trial court having examined all the evidence touching the grounds for the objection and having found that they had been explained away in the commissioner's report, the conclusion reached by the court below, accepting and adopting the findings of fact contained in said report, and especially those referring to the disposition of the association's money, should not be disturbed.

In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil., 516), it was held that the findings of facts made by a referee appointed under the provisions of section 135 of the Code of Civil Procedure stand upon the same basis, when approved by the Court, as findings made by the judge himself. And in Kriedt vs. E. C. McCullogh & Co.(37 Phil., 474), the court held: "Under section 140 of the Code of Civil Procedure it is made the duty of the court to render judgment in accordance with the report of the referee unless the court shall unless for cause shown set aside the report or recommit it to the referee. This provision places upon the litigant parties of the duty of discovering and exhibiting to the court any error that may be contained therein." The appellants stated the grounds for their objection. The trial examined the evidence and the commissioner's report, and accepted the findings of fact made in the report. We find no convincing arguments on the appellant's brief to justify a reversal of the trial court's conclusion admitting the commissioner's findings.

There is no question that "Turnuhan Polistico & Co." is an unlawful partnership (U.S. vs. Baguio, 39 Phil., 962), but the appellants allege that because it is so, some charitable institution to whom the partnership funds may be ordered to be turned over, should be included, as a party defendant. The appellants refer to article 1666 of the Civil Code, which provides:

A partnership must have a lawful object, and must be established for the common benefit of the partners.

When the dissolution of an unlawful partnership is decreed, the profits shall be given to charitable institutions of the domicile of the partnership, or, in default of such, to those of the province.

Appellant's contention on this point is untenable. According to said article, no charitable institution is a necessary party in the present case of determination of the rights of the parties. The action which may arise from said article, in

the case of unlawful partnership, is that for the recovery of the amounts paid by the member from those in charge of the administration of said partnership, and it is not necessary for the said parties to base their action to the existence of the partnership, but on the fact that of having contributed some money to the partnership capital. And hence, the charitable institution of the domicile of the partnership, and in the default thereof, those of the province are not necessary parties in this case. The article cited above permits no action for the purpose of obtaining the earnings made by the unlawful partnership, during its existence as result of the business in which it was engaged, because for the purpose, as Manresa remarks, the partner will have to base his action upon the partnership contract, which is to annul and without legal existence by reason of its unlawful object; and it is self evident that what does not exist cannot be a cause of action. Hence, paragraph 2 of the same article provides that when the dissolution of the unlawful partnership is decreed, the profits cannot inure to the benefit of the partners, but must be given to some charitable institution.

We deem in pertinent to quote Manresa's commentaries on article 1666 at length, as a clear explanation of the scope and spirit of the provision of the Civil Code which we are concerned. Commenting on said article Manresa, among other things says:

When the subscriptions of the members have been paid to the management of the partnership, and employed by the latter in transactions consistent with the purposes of the partnership may the former demand the return of the reimbursement thereof from the manager or administrator withholding them?

Apropos of this, it is asserted: If the partnership has no valid existence, if it is considered juridically non-existent, the contract entered into can have no legal effect; and in that case, how can it give rise to an action in favor of the partners to judicially demand from the manager or the administrator of the partnership capital, each one's contribution?

The authors discuss this point at great length, but Ricci decides the matter quite clearly, dispelling all doubts thereon. He holds that the partner who limits himself to demanding only the amount contributed by him need not resort to the partnership contract on which to base his action. And he adds in explanation that the partner makes his contribution, which passes to the managing partner for the purpose of carrying on the business or industry which is the object of the partnership; or in other words, to breathe the breath of life into a partnership contract with an objection forbidden by law. And as said

contrast does not exist in the eyes of the law, the purpose from which the contribution was made has not come into existence, and the administrator of the partnership holding said contribution retains what belongs to others, without any consideration; for which reason he is not bound to return it and he who has paid in his share is entitled to recover it.

But this is not the case with regard to profits earned in the course of the partnership, because they do not constitute or represent the partner's contribution but are the result of the industry, business or speculation which is the object of the partnership, and therefor, in order to demand the proportional part of the said profits, the partner would have to base his action on the contract which is null and void, since this partition or distribution of the profits is one of the juridical effects thereof. Wherefore considering this contract asnon-existent, by reason of its illicit object, it cannot give rise to the necessary action, which must be the basis of the judicial complaint. Furthermore, it would be immoral and unjust for the law to permit a profit from an industry prohibited by it.

Hence the distinction made in the second paragraph of this article of this Code, providing that the profits obtained by unlawful means shall not enrich the partners, but shall upon the dissolution of the partnership, be given to the charitable institutions of the domicile of the partnership, or, in default of such, to those of the province.

This is a new rule, unprecedented by our law, introduced to supply an obvious deficiency of the former law, which did not describe the purpose to which those profits denied the partners were to be applied, nor state what to be done with them.

The profits are so applied, and not the contributions, because this would be an excessive and unjust sanction for, as we have seen, there is no reason, in such a case, for depriving the partner of the portion of the capital that he contributed, the circumstances of the two cases being entirely different.

Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts contributed are to be returned by the partners, because it only deals with the disposition of the profits; but the fact that said contributions are not included in the disposal prescribed profits, shows that in consequences of said exclusion, the general law must be followed, and hence the partners should reimburse the amount of their respective contributions. Any other

solution is immoral, and the law will not consent to the latter remaining in the possession of the manager or administrator who has refused to return them, by denying to the partners the action to demand them. (Manresa, Commentaries on the Spanish Civil Code, vol. XI, pp. 262-264)

The judgment appealed from, being in accordance with law, should be, as it is hereby, affirmed with costs against the appellants; provided, however, the defendants shall pay the legal interest on the sum of P24,607.80 from the date of the decision of the court, and provided, further, that the defendants shall deposit this sum of money and other documents evidencing uncollected credits in the office of the clerk of the trial court, in order that said court may distribute them among the members of said association, upon being duly identified in the manner that it may deem proper. So ordered.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-4811 July 31, 1953

CHARLES F. WOODHOUSE, plaintiff-appellant, vs. FORTUNATO F. HALILI, defendant-appellant.

Tañada, Pelaez & Teehankee for defendant and appellant. Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.

LABRADOR, J.:

On November 29, 1947, the plaintiff entered on a written agreement, Exhibit A, with the defendant, the most important provisions of which are (1) that they shall organize a partnership for the bottling and distribution of Mision soft drinks, plaintiff to act as industrial partner or manager, and the defendant as a capitalist, furnishing the capital necessary therefor; (2) that the defendant was to decide matters of general policy regarding the business, while the plaintiff was to attend to the operation and development of the bottling plant; (3) that the plaintiff was to secure the Mission Soft Drinks franchise for and in behalf of the proposed partnership; and (4) that the plaintiff was to receive 30 per cent of the net profits of the business. The above agreement was arrived at after various conferences and consultations by and between them, with the assistance of their respective attorneys. Prior to entering into this agreement, plaintiff had informed the Mission Dry Corporation of Los Angeles, California, U.S.A., manufacturers of the bases and ingridients of the beverages bearing its name, that he had interested a prominent financier (defendant herein) in the business, who was willing to invest half a million dollars in the bottling and distribution of the said beverages, and requested, in order that he may close the deal with him, that the right to bottle and distribute be granted him for a limited time under the condition that it will finally be transferred to the corporation (Exhibit H). Pursuant for this request, plaintiff was given "a thirty-days" option on exclusive bottling and distribution rights for the Philippines" (Exhibit J). Formal negotiations between plaintiff and defendant began at a meeting on November 27, 1947, at the Manila Hotel, with their lawyers attending. Before this meeting plaintiff's lawyer had prepared the draft of the agreement, Exhibit II or OO, but this was not satisfactory because a partnership, instead

of a corporation, was desired. Defendant's lawyer prepared after the meeting his own draft, Exhibit HH. This last draft appears to be the main basis of the agreement, Exhibit A.

The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did not like to go to the United States without the agreement being not first signed. On that day plaintiff and defendant went to the United States, and on December 10, 1947, a franchise agreement (Exhibit V) was entered into the Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse, granted defendant the exclusive right, license, and authority to produce, bottle, distribute, and sell Mision beverages in the Philippines. The plaintiff and the defendant thereafter returned to the Philippines. Plaintiff reported for duty in January, 1948, but operations were not begun until the first week of February, 1948. In January plaintiff was given as advance, on account of profits, the sum of P2,000, besides the use of a car; in February, 1948, also P2,000, and in March only P1,000. The car was withdrawn from plaintiff on March 9, 1948.

When the bottling plant was already on operation, plaintiff demanded of defendant that the partnership papers be executed. At first defendant executed himself, saying there was no hurry. Then he promised to do so after the sales of the product had been increased to P50,000. As nothing definite was forthcoming, after this condition was attained, and as defendant refused to give further allowances to plaintiff, the latter caused his attorneys to take up the matter with the defendant with a view to a possible settlement. as none could be arrived at, the present action was instituted.

In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of the profits, and a share thereof of 30 per cent, as well as damages in the amount of P200,000. In his answer defendant alleges by way of defense (1) that defendant's consent to the agreement, Exhibit A, was secured by the representation of plaintiff that he was the owner, or was about to become owner of an exclusive bottling franchise, which representation was false, and plaintiff did not secure the franchise, but was given to defendant himself; (2) that defendant did not fail to carry out his undertakings, but that it was plaintiff who failed; (3) that plaintiff agreed to contribute the exclusive franchise to the partnership, but plaintiff failed to do so. He also presented a counter-claim for P200,000 as damages. On these issues the parties went to trial, and thereafter the Court of First Instance rendered judgment ordering defendant to render an accounting of the profits of the bottling and distribution business, subject of the action, and to pay plaintiff 15 percent thereof. it held that the execution of the contract of partnership could not be enforced upon the parties, but it also held that the defense of fraud was not proved. Against this judgment both parties have appealed.

The most important question of fact to be determined is whether defendant had falsely represented that he had an exclusive franchise to bottle Mission beverages, and whether this false representation or fraud, if it existed, annuls the agreement to form the partnership. The trial court found that it is improbable that defendant was never shown the letter, Exhibit J, granting plaintiff had; that the drafts of the contract prior to the final one 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; . . . .

3. The manager, upon the organization of the said corporation, shall forthwith transfer to the said corporation his exclusive right to bottle Mission products and to sell them throughout the Philippines. . . . .

(Exhibit II; emphasis ours)

The trial court did not consider this draft on the principle of integration of jural acts. We find that the principle invoked is inapplicable, since the purpose of considering the prior draft is not to vary, alter, or modify the agreement, but to discover the intent of the parties thereto and the circumstances surrounding the execution of the contract. The issue of fact is: Did plaintiff represent to defendant that he had an exclusive franchise? Certainly, his acts or statements prior to the agreement are essential and relevant to the determination of said issue. The act or statement of the plaintiff was not sought to be introduced to change or alter the terms of the agreement, but to prove how he induced the defendant to enter into it — to prove the representations or inducements, or fraud, with which or by which he secured the other party's consent thereto. These are expressly excluded from the parol evidence rule. (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 209; port Banga Lumber Co. vs. Export & Import Lumber Co., 26 Phil., 602; III Moran 221,1952 rev. ed.) Fraud and false representation are an incident to the creation of a jural act, not to its integration, and are not governed by the rules on integration. Were parties prohibited from proving said representations or inducements, on the ground that the agreement had already been entered into, it would be impossible to prove misrepresentation or fraud. Furthermore, the parol evidence rule expressly allows the evidence to be introduced when the validity of an instrument is put in issue by the pleadings (section 22, par. (a), Rule 123, Rules of Court),as in this case.

That plaintiff did make the representation can also be easily gleaned from his own letters and his own testimony. In his letter to Mission Dry Corporation, Exhibit H, he said:.

. . . He told me to come back to him when I was able to speak with authority so that we could come to terms as far as he and I were concerned. That is the reason why the cable was sent. Without this authority, I am in a poor bargaining position. . .

I would propose that you grant me the exclusive bottling and distributing rights for a limited period of time, during which I may consummate my plants. . . .

By virtue of this letter the option on exclusive bottling was given to the plaintiff on October 14, 1947. (See Exhibit J.) If this option for an exclusive franchise was intended by plaintiff as an instrument with which to bargain with defendant and close the deal with him, he must have used his said option for the above-indicated purpose, especially as it appears that he was able to secure, through its use, what he wanted.

Plaintiff's own version of the preliminary conversation he had with defendant is to the effect that when plaintiff called on the latter, the latter answered, "Well, come back to me when you have the authority to operate. I am definitely interested in the bottling business." (t. s. n., pp. 60-61.) When after the elections of 1949 plaintiff went to see the defendant (and at that time he had already the option), he must have exultantly told defendant that he had the authority already. It is improbable and incredible for him to have disclosed the fact that he had only an option to the exclusive franchise, which was to last thirty days only, and still more improbable for him to have disclosed that, at the time of the signing of the formal agreement, his option had already expired. Had he done so, he would have destroyed all his bargaining power and authority, and in all probability lost the deal itself.

The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in the agreement "to secure the Mission Dry franchise for and in behalf of the proposed partnership." The existence of this provision in the final agreement does not militate against plaintiff having represented that he had the exclusive franchise; it rather strengthens belief that he did actually make the representation. How could plaintiff assure defendant that he would get the franchise for the latter if he had not actually obtained it for himself? Defendant would not have gone into the business unless the franchise was raised in his name, or at least in the name of the partnership. Plaintiff assured defendant he could get the franchise. Thus, in the draft prepared by defendant's attorney, Exhibit HH, the above provision is inserted, with the difference that instead of securing the franchise for the defendant, plaintiff was to secure it for the partnership. To show that the insertion of the above provision does not eliminate the probability of plaintiff representing himself as the exclusive grantee of the franchise, the final agreement contains in its third paragraph the following:

. . . and the manager is ready and willing to allow the capitalists to use the exclusive franchise . . .

and in paragraph 11 it also expressly states:

1. In the event of the dissolution or termination of the partnership, . . . the franchise from Mission Dry Corporation shall be reassigned to the manager.

These statements confirm the conclusion that defendant believed, or was made to believe, that plaintiff was the grantee of an exclusive franchise. Thus it is that it was also agreed upon that the franchise was to be transferred to the name of the partnership, and that, upon its dissolution or termination, the same shall be reassigned to the plaintiff.

Again, the immediate reaction of defendant, when in California he learned that plaintiff did not have the exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the net profits to one half of that agreed upon. He could not have had such a feeling had not plaintiff actually made him believe that he (plaintiff) was the exclusive grantee of the franchise.

The learned trial judge reasons in his decision that the assistance of counsel in the making of the contract made fraud improbable. Not necessarily, because the alleged representation took place before the conferences were had, in other words, plaintiff had already represented to defendant, and the latter had already believed in, the existence of plaintiff's exclusive franchise before the formal negotiations, and they were assisted by their lawyers only when said formal negotiations actually took place. Furthermore, plaintiff's attorney testified that plaintiff had said that he had the exclusive franchise; and defendant's lawyer testified that plaintiff explained to him, upon being asked for the franchise, that he had left the papers evidencing it.(t.s.n., p. 266.)

We conclude from all the foregoing that plaintiff did actually represent to defendant that he was the holder of the exclusive franchise. The defendant was made to believe, and he actually believed, that plaintiff had the exclusive franchise. Defendant would not perhaps have gone to California and incurred expenses for the trip, unless he believed that plaintiff did have that exclusive privilege, and that the latter would be able to get the same from the Mission Dry Corporation itself. Plaintiff knew what defendant believed about his (plaintiff's) exclusive franchise, as he induced him to that belief, and he may not be allowed to deny that defendant was induced by that belief. (IX Wigmore, sec. 2423; Sec. 65, Rule 123, Rules of Court.)

We now come to the legal aspect of the false representation. Does it amount to a fraud that would vitiate the contract? It must be noted that fraud is manifested in illimitable number of degrees or gradations, from the innocent praises of a salesman about the excellence of his wares to those malicious machinations and representations that the law punishes as a crime. In consequence, article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal fraud, which may be a ground for the annulment of a contract, and the incidental deceit, which only renders the party who employs it liable for damages. This Court had held that in order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo causante), inducement to the making of the contract. (Article 1270, Spanish Civil Code; Hill vs. Veloso, 31 Phil. 160.) The record abounds with circumstances indicative that the fact that the principal consideration, the main cause that induced defendant to enter into the partnership agreement

with plaintiff, was the ability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the partnership. The original draft prepared by defendant's counsel was to the effect that plaintiff obligated himself to secure a franchise for the defendant. Correction appears in this same original draft, but the change is made not as to the said obligation but as to the grantee. In the corrected draft the word "capitalist"(grantee) is changed to "partnership." The contract in its final form retains the substituted term "partnership." The defendant was, therefore, led to the belief that plaintiff had the exclusive franchise, but that the same was to be secured for or transferred to the partnership. The plaintiff no longer had the exclusive franchise, or the option thereto, at the time the contract was perfected. But while he had already lost his option thereto (when the contract was entered into), the principal obligation that he assumed or undertook was to secure said franchise for the partnership, as the bottler and distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of a false representation, this was not the causal consideration, or the principal inducement, that led plaintiff to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the consideration or price plaintiff gave in exchange for the share of 30 percent granted him in the net profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net profits because he was transferring his exclusive franchise to the partnership. Thus, in the draft prepared by plaintiff's lawyer, Exhibit II, the following provision exists:

3. That the MANAGER, upon the organization of the said corporation, shall forthwith transfer to the said corporation his exclusive right to bottle Mission products and to sell them throughout the Philippines. As a consideration for such transfer, the CAPITALIST shall transfer to the Manager fully paid non assessable shares of the said corporation . . . twenty-five per centum of the capital stock of the said corporation. (Par. 3, Exhibit II; emphasis ours.)

Plaintiff had never been a bottler or a chemist; he never had experience in the production or distribution of beverages. As a matter of fact, when the bottling plant being built, all that he suggested was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive franchise did not vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a share of 30 per cent of the net profits; in other words, by pretending that he had the exclusive franchise and promising to transfer it to defendant, he obtained the consent of the latter to

give him (plaintiff) a big slice in the net profits. This is the dolo incidentedefined in article 1270 of the Spanish Civil Code, because it was used to get the other party's consent to a big share in the profits, an incidental matter in the agreement.

El dolo incidental no es el que puede producirse en el cumplimiento del contrato sino que significa aqui, el que concurriendoen el consentimiento, o precediendolo, no influyo para arrancar porsi solo el consentimiento ni en la totalidad de la obligacion, sinoen algun extremo o accidente de esta, dando lugar tan solo a una accion para reclamar indemnizacion de perjuicios. (8 Manresa 602.)

Having arrived at the conclusion that the agreement may not be declared null and void, the question that next comes before us is, May the agreement be carried out or executed? We find no merit in the claim of plaintiff that the partnership was already a fait accompli from the time of the operation of the plant, as it is evident from the very language of the agreement that the parties intended that the execution of the agreement to form a partnership was to be carried out at a later date. They expressly agreed that they shall form a partnership. (Par. No. 1, Exhibit A.) As a matter of fact, from the time that the franchise from the Mission Dry Corporation was obtained in California, plaintiff himself had been demanding that defendant comply with the agreement. And plaintiff's present action seeks the enforcement of this agreement. Plaintiff's claim, therefore, is both inconsistent with their intention and incompatible with his own conduct and suit.

As the trial court correctly concluded, the defendant may not be compelled against his will to carry out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the defendant has an obligation to do, not to give. The law recognizes the individual's freedom or liberty to do an act he has promised to do, or not to do it, as he pleases. It falls within what Spanish commentators call a very personal act (acto personalismo), of which courts may not compel compliance, as it is considered an act of violence to do so.

Efectos de las obligaciones consistentes en hechos personalismo.—Tratamos de la ejecucion de las obligaciones de hacer en el solocaso de su incumplimiento por parte del deudor, ya sean los hechos personalisimos, ya se hallen en la facultad de un tercero; porque el complimiento espontaneo de las mismas esta regido por los preceptos relativos al pago, y en nada les afectan las disposiciones del art. 1.098.

Esto supuesto, la primera dificultad del asunto consiste en resolver si el deudor puede ser precisado a realizar el hecho y porque medios.

Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el principio romanonemo potest precise cogi ad factum. Nadie puede ser obligado violentamente a haceruna cosa. Los que perciben la posibilidad de la destruccion deeste principio, añaden que, aun cuando se pudiera obligar al deudor, no deberia hacerse, porque esto constituiria una violencia, y noes la violenciamodo propio de cumplir las obligaciones (Bigot, Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo cuandodecia que obligar por la violencia seria infrigir la libertad eimponer una especie de esclavitud.

x x x x x x x x x

En efecto; las obligaciones contractuales no se acomodan biencon el empleo de la fuerza fisica, no ya precisamente porque seconstituya de este modo una especie de esclavitud, segun el dichode Antonio Gomez, sino porque se supone que el acreedor tuvo encuenta el caracter personalisimo del hecho ofrecido, y calculo sobre laposibilidad de que por alguna razon no se realizase. Repugna,ademas, a la conciencia social el empleo de la fuerza publica, mediante coaccion sobre las personas, en las relaciones puramente particulares; porque la evolucion de las ideas ha ido poniendo masde relieve cada dia el respeto a la personalidad humana, y nose admite bien la violencia sobre el individuo la cual tiene caracter visiblemente penal, sino por motivos que interesen a la colectividad de ciudadanos. Es, pues, posible y licita esta violencia cuando setrata de las obligaciones que hemos llamado ex lege, que afectanal orden social y a la entidad de Estado, y aparecen impuestas sinconsideracion a las conveniencias particulares, y sin que por estemotivo puedan tampoco ser modificadas; pero no debe serlo cuandola obligacion reviste un interes puramente particular, como sucedeen las contractuales, y cuando, por consecuencia, paraceria salirseel Estado de su esfera propia, entrado a dirimir, con apoyo dela fuerza colectiva, las diferencias producidas entre los ciudadanos. (19 Scaevola 428, 431-432.)

The last question for us to decide is that of damages,damages that plaintiff is entitled to receive because of defendant's refusal to form the partnership, and damages that defendant is also entitled to collect because of the falsity of plaintiff's representation. (Article 1101, Spanish Civil Code.) Under article 1106 of the Spanish Civil Code the measure of damages is the actual loss

suffered and the profits reasonably expected to be received, embraced in the terms daño emergente and lucro cesante. Plaintiff is entitled under the terms of the agreement to 30 per cent of the net profits of the business. Against this amount of damages, we must set off the damage defendant suffered by plaintiff's misrepresentation that he had obtained a very high percentage of share in the profits. We can do no better than follow the appraisal that the parties themselves had adopted.

When defendant learned in Los Angeles that plaintiff did not have the exclusive franchise which he pretended he had and which he had agreed to transfer to the partnership, his spontaneous reaction was to reduce plaintiff's share form 30 per cent to 15 per cent only, to which reduction defendant appears to have readily given his assent. It was under this understanding, which amounts to a virtual modification of the contract, that the bottling plant was established and plaintiff worked as Manager for the first three months. If the contract may not be considered modified as to plaintiff's share in the profits, by the decision of defendant to reduce the same to one-half and the assent thereto of plaintiff, then we may consider the said amount as a fair estimate of the damages plaintiff is entitled to under the principle enunciated in the case of Varadero de Manila vs. Insular Lumber Co., 46 Phil. 176. Defendant's decision to reduce plaintiff's share and plaintiff's consent thereto amount to an admission on the part of each of the reasonableness of this amount as plaintiff's share. This same amount was fixed by the trial court. The agreement contains the stipulation that upon the termination of the partnership, defendant was to convey the franchise back to plaintiff (Par. 11, Exhibit A). The judgment of the trial court does not fix the period within which these damages shall be paid to plaintiff. In view of paragraph 11 of Exhibit A, we declare that plaintiff's share of 15 per cent of the net profits shall continue to be paid while defendant uses the franchise from the Mission Dry Corporation.

With the modification above indicated, the judgment appealed from is hereby affirmed. Without costs.

Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo and Bautista Angelo, JJ., concur.

THIRD DIVISION AURELIO K. LITONJUA, JR.,

Petitioner, - versus – EDUARDO K. LITONJUA, SR., ROBERT T. YANG, ANGLO PHILS. MARITIME, INC., CINEPLEX, INC., DDM GARMENTS, INC., EDDIE K. LITONJUA SHIPPING AGENCY, INC., EDDIE K. LITONJUA SHIPPING CO., INC., LITONJUA SECURITIES, INC. (formerly E. K. Litonjua Sec), LUNETA THEATER, INC., E & L REALTY, (formerly E & L INT’L SHIPPING CORP.), FNP CO., INC., HOME ENTERPRISES, INC., BEAUMONT DEV. REALTY CO., INC., GLOED LAND CORP., EQUITY TRADING CO., INC., 3D CORP., “L” DEV. CORP, LCM THEATRICAL ENTERPRISES, INC., LITONJUA SHIPPING CO. INC., MACOIL INC., ODEON REALTY CORP., SARATOGA REALTY, INC., ACT THEATER INC. (formerly General Theatrical & Film Exchange, INC.), AVENUE REALTY, INC., AVENUE THEATER, INC. and LVF PHILIPPINES, INC., (Formerly VF PHILIPPINES),

Respondents.

G.R. NOS. 166299-300 Present: PANGANIBAN, J., Chairman SANDOVAL- GUTIERREZ, CORONA, CARPIO MORALES and GARCIA, JJ. Promulgated: December 13, 2005

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x D E C I S I O N GARCIA, J.: In this petition for review under Rule 45 of the Rules of Court, petitioner Aurelio K. Litonjua, Jr. seeks to nullify and set aside the Decision of the Court of Appeals (CA) dated March 31, 2004[1] in consolidated cases C.A.

G.R. Sp. No. 76987 and C.A. G.R. SP. No 78774 and its Resolution dated December 07, 2004,[2] denying petitioner’s motion for reconsideration. The recourse is cast against the following factual backdrop: Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K. Litonjua, Sr. (Eduardo) are brothers. The legal dispute between them started when, on December 4, 2002, in the Regional Trial Court (RTC) at Pasig City, Aurelio filed a suit against his brother Eduardo and herein respondent Robert T. Yang (Yang) and several corporations for specific performance and accounting. In his complaint,[3] docketed as Civil Case No. 69235 and eventually raffled to Branch 68 of the court,[4] Aurelio alleged that, since June 1973, he and Eduardo are into a joint venture/partnership arrangement in the Odeon Theater business which had expanded thru investment in Cineplex, Inc., LCM Theatrical Enterprises, Odeon Realty Corporation (operator of Odeon I and II theatres), Avenue Realty, Inc., owner of lands and buildings, among other corporations. Yang is described in the complaint as petitioner’s and Eduardo’s partner in their Odeon Theater investment.[5] The same complaint also contained the following material averments:

3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered into a joint venture/partnership for the continuation of their family business and common family funds …. 3.01.1 This joint venture/[partnership] agreement was contained in a memorandum addressed by Eduardo to his siblings, parents and other relatives.Copy of this memorandum is attached hereto and made an integral part as Annex “A” and the portion referring to [Aurelio] submarked as Annex “A-1”. 3.02 It was then agreed upon between [Aurelio] and Eduardo that in consideration of [Aurelio’s] retaining his share in the remaining family businesses (mostly, movie theaters, shipping and land development) and contributing his industry to the continued operation of these businesses, [Aurelio] will be given P1 Million or 10% equity in all these businesses and those to be subsequently acquired by them whichever is greater. . . . 4.01 … from 22 June 1973 to about August 2001, or [in] a span of 28 years, [Aurelio] and Eduardo had

accumulated in their joint venture/partnership various assets including but not limited to the corporate defendants and [their] respective assets. 4.02 In addition . . . the joint venture/partnership … had also acquired [various other assets], but Eduardo caused to be registered in the names of other parties…. xxx xxx xxx 4.04 The substantial assets of most of the corporate defendants consist of real properties …. A list of some of these real properties is attached hereto and made an integral part as Annex “B”. xxx xxx xxx 5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo became sour so that [Aurelio] requested for an accounting and liquidation of his share in the joint venture/partnership [but these demands for complete accounting and liquidation were not heeded].

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

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

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

You have now your own life to live after having been married. …. I am trying my best to mold you the way I work so you can follow the pattern …. You will be the only one left with the company, among us brothers and I will ask you to stay as I want you to run this office every time I am away. I want you to run it the way I am trying to run it because I will be all alone and I will depend entirely to you (sic). My sons will not be ready to help me yet until about maybe 15/20 years from now. Whatever is left in the corporation, I will make sure that you get ONE MILLION PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is greater. We two will gamble the whole thing of what I have and what you are entitled to. …. It will be you and me alone on this. If ever I pass away, I want you to take care of all of this. You keep my share for my two sons are ready take over but give them the chance to run the company which I have built. xxx xxx xxx Because you will need a place to stay, I will arrange to give you first ONE HUNDRED THOUSANDS PESOS: (P100, 000.00) in cash or asset, like Lt. Artiaga so you can live better there. The rest I will give you in form of stocks which you can keep. This stock I assure you is good and saleable. I will also gladly give you the share of Wack-Wack …and Valley Golf … because you have been good. The rest will be in stocks from all the corporations which I repeat, ten percent (10%) equity. [6]

On December 20, 2002, Eduardo and the corporate respondents, as defendants a quo, filed a joint ANSWER With Compulsory Counterclaim denying under oath the material allegations of the complaint, more particularly that portion thereof depicting petitioner and Eduardo as having entered into a contract of partnership. As affirmative defenses, Eduardo, et al., apart from raising a jurisdictional matter, alleged that the complaint states no cause of action, since no cause of action may be derived from the actionable document, i.e., Annex “A-1”, being void under the terms of Article 1767 in relation to Article 1773 of the Civil Code, infra. It is further alleged that whatever undertaking Eduardo agreed to do, if any, under

Annex “A-1”, are unenforceable under the provisions of the Statute of Frauds.[7] For his part, Yang - who was served with summons long after the other defendants submitted their answer – moved to dismiss on the ground, inter alia, that, as to him, petitioner has no cause of action and the complaint does not state any.[8]Petitioner opposed this motion to dismiss. On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative Defenses.[9] To this motion, petitioner interposed an Opposition with ex-Parte Motion to Set the Case for Pre-trial.[10]

Acting on the separate motions immediately adverted to above, the trial court, in an Omnibus Order dated March 5, 2003, denied the affirmative defenses and, except for Yang, set the case for pre-trial on April 10, 2003.[11]

In another Omnibus Order of April 2, 2003, the same court denied

the motion of Eduardo, et al., for reconsideration[12] and Yang’s motion to dismiss. The following then transpired insofar as Yang is concerned:

1. On April 14, 2003, Yang filed his ANSWER, but expressly

reserved the right to seek reconsideration of the April 2, 2003 Omnibus Order and to pursue his failed motion to dismiss[13] to its full resolution.

2. On April 24, 2003, he moved for reconsideration of the

Omnibus Order of April 2, 2003, but his motion was denied in an Order of July 4, 2003.[14]

3. On August 26, 2003, Yang went to the Court of Appeals (CA) in

a petition for certiorari under Rule 65 of the Rules of Court, docketed as CA-G.R. SP No. 78774,[15] to nullify the separate orders of the trial court, the first denying his motion to dismiss the basic complaint and, the second, denying his motion for reconsideration.

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

Per its resolution dated October 2, 2003,[16] the CA’s 14th Division

ordered the consolidation of CA G.R. SP No. 78774 withCA G.R. SP No. 76987.

Following the submission by the parties of their respective

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

WHEREFORE, judgment is hereby rendered

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

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

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

In time, petitioner moved for reconsideration but his motion was denied by the CA in its equally assailed Resolution of December 7, 2004.[18] . Hence, petitioner’s present recourse, on the contention that the CA erred:

A. When it ruled that there was no partnership created by the actionable document because this was not a public instrument and immovable properties were contributed to the partnership. B. When it ruled that the actionable document did not create a demandable right in favor of petitioner. C. When it ruled that the complaint stated no cause of action against [respondent] Robert Yang; and

D. When it ruled that petitioner has changed his theory on appeal when all that Petitioner had done was to support his pleaded cause of action by another legal perspective/argument. The petition lacks merit. Petitioner’s demand, as defined in the petitory portion of his

complaint in the trial court, is for delivery or payment to him, as Eduardo’s and Yang’s partner, of his partnership/joint venture share, after an accounting has been duly conducted of what he deems to be partnership/joint venture property.[19]

A partnership exists when two or more persons agree to place their

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

The underlying issue that necessarily comes to mind in this

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

Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.

Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission. Failure to comply with the requirement of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons. Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument.

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

The CA, addressing the foregoing query, correctly stated that

petitioner’s contribution consisted of immovables and real rights. Wrote that court:

A further examination of the allegations in the

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

Significantly enough, petitioner matter-of-factly concurred with the appellate court’s observation that, prescinding from what he himself alleged in his basic complaint, his contribution to the partnership consisted of his share in the Litonjua family businesses which owned variable immovable properties. Petitioner’s assertion in his motion for reconsideration[24] of the CA’s decision, that “what was to be contributed to the business [of the partnership] was [petitioner’s] industry and his share in the family [theatre and land development] business” leaves no room for speculation as to what petitioner contributed to the perceived partnership.

Lest it be overlooked, the contract-validating inventory requirement

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

Petitioner, in an obvious bid to evade the application of Article

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

Considering thus the value and nature of petitioner’s alleged

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

Given the foregoing perspective, what the appellate court wrote in its assailed Decision[26] about the probative value and legal effect of Annex “A-1” commends itself for concurrence:

Considering that the allegations in the complaint showed that

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

Likewise well-taken are the following complementary excerpts from the CA’s equally assailed Resolution of December 7, 2004[27] denying petitioner’s motion for reconsideration:

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

Under the second

assigned error, it is petitioner’s posture that Annex “A-1”, assuming its inefficacy or nullity as a partnership document, nevertheless created demandable rights in his favor. As petitioner succinctly puts it in this petition:

43. Contrariwise, this actionable document, especially

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

44. It may not be a contract of loan, or a mortgage or

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

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

sudden twist of stance, he has now contended that the actionable instrument may be considered an innominate contract. xxx Verily, this now changes [petitioner’s] theory of the case which is not only prohibited by the Rules but also is an implied admission that the very theory he himself … has

adopted, filed and prosecuted before the respondent court is erroneous.

Be that as it may . …. We hold that this new theory

contravenes [petitioner’s] theory of the actionable document being a partnership document. If anything, it is so obvious we do have to test the sufficiency of the cause of action on the basis of partnership law xxx.[29] (Emphasis in the original; Words in bracket added).

But even assuming in gratia argumenti that Annex “A-1” partakes of a perfected innominate contract, petitioner’s complaint would still be dismissible as against Eduardo and, more so, against Yang. It cannot be over-emphasized that petitioner points to Eduardo as the author of Annex “A-1”. Withal, even on this consideration alone, petitioner’s claim against Yang is doomed from the very start. As it were, the only portion of Annex “A-1” which could perhaps be remotely regarded as vesting petitioner with a right to demand from respondent Eduardo the observance of a determinate conduct, reads: xxx You will be the only one left with the company,

among us brothers and I will ask you to stay as I want you to run this office everytime I am away. I want you to run it the way I am trying to run it because I will be alone and I will depend entirely to you, My sons will not be ready to help me yet until about maybe 15/20 years from now. Whatever is left in the corporation, I will make sure that you get ONE MILLION PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is greater. (Underscoring added)

It is at

once apparent that what respondent Eduardo imposed upon himself under the above passage, if he indeed wrote Annex “A-1”, is a promise which is not to be performed within one year from “contract” execution on June 22, 1973. Accordingly, the agreement embodied in Annex “A-1” is covered by the Statute of Frauds and ergo unenforceable for non-compliance therewith.[30] By force of the statute of frauds, an agreement that by its terms is not to be performed within a year from the making thereof shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing and subscribed by the party

charged. Corollarily, no action can be proved unless the requirement exacted by the statute of frauds is complied with.[31]

Lest it be

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

In sum then, the Court rules, as did the CA, that petitioner’s complaint for specific performance anchored on an actionable document of partnership which is legally inexistent or void or, at best, unenforceable does not state a cause of action as against respondent Eduardo and the corporate defendants. And if no of action can successfully be maintained against respondent Eduardo because no valid partnership existed between him and petitioner, the Court cannot see its way clear on how the same action could plausibly prosper against Yang. Surely, Yang could not have become a partner in, or could not have had any form of business relationship with, an inexistent partnership. As may be noted, petitioner has not, in his complaint, provide the logical nexus that would tie Yang to him as his partner. In fact, attendant circumstances would indicate the contrary. Consider:

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

2. In some detail, petitioner mentioned what he had contributed to the joint venture/partnership with Eduardo and what his share in the businesses will be. No allegation is made whatsoever about what Yang contributed, if any, let alone his proportional share in the profits. But such allegation cannot, however, be made because, as aptly observed by the CA, the

actionable document did not contain such provision, let alone mention the name of Yang. How, indeed, could a person be considered a partner when the document purporting to establish the partnership contract did not even mention his name.

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

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

[Respondent] Yang, … is impleaded because, as alleged in the complaint, he is a “partner” of [Eduardo] and the [petitioner] in the Odeon Theater Investment which expanded through reinvestments of profits and direct investments in several corporations, thus:

xxx xxx xxx

Clearly, [petitioner’s] claim against … Yang arose from his alleged partnership with petitioner and the …respondent. However, there was NO allegation in the complaint which directly alleged how the supposed contractual relation was created between [petitioner] and …Yang. More importantly, however, the foregoing ruling of

this Court that the purported partnership between [Eduardo] is void and legally inexistent directly affects said claim against …Yang. Since [petitioner] is trying to establish his claim against … Yang by linking him to the legally inexistent partnership . . . such attempt had become futile because there was NOTHING that would contractually connect [petitioner] and … Yang. To establish a valid cause of action, the complaint should have a statement of fact upon which to connect [respondent] Yang to the alleged partnership between [petitioner] and respondent [Eduardo], including their alleged investment in the Odeon Theater. A statement of facts on those matters is pivotal to the complaint as they would constitute the ultimate facts necessary to establish the elements of a cause of action against … Yang. [35]

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

xxx Whatever the complaint calls it, it is the

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

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

8. Whether or not the actionable document creates a

partnership, joint venture, or whatever, is a legal matter. What is determinative for purposes of sufficiency of the

complainant’s allegations, is whether the actionable document bears out an actionable contract – be it a partnership, a joint venture or whatever or some innominate contract … It may be noted that one kind of innominate contract is what is known as du ut facias (I give that you may do).[37]

43. Contrariwise, this actionable document,

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

Springing surprises on the opposing party is offensive to the sporting idea of fair play, justice and due process; hence, the proscription against a party shifting from one theory at the trial court to a new and different theory in the appellate court.[39] On the same rationale, an issue which was neither averred in the complaint cannot be raised for the first time on appeal.[40] It is not difficult, therefore, to agree with the CA when it made short shrift of petitioner’s innominate contract theory on the basis of the foregoing basic reasons. Petitioner’s protestation that his act of introducing the concept of innominate contract was not a case of changing theories but of supporting his pleaded cause of action – that of the existence of a partnership - by another legal perspective/argument, strikes the Court as a strained attempt to rationalize an untenable position. Paragraph 12 of his motion for reconsideration of the CA’s decision virtually relegates partnership as a fall-back theory. Two paragraphs later, in the same notion, petitioner faults the appellate court for reading, with myopic eyes, the actionable document solely as establishing a partnership/joint venture. Verily, the cited paragraphs are a study of a party hedging on whether or not to pursue the original cause of action or altogether abandoning the same, thus:

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

14. All told, the Decision takes off from a false

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

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

SO ORDERED.