UY vs.

PUZON, substituted by FRANCO PUZON

(G.R. No. L-19819 October 26, 1977)
Case is revolves around Article 1788 of the Civil Code which provides
for the duty of each partner to contribute to the partnership capital/funds.
Art. 1788: A partner who has undertaken to contribute a sum of money
and fails to do so becomes a debtor for the interest and damages from the time he should have
complied with his obligation.
The same rules applies to any amount he may have taken from the
partnership coffers, and his liability shall begin from the time he converted the amount to his own use.

FACTS:
Bartolome Puzon had a contract with the government, specifically with the Bureau of Public
Highways, for the construction of the Ganyangan Bato Section of the Pagadian Zamboanga City
Road, province of Zamboanga del Sur and of five (5) bridges in the Malangas-Ganyangan Road.
Finding difficulty in accomplishing both projects, Puzon sought the financial assistance of
William Uy.
As an inducement, Puzon proposed the creation of a partnership between them which would be
the sub-contractor of the projects and the profits to be divided equally between them.
Uy agreed thus resulting in the formation of a partnership with the firm name "U.P.
Construction Company".
The partners agreed that the partnership capital would be P100,000.00 of which each partner
shall contribute P50,000.00 in cash.
But Puzon was short of cash and he promised to contribute his share as soon as his loan
application with the Philippine National Bank in the amount of P150,000.00 shall have been
approved.
However, before his loan application could be acted upon, he had to clear his collateral of its
incumbrances first.
For this purpose, on October 1956, Uy gave Puzon P40,000.00 as advance contribution to the
partnership which will be used by Puzon to pay his obligations to effect the release of his
mortgages with the PNB and Rehabilitation Finance Corporation.
In turn, Puzon promised Uy that the loan P150,000.00 from would be given to the partnership to
be applied thusly:
P40,000.00, as reimbursement of Uy's capital contribution which was used to clear the title of
Puzon's property;
P50,000.00, as Puzon's contribution to the partnership; and
the balance of P60,000.00 as Puzon's personal loan to the partnership

On January 1957, the partnership agreement was signed by the parties, although work on the
projects was started by the partnership as early October 1956.
Uy was entrusted with the management of the projects and whatever expenses he might incur,
would be considered as part of his contribution to the partnership and by the end of December
1957, Uy had contributed the total amount of P115,453.39, including his capital.
Going back, Puzon's loan application was approved by PNB, on November 1956, but Puzon only
gave to Uy P60,000.00; and of this amount, P40,000.00 was for the reimbursement of Uy's
contribution which was used to clear the title to Puzon's property, and the P20,000.00 as Puzon's
contribution to the partnership capital.
Aside from this, to guarantee the repayment of the loan, Puzon, without the knowledge and
consent of Uy, assigned to PNB all the payments to be received on account of the contracts of the
partnership with the Bureau of Public Highways for the construction of the projects.
By virtue of said assignment, of the amount of P1,047,181.07, released by the Bureau of Public
Highways, P332,539.60 was applied by PNB in payment of Puzon's loan and only the amount of
P27,820.80 was deposited in the partnership funds.
As time passed the financial demands of the projects increased, Uy found difficulty in obtaining
the necessary funds with which to pursue the construction projects.
So, Uy called on Puzon to comply with his obligations under the terms of their partnership
agreement and to place, at lest, his capital contribution at the disposal of the partnership.
But despite several promises, Puzon, however, failed to do so.
On November 1957, after failing to reach an agreement with Uy, Puzon, as prime contractor,
wrote the U.P. Construction Company terminating their subcontract agreement as of December
1957.
Thereafter, Uy was not allowed anymore to hold office in the U.P. Construction Company and his
authority to deal with the Bureau of Public Highways in behalf of the partnership was revoked
by Puzon who continued with the construction projects alone.
Because of what transpired, on May 1958, Uy, claiming that Puzon had violated the terms of their
partnership agreement, instituted an action in court, seeking, inter alia, the dissolution of the
partnership and payment of damages.
The trial court found that Puzon, contrary to the terms of their partnership agreement, failed to
contribute his share in the partnership capital; applied partnership funds to his personal use;
ousted Uy from the management of the firm, and caused the failure of the partnership to realize
the expected profits of at least P400,000.00. As a consequence, the trial court ordered the
dissolution of the partnership and further ordered Puzon to pay Uy the sum of P320,103.13.
Hence, the present appeal to the Supreme Court.
Bartolome Puzon during the pendency of the appeal before SC died, and was substituted by

Franco Puzon

ISSUES:
(1) WON Puzon is guilty of breach of contract
(2) WON Uy is entitled to reimbursement for the amount he has spent on the partnership
(3) WON Uy failed to make profits because of Puzon's breach of contract

RULING:
1) YES, the appellant is guilty of breach of contract
After Puzon's loan of P150,000.00 was approved by the PNB, he only gave P20,000.00 as his
contribution to the partnership capital which was short of the P50,000 agreed upon between him
and Uy as partners; thereafter, he failed to make any further contributions to the partnership.

SC also sustained the findings of the trial court that Puzon misapplied partnership funds since
the assignment of payments by Puzon in favor of PNB was made without the knowledge and
consent of Uy.
SC rejected the contention of Puzon that there was no prejudice to the partnership since he
reimbursed all of the payments applied to his loan.
SC explained that Puzon received from the Bureau of Public highways, P1,047,181.01, which
amount rightfully and legally belongs to the partnership. But of this amount, only P27,820.80 was
deposited in the account of the partnership.
According to the court, if Puzon gave to the partnership all that were eamed and due it under the
subcontract agreements, the money would have been used as a safe reserve for the discharge of
all obligations of the firm and the partnership would have been able to successfully and
profitably prosecute the projects it subcontracted.
SC also noted that there has been no complete reimbursement because Puzon disbursed a total of
P952,839.77 to the partnership but since the Bureau released P1,047,181.01, Puzon still has a
deficit balance of P94,342.24.

2) YES, Uy is entitled to reimbursement for the amount he has spent on the partnership

Since Puzon was at fault, the trial court properly ordered him to reimburse Uy whatever amount
the latter had invested in or spent for the partnership on account of the construction projects.
The total investment of Uy in the partnership amounted Pl15,453.39.

3) Uy failed to make profits because of Puzon's breach of contract and was thus entited to
compensatory damages
SC said, had Puzon not been remiss in his obligations as partner and as prime contractor of the
construction projects as he was bound to perform pursuant to the partnership and subcontract
agreements, and considering the fact that the total contract amount of the two projects is
P2,327,335.76, it is reasonable to expect that the partnership would have earned much more than
the P334,255.61 of profits earned by the partnership as calculated by the Court.
SC added the award, therefore, made by the trial court of the amount of P200,000.00, as
compensatory damages, is not speculative, but based on reasonable estimate.
SC finding no error in the decision appealed from, affirmed the decision of the trial court.