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.
DECISION
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 abovedescribed 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 plaintiffappellant. 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 plaintiffappellant. 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.

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.

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.

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.

The

SO

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

WHEREFORE, the decision of the Court of Appeals is hereby REVERSED

and
the
complaint
against
petitioner
is
DISMISSED.
ORDERED.

Bellosillo, (Chairman), Quisumbing, Buena, and De Leon, Jr., JJ., concur.

SECOND DIVISION
[G.R. NO. 159333 : July 31, 2006]
ARSENIO
T.
MENDIOLA, Petitioner, v. COURT
OF
APPEALS,
NATIONAL LABOR RELATIONS COMMISSION, PACIFIC FOREST
RESOURCES, PHILS., INC. and/or CELLMARK AB,Respondents.
DECISION
PUNO, J.:
On appeal are the Decision1 and Resolution2 of the Court of Appeals, dated
January 30, 2003 and July 30, 2003, respectively, in CA-G.R. SP No. 71028,
affirming the ruling3 of the National Labor Relations Commission (NLRC),
which in turn set aside the July 30, 2001 Decision 4 of the labor arbiter. The
labor arbiter declared illegal the dismissal of petitioner from employment
and awarded separation pay, moral and exemplary damages, and attorney's
fees.
The facts are as follows:
Private respondent Pacific Forest Resources, Phils., Inc. (Pacfor) is a
corporation organized and existing under the laws of California, USA. It is a
subsidiary of Cellulose Marketing International, a corporation duly
organized under the laws of Sweden, with principal office in Gothenburg,
Sweden.

Private respondent Pacfor entered into a "Side Agreement on Representative

Office known as Pacific Forest Resources (Phils.), Inc." 5 with petitioner
Arsenio T. Mendiola (ATM), effective May 1, 1995, "assuming that PacforPhils. is already approved by the Securities and Exchange Commission [SEC]
on the said date."6 The Side Agreement outlines the business relationship of
the parties with regard to the Philippine operations of Pacfor. Private
respondent will establish a Pacfor representative office in the Philippines, to
be known as Pacfor Phils, and petitioner ATM will be its President.
Petitioner's base salary and the overhead expenditures of the company shall
be borne by the representative office and funded by Pacfor/ATM, since
Pacfor Phils. is equally owned on a 50-50 equity by ATM and Pacfor-usa.
On July 14, 1995, the SEC granted the application of private respondent
Pacfor for a license to transact business in the Philippines under the name of
Pacfor or Pacfor Phils.7 In its application, private respondent Pacfor proposed
to establish its representative office in the Philippines with the purpose of
monitoring and coordinating the market activities for paper products. It also
designated petitioner as its resident agent in the Philippines, authorized to
accept summons and processes in all legal proceedings, and all notices
affecting the corporation.8
In March 1997, the Side Agreement was amended through a "Revised
Operating and Profit Sharing Agreement for the Representative Office
Known as Pacific Forest Resources (Philippines)," 9 where the salary of
petitioner was increased to $78,000 per annum. Both agreements show that
the operational expenses will be borne by the representative office and
funded by all parties "as equal partners," while the profits and commissions
will be shared among them.
In July 2000, petitioner wrote Kevin Daley, Vice President for Asia of Pacfor,
seeking confirmation of his 50% equity of Pacfor Phils. 10 Private respondent
Pacfor, through William Gleason, its President, replied that petitioner is not a
part-owner of Pacfor Phils. because the latter is merely Pacfor-USA's
representative office and not an entity separate and distinct from Pacfor-USA.
"It's simply a 'theoretical company' with the purpose of dividing the income
50-50."11 Petitioner presumably knew of this arrangement from the start,

having been the one to propose to private respondent Pacfor the setting up of
a representative office, and "not a branch office" in the Philippines to save on
taxes.12
Petitioner claimed that he was all along made to believe that he was in a joint
venture with them. He alleged he would have been better off remaining as an
independent agent or representative of Pacfor-USA as ATM Marketing
Corp.13 Had he known that no joint venture existed, he would not have
allowed Pacfor to take the profitable business of his own company, ATM
Marketing Corp.14 Petitioner raised other issues, such as the rentals of office
furniture, salary of the employees, company car, as well as commissions
allegedly due him. The issues were not resolved, hence, in October 2000,
petitioner wrote Pacfor-USA demanding payment of unpaid commissions
and office furniture and equipment rentals, amounting to more than one
million dollars.15
On November 27, 2000, private respondent Pacfor, through counsel, ordered
petitioner to turn over to it all papers, documents, files, records, and other
materials in his or ATM Marketing Corporation's possession that belong to
Pacfor or Pacfor Phils.16 On December 18, 2000, private respondent Pacfor
also required petitioner to remit more than three hundred thousand-peso
Christmas giveaway fund for clients of Pacfor Phils. 17 Lastly, private
respondent Pacfor withdrew all its offers of settlement and ordered
petitioner to transfer title and turn over to it possession of the service car. 18
Private respondent Pacfor likewise sent letters to its clients in the Philippines,
advising them not to deal with Pacfor Phils. In its letter to Intercontinental
Paper Industries, Inc., dated November 21, 2000, private respondent Pacfor
stated:
Until further notice, please course all inquiries and communications for
Pacific Forest Resources (Philippines) to:
Pacific Forest Resources
200 Tamal Plaza, Suite 200
Corte Madera, CA, USA 94925

(415) 927 1700 phone

(415) 381 4358 fax
Please do not send any communication to Mr. Arsenio "Boy" T. Mendiola or
to the offices of ATM Marketing Corporation at Room 504, Concorde
Building, Legaspi Village, Makati City, Philippines.19
In another letter addressed to Davao Corrugated Carton Corp. (DAVCOR),
dated December 2000, private respondent directed said client "to please
communicate directly with us on any further questions associated with these
payments or any future business. Do not communicate with [Pacfor] and/or
[ATM]."20
Petitioner construed these directives as a severance of the "unregistered
partnership" between him and Pacfor, and the termination of his employment
as resident manager of Pacfor Phils. 21 In a memorandum to the employees of
Pacfor Phils., dated January 29, 2001, he stated:
I received a letter from Pacific Forest Resources, Inc. demanding the turnover
of all records to them effective December 19, 2000. The company records were
turned over only on January 26, 2001. This means our jobs with Pacific Forest
were terminated effective December 19, 2000. I am concerned about your
welfare. I would like to help you by offering you to work with ATM
Marketing Corporation.
Please let me know if you are interested.22
On the basis of the "Side Agreement," petitioner insisted that he and Pacfor
equally own Pacfor Phils. Thus, it follows that he and Pacfor likewise own, on
a 50/50 basis, Pacfor Phils.' office furniture and equipment and the service
car. He also reiterated his demand for unpaid commissions, and proposed to
offset these with the remaining Christmas giveaway fund in his
possession.23 Furthermore, he did not renew the lease contract with Pulp and
Paper, Inc., the lessor of the office premises of Pacfor Phils., wherein he was
the signatory to the lease agreement.24

On February 2, 2001, private respondent Pacfor placed petitioner on

preventive suspension and ordered him to show cause why no disciplinary
action should be taken against him. Private respondent Pacfor charged
petitioner with willful disobedience and serious misconduct for his refusal to
turn over the service car and the Christmas giveaway fund which he applied
to his alleged unpaid commissions. Private respondent also alleged loss of
confidence and gross neglect of duty on the part of petitioner for allegedly
allowing another corporation owned by petitioner's relatives, High End
Products, Inc. (HEPI), to use the same telephone and facsimile numbers of
Pacfor, to possibly steal and divert the sales and business of private
respondent for HEPI's principal, International Forest Products, a competitor
of private respondent.25
Petitioner denied the charges. He reiterated that he considered the import of
Pacfor President William Gleason's letters as a "cessation of his position and
of the existence of Pacfor Phils." He likewise informed private respondent
Pacfor that ATM Marketing Corp. now occupies Pacfor Phils.' office
premises,26 and demanded payment of his separation pay. 27 On February 15,
2001, petitioner filed his complaint for illegal dismissal, recovery of
separation pay, and payment of attorney's fees with the NLRC.28
In the meantime, private respondent Pacfor lodged fresh charges against
petitioner. In a memorandum dated March 5, 2001, private respondent
directed petitioner to explain why he should not be disciplined for serious
misconduct and conflict of interest. Private respondent charged petitioner
anew with serious misconduct for the latter's alleged act of fraud and
misrepresentation in authorizing the release of an additional peso salary for
himself, besides the dollar salary agreed upon by the parties. Private
respondent also accused petitioner of disloyalty and representation of
conflicting interests for having continued using the Pacfor Phils.' office for
operations of HEPI. In addition, petitioner allegedly solicited business for
HEPI from a competitor company of private respondent Pacfor.29
Labor Arbiter Felipe Pati ruled in favor of petitioner, finding there was
constructive dismissal. By directing petitioner to turn over all office records
and materials, regardless of whether he may have retained copies, private

respondent Pacfor virtually deprived petitioner of his job by the gradual

diminution of his authority as resident manager. Petitioner's position as
resident manager whose duty, among others, was to maintain the security of
its business transactions and communications was rendered meaningless.
The dispositive portion of the decision of the Labor Arbiter reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering
herein respondents Cellmark AB and Pacific Forest Resources, Inc., jointly
and severally to compensate complainant Arsenio T. Mendiola separation
pay equivalent to at least one month for every year of service, whichever is
higher (sic), as reinstatement is no longer feasible by reason of the strained
relations of the parties equivalent to five (5) months in the amount of
$32,000.00 plus the sum of P250,000.00; pay complainant the sum
of P500,000.00 as moral and exemplary damages and ten percent (10%) of the
amounts awarded as and for attorney's fees.
All other claims are dismissed for lack of basis.
SO ORDERED.30
Private respondent Pacfor appealed to the NLRC which ruled in its favor. On
December 20, 2001, the NLRC set aside the July 30, 2001 decision of the labor
arbiter, for lack of jurisdiction and lack of merit.31 It held there was no
employer-employee relationship between the parties. Based on the two
agreements between the parties, it concluded that petitioner is not an
employee of private respondent Pacfor, but a full co-owner (50/50 equity).
The NLRC denied petitioner's Motion for Reconsideration.32
Petitioner was not successful on his appeal to the Court of Appeals. The
appellate court upheld the ruling of the NLRC.
Petitioner's Motion for Reconsideration33 of the decision of the Court of
Appeals was denied.
Hence, this appeal.34
Petitioner assigns the following errors:

A. The Respondent Court of Appeals committed reversible error and abused

its discretion in rendering judgment against petitioner since jurisdiction has
been acquired over the subject matter of the case as there exists employeremployee relationship between the parties.
B. The Respondent Court of Appeals committed reversible error and abused
its discretion in ruling that jurisdiction over the subject matter cannot be
waived and may be alleged even for the first time on appeal or considered by
the court motu prop[r]io.35
The first issue is whether an employer-employee relationship exists between
petitioner and private respondent Pacfor.
Petitioner argues that he is an industrial partner of the partnership he formed
with private respondent Pacfor, and also an employee of the partnership.
Petitioner insists that an industrial partner may at the same time be an
employee of the partnership, provided there is such an agreement, which, in
this case, is the "Side Agreement" and the "Revised Operating and Profit
Sharing Agreement." The Court of Appeals denied the appeal of petitioner,
holding that "the legal basis of the complaint is not employment but perhaps
partnership, co-ownership, or independent contractorship." Hence, the Labor
Code cannot apply.
We hold that petitioner is an employee of private respondent Pacfor and that
no partnership or co-ownership exists between the parties.
In a partnership, the members become co-owners of what is contributed to
the firm capital and of all property that may be acquired thereby and
through the efforts of the members. 36 The property or stock of the
partnership forms a community of goods, a common fund, in which each
party has a proprietary interest. 37 In fact, the New Civil Code regards a
partner as a co-owner of specific partnership property.38 Each partner
possesses a joint interest in the whole of partnership property. If the relation
does not have this feature, it is not one of partnership. 39 This essential
element, the community of interest, or co-ownership of, or joint interest in
partnership property is absent in the relations between petitioner and private
respondent Pacfor. Petitioner is not a part-owner of Pacfor Phils. William

Gleason, private respondent Pacfor's President established this fact when he

said that Pacfor Phils. is simply a "theoretical company" for the purpose of
dividing the income 50-50. He stressed that petitioner knew of this
arrangement from the very start, having been the one to propose to private
respondent Pacfor the setting up of a representative office, and "not a branch
office" in the Philippines to save on taxes. Thus, the parties in this case,
merely shared profits. This alone does not make a partnership.40
Besides, a corporation cannot become a member of a partnership in the
absence of express authorization by statute or charter.41 This doctrine is based
on the following considerations: (1) that the mutual agency between the
partners, whereby the corporation would be bound by the acts of persons
who are not its duly appointed and authorized agents and officers, would be
inconsistent with the policy of the law that the corporation shall manage its
own affairs separately and exclusively; and, (2) that such an arrangement
would improperly allow corporate property to become subject to risks not
contemplated by the stockholders when they originally invested in the
corporation.42 No such authorization has been proved in the case at bar.
Be that as it may, we hold that on the basis of the evidence, an employeremployee relationship is present in the case at bar. 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.43
In the instant case, all the foregoing elements are present. First, it was private
respondent Pacfor which selected and engaged the services of petitioner as
its resident agent in the Philippines. Second, as stipulated in their Side
Agreement, private respondent Pacfor pays petitioner his salary amounting
to $65,000 per annum which was later increased to $78,000. Third, private
respondent Pacfor holds the power of dismissal, as may be gleaned through
the various memoranda it issued against petitioner, placing the latter on
preventive suspension while charging him with various offenses, including

willful disobedience, serious misconduct, and gross neglect of duty, and

ordering him to show cause why no disciplinary action should be taken
against him.
Lastly and most important, private respondent Pacfor has the power of
control over the means and method of petitioner in accomplishing his work.
The power of control refers merely to the existence of the power, and not to
the actual exercise thereof. The principal consideration is whether the
employer has the right to control the manner of doing the work, and it is not
the actual exercise of the right by interfering with the work, but the right to
control, which constitutes the test of the existence of an employer-employee
relationship.44 In the case at bar, private respondent Pacfor, as employer,
clearly possesses such right of control. Petitioner, as private respondent
Pacfor's resident agent in the Philippines, is, exactly so, only an agent of the
corporation, a representative of Pacfor, who transacts business, and accepts
service on its behalf.
This right of control was exercised by private respondent Pacfor during the
period of November to December 2000, when it directed petitioner to turn
over to it all records of Pacfor Phils.; when it ordered petitioner to remit the
Christmas giveaway fund intended for clients of Pacfor Phils.; and, when it
withdrew all its offers of settlement and ordered petitioner to transfer title
and turn over to it the possession of the service car. It was also during this
period when private respondent Pacfor sent letters to its clients in the
Philippines, particularly Intercontinental Paper Industries, Inc. and DAVCOR,
advising them not to deal with petitioner and/or Pacfor Phils. In its letter to
DAVCOR, private respondent Pacfor replied to the client's request for an
invoice payment extension, and formulated a revised payment program for
DAVCOR. This is one unmistakable proof that private respondent Pacfor
exercises control over the petitioner.
Next, we shall determine if petitioner was constructively dismissed from
employment.
The evidence shows that when petitioner insisted on his 50% equity in Pacfor
Phils., and would not quit however, private respondent Pacfor began to

systematically deprive petitioner of his duties and benefits to make him feel
that his presence in the company was no longer wanted. First, private
respondent Pacfor directed petitioner to turn over to it all records of Pacfor
Phils. This would certainly make the work of petitioner very difficult, if not
impossible. Second, private respondent Pacfor ordered petitioner to remit the
Christmas giveaway fund intended for clients of Pacfor Phils. Then it ordered
petitioner to transfer title and turn over to it the possession of the service car.
It also advised its clients in the Philippines, particularly Intercontinental
Paper Industries, Inc. and DAVCOR, not to deal with petitioner and/or
Pacfor Phils. Lastly, private respondent Pacfor appointed a new resident
agent for Pacfor Phils.45
Although there is no reduction of the salary of petitioner, constructive
dismissal is still present because continued employment of petitioner is
rendered, at the very least, unreasonable. 46 There is an act of clear
discrimination, insensibility or disdain by the employer that continued
employment may become so unbearable on the part of the employee so as to
foreclose any choice on his part except to resign from such employment.47
The harassing acts of the private respondent are unjustified. They were
undertaken when petitioner sought clarification from the private respondent
about his supposed 50% equity on Pacfor Phils. Private respondent Pacfor
invokes its rights as an owner. Allegedly, its issuance of the foregoing
directives against petitioner was a valid exercise of management prerogative.
We remind private respondent Pacfor that the exercise of management
prerogative is not absolute. "By its very nature, encompassing as it could be,
management prerogative must be exercised in good faith and with due
regard to the rights of labor - verily, with the principles of fair play at heart
and justice in mind." The exercise of management prerogative cannot be
utilized as an implement to circumvent our laws and oppress employees.48
As resident agent of private respondent corporation, petitioner occupied a
position involving trust and confidence. In the light of the strained relations
between the parties, the full restoration of an employment relationship based
on trust and confidence is no longer possible. He should be awarded
separation pay, in lieu of reinstatement.

IN VIEW WHEREOF, the petition is GRANTED. The Court of Appeals'

January 30, 2003 Decision in CA-G.R. SP No. 71028 and July 30, 2003
Resolution, affirming the December 20, 2001 Decision of the National Labor
Relations Commission, are ANNULED and SET ASIDE. The July 30, 2001
Decision
of
the
Labor
Arbiter
is REINSTATED with
the MODIFICATION that the amount of P250,000.00 representing an
alleged increase in petitioner's salary shall be deducted from the grant of
separation pay for lack of evidence.
SO ORDERED.
Sandoval-Gutierrez, Corona, Azcuna, Garcia, JJ., concur.

EN BANC
[G.R. No. 18703. August 28, 1922. ]
INVOLUNTARY INSOLVENCY OF CAMPOS RUEDA & CO., S. en
C., Appellee, v. PACIFIC COMMERCIAL CO., ASIATIC PETROLEUM CO.,
and INTERNATIONAL BANKING CORPORATION,PetitionersAppellants.
Jose Yulo, Ross & Lawrence and J. A. Wolfson for Appellants.
Antonio Sanz for Appellee.
SYLLABUS
INVOLUNTARY INSOLVENCY; LIMITED PARTNERSHIP; ACT OF
BANKRUPTCY; SOLVENCY OF PARTNERS. In the Philippines a limited
partnership duly organized in accordance with law has a personality distinct
from that of its members; and if it commits an act of bankruptcy, such as that
of failing for more than thirty days to pay debts amounting to P1,000 or
more, it may be adjudged insolvent on the petition of three of its creditors
although its members may not be insolvent.
DECISION
ROMUALDEZ, J. :
The record of this proceeding having been transmitted to this court by virtue
of an appeal taken herein, a motion was presented by the appellants praying
this court that this case be considered purely a moot question now, for the
reason that subsequent to the decision appealed from, the partnership
Campos Rueda & Co., voluntarily filed an application for a judicial decree

adjudging itself insolvent, which is just what the herein petitioners and
appellants tried to obtain from the lower court in this proceeding.
The motion now before us must be, and is hereby, denied even under the
facts stated by the appellants in their motion aforesaid. The question raised
in this case is not a purely moot one: the fact that a man was insolvent on a
certain day does not justify an inference that he was some time prior thereto.
"Proof that a man was insolvent on a certain day does not justify an inference
that he was on a day some time prior thereto. Many contingencies, such as
unwise investments, losing contracts, misfortune, or accident, might happen
to reduce a person from a state of solvency within a short space of time."
(Kimball
v.
Dresser,
98
Me.,
519;
57
Atl.
Rep.,
767)
A decree of insolvency begins to operate on the date it is issued. It is one
thing to adjudge Campos Rueda & Co. insolvent in December, 1921, as
prayed for in this case and another to declare it insolvent in July, 1922, stated
in
the
motion.
Turning to the merits of this appeal, we find that this limited partnership
was, and is indebted to the appellants in various sums amounting to not less
than P1,000, payable in the Philippines, which were not paid more than
thirty days prior to the date of the filing by the petitioners of the application
for involuntary insolvency now before us. These facts were sufficiency
established
by
the
evidence.
The trial court denied the petition on the ground that it was not proven, nor
alleged, that the members of the aforesaid firm were insolvent at the time the
application was filed; and that as said partners are personally and solidarily
liable for the consequences of the transactions of the partnership, it cannot be
adjudged insolvent so long as the partners are not alleged and proven to be
insolvent. From this judgment the petitioners appeal to this court, on the
ground that this finding of the lower court is erroneous.
The fundamental question that presents itself for decision is whether or not a
limited partnership, such as the appellee, which has failed to pay its
obligations with three creditors for more than thirty days, may be held to
have committed an act of insolvency, and thereby be adjudged insolvent
against
its
will.

Unlike the common law, the Philippine statues consider a limited partnership
as a juridical entity for all intents and purposes, which personality is
recognized in all its acts and contracts (art. 116, Code of Commerce). This
being so and the juridical personality of a limited partnership being different
from that of its members, it must, on general principle, answer for, and suffer,
the subject of rights and obligations. If, as in the instant case, the limited
partnership of Campos Rueda & Co. failed to pay its obligations with three
creditors for a period of more than thirty days, which failure constitutes,
under our Insolvency Law, one of the acts of bankrupt upon which an
adjudication of involuntary insolvency can be predicated, this partnership
must suffer the consequences of such a failure, and must be adjudged
insolvent. We are not unmindful of the fact that some courts of the United
States have held that partnership may not be adjudged insolvent in an
involuntary insolvency proceeding unless all of its members are insolvent,
while others have maintained a contrary view. But it must be borne in mind
that under the American common law, partnership have no juridical
personality independent from that of its members; and if now they have such
personality for the purposes of the insolvency law, it is only by virtue of a
general law enacted by the Congress of the United States on July 1, 1898,
section 5, paragraph (h), of which reads thus:jgc:chanrobles.com.ph
"In the event of one or more but not all of the members of a partnership being
adjudge bankrupt, the partnership property shall not be administered in
bankruptcy, unless by consent of the partner or partners not adjudges
bankrupt; shall settle the partnership business as expeditiously as its nature
will permit, and account for the interest of the partner or partners adjudge
bankrupt."cralaw
virtua1aw
library
The general consideration that these partnership had juridical personality
and the limitations prescribed in subsection (h) above set forth gave rise to
the conflict noted in American decisions, as stated in the case of In re
Samuels (215 Fed., 845). which mentioned the two apparently conflicting
doctrines, citing one from In re Bertenshaw (157 Fed., 363), and the other
from
Francis
v.
McNeal
(186
Fed.,
481).
But there being in our insolvency law no such provision as that contained in
section 5 of said Act of Congress of July 1, 1898, nor any rule similar thereto,
and the juridical personality of limited partnerships being recognized by our

statutes from their formation in all their acts and contracts the decisions of
American courts on this point can have no application in this jurisdiction, nor
do we see any reason why these partnerships cannot be adjudges bankrupt
irrespective of the solvency or insolvency of their members, provided the
partnership has, as such, committed some of the acts of insolvency provided
in our law. Under this view it is unnecessary to discuss the other points
raised by the parties, although in the particular case under consideration it
can be added that the liability of the limited partners for the obligations and
losses of the partnership is limited to the amounts paid or promised to be
paid into the common fund except when a limited partner should have
included his name or consented to its inclusion in the firm name (arts. 147
and
148,
Code
of
Commerce).
Therefore, it having been proven that the partnership Campos Rueda & Co.
failed for more than thirty days to pay its obligations to the petitioners, the
Pacific Commercial Co., the Asiatic Petroleum Co., and the International
Banking Corporation, the case comes under paragraph 11 of section 20 of Act
No. 1956, and consequently the petitioners have the right to a judicial decree
declaring
the
involuntary
insolvency
of
said
partnership.
Wherefore, the judgment appealed from is reversed, and it is adjudged that
the limited partnership Campos Rueda & Co. is, and was on December 28,
1921, liable for having failed for more than thirty days to meet its obligations
with the three petitioners herein, and it is ordered that this proceeding be
remanded to the Court of First Instance of Manila with instruction to said
court to issue the proper decrees under section 24 of Act No. 1956, and
proceed
therewith
until
its
final
disposition.
It

is

so

ordered

without

special

findings

as

to

costs.

Araullo, C.J., Johnson, Street, Malcolm, Avancea, Villamor, Ostrand, and

Johns, JJ., concur.

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, v.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, Respondents.
Demosthenes B. Gadioma for petitioners.
DECISION
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.cralawnad
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 on 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.cralawnad
Not only that. He considered the share of the profits of each petitioner in the
sum of P33,584 as a "distributive dividend" taxable in full (not a mere capital
gain of which 1/2 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 v. 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 Tobeas
says:jgc:chanrobles.com.ph
"Como establecer el deslinde entre la comunidad ordinaria o copropiedad y
la
sociedad?
"El criterio diferencial segun la doctrina m s generalizada est : por raz
"n del origen, en que la sociedad presupone necesariamente la convencion,
mientras que la comunidad puede existir y existe ordinariamente sin ella; y
por raz "n del fin u 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 positivo 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 seala como nota
fundamental de diferenciacion, aparte del origen o 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 Espaol, 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 v. 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.chanrobles virtual lawlibrary
The instant case is distinguishable from the cases where the parties engaged
in joint ventures for profit. Thus, in Ona v. 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 v. 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 v. 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 donors tax (See art. 1448, Civil Code). We are not prejudging this
matter.
It
might
have
already
prescribed.

EN BANC
[G.R. No. L-4935. May 28, 1954.]
J.M. TUASON & CO., INC., represented by its Managing PARTNER,
GREGORIO ARANETA, INC.,Plaintiff-Appellee, v. QUIRINO
BOLAOS, Defendant-Appellant.
Araneta & Araneta for Appellee.

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

Jose A. Buendia for Appellant.

SO

SYLLABUS

Abad

ORDERED.
Santos,

Escolin,

Concepcion, Jr ., is on leave.

Cuevas

and

Alampay, JJ.,

concur.

1. PARTIES; REAL PARTY IN INTEREST; ATTORNEY MAY BRING ACTION

IN THE PLAINTIFFS NAME. Section 2 of the Rules of Court requires that
an action be brought in the name of, but not necessarily by, the real property
interest. 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.
2. ID.; CORPORATION AS PARTY MAY BE REPRESENTED BY ANOTHER
PERSON. NATURAL OR JUDICIAL. There is nothing against one
corporation being represented by another person, natural or juridical, in a
suit in court, for the true rule is that "although 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. v. Weston, 80
A.L.R.,
1043,
citing
2
Fletcher
Cyc.
E.
1082.)
3. COMPLAINTS; AMENDMENTS TO CONFIRM TO EVIDENCE NOT
NECESSARY TO RENDER JUDGMENT ON FACTS PROVED THOUGH
NOT ALLEGED. 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 the appellate court may treat the pleading as amended to confirm to the
evidence, although the pleadings were not actually amended. (Citing Maran,
Rules
of
Court,
1952
ed.,
389-390.)
4. LAND REGISTRATION; REOPENING OF DECREE AFTER ONE YEAR,
NOT ALLOWED. A decree of registration can no longer be impugned on
the ground of fraud, error or lack of notice to defendant, after one year has
elapsed from the issuance and entry of the decree. Neither could the decree
be collaterally attacked by any person claiming title to, or interest in, the land
prior to the registration proceedings, nor could title to that land in
derogation of that of plaintiff be acquired by adverse possession or
prescription since adverse, notorious and continuous possession under claim
of ownership is ineffective against Torrens title ands the right to secure
possession under a decree of registration does not prescribe.
5. ACTIONS; IDENTITY OF CAUSE OF ACTION. Where one action is for
the recovery of ownership and the other is for recovery of possession, there is
no
identity
of
cause
of
action.
6. ID.; CLASS SUIT. Where the action seeks relief for each individual
plaintiff and not relief for and on behalf of others, the action is not a class
suit.
DECISION
REYES, J.:
This is an action originally brought in the Court of First Instance of Rizal,
Quezon City Branch, to recover possession of registered land situated in

barrio

Tatalon,

Quezon

City.

Plaintiffs 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 plaintiffs 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 to 6 hectares, more or less, after defendant
had indicated the plaintiffs surveyors the portion of land claimed and
occupied by him. The second amendment became necessary and was
allowed following the testimony of plaintiffs surveyors that a portion of the
area was embraced in another certificate of title, which was plaintiffs
Transfer Certificate of Title No. 37677. And still later, in the course of trial,
after defendants 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 the land in
dispute) under claim of ownership, adverse to the entire world by defendant
and his predecessors in interest" from "time immemorial." 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 notice 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
of
errors:jgc:chanrobles.com.ph

"I. The trial court erred in not dismissing the case on the ground that the case
was
not
brought
by
the
real
party
in
interest.
"II. The trial court erred in admitting the third amended complaint.
"III. The trial court erred in denying defendants 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.
"VI. 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."cralaw
virtua1aw
library
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 & 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 & 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. v. 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:chanrob1es virtual 1aw
library
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 after judgment; but failure so to amend does not affect
the result 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."cralaw
virtua1aw
library
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 his Rules of
Court:jgc:chanrobles.com.ph
"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, through 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 Bolaos," defendant later changed his lawyer and also his
theory and tried to prove that the land in dispute was not covered by
plaintiffs 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 defendants answer to the
third
amended
complaint.
As the land in dispute is covered by plaintiffs 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
could the decree be collaterally attacked by any person claiming title to, or
interest in, the land prior to the registration proceedings. (Sorogon v.
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 v. 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 prescribe. (Francisco v. 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., v. Marinao 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 the 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 also 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 appellants 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 other
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 Appellant.
Paras, C.J., Pablo, Bengzon, Montemayor, Jugo, Bautista Angelo, Labrador
and Concepcion, JJ., concur.

SECOND DIVISION
[G.R. No. 126881. October 3, 2000.]
HEIRS OF TAN ENG KEE, Petitioners, v. COURT OF APPEALS and
BENGUET LUMBER COMPANY, represented by its President TAN ENG
LAY, Respondents.
DECISION

DE LEON, JR., J.:

In this petition for review on certiorari, petitioners pray for the reversal of the
Decision 1 dated March 13, 1996 of the former Fifth Division 2 of the Court of
Appeals in CA-G.R. CV No. 47937, the dispositive portion of which
states:chanrob1es
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THE FOREGOING CONSIDERED, the appealed decision is hereby set aside,
and
the
complaint
dismissed.
The

facts

are:chanrob1es

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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 decedents
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 complaint 4 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 Kees 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 judgment
6 on April 12, 1995, to wit:chanrob1es virtual 1aw library
WHEREFORE, in view of all the foregoing, judgment is hereby
rendered:chanrob1es
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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.chanrob1es

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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 reconsideration 7 was denied by the Court
of Appeals in a Resolution 8 dated October 11, 1996.
Hence,

the

present

petition.chanrob1es

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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 judgment 9 dismissing the cases for insufficiency of evidence.
In their assignment of errors, petitioners claim that:chanrob1es virtual 1aw
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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:chanrob1es
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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).

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:chanrob1es virtual 1aw library
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 oncertiorari. 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:chanrob1es
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(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:chanrob1es
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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:chanrob1es virtual
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x
x
x
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 Kees
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.
x
x
x
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 Kees
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.
x
x
x
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 latters capital assets,
contrary to the allegations in pars. 6, 7 and 8 of the complaint.chanrob1es
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These are not evidences supporting the existence of a partnership:chanrob1es
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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
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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:chanrob1es
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. . . 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:chanrob1es
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(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:chanrob1es
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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. Bolaos,
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. 26 Tan 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:chanrob1es virtual 1aw

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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:chanrob1es
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In determining whether a partnership exists, these rules shall
apply:chanrob1es
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(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:chanrob1es virtual 1aw
library
(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:chanrob1es virtua1 1aw 1ibrary
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:chanrob1es
virtual
1aw
library
(i) even a mere supervisor in a company, factory or store gives orders and
directions to his subordinates. So long, therefore, that an employees 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 respondents 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 hereby AFFIRMED in toto. No pronouncement as to
costs.
SO
Bellosillo, Mendoza, Quisumbing and Buena, JJ., concur.

ORDERED.

ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F.

LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and the
COURT OF APPEALS, Respondents.
Belo, Abiera & Associates for petitioners in 75875.chanrobles virtual law library
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.
GUTIERREZ, JR., J.:

Third DIVISION
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM
and
CHARLES
CHAMSAY, Petitioners,
vs. SANITARY
WARES
MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F.
LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUZ,Respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R.
LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A.
BONCAN, BALDWIN YOUNG and AVELINO V. CRUX, Petitioners,
vs. THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN
GRIFFIN, DAVID P. WHITTINGHAM, CHARLES CHAMSAY and
LUCIANO SALAZAR, Respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO
E.
SALAZAR, Petitioner,
vs. SANITARY
WARES
MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO,

These consolidated petitions seek the review of the amended decision of the
Court of Appeals in CA-G.R. SP Nos. 05604 and 05617 which set aside the
earlier decision dated June 5, 1986, of the then Intermediate Appellate Court
and directed that in all subsequent elections for directors of Sanitary Wares
Manufacturing Corporation (Saniwares), American Standard Inc. (ASI)
cannot nominate more than three (3) directors; that the Filipino stockholders
shall not interfere in ASI's choice of its three (3) nominees; that, on the other
hand, the Filipino stockholders can nominate only six (6) candidates and in
the event they cannot agree on the six (6) nominees, they shall vote only
among themselves to determine who the six (6) nominees will be, with
cumulative voting to be allowed but without interference from
ASI.chanroblesvirtualawlibrary chanrobles virtual law library
The antecedent facts can be summarized as follows: chanrobles virtual law
library
In 1961, Saniwares, a domestic corporation was incorporated for the primary
purpose of manufacturing and marketing sanitary wares. One of the
incorporators, Mr. Baldwin Young went abroad to look for foreign partners,
European or American who could help in its expansion plans. On August 15,
1962, ASI, a foreign corporation domiciled in Delaware, United States entered
into an Agreement with Saniwares and some Filipino investors whereby ASI
and the Filipino investors agreed to participate in the ownership of an
enterprise which would engage primarily in the business of manufacturing
in the Philippines and selling here and abroad vitreous china and sanitary
wares. The parties agreed that the business operations in the Philippines
shall be carried on by an incorporated enterprise and that the name of the
corporation
shall
initially
be
"Sanitary
Wares
Manufacturing
Corporation." chanrobles virtual law library

The Agreement has the following provisions relevant to the issues in these
cases on the nomination and election of the directors of the
corporation: chanrobles virtual law library
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in
the form annexed hereto as Exhibit A and, insofar as permitted under
Philippine law, shall specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of
Directors, which shall consist of nine individuals. As long as AmericanStandard shall own at least 30% of the outstanding stock of the Corporation,
three of the nine directors shall be designated by American-Standard, and
the other six shall be designated by the other stockholders of the
Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to
protect it as a minority group, including the grant of veto powers over a
number of corporate acts and the right to designate certain officers, such as a
member of the Executive Committee whose vote was required for important
corporate transactions.chanroblesvirtualawlibrary chanrobles virtual law
library
Later, the 30% capital stock of ASI was increased to 40%. The corporation was
also registered with the Board of Investments for availment of incentives with
the condition that at least 60% of the capital stock of the corporation shall be
owned by Philippine nationals.chanroblesvirtualawlibrary chanrobles virtual
law library
The joint enterprise thus entered into by the Filipino investors and the
American corporation prospered. Unfortunately, with the business successes,
there came a deterioration of the initially harmonious relations between the

two groups. According to the Filipino group, a basic disagreement was due
to their desire to expand the export operations of the company to which ASI
objected as it apparently had other subsidiaries of joint joint venture groups
in the countries where Philippine exports were contemplated. On March 8,
1983, the annual stockholders' meeting was held. The meeting was presided
by Baldwin Young. The minutes were taken by the Secretary, Avelino Cruz.
After disposing of the preliminary items in the agenda, the stockholders then
proceeded to the election of the members of the board of directors. The ASI
group nominated three persons namely; Wolfgang Aurbach, John Griffin and
David P. Whittingham. The Philippine investors nominated six, namely;
Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F.
Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr.
Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay. The
chairman, Baldwin Young ruled the last two nominations out of order on the
basis of section 5 (a) of the Agreement, the consistent practice of the parties
during the past annual stockholders' meetings to nominate only nine persons
as nominees for the nine-member board of directors, and the legal advice of
Saniwares' legal counsel. The following events then, transpired:
... There were protests against the action of the Chairman and heated
arguments ensued. An appeal was made by the ASI representative to the
body of stockholders present that a vote be taken on the ruling of the
Chairman. The Chairman, Baldwin Young, declared the appeal out of order
and no vote on the ruling was taken. The Chairman then instructed the
Corporate Secretary to cast all the votes present and represented by proxy
equally for the 6 nominees of the Philippine Investors and the 3 nominees of
ASI, thus effectively excluding the 2 additional persons nominated, namely,
Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua
protested the decision of the Chairman and announced that all votes
accruing to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No.
05617) were being cumulatively voted for the three ASI nominees and
Charles Chamsay, and instructed the Secretary to so vote. Luciano E. Salazar
and other proxy holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617) were
being voted cumulatively in favor of Luciano E. Salazar. The Chairman,
Baldwin Young, nevertheless instructed the Secretary to cast all votes equally

in favor of the three ASI nominees, namely, Wolfgang Aurbach, John Griffin
and David Whittingham and the six originally nominated by Rogelio
Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr.,
Enrique Lagdameo, George F. Lee, and Baldwin Young. The Secretary then
certified for the election of the following Wolfgang Aurbach, John Griffin,
David Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. The
representative of ASI then moved to recess the meeting which was duly
seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No.
05617). This motion to adjourn was accepted by the Chairman, Baldwin
Young, who announced that the motion was carried and declared the
meeting adjourned. Protests against the adjournment were registered and
having been ignored, Mr. Jaqua the ASI representative, stated that the
meeting was not adjourned but only recessed and that the meeting would be
reconvened in the next room. The Chairman then threatened to have the
stockholders who did not agree to the decision of the Chairman on the
casting of votes bodily thrown out. The ASI Group, Luciano E. Salazar and
other stockholders, allegedly representing 53 or 54% of the shares of
Saniwares, decided to continue the meeting at the elevator lobby of the
American Standard Building. The continued meeting was presided by
Luciano E. Salazar, while Andres Gatmaitan acted as Secretary. On the basis
of the cumulative votes cast earlier in the meeting, the ASI Group nominated
its four nominees; Wolfgang Aurbach, John Griffin, David Whittingham and
Charles Chamsay. Luciano E. Salazar voted for himself, thus the said five
directors were certified as elected directors by the Acting Secretary, Andres
Gatmaitan, with the explanation that there was a tie among the other six (6)
nominees for the four (4) remaining positions of directors and that the body
decided not to break the tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties
with the Securities and Exchange Commission (SEC). The first petition filed
was for preliminary injunction by Saniwares, Emesto V. Lagdameo, Baldwin
Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and
George F. Lee against Luciano Salazar and Charles Chamsay. The case was
denominated as SEC Case No. 2417. The second petition was for quo
warranto and application for receivership by Wolfgang Aurbach, John

Griffin, David Whittingham, Luciano E. Salazar and Charles Chamsay

against the group of Young and Lagdameo (petitioners in SEC Case No.
2417) and Avelino F. Cruz. The case was docketed as SEC Case No. 2718.
Both sets of parties except for Avelino Cruz claimed to be the legitimate
directors of the corporation.chanroblesvirtualawlibrary chanrobles virtual
law library
The two petitions were consolidated and tried jointly by a hearing officer
who rendered a decision upholding the election of the Lagdameo Group and
dismissing the quo warranto petition of Salazar and Chamsay. The ASI
Group and Salazar appealed the decision to the SEC en banc which affirmed
the hearing officer's decision.chanroblesvirtualawlibrary chanrobles virtual
law library
The SEC decision led to the filing of two separate appeals with the
Intermediate Appellate Court by Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604) and
by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were
consolidated and the appellate court in its decision ordered the remand of
the case to the Securities and Exchange Commission with the directive that a
new stockholders' meeting of Saniwares be ordered convoked as soon as
possible,
under
the
supervision
of
the
Commission.chanroblesvirtualawlibrary chanrobles virtual law library
Upon a motion for reconsideration filed by the appellees Lagdameo Group)
the appellate court (Court of Appeals) rendered the questioned amended
decision. Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham
and Charles Chamsay in G.R. No. 75875 assign the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED
ELECTION OF PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD
OF DIRECTORS OF SANIWARES WHEN IN FACT THERE WAS NO
ELECTION AT ALL.chanroblesvirtualawlibrary chanrobles virtual law
library
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM
EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED BY THE
NUMBER OF SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS

AND THE CORPORATION THEY REPRESENT OF THEIR PROPERTY

RIGHTS
WITHOUT
DUE
PROCESS
OF
LAW.chanroblesvirtualawlibrary chanrobles virtual law library
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS
PROVISIONS INTO THE AGREEMENT OF THE PARTIES WHICH WERE
NOT THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended
decision on the following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding
contractual agreements entered into by stockholders and the replacement of
the conditions of such agreements with terms never contemplated by the
stockholders
but
merely
dictated
by
the
CA .chanroblesvirtualawlibrarychanrobles virtual law library
11.2. The Amended decision would likewise sanction the deprivation of the
property rights of stockholders without due process of law in order that a
favored group of stockholders may be illegally benefitted and guaranteed a
continuing monopoly of the control of a corporation. (pp. 14-15, Rollo-7597576)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE
RECOGNIZING THAT THE STOCKHOLDERS OF SANIWARES ARE
DIVIDED INTO TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC
INTENT
OF
THE
AGREEMENT
AND
THE
LAW.chanroblesvirtualawlibrary chanrobles virtual law library
IIchanrobles virtual law library
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT
PRIVATE PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS

DURING THE 8 MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF

SANTWARES. (P. 24, Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are discussed
jointly.chanroblesvirtualawlibrary chanrobles virtual law library
The main issue hinges on who were the duly elected directors of Saniwares
for the year 1983 during its annual stockholders' meeting held on March 8,
1983. To answer this question the following factors should be determined: (1)
the nature of the business established by the parties whether it was a joint
venture or a corporation and (2) whether or not the ASI Group may vote
their additional 10% equity during elections of Saniwares' board of
directors.chanroblesvirtualawlibrary chanrobles virtual law library
The rule is that whether the parties to a particular contract have thereby
established among themselves a joint venture or some other relation depends
upon their actual intention which is determined in accordance with the rules
governing the interpretation and construction of contracts. (Terminal Shares,
Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales
Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668) chanrobles
virtual law library
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the
actual intention of the parties should be viewed strictly on the "Agreement"
dated August 15,1962 wherein it is clearly stated that the parties' intention
was
to
form
a
corporation
and
not
a
joint
venture.chanroblesvirtualawlibrary chanrobles virtual law library
They specifically mention number 16 under Miscellaneous Provisions which
states:
xxx xxx xxxchanrobles virtual law library
c) nothing herein contained shall be construed to constitute any of the parties
hereto partners or joint venturers in respect of any transaction hereunder. (At
P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that the
parties' agreement was to establish a joint venture presented by the
Lagdameo and Young Group on the ground that it contravenes the parol
evidence rule under section 7, Rule 130 of the Revised Rules of Court.

According to them, the Lagdameo and Young Group never pleaded in their
pleading that the "Agreement" failed to express the true intent of the
parties.chanroblesvirtualawlibrary chanrobles virtual law library
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been
reduced to writing, it is to be considered as containing all such terms, and
therefore, there can be, between the parties and their successors in interest,
no evidence of the terms of the agreement other than the contents of the
writing, except in the following cases: chanrobles virtual law library
(a) Where a mistake or imperfection of the writing, or its failure to express
the true intent and agreement of the parties or the validity of the agreement
is put in issue by the pleadings.chanroblesvirtualawlibrary chanrobles virtual
law library
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in
their Reply and Answer to Counterclaim in SEC Case No. 2417 that the
Agreement failed to express the true intent of the parties, to wit:
xxx xxx xxxchanrobles virtual law library
4. While certain provisions of the Agreement would make it appear that the
parties thereto disclaim being partners or joint venturers such disclaimer is
directed at third parties and is not inconsistent with, and does not preclude,
the existence of two distinct groups of stockholders in Saniwares one of
which (the Philippine Investors) shall constitute the majority, and the other
ASI shall constitute the minority stockholder. In any event, the evident
intention of the Philippine Investors and ASI in entering into the Agreement
is to enter into ajoint venture enterprise, and if some words in the Agreement
appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former (Art. 1370, New Civil Code). The various stipulations
of a contract shall be interpreted together attributing to the doubtful ones
that sense which may result from all of them taken jointly (Art. 1374, New
Civil Code). Moreover, in order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall be principally
considered. (Art. 1371, New Civil Code). (Part I, Original Records, SEC Case
No. 2417)

It has been ruled:

In an action at law, where there is evidence tending to prove that the parties
joined their efforts in furtherance of an enterprise for their joint profit, the
question whether they intended by their agreement to create a joint
adventure, or to assume some other relation is a question of fact for the jury.
(Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex.
Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the
Agreement as well as the testimonial evidence presented by the Lagdameo
and Young Group shows that the parties agreed to establish a joint venture
and not a corporation. The history of the organization of Saniwares and the
unusual arrangements which govern its policy making body are all
consistent with a joint venture and not with an ordinary corporation. As
stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated
the Agreement with ASI in behalf of the Philippine nationals. He testified
that ASI agreed to accept the role of minority vis-a-vis the Philippine
National group of investors, on the condition that the Agreement should
contain
provisions
to
protect
ASI
as
the
minority.chanroblesvirtualawlibrary chanrobles virtual law library
An examination of the Agreement shows that certain provisions were
included to protect the interests of ASI as the minority. For example, the vote
of 7 out of 9 directors is required in certain enumerated corporate acts [Sec. 3
(b) (ii) (a) of the Agreement]. ASI is contractually entitled to designate a
member of the Executive Committee and the vote of this member is required
for certain transactions [Sec. 3 (b) (i)].chanroblesvirtualawlibrary chanrobles
virtual law library
The Agreement also requires a 75% super-majority vote for the amendment
of the articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is
also given the right to designate the president and plant manager [Sec. 5 (6)].
The Agreement further provides that the sales policy of Saniwares shall be
that which is normally followed by ASI [Sec. 13 (a)] and that Saniwares

should not export "Standard" products otherwise than through ASI's Export
Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to provide
technology and know-how to Saniwares and the latter paid royalties for the
same. (At p. 2).chanroblesvirtualawlibrary chanrobles virtual law library
xxx xxx xxxchanrobles virtual law library
It is pertinent to note that the provisions of the Agreement requiring a 7 out
of 9 votes of the board of directors for certain actions, in effect gave ASI
(which designates 3 directors under the Agreement) an effective veto power.
Furthermore, the grant to ASI of the right to designate certain officers of the
corporation; the super-majority voting requirements for amendments of the
articles and by-laws; and most significantly to the issues of tms case, the
provision that ASI shall designate 3 out of the 9 directors and the other
stockholders shall designate the other 6, clearly indicate that there are two
distinct groups in Saniwares, namely ASI, which owns 40% of the capital
stock and the Philippine National stockholders who own the balance of 60%,
and that 2) ASI is given certain protections as the minority
stockholder.chanroblesvirtualawlibrary chanrobles virtual law library
Premises considered, we believe that under the Agreement there are two
groups of stockholders who established a corporation with provisions for a
special contractual relationship between the parties, i.e., ASI and the other
stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not
"nominated" or "elected" in the selection of the nine directors on a six to three
ratio. Each group is assured of a fixed number of directors in the
board.chanroblesvirtualawlibrary chanrobles virtual law library
Moreover, ASI in its communications referred to the enterprise as joint
venture. Baldwin Young also testified that Section 16(c) of the Agreement
that "Nothing herein contained shall be construed to constitute any of the
parties hereto partners or joint venturers in respect of any transaction
hereunder" was merely to obviate the possibility of the enterprise being
treated as partnership for tax purposes and liabilities to third
parties.chanroblesvirtualawlibrary chanrobles virtual law library

Quite often, Filipino entrepreneurs in their desire to develop the industrial

and manufacturing capacities of a local firm are constrained to seek the
technology and marketing assistance of huge multinational corporations of
the developed world. Arrangements are formalized where a foreign group
becomes a minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance. However, there
is always a danger from such arrangements. The foreign group may, from the
start, intend to establish its own sole or monopolistic operations and merely
uses the joint venture arrangement to gain a foothold or test the Philippine
waters, so to speak. Or the covetousness may come later. As the Philippine
firm enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to completely or
predominantly take over the entire company. This undermining of joint
ventures is not consistent with fair dealing to say the least. To the extent that
such subversive actions can be lawfully prevented, the courts should extend
protection especially in industries where constitutional and legal
requirements
reserve
controlling
ownership
to
Filipino
citizens.chanroblesvirtualawlibrary chanrobles virtual law library
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of
stockholders to enter into agreements regarding the exercise of their voting
rights.chanroblesvirtualawlibrary chanrobles virtual law library
Sec. 100. Agreements by stockholders.-chanrobles virtual law library
xxx xxx xxxchanrobles virtual law library
2. An agreement between two or more stockholders, if in writing and signed
by the parties thereto, may provide that in exercising any voting rights, the
shares held by them shall be voted as therein provided, or as they may agree,
or as determined in accordance with a procedure agreed upon by
them.chanroblesvirtualawlibrarychanrobles virtual law library
Appellants contend that the above provision is included in the Corporation
Code's chapter on close corporations and Saniwares cannot be a close
corporation because it has 95 stockholders. Firstly, although Saniwares had
95 stockholders at the time of the disputed stockholders meeting, these 95
stockholders are not separate from each other but are divisible into groups

representing a single Identifiable interest. For example, ASI, its nominees and
lawyers count for 13 of the 95 stockholders. The YoungYutivo family count
for another 13 stockholders, the Chamsay family for 8 stockholders, the
Santos family for 9 stockholders, the Dy family for 7 stockholders, etc. If the
members of one family and/or business or interest group are considered as
one (which, it is respectfully submitted, they should be for purposes of
determining how closely held Saniwares is there were as of 8 March 1983,
practically only 17 stockholders of Saniwares. (Please refer to discussion in
pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11 December 1984 and
Annex "A" thereof).chanroblesvirtualawlibrary chanrobles virtual law library
Secondly, even assuming that Saniwares is technically not a close corporation
because it has more than 20 stockholders, the undeniable fact is that it is
aclose-held corporation. Surely, appellants cannot honestly claim that
Saniwares
is
a
public
issue
or
a
widely
held
corporation.chanroblesvirtualawlibrary chanrobles virtual law library
In the United States, many courts have taken a realistic approach to joint
venture corporations and have not rigidly applied principles of corporation
law designed primarily for public issue corporations. These courts have
indicated that express arrangements between corporate joint ventures should
be construed with less emphasis on the ordinary rules of law usually applied
to corporate entities and with more consideration given to the nature of the
agreement between the joint venturers (Please see Wabash Ry v. American
Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des Moines
Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic Coast Line
Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d 903;
Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571;
Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture
Corporations", 11 Vand Law Rev. p. 680,1958). These American cases dealt
with legal questions as to the extent to which the requirements arising from
the corporate form of joint venture corporations should control, and the
courts ruled that substantial justice lay with those litigants who relied on the
joint venture agreement rather than the litigants who relied on the orthodox
principles of corporation law.chanroblesvirtualawlibrary chanrobles virtual
law library

As correctly held by the SEC Hearing Officer: chanrobles virtual law library
It is said that participants in a joint venture, in organizing the joint venture
deviate from the traditional pattern of corporation management. A noted
authority has pointed out that just as in close corporations, shareholders'
agreements in joint venture corporations often contain provisions which do
one or more of the following: (1) require greater than majority vote for
shareholder and director action; (2) give certain shareholders or groups of
shareholders power to select a specified number of directors; (3) give to the
shareholders control over the selection and retention of employees; and (4)
set up a procedure for the settlement of disputes by arbitration (See I O' Neal,
Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC
Hearing Officer, P. 16)chanrobles virtual law library
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily
imply that agreements regarding the exercise of voting rights are allowed
only in close corporations. As Campos and Lopez-Campos
explain:chanrobles virtual law library
Paragraph 2 refers to pooling and voting agreements in particular. Does this
provision necessarily imply that these agreements can be valid only in close
corporations as defined by the Code? Suppose that a corporation has twenty
five stockholders, and therefore cannot qualify as a close corporation under
section 96, can some of them enter into an agreement to vote as a unit in the
election of directors? It is submitted that there is no reason for denying
stockholders of corporations other than close ones the right to enter into not
voting or pooling agreements to protect their interests, as long as they do not
intend to commit any wrong, or fraud on the other stockholders not parties
to the agreement. Of course, voting or pooling agreements are perhaps more
useful and more often resorted to in close corporations. But they may also be
found necessary even in widely held corporations. Moreover, since the Code
limits the legal meaning of close corporations to those which comply with
the requisites laid down by section 96, it is entirely possible that a
corporation which is in fact a close corporation will not come within the
definition. In such case, its stockholders should not be precluded from

entering into contracts like voting agreements if these are otherwise valid.
(Campos & Lopez-Campos, op cit, p. 405)chanrobles virtual law library
In short, even assuming that sec. 5(a) of the Agreement relating to the
designation or nomination of directors restricts the right of the Agreement's
signatories to vote for directors, such contractual provision, as correctly held
by the SEC, is valid and binding upon the signatories thereto, which include
appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their
additional equity during elections of Saniwares' board of directors, the Court
of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the
management of the corporation is spelled out in the Agreement. Section 5(a)
hereof says that three of the nine directors shall be designated by ASI and the
remaining six by the other stockholders, i.e., the Filipino stockholders. This
allocation of board seats is obviously in consonance with the minority
position of ASI.chanroblesvirtualawlibrary chanrobles virtual law library
Having entered into a well-defined contractual relationship, it is imperative
that the parties should honor and adhere to their respective rights and
obligations thereunder. Appellants seem to contend that any allocation of
board seats, even in joint venture corporations, are null and void to the extent
that such may interfere with the stockholder's rights to cumulative voting as
provided in Section 24 of the Corporation Code. This Court should not be
prepared to hold that any agreement which curtails in any way cumulative
voting should be struck down, even if such agreement has been freely
entered into by experienced businessmen and do not prejudice those who are
not parties thereto. It may well be that it would be more cogent to hold, as
the Securities and Exchange Commission has held in the decision appealed
from, that cumulative voting rights may be voluntarily waived by
stockholders who enter into special relationships with each other to pursue
and implement specific purposes, as in joint venture relationships between
foreign and local stockholders, so long as such agreements do not adversely
affect third parties.chanroblesvirtualawlibrary chanrobles virtual law library

In any event, it is believed that we are not here called upon to make a general
rule on this question. Rather, all that needs to be done is to give life and effect
to the particular contractual rights and obligations which the parties have
assumed for themselves.chanroblesvirtualawlibrary chanrobles virtual law
library
On the one hand, the clearly established minority position of ASI and the
contractual allocation of board seats Cannot be disregarded. On the other
hand, the rights of the stockholders to cumulative voting should also be
protected.chanroblesvirtualawlibrary chanrobles virtual law library
In our decision sought to be reconsidered, we opted to uphold the second
over the first. Upon further reflection, we feel that the proper and just
solution to give due consideration to both factors suggests itself quite clearly.
This Court should recognize and uphold the division of the stockholders into
two groups, and at the same time uphold the right of the stockholders within
each group to cumulative voting in the process of determining who the
group's nominees would be. In practical terms, as suggested by appellant
Luciano E. Salazar himself, this means that if the Filipino stockholders cannot
agree who their six nominees will be, a vote would have to be taken among
the Filipino stockholders only. During this voting, each Filipino stockholder
can cumulate his votes. ASI, however, should not be allowed to interfere in
the voting within the Filipino group. Otherwise, ASI would be able to
designate more than the three directors it is allowed to designate under the
Agreement, and may even be able to get a majority of the board seats, a result
which is clearly contrary to the contractual intent of the
parties.chanroblesvirtualawlibrary chanrobles virtual law library
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give
due consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and
the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI
Group has the right to vote their additional equity pursuant to Section 24 of
the Corporation Code which gives the stockholders of a corporation the right
to cumulate their votes in electing directors. Petitioner Salazar adds that this

right if granted to the ASI Group would not necessarily mean a violation of
the Anti-Dummy Act (Commonwealth Act 108, as amended). He cites section
2-a thereof which provides:
And provided finally that the election of aliens as members of the board of
directors or governing body of corporations or associations engaging in
partially nationalized activities shall be allowed in proportion to their
allowable participation or share in the capital of such entities. (amendments
introduced by Presidential Decree 715, section 1, promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the
Corporation Code. The point of query, however, is whether or not that
provision is applicable to a joint venture with clearly defined agreements:
The legal concept of ajoint 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 in fact 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. Mc Dermott, 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 jurisdictions 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, 395 111. 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. Bolanos, 95 Phil. 906 [1954])
(Campos and Lopez-Campos Comments, Notes and Selected Cases,
Corporation Code 1981)

Moreover, the usual rules as regards the construction and operations of

contracts generally apply to a contract of joint venture. (O' Hara v. Harman 14
App. Dev. (167) 43 NYS 556).chanroblesvirtualawlibrarychanrobles virtual
law library
Bearing these principles in mind, the correct view would be that the
resolution of the question of whether or not the ASI Group may vote their
additional
equity
lies
in
the
agreement
of
the
parties.chanroblesvirtualawlibrary chanrobles virtual law library
Necessarily, the appellate court was correct in upholding the agreement of
the parties as regards the allocation of director seats under Section 5 (a) of
the "Agreement," and the right of each group of stockholders to cumulative
voting in the process of determining who the group's nominees would be
under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5
(a) of the Agreement relates to the manner of nominating the members of the
board of directors while Section 3 (a) (1) relates to the manner of voting for
these nominees.chanroblesvirtualawlibrary chanrobles virtual law library
This is the proper interpretation of the Agreement of the parties as regards
the
election
of
members
of
the
board
of
directors.chanroblesvirtualawlibrarychanrobles virtual law library
To allow the ASI Group to vote their additional equity to help elect even a
Filipino director who would be beholden to them would obliterate their
minority status as agreed upon by the parties. As aptly stated by the
appellate court:
... ASI, however, should not be allowed to interfere in the voting within the
Filipino group. Otherwise, ASI would be able to designate more than the
three directors it is allowed to designate under the Agreement, and may even
be able to get a majority of the board seats, a result which is clearly contrary
to the contractual intent of the parties.chanroblesvirtualawlibrary chanrobles
virtual law library
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give
due consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and
the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (At p. 39, Rollo, 75875)

Equally important as the consideration of the contractual intent of the parties

is the consideration as regards the possible domination by the foreign
investors of the enterprise in violation of the nationalization requirements
enshrined in the Constitution and circumvention of the Anti-Dummy Act. In
this regard, petitioner Salazar's position is that the Anti-Dummy Act allows
the ASI group to elect board directors in proportion to theirshare in the capital
of the entity. It is to be noted, however, that the same law also limits the
election of aliens as members of the board of directors in proportion to their
allowance participation of said entity. In the instant case, the foreign Group ASI
was limited to designate three directors. This is the allowable participation of
the ASI Group. Hence, in future dealings, this limitation of six to three board
seats should always be maintained as long as the joint venture agreement
exists considering that in limiting 3 board seats in the 9-man board of
directors there are provisions already agreed upon and embodied in the
parties' Agreement to protect the interests arising from the minority status of
the foreign investors.chanroblesvirtualawlibrary chanrobles virtual law
library
With these findings, we the decisions of the SEC Hearing Officer and SEC
which were impliedly affirmed by the appellate court declaring Messrs.
Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V.
Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee as the duly elected directors of
Saniwares
at
the
March
8,1983
annual
stockholders'
meeting.chanroblesvirtualawlibrary chanrobles virtual law library
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No.
75951) object to a cumulative voting during the election of the board of
directors of the enterprise as ruled by the appellate court and submits that
the six (6) directors allotted the Filipino stockholders should be selected by
consensus pursuant to section 5 (a) of the Agreement which uses the word
"designate" meaning "nominate, delegate or appoint." chanrobles virtual law
library
They also stress the possibility that the ASI Group might take control of the
enterprise if the Filipino stockholders are allowed to select their nominees
separately and not as a common slot determined by the majority of their
group.chanroblesvirtualawlibrary chanrobles virtual law library

Section 5 (a) of the Agreement which uses the word designates in the
allocation of board directors should not be interpreted in isolation. This
should be construed in relation to section 3 (a) (1) of the Agreement. As we
stated earlier, section 3(a) (1) relates to themanner of voting for these nominees
which is cumulative voting while section 5(a) relates to the manner
of nominating the members of the board of directors. The petitioners in G.R.
No. 75951 agreed to this procedure, hence, they cannot now impugn its
legality.chanroblesvirtualawlibrary chanrobles virtual law library
The insinuation that the ASI Group may be able to control the enterprise
under the cumulative voting procedure cannot, however, be ignored. The
validity of the cumulative voting procedure is dependent on the directors
thus elected being genuine members of the Filipino group, not voters whose
interest is to increase the ASI share in the management of Saniwares. The
joint venture character of the enterprise must always be taken into account,
so long as the company exists under its original agreement. Cumulative
voting may not be used as a device to enable ASI to achieve stealthily or
indirectly what they cannot accomplish openly. There are substantial
safeguards in the Agreement which are intended to preserve the majority
status of the Filipino investors as well as to maintain the minority status of
the foreign investors group as earlier discussed. They should be
maintained.chanroblesvirtualawlibrary chanrobles virtual law library
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are
DISMISSED and the petition in G.R. No. 75951 is partly GRANTED. The
amended decision of the Court of Appeals is MODIFIED in that Messrs.
Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo,
Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique
Lagdameo, and George F. Lee are declared as the duly elected directors of
Saniwares at the March 8,1983 annual stockholders' meeting. In all other
respects, the questioned decision is AFFIRMED. Costs against the petitioners
in
G.R.
Nos.
75975-76
and
G.R.
No.
75875.chanroblesvirtualawlibrary chanrobles virtual law library
SO ORDERED.
Fernan,
C.J.,
(Chairman),
Bidin
and
Cortes,
JJ.,
concur.chanroblesvirtualawlibrary chanrobles virtual law library
Feliciano, J., took no part.

2. ID. Those who contracted with the person in whose name the business
of a partnership of cuentas en participacion is conducted, shall have only the
right of action against such person and not against the other persons
interested, and the latter, on the other hand, shall have no right of action
against the third person who contracted with the manager unless such
manager formally transferred his right to them. (Art. 242, Code of
Commerce.)
DECISION
MAPA, J. :

FIRST DIVISION
[G.R. No. 2800. December 4, 1906. ]
FRANK S. BOURNS, Plaintiff-Appellee, v. D.M. CARMAN ET
AL., Defendants-Appellants.
W.A. Kincaid, for Appellants.
J.N. Wolfson, for Appellee.
SYLLABUS
1. PARTNERSHIP OF "CUENTAS EN PARTICIPACION." A partnership
constituted in such a manner that its existence was only known to those who
had an interest in the same, there being no mutual agreement between the
partners, and without a corporate name indicating to the public in some way
that there were other people besides the one who ostensibly managed and
conducted the business, is exactly the accidental partnership of cuentas en
participacion defined in article 239 of the Code of Commerce.

The plaintiff in this action seeks to recover the sum of $437.50, United States
currency, balance due on a contract for the sawing of lumber for the lumber
yard of Lo-Chim-Lim. The contract relating to the said work was entered into
by the said Lo-Chim-Lim, acting as in his own name with the plaintiff, and it
appears that the said Lo-Chim-Lim and his codefendants jointly, alleging
that, at the time the contract was made, they were the joint proprietors and
operators of the said lumber yard engaged in the purchase and sale of
lumber under the name and style of Lo-Chim-Lim. Apparently the plaintiff
tries to show by the words above initalicized that the other defendants were
the partners of Lo-Chim-Lim in the said lumber -yard business.
The court below dismissed the action as to the defendants D.M. Carman and
Fulgencio Tan-Chim-Lim, and rendered judgment against the other
defendants for the amount claimed in the complaint with the costs of
proceedings. Vicente Palanca and Go-Tauco only expected to the said
judgment, moved for a new trial, and have brought the case to this court by
bill
of
exceptions.
The evidence of record show, according to the judgment of the court below,
"That Lo-Chim-Lim had a certain lumber yard in Calle Lemery of the city of
Manila, and that he was the manager of the same, having ordered the
plaintiff to do some work for him at his sawmill in the city of Manila; and
that Vicente Palanca was his partner, and Manila; and that Vicente Palanca
was his partner, and had an interest in the said business as well as in the
profits and losses thereof . . .," and that Go-Tuaco received part of the earning
of the lumber yard in the management of which has was interested.

The court below accordingly found that "Lo-Chim-Lim, Vicente Palanca, and
Go-Tauco had a lumber yard in Calle Lemery of the city of Manila in the year
1904, participated in the profits and losses of the business and that Lo-ChimLim
in
the
business
in
question.
Although the evidence upon this point as stated by the court below is not
entirely satisfactory, it ca not be said, however, that it is plainly and manifest
in conflict with the above finding of that court. Such finding should therefore
be
sustained.
The question thus raised is, therefore, purely on of law and reduces itself to
determining the real legal nature of the participation which the appellants
had in Lo-Chim-Lims lumber yard, and consequently their liability toward
the plaintiff, in connection with the transaction which gave rise to the present
suit.
It seems that the alleged partnership between Lo-Chim-Lim and the
appellants was formed by verbal agreement only. At least there is no
evidence tending to show that said agreement was reduced to writing, or
that
it
was
ever
recorded
in
a
public
instrument.
Moreover, that partnership had no corporate name. The plaintiff himself
alleges in his complaint that the partnership was engaged in business under
the name and style of Lo-Chim-Lim only, which according to the evidence
was the name of one of the defendants. On the other hand, and this is very
important, it does not appear that there was any mutual agreement between
the parties, and if there were any, it has not been shown what that agreement
was. As far as the evidence shows it seems that the business was conducted
by Lo-Chim-Lim in his own name, although he gave to the appellants a share
of the earnings of the business; but what that share was has not been shown
with certainty. The contract made with the plaintiff were made by Lo-ChimLim individually in his own name, and there is no evidence that the
partnership ever contracted in any other form. Under such circumstances we
find nothing upon which to consider this partnership other than as a
partnership of cuentas en participacion. It may be that, as a matter of fact, it
is something different, but the uncertain and scant evidence introduced by
the parties does not permit of any other designation of this partnership. We
see nothing, according to the evidence, but a simple business conducted by
Lo-Chim-Lim exclusively, in his own name, and under his own personal

management, he having effected every transaction connected therewith also

in his own name, the names of the other persons interested in the profits and
losses of the business nowhere appearing. A partnership constituted in such
a manner, the existence of which was only known to those who had an
interest in the same, there being no mutual agreements between the partners,
and without a corporate name indicating to the public in some way that
there were other people besides the one who ostensibly managed and
conducted the business, in exactly the accidental partnership of cuentas en
participacion defined in article 239 of the Code of Commerce.
Those who contract with the person under whose name the business of such
partnership of cuentas en participacion is conducted, shall have only a right
of action against such person and not against the other person interested, and
the latter, on the other hand, shall have no right of action against the third
person who contracted with the manager unless such manager formally
transfers his right to them. (Art. 242 of the Code of Commerce.) It follows,
therefore, that the plaintiff has no right to demand from the appellants the
payment of the amount claimed in the complaint, as Lo-Chim-Lim was the
only one who contracted with him. The action of the plaintiff lacks, therefore,
a
legal
foundation
and
should
be
accordingly
dismissed.
The judgment appealed from is hereby reversed and the appellants are
absolved of the complaint without express provision as to the cost of both
instances. After the expiration of twenty days let judgment be entered in
accordance herewith, and ten days thereafter the cause be remanded to the
court
below
for
execution.
So
ordered.
Arellano, C.J., Torres, Johnson, Carson, Willard, and Tracey, JJ., concur.

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining),

entered into an agreement4with Baguio Gold Mining Company ("Baguio
Gold") for the former to manage and operate the latter's mining claim,
known as the Sto. Nino mine, located in Atok and Tublay, Benguet Province.
The parties' agreement was denominated as "Power of Attorney" and
provided for the following terms:
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold)
shall make available to the MANAGERS (Philex Mining) up to ELEVEN
MILLION PESOS (P11,000,000.00), in such amounts as from time to time may
be required by the MANAGERS within the said 3-year period, for use in the
MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION
PESOS (P11,000,000.00) shall be deemed, for internal audit purposes, as the
owner's account in the Sto. Nino PROJECT. Any part of any income of the
PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino
PROJECT, shall be added to such owner's account.

THIRD DIVISION
[G.R. NO. 148187 : April 16, 2008]
PHILEX MINING CORPORATION, Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE,Respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a Petition for Review on Certiorari of the June 30, 2000 Decision1 of the
Court of Appeals in CA-G.R. SP No. 49385, which affirmed the Decision 2 of
the Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April 3,
2001 Resolution3 denying the motion for reconsideration.
The facts of the case are as follows:

5. Whenever the MANAGERS shall deem it necessary and convenient in

connection with the MANAGEMENT of the STO. NINO MINE, they may
transfer their own funds or property to the Sto. Nino PROJECT, in accordance
with the following arrangements:
(a) The properties shall be appraised and, together with the cash, shall be
carried by the Sto. Nino PROJECT as a special fund to be known as the
MANAGERS' account.
(b) The total of the MANAGERS' account shall not exceed P11,000,000.00,
except with prior approval of the PRINCIPAL; provided, however, that if the
compensation of the MANAGERS as herein provided cannot be paid in cash
from the Sto. Nino PROJECT, the amount not so paid in cash shall be added
to the MANAGERS' account.
(c) The cash and property shall not thereafter be withdrawn from the Sto.
Nino PROJECT until termination of this Agency.
(d) The MANAGERS' account shall not accrue interest. Since it is the desire of
the PRINCIPAL to extend to the MANAGERS the benefit of subsequent

appreciation of property, upon a projected termination of this Agency, the

ratio which the MANAGERS' account has to the owner's account will be
determined, and the corresponding proportion of the entire assets of the
STO. NINO MINE, excluding the claims, shall be transferred to the
MANAGERS, except that such transferred assets shall not include mine
development, roads, buildings, and similar property which will be valueless,
or of slight value, to the MANAGERS. The MANAGERS can, on the other
hand, require at their option that property originally transferred by them to
the Sto. Nino PROJECT be re-transferred to them. Until such assets are
transferred to the MANAGERS, this Agency shall remain subsisting.
xxx
12. The compensation of the MANAGER shall be fifty per cent (50%) of the
net profit of the Sto. Nino PROJECT before income tax. It is understood that
the MANAGERS shall pay income tax on their compensation, while the
PRINCIPAL shall pay income tax on the net profit of the Sto. Nino PROJECT
after deduction therefrom of the MANAGERS' compensation.
xxx
16. The PRINCIPAL has current pecuniary obligation in favor of the
MANAGERS and, in the future, may incur other obligations in favor of the
MANAGERS. This Power of Attorney has been executed as security for the
payment and satisfaction of all such obligations of the PRINCIPAL in favor of
the MANAGERS and as a means to fulfill the same. Therefore, this Agency
shall be irrevocable while any obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the MANAGERS' account. After all
obligations of the PRINCIPAL in favor of the MANAGERS have been paid
and satisfied in full, this Agency shall be revocable by the PRINCIPAL upon
36-month notice to the MANAGERS.
17. Notwithstanding any agreement or understanding between the
PRINCIPAL and the MANAGERS to the contrary, the MANAGERS may
withdraw from this Agency by giving 6-month notice to the PRINCIPAL. The
MANAGERS shall not in any manner be held liable to the PRINCIPAL by
reason alone of such withdrawal. Paragraph 5(d) hereof shall be operative in
case of the MANAGERS' withdrawal.

x x x x5
In the course of managing and operating the project, Philex Mining made
advances of cash and property in accordance with paragraph 5 of the
agreement. However, the mine suffered continuing losses over the years
which resulted to petitioner's withdrawal as manager of the mine on January
28, 1982 and in the eventual cessation of mine operations on February 20,
1982.6
Thereafter, on September 27, 1982, the parties executed a "Compromise with
Dation in Payment"7wherein Baguio Gold admitted an indebtedness to
petitioner in the amount of P179,394,000.00 and agreed to pay the same in
three segments by first assigning Baguio Gold's tangible assets to petitioner,
transferring to the latter Baguio Gold's equitable title in its Philodrill assets
and finally settling the remaining liability through properties that Baguio
Gold may acquire in the future.
On December 31, 1982, the parties executed an "Amendment to Compromise
with Dation in Payment"8 where the parties determined that Baguio Gold's
indebtedness to petitioner actually amounted to P259,137,245.00, which sum
included liabilities of Baguio Gold to other creditors that petitioner had
assumed as guarantor. These liabilities pertained to long-term loans
amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank of
America NT & SA and Citibank N.A. This time, Baguio Gold undertook to
pay petitioner in two segments by first assigning its tangible assets for
P127,838,051.00 and then transferring its equitable title in its Philodrill assets
for P16,302,426.00. The parties then ascertained that Baguio Gold had a
remaining outstanding indebtedness to petitioner in the amount of
P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the remaining
outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to
allowances and reserves that were set up in 1981 and P2,860,768.00 to the
1982 operations.
In its 1982 annual income tax return, petitioner deducted from its gross
income the amount of P112,136,000.00 as "loss on settlement of receivables

from Baguio Gold against reserves and allowances." 9 However, the Bureau of
Internal Revenue (BIR) disallowed the amount as deduction for bad debt and
assessed petitioner a deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be
allowed since all requisites for a bad debt deduction were satisfied, to wit: (a)
there was a valid and existing debt; (b) the debt was ascertained to be
worthless; and (c) it was charged off within the taxable year when it was
determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management contract
it entered into with Baguio Gold. The bad debt deduction represented
advances made by petitioner which, pursuant to the management contract,
formed part of Baguio Gold's "pecuniary obligations" to petitioner. It also
included payments made by petitioner as guarantor of Baguio Gold's longterm loans which legally entitled petitioner to be subrogated to the rights of
the original creditor.
Petitioner also asserted that due to Baguio Gold's irreversible losses, it
became evident that it would not be able to recover the advances and
payments it had made in behalf of Baguio Gold. For a debt to be considered
worthless, petitioner claimed that it was neither required to institute a
judicial action for collection against the debtor nor to sell or dispose of
collateral assets in satisfaction of the debt. It is enough that a taxpayer
exerted diligent efforts to enforce collection and exhausted all reasonable
means to collect.
On October 28, 1994, the BIR denied petitioner's protest for lack of legal and
factual basis. It held that the alleged debt was not ascertained to be worthless
since Baguio Gold remained existing and had not filed a petition for
bankruptcy; and that the deduction did not consist of a valid and subsisting
debt considering that, under the management contract, petitioner was to be
paid fifty percent (50%) of the project's net profit.10
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered
judgment, as follows:

WHEREFORE, in view of the foregoing, the instant Petition for Review is

hereby DENIED for lack of merit. The assessment in question, viz: FAS-1-8288-003067 for deficiency income tax in the amount of P62,811,161.39 is hereby
AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED
to PAY respondent Commissioner of Internal Revenue the amount of
P62,811,161.39, plus, 20% delinquency interest due computed from February
10, 1995, which is the date after the 20-day grace period given by the
respondent within which petitioner has to pay the deficiency amount x x x
up to actual date of payment.
SO ORDERED.11
The CTA rejected petitioner's assertion that the advances it made for the Sto.
Nino mine were in the nature of a loan. It instead characterized the advances
as petitioner's investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The CTA held that the
"Power of Attorney" executed by petitioner and Baguio Gold was actually a
partnership agreement. Since the advanced amount partook of the nature of
an investment, it could not be deducted as a bad debt from petitioner's gross
income.
The CTA likewise held that the amount paid by petitioner for the long-term
loan obligations of Baguio Gold could not be allowed as a bad debt
deduction. At the time the payments were made, Baguio Gold was not in
default since its loans were not yet due and demandable. What petitioner did
was to pre-pay the loans as evidenced by the notice sent by Bank of America
showing that it was merely demanding payment of the installment and
interests due. Moreover, Citibank imposed and collected a "pre-termination
penalty" for the pre-payment.
The Court of Appeals affirmed the decision of the CTA. 12 Hence, upon denial
of its motion for reconsideration,13 petitioner took this recourse under Rule 45
of the Rules of Court, alleging that:

I.
The Court of Appeals erred in construing that the advances made by Philex
in the management of the Sto. Nino Mine pursuant to the Power of Attorney
partook of the nature of an investment rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net
profits of the Sto. Nino Mine indicates that Philex is a partner of Baguio Gold
in the development of the Sto. Nino Mine notwithstanding the clear absence
of any intent on the part of Philex and Baguio Gold to form a partnership.
III.
The Court of Appeals erred in relying only on the Power of Attorney and in
completely disregarding the Compromise Agreement and the Amended
Compromise Agreement when it construed the nature of the advances made
by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the issue of the
propriety of the bad debts write-off.14
Petitioner insists that in determining the nature of its business relationship
with Baguio Gold, we should not only rely on the "Power of Attorney", but
also on the subsequent "Compromise with Dation in Payment" and
"Amended Compromise with Dation in Payment" that the parties executed in
1982. These documents, allegedly evinced the parties' intent to treat the
advances and payments as a loan and establish a creditor-debtor relationship
between them.
The petition lacks merit.
The lower courts correctly held that the "Power of Attorney" is the instrument
that is material in determining the true nature of the business relationship
between petitioner and Baguio Gold. Before resort may be had to the two
compromise agreements, the parties' contractual intent must first be
discovered from the expressed language of the primary contract under which
the parties' business relations were founded. It should be noted that the

compromise agreements were mere collateral documents executed by the

parties pursuant to the termination of their business relationship created
under the "Power of Attorney". On the other hand, it is the latter which
established the juridical relation of the parties and defined the parameters of
their dealings with one another.
The execution of the two compromise agreements can hardly be considered
as a subsequent or contemporaneous act that is reflective of the parties' true
intent. The compromise agreements were executed eleven years after the
"Power of Attorney" and merely laid out a plan or procedure by which
petitioner could recover the advances and payments it made under the
"Power of Attorney". The parties entered into the compromise agreements as
a consequence of the dissolution of their business relationship. It did not
define that relationship or indicate its real character.
An examination of the "Power of Attorney" reveals that a partnership or joint
venture was indeed intended by the parties. Under 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.15 While a corporation, like petitioner, cannot generally enter into
a contract of partnership unless authorized by law or its charter, it has been
held that it may enter into a joint venture which is akin to a particular
partnership:
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. x x x It is in fact 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. x x x The main distinction cited by most opinions in
common law jurisdictions 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. x
x x 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. x x x It would

seem therefore that under Philippine law, a joint venture is a form of

partnership and should 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. x
x x (Citations omitted) 16
Perusal of the agreement denominated as the "Power of Attorney" indicates
that the parties had intended to create a partnership and establish a common
fund for the purpose. They also had a joint interest in the profits of the
business as shown by a 50-50 sharing in the income of the mine.
Under the "Power of Attorney", petitioner and Baguio Gold undertook to
contribute money, property and industry to the common fund known as the
Sto. Nio mine.17 In this regard, we note that there is a substantive
equivalence in the respective contributions of the parties to the development
and operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement,
petitioner and Baguio Gold were to contribute equally to the joint venture
assets under their respective accounts. Baguio Gold would
contribute P11M under its owner's account plus any of its income that is left
in the project, in addition to its actual mining claim. Meanwhile, petitioner's
contribution would consist of itsexpertise in the management and operation
of mines, as well as the manager's account which is comprised of P11M in
funds and property and petitioner's "compensation" as manager that cannot
be paid in cash.
However, petitioner asserts that it could not have entered into a partnership
agreement with Baguio Gold because it did not "bind" itself to contribute
money or property to the project; that under paragraph 5 of the agreement, it
was only optional for petitioner to transfer funds or property to the Sto.
Nio project "(w)henever the MANAGERS shall deem it necessary and
convenient in connection with the MANAGEMENT of the STO. NIO
MINE."18
The wording of the parties' agreement as to petitioner's contribution to the
common fund does not detract from the fact that petitioner transferred its
funds and property to the project as specified in paragraph 5, thus rendering

effective the other stipulations of the contract, particularly paragraph 5(c)

which prohibits petitioner from withdrawing the advances until termination
of the parties' business relations. As can be seen, petitioner became bound by
its contributions once the transfers were made. The contributions acquired an
obligatory nature as soon as petitioner had chosen to exercise its option
under paragraph 5.
There is no merit to petitioner's claim that the prohibition in paragraph 5(c)
against withdrawal of advances should not be taken as an indication that it
had entered into a partnership with Baguio Gold; that the stipulation only
showed that what the parties entered into was actually a contract of agency
coupled with an interest which is not revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that cannot be revoked or
withdrawn by the principal due to an interest of a third party that depends
upon it, or the mutual interest of both principal and agent. 19 In this case, the
non-revocation or non-withdrawal under paragraph 5(c) applies to
the advances made by petitioner who is supposedly the agent and not the
principal under the contract. Thus, it cannot be inferred from the stipulation
that the parties' relation under the agreement is one of agency coupled with
an interest and not a partnership.
Neither can paragraph 16 of the agreement be taken as an indication that the
relationship of the parties was one of agency and not a partnership.
Although the said provision states that "this Agency shall be irrevocable
while any obligation of the PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS' account," it does not necessarily
follow that the parties entered into an agency contract coupled with an
interest that cannot be withdrawn by Baguio Gold.
It should be stressed that the main object of the "Power of Attorney" was not
to confer a power in favor of petitioner to contract with third persons on
behalf of Baguio Gold but to create a business relationship between
petitioner and Baguio Gold, in which the former was to manage and operate
the latter's mine through the parties' mutual contribution of material
resources and industry. The essence of an agency, even one that is coupled
with interest, is the agent's ability to represent his principal and bring about

business relations between the latter and third persons. 20 Where

representation for and in behalf of the principal is merely incidental or
necessary for the proper discharge of one's paramount undertaking under a
contract, the latter may not necessarily be a contract of agency, but some
other agreement depending on the ultimate undertaking of the parties.21
In this case, the totality of the circumstances and the stipulations in the
parties' agreement indubitably lead to the conclusion that a partnership was
formed between petitioner and Baguio Gold.
First, it does not appear that Baguio Gold was unconditionally obligated to
return the advances made by petitioner under the agreement. Paragraph 5
(d) thereof provides that upon termination of the parties' business relations,
"the ratio which the MANAGER'S account has to the owner's account will be
determined, and the corresponding proportion of the entire assets of the
STO. NINO MINE, excluding the claims" shall be transferred to
petitioner.22 As pointed out by the Court of Tax Appeals, petitioner was
merely entitled to a proportionate return of the mine's assets upon
dissolution of the parties' business relations. There was nothing in the
agreement that would require Baguio Gold to make payments of the
advances to petitioner as would be recognized as an item of obligation or
"accounts payable" for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a
distribution of assets of the Sto. Nio mine upon termination, a provision
that is more consistent with a partnership than a creditor-debtor relationship.
It should be pointed out that in a contract of loan, a person who receives a
loan or money or any fungible thing acquires ownership thereof and
is bound to pay the creditor an equal amount of the same kind and
quality.23 In this case, however, there was no stipulation for Baguio Gold to
actually repay petitioner the cash and property that it had advanced, but
only the return of an amount pegged at a ratio which the manager's account
had to the owner's account.
In this connection, we find no contractual basis for the execution of the two
compromise agreements in which Baguio Gold recognized a debt in favor of

petitioner, which supposedly arose from the termination of their business

relations over the Sto. Nino mine. The "Power of Attorney" clearly provides
that petitioner would only be entitled to the return of a proportionate share
of the mine assets to be computed at a ratio that the manager's account had
to the owner's account. Except to provide a basis for claiming the advances as
a bad debt deduction, there is no reason for Baguio Gold to hold itself liable
to petitioner under the compromise agreements, for any amount over and
above the proportion agreed upon in the "Power of Attorney".
Next, the tax court correctly observed that it was unlikely for a business
corporation to lend hundreds of millions of pesos to another corporation
with neither security, or collateral, nor a specific deed evidencing the terms
and conditions of such loans. The parties also did not provide a specific
maturity date for the advances to become due and demandable, and the
manner of payment was unclear. All these point to the inevitable conclusion
that the advances were not loans but capital contributions to a partnership.
The strongest indication that petitioner was a partner in the Sto Nio mine
is the fact that it would receive 50% of the net profits as "compensation"
under paragraph 12 of the agreement. The entirety of the parties' contractual
stipulations simply leads to no other conclusion than that petitioner's
"compensation" is actually its share in the income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a
person of a share in the profits of a business is prima facie evidence that he is a
partner in the business." Petitioner asserts, however, that no such inference
can be drawn against it since its share in the profits of the Sto Nio project
was in the nature of compensation or "wages of an employee", under the
exception provided in Article 1769 (4) (b).24
On this score, the tax court correctly noted that petitioner was not an
employee of Baguio Gold who will be paid "wages" pursuant to an employeremployee relationship. To begin with, petitioner was the manager of the
project and had put substantial sums into the venture in order to ensure its
viability and profitability. By pegging its compensation to profits, petitioner
also stood not to be remunerated in case the mine had no income. It is hard

to believe that petitioner would take the risk of not being paid at all for its
services, if it were truly just an ordinary employee.
Consequently, we find that petitioner's "compensation" under paragraph 12
of the agreement actually constitutes its share in the net profits of the
partnership. Indeed, petitioner would not be entitled to an equal share in the
income of the mine if it were just an employee of Baguio Gold. 25 It is not
surprising that petitioner was to receive a 50% share in the net profits,
considering that the "Power of Attorney" also provided for an almost equal
contribution of the parties to the St. Nino mine. The "compensation" agreed
upon only serves to reinforce the notion that the parties' relations were
indeed of partners and not employer-employee.

1982 income in the amount of P62,811,161.31, with 20% delinquency interest

computed from February 10, 1995, which is the due date given for the
payment of the deficiency income tax, up to the actual date of payment.
SO ORDERED.

All told, the lower courts did not err in treating petitioner's advances as
investments in a partnership known as the Sto. Nino mine. The advances
were not "debts" of Baguio Gold to petitioner inasmuch as the latter was
under no unconditional obligation to return the same to the former under the
"Power of Attorney". As for the amounts that petitioner paid as guarantor to
Baguio Gold's creditors, we find no reason to depart from the tax court's
factual finding that Baguio Gold's debts were not yet due and demandable at
the time that petitioner paid the same. Verily, petitioner pre-paid Baguio
Gold's outstanding loans to its bank creditors and this conclusion is
supported by the evidence on record.26
In sum, petitioner cannot claim the advances as a bad debt deduction from
its gross income. Deductions for income tax purposes partake of the nature
of tax exemptions and are strictly construed against the taxpayer, who must
prove by convincing evidence that he is entitled to the deduction
claimed.27 In this case, petitioner failed to substantiate its assertion that the
advances were subsisting debts of Baguio Gold that could be deducted from
its gross income. Consequently, it could not claim the advances as a valid bad
debt deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals
in CA-G.R. SP No. 49385 dated June 30, 2000, which affirmed the decision of
the Court of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner
Philex Mining Corporation is ORDERED to PAY the deficiency tax on its

THIRD
[G.R.

DIVISION
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; PEOPLES 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, v. COURT OF APPEALS, COURT OF TAX
APPEALS and COMMISSIONER OF INTERNAL REVENUE,Respondents.
DECISION
PANGANIBAN, J.:
Pursuant to "reinsurance treaties," a number of local insurance firms formed
themselves into a "pool" in order to facilitate the handling of business
contracted with a nonresident foreign reinsurance company. May the
"clearing house" or "insurance pool" so formed be deemed a partnership or
an association that is taxable as a corporation under the National Internal
Revenue Code (NIRC)? Should the pools remittances to the member
companies and to the said foreign firm be taxable as dividends? Under the

facts of this case, has the governments right to assess and collect said tax
prescribed?chanroblesvirtuallawlibrary
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:jgc:chanrobles.com.ph
"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:jgc:chanrobles.com.ph
"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.

penalty-non-filing of return 300.00

"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:chanrob1es virtual 1aw library

late payment 300.00

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 4/5/79 545,193.60

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

TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
===========
10% withholding tax at
source due thereon P65,563.60
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 & P89,438.68

COLLECTIBLE ==========" 8
The CA ruled in the main that the pool of machinery insurers was a
partnership taxable as a corporation, and that the latters collection of
premiums on behalf of its members, the ceding companies, was taxable
income. It added that prescription did not bar the Bureau of Internal

Revenue (BIR) from collecting the taxes due, because "the taxpayer cannot be
located at the address given in the information return filed." Hence, this
Petition for Review before us. 9

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

The Issues

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

Before
this
Court,
issues:jgc:chanrobles.com.ph

petitioners

raise

the

following

"1. Whether or not the Clearing House, acting as a mere agent and
performing strictly administrative functions, and which did not insure or
assume any risk in its own name, was a partnership or association subject to
tax
as
a
corporation;
"2. Whether or not the remittances to petitioners and MUNICHRE of their
respective shares of reinsurance premiums, pertaining to their individual
and separate contracts of reinsurance, were "dividends" subject to tax; and
"3. Whether or not the respondent Commissioners right to assess the
Clearing House had already prescribed." 10
The Courts Ruling

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

Issue:chanrob1es
Taxable

virtual
as

1aw
a

library
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

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:jgc:chanrobles.com.ph
"SECTION 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 copartnership (compaias colectivas), general professional partnerships,
private
educational
institutions,
and
building
and
loan

associations

."cralaw

virtua1aw

library

members. 23 The Court of Appeals astutely applied Evangelista: 24

Ineludibly, the Philippine legislature included in the concept of corporations

those entities that resembled them such as unregistered partnerships and
associations. Parenthetically, the NLRCs inclusion of such entities in the tax
on corporations was made even clearer by the Tax Reform Act of 1997, 21
which amended the Tax Code. Pertinent provisions of the new law read as
follows:jgc:chanrobles.com.ph

". . . Accordingly, a pool of individual real property owners dealing in real

estate business was considered a corporation for purposes of the tax in Sec.
24 of the Tax Code in Evangelista v. Collector of Internal Revenue, supra. The
Supreme
Court
said:chanrob1es
virtual
1aw
library

"SECTION 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 . . ."cralaw virtua1aw library
"SECTION 22. Definition. When used in this Title:chanrob1es virtual 1aw
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x
x
x

(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.chanrobles
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x

x."cralaw

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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

The term partnership includes a syndicate, group, pool, joint venture or

other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on . . . (8 Mertens Law of
Federal
Income
Taxation,
p.
562
Note
63)"
Article 1767 of the Civil Code recognizes the creation of a contract of
partnership when "two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of
dividing the profits among themselves." 25 Its requisites are:" (1) mutual
contribution to a common stock, and (2) a joint interest in the profits." 26 In
other words, a partnership is formed when persons contract "to devote to a
common purpose either money, property, or labor with the intention of
dividing the profits between themselves." 27 Meanwhile, an association
implies associates who enter into a "joint enterprise . . . 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:chanrob1es virtual 1aw library
(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 pools formation. As aptly found by
the
CTA:jgc:chanrobles.com.ph
". . . 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. . . 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 coownership 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
Pools

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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,." . . 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." . . be paid upon reinsurance by any company that has already
paid the tax . . ." 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 RPWest 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:chanrob1es

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Prescription
Petitioners also argue that the governments right to assess and collect the
subject tax had prescribed. They claim that the subject information return
was filed by the pool on April 14, 1976. On the basis of this return, the BIR
telephoned petitioners on November 11, 1981, to give them notice of its letter
of assessment dated March 27, 1981. Thus, the petitioners contend that the
five-year statute of limitations then provided in the NIRC had already
lapsed, and that the internal revenue commissioner was already barred by
prescription
from
making
an
assessment.
56
We cannot sustain the petitioners. The CA and the CTA categorically found
that the prescriptive period was tolled under then Section 333 of the NIRC, 57

because" the taxpayer cannot be located at the address given in the

information return filed and for which reason there was delay in sending the
assessment." 58 Indeed, whether the governments right to collect and assess
the tax has prescribed involves facts which have been ruled upon by the
lower courts. It is axiomatic that in the absence of a clear showing of palpable
error or grave abuse of discretion, as in this case, this Court must not
overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before
the Court of Appeals that the pool changed its address, for they stated that
the pools information return filed in 1980 indicated therein its "present
address." The Court finds that this falls short of the requirement of Section
333 of the NIRC for the suspension of the prescriptive. period. The law
clearly states that the said period will be suspended only "if the taxpayer
informs the Commissioner of Internal Revenue of any change in the
address."cralaw
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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.chanroblesvirtuallawlibrary

Romero, Vitug, Purisima and Gonzaga-Reyes, JJ., concur.