Republic of the Philippines

SUPREME COURT
Manila

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, 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.

Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

GUTIERREZ, JR., J.:

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.
The antecedent facts can be summarized as follows:

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."

The Agreement has the following provisions relevant to the issues in these cases on the nomination and election
of the directors of the corporation:

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 American-Standard 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.

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.

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.

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.

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.

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.

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.

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, Rollo-75875)

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 .

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-75975-76)

On the other hand, the petitioners in G.R. No. 75951 contend that:

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.

II

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.

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.

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)

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.

They specifically mention number 16 under Miscellaneous Provisions which states:

xxx xxx xxx

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.

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:
 (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.

(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 xxx

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.

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)].
 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).

xxx xxx xxx

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.

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.

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.

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.

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.
Sec. 100. Agreements by stockholders.-

xxx xxx xxx

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.

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).

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 a close-held corporation. Surely,
appellants cannot honestly claim that Saniwares is a public issue or a widely held corporation.

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.

As correctly held by the SEC Hearing Officer:

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)

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:

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)

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.

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.
 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.

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.

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.

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).

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.

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.

This is the proper interpretation of the Agreement of the parties as regards the election of members of the board
of directors.

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.

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 their share
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.

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.

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."

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.

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 the manner 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.

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.

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.

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

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

DECISION
PANGANIBAN, J.:

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

The Case

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

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

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

WHEREFORE, the Court rules:

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

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

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

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

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

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

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per appearance in court;

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

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or for the unpaid price of nets and
floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total amount of P600,045.00, this
Court noted that these items were attached to guarantee any judgment that may be rendered in favor of the
plaintiff but, upon agreement of the parties, and, to avoid further deterioration of the nets during the pendency
of this case, it was ordered sold at public auction for not less than P900,000.00 for which the plaintiff was the
sole and winning bidder. The proceeds of the sale paid for by plaintiff was deposited in court. In effect, the
amount of P900,000.00 replaced the attached property as a guaranty for any judgment that plaintiff may be able
to secure in this case with the ownership and possession of the nets and floats awarded and delivered by the
sheriff to plaintiff as the highest bidder in the public auction sale. It has also been noted that ownership of the
nets [was] retained by the plaintiff until full payment [was] made as stipulated in the invoices; hence, in effect,
the plaintiff attached its own properties. It [was] for this reason also that this Court earlier ordered the
attachment bond filed by plaintiff to guaranty damages to defendants to be cancelled and for the P900,000.00
cash bidded and paid for by plaintiff to serve as its bond in favor of defendants.

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

SO ORDERED. [3]

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated
February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries,
Inc. (herein respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong
Lim, who however was not a signatory to the agreement. The total price of the nets amounted to P532,045. Four
hundred pieces of floats worth P68,000 were also sold to the Corporation.[4]
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent filed a
collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities as general partners, on the allegation that
Ocean Quest Fishing Corporation was a nonexistent corporation as shown by a Certification from the Securities
and Exchange Commission.[5] On September 20, 1990, the lower court issued a Writ of Preliminary Attachment,
which the sheriff enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the
Fisheries Port, Navotas, Metro Manila.
 Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a
reasonable time within which to pay. He also turned over to respondent some of the nets which were in his
possession. Peter Yao filed an Answer, after which he was deemed to have waived his right to cross-examine
witnesses and to present evidence on his behalf, because of his failure to appear in subsequent hearings. Lim Tong
Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ
of Attachment.[6] The trial court maintained the Writ, and upon motion of private respondent, ordered the sale of
the fishing nets at a public auction. Philippine Fishing Gear Industries won the bidding and deposited with the
said court the sales proceeds of P900,000.[7]
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries
was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay
respondent.[8]
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the
witnesses presented and (2) on a Compromise Agreement executed by the three[9] in Civil Case No. 1492-MN
which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity
of commercial documents; (b) a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an
injunction and (e) damages.[10] The Compromise Agreement provided:

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

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

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

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that
joint liability could be presumed from the equal distribution of the profit and loss.[12]
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business
and may thus be held liable as a such for the fishing nets and floats purchased by and for the use of the
partnership. The appellate court ruled:

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

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

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

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT

CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP
AGREEMENT EXISTED AMONG THEM.

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

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF
PETITIONER LIMS GOODS.

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

This Courts Ruling

The Petition is devoid of merit.

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

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner
controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that
the CA based its finding on the Compromise Agreement alone. Furthermore, he disclaims any direct participation
in the purchase of the nets, alleging that the negotiations were conducted by Chua and Yao only, and that he has
not even met the representatives of the respondent company. Petitioner further argues that he was a lessor, not a
partner, of Chua and Yao, for the "Contract of Lease" dated February 1, 1990, showed that he had merely leased
to the two the main asset of the purported partnership -- the fishing boat F/B Lourdes. The lease was for six
months, with a monthly rental of P37,500 plus 25 percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly
showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code
which provides:

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

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

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join him,
while Antonio Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two fishing boats,
the FB Lourdes and the FB Nelson for the sum of P3.35 million;

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

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

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

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

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

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

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

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a
fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus
Lim who was petitioners brother. In their Compromise Agreement, they subsequently revealed their intention to
pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These
boats, the purchase and the repair of which were financed with borrowed money, fell under the term common
fund under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible
like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would
be divided equally among them also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the
nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance
of their business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not
in the acquisition of the aforesaid equipment, without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged
in the fishing business. They purchased the boats, which constituted the main assets of the partnership, and they
agreed that the proceeds from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only questions of
law. Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent
proof that the present action is embraced by one of the exceptions to the rule.[16] In assailing the factual findings
of the two lower courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.
Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate courts sole basis for assuming the existence of a partnership was the
Compromise Agreement. He also claims that the settlement was entered into only to end the dispute among them,
but not to adjudicate their preexisting rights and obligations. His arguments are baseless. The Agreement was but
an embodiment of the relationship extant among the parties prior to its execution.
A proper adjudication of claimants rights mandates that courts must review and thoroughly appraise all
relevant facts. Both lower courts have done so and have found, correctly, a preexisting partnership among the
parties. In implying that the lower courts have decided on the basis of one piece of document alone, petitioner
fails to appreciate that the CA and the RTC delved into the history of the document and explored all the possible
consequential combinations in harmony with law, logic and fairness. Verily, the two lower courts factual findings
mentioned above nullified petitioners argument that the existence of a partnership was based only on the
Compromise Agreement.

Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he was merely the lessor of the boats to Chua and Yao,
not a partner in the fishing venture. His argument allegedly finds support in the Contract of Lease and the
registration papers showing that he was the owner of the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his
own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of
them. No lessor would do what petitioner did. Indeed, his consent to the sale proved that there was a preexisting
partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in
which debts were undertaken in order to finance the acquisition and the upgrading of the vessels which would be
used in their fishing business. The sale of the boats, as well as the division among the three of the balance
remaining after the payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name,
was not his own property but an asset of the partnership. It is not uncommon to register the properties acquired
from a loan in the name of the person the lender trusts, who in this case is the petitioner himself. After all, he is
the brother of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to pay a debt he did
not incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua
and Yao, and not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a
result thereof: Provided however, That when any such ostensible corporation is sued on any transaction entered
by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack
of corporate personality.

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

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from
denying its corporate existence. The reason behind this doctrine is obvious - an unincorporated association has
no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation
as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act
or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting
or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered into or for other acts performed as such agent.[17]
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first
instance, an unincorporated association, which represented itself to be a corporation, will be estopped from
denying its corporate capacity in a suit against it by a third person who relied in good faith on such
representation. It cannot allege lack of personality to be sued to evade its responsibility for a contract it entered
into and by virtue of which it received advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as
a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or
took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets
it sold. The only question here is whether petitioner should be held jointly[18] liable with Chua and Yao. Petitioner
contests such liability, insisting that only those who dealt in the name of the ostensible corporation should be held
liable. Since his name does not appear on any of the contracts and since he never directly transacted with the
respondent corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has
earlier been proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the
Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in representation of it. Clearly, under the law on estoppel, those acting
on behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as
general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped
the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is
deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel. We
reiterate the ruling of the Court in Alonso v. Villamor:[19]

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

Third Issue: Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with
the Court of Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an
asset of the partnership and that it was placed in the name of petitioner, only to assure payment of the debt he and
his partners owed. The nets and the floats were specifically manufactured and tailor-made according to their own
design, and were bought and used in the fishing venture they agreed upon. Hence, the issuance of the Writ to
assure the payment of the price stipulated in the invoices is proper. Besides, by specific agreement, ownership of
the nets remained with Respondent Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. L-68118 October 29, 1985

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

Demosthenes B. Gadioma for petitioners.

AQUINO, J.:

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

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

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

In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of
Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in
addition to individual income tax on their shares thereof He assessed P37,018 as corporate income tax, P18,509
as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.

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

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

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

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

We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil
Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided
the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be
obviated.

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

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

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

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

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en

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

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

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

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

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

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

All co-ownerships are not deemed unregistered pratnership.Co-Ownership who own

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

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

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

In the instant case, what the Commissioner should have investigated was whether the father donated the two lots
to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this
matter. It might have already prescribed.

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

SO ORDERED.
G.R. No. L-25532 February 28, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and
Special Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.

REYES, J.B.L., J.:

A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947 by
herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the limited
partners. The partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership. On 1
October 1947, the limited partnership was registered with the Securities and Exchange Commission. The firm
engaged, among other activities, in the importation, marketing, distribution and operation of automatic
phonographs, radios, television sets and amusement machines, their parts and accessories. It had an office and
held itself out as a limited partnership, handling and carrying merchandise, using invoices, bills and letterheads
bearing its trade-name, maintaining its own books of accounts and bank accounts, and had a quota allocation
with the Central Bank.

In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18 December
1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The sale was duly recorded
with the Securities and Exchange Commission on 20 December 1948.

The limited partnership had been filing its income tax returns as a corporation, without objection by the herein
petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an assessment, consolidated the
income of the firm and the individual incomes of the partners-spouses Suter and Spirig resulting in a
determination of a deficiency income tax against respondent Suter in the amount of P2,678.06 for 1954 and
P4,567.00 for 1955.

Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not in accordance
with law, but his request was denied. Unable to secure a reconsideration, he appealed to the Court of Tax
Appeals, which court, after trial, rendered a decision, on 11 November 1965, reversing that of the
Commissioner of Internal Revenue.

The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax court's
aforesaid decision. It raises these issues:

(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be disregarded
for income tax purposes, considering that respondent William J. Suter and his wife, Julia Spirig Suter actually
formed a single taxable unit; and

(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent William J. Suter
and Julia Spirig Suter and the subsequent sale to them by the remaining partner, Gustav Carlson, of his
participation of P2,000.00 in the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig and
their subsequent acquisition of the interests of remaining partner Carlson in the partnership dissolved the limited
partnership, and if they did not, the fiction of juridical personality of the partnership should be disregarded for
income tax purposes because the spouses have exclusive ownership and control of the business; consequently
the income tax return of respondent Suter for the years in question should have included his and his wife's
individual incomes and that of the limited partnership, in accordance with Section 45 (d) of the National
Internal Revenue Code, which provides as follows:

(d) Husband and wife. In the case of married persons, whether citizens, residents or non-residents,
only one consolidated return for the taxable year shall be filed by either spouse to cover the income of
both spouses; ....

In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his marriage
with limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948 is not a ground
for dissolution of the partnership, either in the Code of Commerce or in the New Civil Code, and that since its
juridical personality had not been affected and since, as a limited partnership, as contra distinguished from a
duly registered general partnership, it is taxable on its income similarly with corporations, Suter was not bound
to include in his individual return the income of the limited partnership.

We find the Commissioner's appeal unmeritorious.

The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by operation of
law because of the marriage of the only general partner, William J. Suter to the originally limited partner, Julia
Spirig one year after the partnership was organized is rested by the appellant upon the opinion of now Senator
Tolentino in Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th Ed., page 58,
that reads as follows:

A husband and a wife may not enter into a contract of general copartnership, because under the Civil
Code, which applies in the absence of express provision in the Code of Commerce, persons prohibited
from making donations to each other are prohibited from entering into universal partnerships. (2
Echaverri 196) It follows that the marriage of partners necessarily brings about the dissolution of a pre-
existing partnership. (1 Guy de Montella 58)

The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd.
was not a universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the Spanish
Civil Code, of 1889 (which was the law in force when the subject firm was organized in 1947),
a universal partnership requires either that the object of the association be all the present property of the
partners, as contributed by them to the common fund, or else "all that the partners may acquire by their industry
or work during the existence of the partnership". William J. Suter "Morcoin" Co., Ltd. was not such a universal
partnership, since the contributions of the partners were fixed sums of money, P20,000.00 by William Suter and
P18,000.00 by Julia Spirig and neither one of them was an industrial partner. It follows that William J. Suter
"Morcoin" Co., Ltd. was not a partnership that spouses were forbidden to enter by Article 1677 of the Civil
Code of 1889.

The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th Edition, 1952,
Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the aforesaid Article 1677:

Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero o podran
constituir sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos a la tesis
 permisiva de los contratos de sociedad particular entre esposos, ya que ningun precepto de nuestro
Codigo los prohibe, y hay que estar a la norma general segun la que toda persona es capaz para contratar
mientras no sea declarado incapaz por la ley. La jurisprudencia de la Direccion de los Registros fue
favorable a esta misma tesis en su resolution de 3 de febrero de 1936, mas parece cambiar de rumbo en
la de 9 de marzo de 1943.

Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one of the
causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce.

The appellant's view, that by the marriage of both partners the company became a single proprietorship, is
equally erroneous. The capital contributions of partners William J. Suter and Julia Spirig were separately owned
and contributed by them before their marriage; and after they were joined in wedlock, such contributions
remained their respective separate property under the Spanish Civil Code (Article 1396):

The following shall be the exclusive property of each spouse:

(a) That which is brought to the marriage as his or her own; ....

Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become common
property of both after their marriage in 1948.

It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its
own, distinct and separate from that of its partners (unlike American and English law that does not recognize
such separate juridical personality), the bypassing of the existence of the limited partnership as a taxpayer can
only be done by ignoring or disregarding clear statutory mandates and basic principles of our law. The limited
partnership's separate individuality makes it impossible to equate its income with that of the component
members. True, section 24 of the Internal Revenue Code merges registered general co-partnerships (compaias
colectivas) with the personality of the individual partners for income tax purposes. But this rule is exceptional in
its disregard of a cardinal tenet of our partnership laws, and can not be extended by mere implication to limited
partnerships.

The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-13554,
Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for disregarding
the fiction of legal personality of the corporations involved therein are not applicable to the present case. In the
cited cases, the corporations were already subject to tax when the fiction of their corporate personality was
pierced; in the present case, to do so would exempt the limited partnership from income taxation but would
throw the tax burden upon the partners-spouses in their individual capacities. The corporations, in the cases
cited, merely served as business conduits or alter egos of the stockholders, a factor that justified a disregard of
their corporate personalities for tax purposes. This is not true in the present case. Here, the limited partnership is
not a mere business conduit of the partner-spouses; it was organized for legitimate business purposes; it
conducted its own dealings with its customers prior to appellee's marriage, and had been filing its own income
tax returns as such independent entity. The change in its membership, brought about by the marriage of the
partners and their subsequent acquisition of all interest therein, is no ground for withdrawing the partnership
from the coverage of Section 24 of the tax code, requiring it to pay income tax. As far as the records show, the
partners did not enter into matrimony and thereafter buy the interests of the remaining partner with the
premeditated scheme or design to use the partnership as a business conduit to dodge the tax laws. Regularity,
not otherwise, is presumed.
As the limited partnership under consideration is taxable on its income, to require that income to be included in
the individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would
even conflict with what it specifically provides in its Section 24: for the appellant Commissioner's stand results
in equal treatment, tax wise, of a general copartnership (compaia colectiva) and a limited partnership, when
the code plainly differentiates the two. Thus, the code taxes the latter on its income, but not the former, because
it is in the case of compaias colectivas that the members, and not the firm, are taxable in their individual
capacities for any dividend or share of the profit derived from the duly registered general partnership (Section
26, N.I.R.C.; Araas, Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 88-89).lawphi1.nt

But it is argued that the income of the limited partnership is actually or constructively the income of the spouses
and forms part of the conjugal partnership of gains. This is not wholly correct. As pointed out in Agapito vs.
Molo 50 Phil. 779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the fruits of the wife's
parapherna become conjugal only when no longer needed to defray the expenses for the administration and
preservation of the paraphernal capital of the wife. Then again, the appellant's argument erroneously confines
itself to the question of the legal personality of the limited partnership, which is not essential to the income
taxability of the partnership since the law taxes the income of even joint accounts that have no personality of
their own. 1 Appellant is, likewise, mistaken in that it assumes that the conjugal partnership of gains is a taxable
unit, which it is not. What is taxable is the "income of both spouses" (Section 45 [d] in their individual
capacities. Though the amount of income (income of the conjugal partnership vis-a-vis the joint income of
husband and wife) may be the same for a given taxable year, their consequences would be different, as their
contributions in the business partnership are not the same.

The difference in tax rates between the income of the limited partnership being consolidated with, and when
split from the income of the spouses, is not a justification for requiring consolidation; the revenue code, as it
presently stands, does not authorize it, and even bars it by requiring the limited partnership to pay tax on its own
income.

FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.
G.R. No. 413 February 2, 1903

JOSE FERNANDEZ, plaintiff-appellant,

vs.
FRANCISCO DE LA ROSA, defendant-appellee.

Vicente Miranda, for appellant.

Simplicio del Rosario, for appellee.

LADD, J.:

The object of this action is to obtain from the court a declaration that a partnership exists between the parties,
that the plaintiff has a consequent interested in certain cascoes which are alleged to be partnership property, and
that the defendant is bound to render an account of his administration of the cascoes and the business carried on
with them.

Judgment was rendered for the defendant in the court below and the plaintiff appealed.

The respective claims of the parties as to the facts, so far as it is necessary to state them in order to indicate the
point in dispute, may be briefly summarized. The plaintiff alleges that in January, 1900, he entered into a verbal
agreement with the defendant to form a partnership for the purchase of cascoes and the carrying on of the
business of letting the same for hire in Manila, the defendant to buy the cascoes and each partner to furnish for
that purpose such amount of money as he could, the profits to be divided proportionately; that in the same
January the plaintiff furnished the defendant 300 pesos to purchase a casco designated as No. 1515, which the
defendant did purchase for 500 pesos of Doa Isabel Vales, taking the title in his own name; that the plaintiff
furnished further sums aggregating about 300 pesos for repairs on this casco; that on the fifth of the following
March he furnished the defendant 825 pesos to purchase another casco designated as No. 2089, which the
defendant did purchase for 1,000 pesos of Luis R. Yangco, taking the title to this casco also in his own name;
that in April the parties undertook to draw up articles of partnership for the purpose of embodying the same in
an authentic document, but that the defendant having proposed a draft of such articles which differed materially
from the terms of the earlier verbal agreement, and being unwillingly to include casco No. 2089 in the
partnership, they were unable to come to any understanding and no written agreement was executed; that the
defendant having in the meantime had the control and management of the two cascoes, the plaintiff made a
demand for an accounting upon him, which the defendant refused to render, denying the existence of the
partnership altogether.

The defendant admits that the project of forming a partnership in the casco business in which he was already
engaged to some extent individually was discussed between himself and the plaintiff in January, 1900, and
earlier, one Marcos Angulo, who was a partner of the plaintiff in a bakery business, being also a party to the
negotiations, but he denies that any agreement was ever consummated. He denies that the plaintiff furnished any
money in January, 1900, for the purchase of casco No. 1515, or for repairs on the same, but claims that he
borrowed 300 pesos on his individual account in January from the bakery firm, consisting of the plaintiff,
Marcos Angulo, and Antonio Angulo. The 825 pesos, which he admits he received from the plaintiff March 5,
he claims was for the purchase of casco No. 1515, which he alleged was bought March 12, and he alleges that
he never received anything from the defendant toward the purchase of casco No. 2089. He claims to have paid,
exclusive of repairs, 1,200 pesos for the first casco and 2,000 pesos for the second one.

The case comes to this court under the old procedure, and it is therefore necessary for us the review the
evidence and pass upon the facts. Our general conclusions may be stated as follows:
(1) Doa Isabel Vales, from whom the defendant bought casco No. 1515, testifies that the sale was made and
the casco delivered in January, although the public document of sale was not executed till some time afterwards.
This witness is apparently disinterested, and we think it is safe to rely upon the truth of her testimony, especially
as the defendant, while asserting that the sale was in March, admits that he had the casco taken to the ways for
repairs in January.

It is true that the public document of sale was executed March 10, and that the vendor declares therein that she
is the owner of the casco, but such declaration does not exclude proof as to the actual date of the sale, at least as
against the plaintiff, who was not a party to the instrument. (Civil Code, sec. 1218.) It often happens, of course,
in such cases, that the actual sale precedes by a considerable time the execution of the formal instrument of
transfer, and this is what we think occurred here.

(2) The plaintiff presented in evidence the following receipt: "I have this day received from D. Jose Fernandez
eight hundred and twenty-five pesos for the cost of a casco which we are to purchase in company. Manila,
March 5, 1900. Francisco de la Rosa." The authenticity of this receipt is admitted by the defendant. If casco No.
1515 was bought, as we think it was, in January, the casco referred to in the receipt which the parties "are to
purchase in company" must be casco No. 2089, which was bought March 22. We find this to be the fact, and
that the plaintiff furnished and the defendant received 825 pesos toward the purchase of this casco, with the
understanding that it was to be purchased on joint account.

(3) Antonio Fernandez testifies that in the early part of January, 1900, he saw Antonio Angulo give the
defendant, in the name of the plaintiff, a sum of money, the amount of which he is unable to state, for the
purchase of a casco to be used in the plaintiff's and defendant's business. Antonio Angulo also testifies, but the
defendant claims that the fact that Angulo was a partner of the plaintiff rendered him incompetent as a witness
under the provisions of article 643 of the then Code of Civil Procedure, and without deciding whether this point
is well taken, we have discarded his testimony altogether in considering the case. The defendant admits the
receipt of 300 pesos from Antonio Angulo in January, claiming, as has been stated, that it was a loan from the
firm. Yet he sets up the claim that the 825 pesos which he received from the plaintiff in March were furnished
toward the purchase of casco No. 1515, thereby virtually admitting that casco was purchased in company with
the plaintiff. We discover nothing in the evidence to support the claim that the 300 pesos received in January
was a loan, unless it may be the fact that the defendant had on previous occasions borrowed money from the
bakery firm. We think all the probabilities of the case point to the truth of the evidence of Antonio Fernandez as
to this transaction, and we find the fact to be that the sum in question was furnished by the plaintiff toward the
purchase for joint ownership of casco No. 1515, and that the defendant received it with the understanding that it
was to be used for this purposed. We also find that the plaintiff furnished some further sums of money for the
repair of casco.

(4) The balance of the purchase price of each of the two cascoes over and above the amount contributed by the
plaintiff was furnished by the defendant.

(5) We are unable to find upon the evidence before us that there was any specific verbal agreement of
partnership, except such as may be implied from the fact as to the purchase of the casco.

(6) Although the evidence is somewhat unsatisfactory upon this point, we think it more probable than otherwise
that no attempt was made to agree upon articles of partnership till about the middle of the April following the
purchase of the cascoes.

(7) At some time subsequently to the failure of the attempt to agree upon partnership articles and after the
defendant had been operating the cascoes for some time, the defendant returned to the plaintiff 1,125 pesos, in
two different sums, one of 300 and one of 825 pesos. The only evidence in the record as to the circumstances
under which the plaintiff received these sums is contained in his answer to the interrogatories proposed to him
by the defendant, and the whole of his statement on this point may properly be considered in determining the
fact as being in the nature of an indivisible admission. He states that both sums were received with an express
reservation on his part of all his rights as a partner. We find this to be the fact.

Two questions of law are raised by the foregoing facts: (1) Did a partnership exist between the parties? (2) If
such partnership existed, was it terminated as a result of the act of the defendant in receiving back the 1,125
pesos?

(1) "Partnership is a contract by which 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." (Civil Code, art.
1665.)

The essential points upon which the minds of the parties must meet in a contract of partnership are, therefore,
(1) mutual contribution to a common stock, and (2) a joint interest in the profits. If the contract contains these
two elements the partnership relation results, and the law itself fixes the incidents of this relation if the parties
fail to do so. (Civil Code, secs. 1689, 1695.)

We have found as a fact that money was furnished by the plaintiff and received by the defendant with the
understanding that it was to be used for the purchase of the cascoes in question. This establishes the first
element of the contract, namely, mutual contribution to a common stock. The second element, namely, the
intention to share profits, appears to be an unavoidable deduction from the fact of the purchase of the cascoes in
common, in the absence of any other explanation of the object of the parties in making the purchase in that
form, and, it may be added, in view of the admitted fact that prior to the purchase of the first casco the
formation of a partnership had been a subject of negotiation between them.

Under other circumstances the relation of joint ownership, a relation distinct though perhaps not essentially
different in its practical consequence from that of partnership, might have been the result of the joint purchase.
If, for instance, it were shown that the object of the parties in purchasing in company had been to make a more
favorable bargain for the two cascoes that they could have done by purchasing them separately, and that they
had no ulterior object except to effect a division of the common property when once they had acquired it,
the affectio societatiswould be lacking and the parties would have become joint tenants only; but, as nothing of
this sort appears in the case, we must assume that the object of the purchase was active use and profit and not
mere passive ownership in common.

It is thus apparent that a complete and perfect contract of partnership was entered into by the parties. This
contract, it is true, might have been subject to a suspensive condition, postponing its operation until an
agreement was reached as to the respective participation of the partners in the profits, the character of the
partnership as collective or en comandita, and other details, but although it is asserted by counsel for the
defendant that such was the case, there is little or nothing in the record to support this claim, and that fact that
the defendant did actually go on and purchase the boat, as it would seem, before any attempt had been made to
formulate partnership articles, strongly discountenances the theory.

The execution of a written agreement was not necessary in order to give efficacy to the verbal contract of
partnership as a civil contract, the contributions of the partners not having been in the form of immovables or
rights in immovables. (Civil Code, art. 1667.) The special provision cited, requiring the execution of a public
writing in the single case mentioned and dispensing with all formal requirements in other cases, renders
inapplicable to this species of contract the general provisions of article 1280 of the Civil Code.
(2) The remaining question is as to the legal effect of the acceptance by the plaintiff of the money returned to
him by the defendant after the definitive failure of the attempt to agree upon partnership articles. The amount
returned fell short, in our view of the facts, of that which the plaintiff had contributed to the capital of the
partnership, since it did not include the sum which he had furnished for the repairs of casco No. 1515.
Moreover, it is quite possible, as claimed by the plaintiff, that a profit may have been realized from the business
during the period in which the defendant have been administering it prior to the return of the money, and if so
he still retained that sum in his hands. For these reasons the acceptance of the money by the plaintiff did not
have the effect of terminating the legal existence of the partnership by converting it into a societas leonina, as
claimed by counsel for the defendant.

Did the defendant waive his right to such interest as remained to him in the partnership property by receiving
the money? Did he by so doing waive his right to an accounting of the profits already realized, if any, and a
participation in them in proportion to the amount he had originally contributed to the common fund? Was the
partnership dissolved by the "will or withdrawal of one of the partners" under article 1705 of the Civil Code?
We think these questions must be answered in the negative.

There was no intention on the part of the plaintiff in accepting the money to relinquish his rights as a partner,
nor is there any evidence that by anything that he said or by anything that he omitted to say he gave the
defendant any ground whatever to believe that he intended to relinquish them. On the contrary he notified the
defendant that he waived none of his rights in the partnership. Nor was the acceptance of the money an act
which was in itself inconsistent with the continuance of the partnership relation, as would have been the case
had the plaintiff withdrawn his entire interest in the partnership. There is, therefore, nothing upon which a
waiver, either express or implied, can be predicated. The defendant might have himself terminated the
partnership relation at any time, if he had chosen to do so, by recognizing the plaintiff's right in the partnership
property and in the profits. Having failed to do this he can not be permitted to force a dissolution upon his co-
partner upon terms which the latter is unwilling to accept. We see nothing in the case which can give the
transaction in question any other aspect than that of the withdrawal by one partner with the consent of the other
of a portion of the common capital.

The result is that we hold and declare that a partnership was formed between the parties in January, 1900, the
existence of which the defendant is bound to recognize; that cascoes No. 1515 and 2089 constitute partnership
property, and that the plaintiff is entitled to an accounting of the defendant's administration of such property,
and of the profits derived therefrom. This declaration does not involve an adjudication as to any disputed items
of the partnership account.

The judgment of the court below will be reversed without costs, and the record returned for the execution of the
judgment now rendered. So ordered.

Arellano, C.J., Torres, Cooper, and Mapa, JJ., concur.

Willard, J., dissenting.
 ON MOTION FOR A REHEARING.

MAPA, J.:

This case has been decided on appeal in favor of the plaintiff, and the defendant has moved for a rehearing upon
the following grounds:

1. Because that part of the decision which refers to the existence of the partnership which is the object of the
complaint is not based upon clear and decisive legal grounds; and

2. Because, upon the supposition of the existence of the partnership, the decision does not clearly determine
whether the juridical relation between the partners suffered any modification in consequence of the withdrawal
by the plaintiff of the sum of 1,125 pesos from the funds of the partnership, or if it continued as before, the
parties being thereby deprived, he alleges, of one of the principal bases for determining with exactness the
amount due to each.

With respect to the first point, the appellant cites the fifth conclusion of the decision, which is as follows: "We
are unable to find from the evidence before us that there was any specific verbal agreement of partnership,
except such as may be implied from the facts as to the purchase of the cascoes."

Discussing this part of the decision, the defendant says that, in the judgment of the court, if on the one hand
there is no direct evidence of a contract, on the other its existence can only be inferred from certain facts, and
the defendant adds that the possibility of an inference is not sufficient ground upon which to consider as
existing what may be inferred to exist, and still less as sufficient ground for declaring its efficacy to produce
legal effects.

This reasoning rests upon a false basis. We have not taken into consideration the mere possibility of an
inference, as the appellant gratuitously stated, for the purpose of arriving at a conclusion that a contract of
partnership was entered into between him and the plaintiff, but have considered the proof which is derived from
the facts connected with the purchase of the cascoes. It is stated in the decision that with the exception of this
evidence we find no other which shows the making of the contract. But this does not mean (for it says exactly
the contrary) that this fact is not absolutely proven, as the defendant erroneously appears to think. From this
data we infer a fact which to our mind is certain and positive, and not a mere possibility; we infer not that it is
possible that the contract may have existed, but that it actually did exist. The proofs constituted by the facts
referred to, although it is the only evidence, and in spite of the fact that it is not direct, we consider, however,
sufficient to produce such a conviction, which may certainly be founded upon any of the various classes of
evidence which the law admits. There is all the more reason for its being so in this case, because a civil
partnership may be constituted in any form, according to article 1667 of the Civil Code, unless real property or
real rights are contributed to it the only case of exception in which it is necessary that the agreement be
recorded in a public instrument.

It is of no importance that the parties have failed to reach an agreement with respect to the minor details of
contract. These details pertain to the accidental and not to the essential part of the contract. We have already
stated in the opinion what are the essential requisites of a contract of partnership, according to the definition of
article 1665. Considering as a whole the probatory facts which appears from the record, we have reached the
conclusion that the plaintiff and the defendant agreed to the essential parts of that contract, and did in fact
constitute a partnership, with the funds of which were purchased the cascoes with which this litigation deals,
although it is true that they did not take the precaution to precisely establish and determine from the beginning
the conditions with respect to the participation of each partner in the profits or losses of the partnership. The
disagreements subsequently arising between them, when endeavoring to fix these conditions, should not and can
not produce the effect of destroying that which has been done, to the prejudice of one of the partners, nor could
it divest his rights under the partnership which had accrued by the actual contribution of capital which followed
the agreement to enter into a partnership, together with the transactions effected with partnership funds. The law
has foreseen the possibility of the constitution of a partnership without an express stipulation by the partners
upon those conditions, and has established rules which may serve as a basis for the distribution of profits and
losses among the partners. (Art. 1689 of the Civil Code. ) We consider that the partnership entered into by the
plaintiff and the defendant falls within the provisions of this article.

With respect to the second point, it is obvious that upon declaring the existence of a partnership and the right of
the plaintiff to demand from the defendant an itemized accounting of his management thereof, it was impossible
at the same time to determine the effects which might have been produced with respect to the interest of the
partnership by the withdrawal by the plaintiff of the sum of 1,125 pesos. This could only be determined after a
liquidation of the partnership. Then, and only then, can it be known if this sum is to be charged to the capital
contributed by the plaintiff, or to his share of the profits, or to both. It might well be that the partnership has
earned profits, and that the plaintiff's participation therein is equivalent to or exceeds the sum mentioned. In this
case it is evident that, notwithstanding that payment, his interest in the partnership would still continue. This is
one case. It would be easy to imagine many others, as the possible results of a liquidation are innumerable. The
liquidation will finally determine the condition of the legal relations of the partners inter se at the time of the
withdrawal of the sum mentioned. It was not, nor is it possible to determine this status a priori without
prejudging the result, as yet unknown, of the litigation. Therefore it is that in the decision no direct statement
has been made upon this point. It is for the same reason that it was expressly stated in the decision that it "does
not involve an adjudication as to any disputed item of the partnership account."

The contentions advanced by the moving party are so evidently unfounded that we can not see the necessity or
convenience of granting the rehearing prayed for, and the motion is therefore denied.
G.R. No. L-19342 May 25, 1972

LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA, MARIANO B.

OA, LUZ B. OA, VIRGINIA B. OA and LORENZO B. OA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

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

BARREDO, J.:p

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

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

Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa and
her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of
Manila for the settlement of her estate. Later, Lorenzo T. Oa the surviving spouse was
appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April
14, 1949, the administrator submitted the project of partition, which was approved by the Court
on May 16, 1949 (See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo,
Jr., all surnamed Oa, were still minors when the project of partition was approved, Lorenzo T.
Oa, their father and administrator of the estate, filed a petition in Civil Case No. 9637 of the
Court of First Instance of Manila for appointment as guardian of said minors. On November 14,
1949, the Court appointed him guardian of the persons and property of the aforenamed minors
(See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have
undivided one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00,
six houses with a total assessed value of P17,590.00 and an undetermined amount to be collected
from the War Damage Commission. Later, they received from said Commission the amount of
P50,000.00, more or less. This amount was not divided among them but was used in the
rehabilitation of properties owned by them in common (t.s.n., p. 46). Of the ten parcels of land
aforementioned, two were acquired after the death of the decedent with money borrowed from
the Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34
BIR rec.).
 The project of partition also shows that the estate shares equally with Lorenzo T. Oa, the
administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter
with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).

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

Year Investment Land Building

Account Account Account

1949 P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

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

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

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership and therefore, subject to the corporate income tax,
pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed
against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for
1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
 Petitioners protested against the assessment and asked for reconsideration of the ruling of
respondent that they have formed an unregistered partnership. Finding no merit in petitioners'
request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).

The original assessment was as follows:

1955

Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

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

Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

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

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

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS

FORMED AN UNREGISTERED PARTNERSHIP;

II.

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

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

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED

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

V.

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE

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

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

Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in
interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as
early as May 16, 1949, and presumably petitioners have been holding their respective shares in their inheritance
since those dates admittedly under the administration or management of the head of the family, the widower and
father Lorenzo T. Oa, the assessment in question refers to the later years 1955 and 1956. We believe this point
to be important because, apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of
Internal Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that
he considered them as having formed an unregistered partnership. At least, there is nothing in the record
indicating that an earlier assessment had already been made. Such being the case, and We see no reason how it
could be otherwise, it is easily understandable why petitioners' position that they are co-owners and not
unregistered co-partners, for the purposes of the impugned assessment, cannot be upheld. Truth to tell,
petitioners should find comfort in the fact that they were not similarly assessed earlier by the Bureau of Internal
Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant
to the project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oa
who used said properties in business by leasing or selling them and investing the income derived therefrom and
the proceed from the sales thereof in real properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building account"
in 1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in "building
account" in 1956. And all these became possible because, admittedly, petitioners never actually received any
share of the income or profits from Lorenzo T. Oa and instead, they allowed him to continue using said shares
as part of the common fund for their ventures, even as they paid the corresponding income taxes on the basis of
their respective shares of the profits of their common business as reported by the said Lorenzo T. Oa.

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

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

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

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

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

xxx xxx xxx

Similarly, the American Law

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

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

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

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

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

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

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

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

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

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

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

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

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with
costs against petitioners.
G.R. No. L-45425 April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

Guillermo B. Reyes for appellants.

Office of the Solicitor-General Tuason for appellee.

IMPERIAL, J.:

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

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

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

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

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

1. Jose Gatchalian .................................................................................................... P0.18

2. Gregoria Cristobal ............................................................................................... .18
3. Saturnina Silva .................................................................................................... .08
4. Guillermo Tapia ................................................................................................... .13
5. Jesus Legaspi ...................................................................................................... .15
6. Jose Silva ............................................................................................................. .07
7. Tomasa Mercado ................................................................................................ .08
8. Julio Gatchalian ................................................................................................... .13
9. Emiliana Santiago ................................................................................................ .13
10. Maria C. Legaspi ............................................................................................... .16
11. Francisco Cabral ............................................................................................... .13
12. Gonzalo Javier .................................................................................................... .14
 13. Maria Santiago ................................................................................................... .17
14. Buenaventura Guzman ...................................................................................... .13
15. Mariano Santos ................................................................................................. .14

Total ........................................................................................................ 2.00

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

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

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

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

7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a copy of
which marked Exhibit C is attached and made a part hereof, requesting exemption from payment of the
income tax to which reply there were enclosed fifteen (15) separate individual income tax returns filed
separately by each one of the plaintiffs, copies of which returns are attached and marked Exhibit D-1 to
D-15, respectively, in order of their names listed in the caption of this case and made parts hereof; a
statement of sale signed by Jose Gatchalian showing the amount put up by each of the plaintiffs to cover
up the attached and marked as Exhibit E and made a part hereof; and a copy of the affidavit signed by
Jose Gatchalian dated December 29, 1934 is attached and marked Exhibit F and made part thereof;

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

9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the defendant,
notwithstanding subsequent demand made by defendant upon the plaintiffs through their attorney on
March 23, 1935, a copy of which marked Exhibit H is enclosed, defendant on May 13, 1935 issued a
warrant of distraint and levy against the property of the plaintiffs, a copy of which warrant marked
Exhibit I is enclosed and made a part hereof;
 10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs, the said
plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi, paid under
protest the sum of P601.51 as part of the tax and penalties to the municipal treasurer of Pulilan, Bulacan,
as evidenced by official receipt No. 7454879 which is attached and marked Exhibit J and made a part
hereof, and requested defendant that plaintiffs be allowed to pay under protest the balance of the tax and
penalties by monthly installments;

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

12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is enclosed and
made a part hereof, to guarantee the payment of the balance of the alleged tax liability by monthly
installments at the rate of P118.70 a month, the first payment under protest to be effected on or before
July 31, 1935;

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

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

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

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

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

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

To whom it may concern:

I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the 11th day of
August, 1934, I sold parts of my shares on ticket No. 178637 to the persons and for the amount indicated
below and the part of may share remaining is also shown to wit:
 Purchaser Amount Address
1. Mariano Santos ........................................... P0.14 Pulilan, Bulacan.
2. Buenaventura Guzman ............................... .13 - Do -
3. Maria Santiago ............................................ .17 - Do -
4. Gonzalo Javier .............................................. .14 - Do -
5. Francisco Cabral .......................................... .13 - Do -
6. Maria C. Legaspi .......................................... .16 - Do -
7. Emiliana Santiago ......................................... .13 - Do -
8. Julio Gatchalian ............................................ .13 - Do -
9. Jose Silva ...................................................... .07 - Do -
10. Tomasa Mercado ....................................... .08 - Do -
11. Jesus Legaspi ............................................. .15 - Do -
12. Guillermo Tapia ........................................... .13 - Do -
13. Saturnina Silva ............................................ .08 - Do -
14. Gregoria Cristobal ....................................... .18 - Do -
15. Jose Gatchalian ............................................ .18 - Do -

2.00 Total cost of said

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

Pulilan, Bulacan, P.I.

(Sgd.) JOSE GATCHALIAN

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

RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED

JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.

Exhibit Purchase Price Net

Name Expenses
No. Price Won prize
1. Jose Gatchalian
D-1 P0.18 P4,425 P 480 3,945
..........................................
 2. Gregoria Cristobal
D-2 .18 4,575 2,000 2,575
......................................
3. Saturnina Silva
D-3 .08 1,875 360 1,515
.............................................
4. Guillermo Tapia
D-4 .13 3,325 360 2,965
..........................................
5. Jesus Legaspi by Maria
D-5 .15 3,825 720 3,105
Cristobal .........
6. Jose Silva
D-6 .08 1,875 360 1,515
....................................................
7. Tomasa Mercado
D-7 .07 1,875 360 1,515
.......................................
8. Julio Gatchalian by Beatriz
D-8 .13 3,150 240 2,910
Guzman .......
9. Emiliana Santiago
D-9 .13 3,325 360 2,965
......................................
10. Maria C. Legaspi
D-10 .16 4,100 960 3,140
......................................
11. Francisco Cabral
D-11 .13 3,325 360 2,965
......................................
12. Gonzalo Javier
D-12 .14 3,325 360 2,965
..........................................
13. Maria Santiago
D-13 .17 4,350 360 3,990
..........................................
14. Buenaventura Guzman
D-14 .13 3,325 360 2,965
...........................
15. Mariano Santos
D-15 .14 3,325 360 2,965
........................................
<="" td="" style="font-size: 14px;
text-decoration: none; color:
2.00 50,000 rgb(0, 0, 128); font-family: arial,
verdana;">

The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to the two
following: (1) Whether the plaintiffs formed a partnership, or merely a community of property without a
personality of its own; in the first case it is admitted that the partnership thus formed is liable for the payment of
income tax, whereas if there was merely a community of property, they are exempt from such payment; and (2)
whether they should pay the tax collectively or whether the latter should be prorated among them and paid
individually.
The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last amended by
section 2 of Act No. 3761, reading as follows:

SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net income
received in the preceding calendar year from all sources by every corporation, joint-stock company,
partnership, joint account (cuenta en participacion), association or insurance company, organized in the
Philippine Islands, no matter how created or organized, but not including duly registered general
copartnership (compaias colectivas), a tax of three per centum upon such income; and a like tax shall
be levied, assessed, collected, and paid annually upon the total net income received in the preceding
calendar year from all sources within the Philippine Islands by every corporation, joint-stock company,
partnership, joint account (cuenta en participacion), association, or insurance company organized,
authorized, or existing under the laws of any foreign country, including interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or otherwise: Provided, however, That nothing in this
section shall be construed as permitting the taxation of the income derived from dividends or net profits
on which the normal tax has been paid.

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

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

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

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

In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the plaintiffs
appellants. So ordered.
G.R. No. L-47045 November 22, 1988

NOBIO SARDANE, petitioner,

vs.
THE COURT OF APPEALS and ROMEO J. ACOJEDO, respondents.

Y.G. Villaruz & Associates for petitioner.

Pelagio R. Lachica for private respondent.

REGALADO, J.:

The extensive discussion and exhaustive disquisition in the decision 1 of the respondent Court 2 should have
written finis to this case without further recourse to Us. The assignment of errors and arguments raised in the
respondent Court by herein private respondent, as the petitioner therein, having been correctly and justifiedly
sustained by said court without any reversible error in its conclusions, the present petition must fail.

The assailed decision details the facts and proceedings which spawned the present controversy as follows:

Petitioner brought an action in the City Court of Dipolog for collection of a sum of P5,217.25
based on promissory notes executed by the herein private respondent Nobio Sardane in favor of
the herein petitioner. Petitioner bases his right to collect on Exhibits B, C, D, E, F, and G
executed on different dates and signed by private respondent Nobio Sardane. Exhibit B is a
printed promissory note involving Pl,117.25 and dated May 13, 1972. Exhibit C is likewise a
printed promissory note and denotes on its face that the sum loaned was Pl,400.00. Exhibit D is
also a printed promissory note dated May 31, 1977 involving an amount of P100.00. Exhibit E is
what is commonly known to the layman as 'vale' which reads: 'Good for: two hundred pesos
(Sgd) Nobio Sardane'. Exhibit F is stated in the following tenor: 'Received from Mr. Romeo
Acojedo the sum Pesos: Two Thousand Two Hundred (P2,200.00) ONLY, to be paid on or
before December 25, 1975. (Sgd) Nobio Sardane.' Exhibit G and H are both vales' involving the
same amount of one hundred pesos, and dated August 25, 1972 and September 12, 1972
respectively.

It has been established in the trial court that on many occasions, the petitioner demanded the
payment of the total amount of P5,217.25. The failure of the private respondent to pay the said
amount prompted the petitioner to seek the services of lawyer who made a letter (Exhibit 1)
formally demanding the return of the sum loaned. Because of the failure of the private
respondent to heed the demands extrajudicially made by the petitioner, the latter was constrained
to bring an action for collection of sum of money.

During the scheduled day for trial, private respondent failed to appear and to file an answer. On
motion by the petitioner, the City Court of Dipolog issued an order dated May 18, 1976 declaring
the private respondent in default and allowed the petitioner to present his evidence ex-parte.
Based on petitioner's evidence, the City Court of Dipolog rendered judgment by default in favor
of the petitioner.
 Private respondent filed a motion to lift the order of default which was granted by the City Court
in an order dated May 24, 1976, taking into consideration that the answer was filed within two
hours after the hearing of the evidence presented ex-parte by the petitioner.

After the trial on the merits, the City Court of Dipolog rendered its decision on September 14,
1976, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the plaintiff and
against the defendant as follows:

(a) Ordering the defendant to pay unto the plaintiff the sum of Five Thousand Two Hundred
Seventeen Pesos and Twenty-five centavos (P5,217.25) plus legal interest to commence from
April 23, 1976 when this case was filed in court; and

(b) Ordering the defendant to pay the plaintiff the sum of P200.00 as attorney's fee and to pay the
cost of this proceeding. 3

Therein defendant Sardane appealed to the Court of First Instance of Zamboanga del Norte which reversed the
decision of the lower court by dismissing the complaint and ordered the plaintiff-appellee Acojedo to pay said
defendant-appellant P500.00 each for actual damages, moral damages, exemplary damages and attorney's fees,
as well as the costs of suit. Plaintiff-appellee then sought the review of said decision by petition to the
respondent Court.

The assignment of errors in said petition for review can be capsulized into two decisive issues, firstly, whether
the oral testimony for the therein private respondent Sardane that a partnership existed between him and therein
petitioner Acojedo are admissible to vary the meaning of the abovementioned promissory notes; and, secondly,
whether because of the failure of therein petitioner to cross-examine therein private respondent on his sur-
rebuttal testimony, there was a waiver of the presumption accorded in favor of said petitioner by Section 8, Rule
8 of the Rules of Court.

On the first issue, the then Court of First Instance held that "the pleadings of the parties herein put in issue the
imperfection or ambiguity of the documents in question", hence "the appellant can avail of the parol evidence
rule to prove his side of the case, that is, the said amount taken by him from appellee is or was not his personal
debt to appellee, but expenses of the partnership between him and appellee."

Consequently, said trial court concluded that the promissory notes involved were merely receipts for the
contributions to said partnership and, therefore, upheld the claim that there was ambiguity in the promissory
notes, hence parol evidence was allowable to vary or contradict the terms of the represented loan contract.

The parol evidence rule in Rule 130 provides:

Sec. 7. Evidence of written agreements.When the terms of an agreement have been reduced to
writing, it is to be considered as containing all such terms, and, therefore, there can be, between
the parties and their successors in interest, no evidence of the terms of the agreement other than
the contents of the writing except in the following cases:

(a) Where a mistake or imperfection of the writing or its failure to express the the true intent and
agreement of the parties, or the validity of the agreement is put in issue by the pleadings;
 (b) When there is an intrinsic ambiguity in the writing.

As correctly pointed out by the respondent Court the exceptions to the rule do not apply in this case as there is
no ambiguity in the writings in question, thus:

In the case at bar, Exhibits B, C, and D are printed promissory notes containing a promise to pay
a sum certain in money, payable on demand and the promise to bear the costs of litigation in the
event of the private respondent's failure to pay the amount loaned when demanded
extrajudicially. Likewise, the vales denote that the private respondent is obliged to return the sum
loaned to him by the petitioner. On their face, nothing appears to be vague or ambigous, for the
terms of the promissory notes clearly show that it was incumbent upon the private respondent to
pay the amount involved in the promissory notes if and when the petitioner demands the same. It
was clearly the intent of the parties to enter into a contract of loan for how could an educated
man like the private respondent be deceived to sign a promissory note yet intending to make such
a writing to be mere receipts of the petitioner's supposed contribution to the alleged partnership
existing between the parties?

It has been established in the trial court that, the private respondent has been engaged in business
for quite a long period of time--as owner of the Sardane Trucking Service, entering into contracts
with the government for the construction of wharfs and seawall; and a member of the City
Council of Dapitan (TSN, July 20, 1976, pp. 57-58).<re||an1w> It indeed puzzles us how
the private respondent could have been misled into signing a document containing terms which
he did not mean them to be. ...

xxx xxx xxx

The private respondent admitted during the cross-examination made by petitioner's counsel that
he was the one who was responsible for the printing of Exhibits B, C, and D (TSN, July 28,
1976, p. 64). How could he purportedly rely on such a flimsy pretext that the promissory notes
were receipts of the petitioner's contribution? 4

The Court of Appeals held, and We agree, that even if evidence aliunde other than the promissory notes may be
admitted to alter the meaning conveyed thereby, still the evidence is insufficient to prove that a partnership
existed between the private parties hereto.

As manager of the basnig Sarcado naturally some degree of control over the operations and maintenance thereof
had to be exercised by herein petitioner. The fact that he had received 50% of the net profits does not
conclusively establish that he was a partner of the private respondent herein. Article 1769(4) of the Civil Code
is explicit that while the receipt by a person of a share of the profits of a business is prima facie evidence that he
is a partner in the business, no such inference shall be drawn if such profits were received in payment as wages
of an employee. Furthermore, herein petitioner had no voice in the management of the affairs of the basnig.
Under similar facts, this Court in the early case of Fortis vs. Gutierrez Hermanos, 5 in denying the claim of the
plaintiff therein that he was a partner in the business of the defendant, declared:

This contention cannot be sustained. It was a mere contract of employment. The plaintiff had no
voice nor vote in the management of the affairs of the company. The fact that the compensation
received by him was to be determined with reference to the profits made by the defendant in
their business did not in any sense make him a partner therein. ...
The same rule was reiterated in Bastida vs. Menzi & Co., Inc., et al. 6 which involved the same factual and legal
milieu.

There are other considerations noted by respondent Court which negate herein petitioner's pretension that he
was a partner and not a mere employee indebted to the present private respondent. Thus, in an action for
damages filed by herein private respondent against the North Zamboanga Timber Co., Inc. arising from the
operations of the business, herein petitioner did not ask to be joined as a party plaintiff. Also, although he
contends that herein private respondent is the treasurer of the alleged partnership, yet it is the latter who is
demanding an accounting. The advertence of the Court of First Instance to the fact that the casco bears the name
of herein petitioner disregards the finding of the respondent Court that it was just a concession since it was he
who obtained the engine used in the Sardaco from the Department of Local Government and Community
Development. Further, the use by the parties of the pronoun "our" in referring to "our basnig, our catch", "our
deposit", or "our boseros" was merely indicative of the camaraderie and not evidentiary of a partnership,
between them.

The foregoing factual findings, which belie the further claim that the aforesaid promissory notes do not express
the true intent and agreement of the parties, are binding on Us since there is no showing that they fall within the
exceptions to the rule limiting the scope of appellate review herein to questions of law.

On the second issue, the pertinent rule on actionable documents in Rule 8, for ready reference, reads:

Sec. 8. How to contest genuineness of such documents.When an action or defense is founded

upon a written instrument, copied in or attached to the corresponding pleading as provided in the
preceding section, the genuineness and due execution of the instrument shall be deemed admitted
unless the adverse party, under oath, specifically denies them, and sets forth what he claims to be
the facts; but this provision does not apply when the adverse party does not appear to be a party
to the instrument or when compliance with an order for the inspection of the original instrument
is refused.

The record shows that herein petitioner did not deny under oath in his answer the authenticity and due execution
of the promissory notes which had been duly pleaded and attached to the complaint, thereby admitting their
genuineness and due execution. Even in the trial court, he did not at all question the fact that he signed said
promissory notes and that the same were genuine. Instead, he presented parol evidence to vary the import of the
promissory notes by alleging that they were mere receipts of his contribution to the alleged partnership.

His arguments on this score reflect a misapprehension of the rule on parol evidence as distinguished from the
rule on actionable documents. As the respondent Court correctly explained to herein petitioner, what he
presented in the trial Court was testimonial evidence that the promissory notes were receipts of his supposed
contributions to the alleged partnership which testimony, in the light of Section 7, Rule 130, could not be
admitted to vary or alter the explicit meaning conveyed by said promissory notes. On the other hand, the
presumed genuineness and due execution of said promissory notes were not affected, pursuant to the provisions
of Section 8, Rule 8, since such aspects were not at all questioned but, on the contrary, were admitted by herein
petitioner.

Petitioner's invocation of the doctrines in Yu Chuck, et al. vs. Kong Li Po, 7 which was reiterated in Central
Surety & Insurance Co. vs. C. N. Hodges, et al. 8 does not sustain his thesis that the herein private respondent
had "waived the mantle of protection given him by Rule 8, Sec. 8". It is true that such implied admission of
genuineness and due execution may be waived by a party but only if he acts in a manner indicative of either an
express or tacit waiver thereof. Petitioner, however, either overlooked or ignored the fact that, as held in Yu
Chuck, and the same is true in other cases of Identical factual settings, such a finding of waiver is proper where
a case has been tried in complete disregard of the rule and the plaintiff having pleaded a document by copy,
presents oral evidence to prove the due execution of the document and no objections are made to the defendant's
evidence in refutation. This situation does not obtain in the present case hence said doctrine is obviously
inapplicable.

Neither did the failure of herein private respondent to cross-examine herein petitioner on the latter's sur-rebuttal
testimony constitute a waiver of the aforesaid implied admission. As found by the respondent Court, said sur-
rebuttal testimony consisted solely of the denial of the testimony of herein private respondent and no new or
additional matter was introduced in that sur-rebuttal testimony to exonerate herein petitioner from his
obligations under the aforesaid promissory notes.

On the foregoing premises and considerations, the respondent Court correctly reversed and set aside the
appealed decision of the Court of First Instance of Zamboanga del Norte and affirmed in full the decision of the
City Court of Dipolog City in Civil Case No. A-1838, dated September 14, 1976.

Belatedly, in his motion for reconsideration of said decision of the respondent Court, herein petitioner, as the
private respondent therein, raised a third unresolved issue that the petition for review therein should have been
dismissed for lack of jurisdiction since the lower Court's decision did not affirm in full the judgment of the City
Court of Dipolog, and which he claimed was a sine qua non for such a petition under the law then in force. He
raises the same point in his present appeal and We will waive the procedural technicalities in order to put this
issue at rest.

Parenthetically, in that same motion for reconsideration he had sought affirmative relief from the respondent
Court praying that it sustain the decision of the trial Court, thereby invoking and submitting to its jurisdiction
which he would now assail. Furthermore, the objection that he raises is actually not one of jurisdiction but of
procedure. 9

At any rate, it will be noted that petitioner anchors his said objection on the provisions of Section 29, Republic
Act 296 as amended by Republic Act 5433 effective September 9, 1968. Subsequently, the procedure for appeal
to the Court of Appeals from decisions of the then courts of first instance in the exercise of their appellate
jurisdiction over cases originating from the municipal courts was provided for by Republic Act 6031, amending
Section 45 of the Judiciary Act effective August 4, 1969. The requirement for affirmance in full of the inferior
court's decision was not adopted or reproduced in Republic Act 6031. Also, since Republic Act 6031 failed to
provide for the procedure or mode of appeal in the cases therein contemplated, the Court of Appeals en
banc provided thereof in its Resolution of August 12, 1971, by requiring a petition for review but which also
did not require for its availability that the judgment of the court of first instance had affirmed in full that of the
lower court. Said mode of appeal and the procedural requirements thereof governed the appeal taken in this case
from the aforesaid Court of First Instance to the Court of Appeals in 1977. 10 Herein petitioner's plaint on this
issue is, therefore, devoid of merit.

WHEREFORE, the judgment of the respondent Court of Appeals is AFFIRMED, with costs against herein
petitioner.

SO ORDERED.
G.R. No. L-1256 October 23, 1903

VICENTE W. PASTOR, plaintiff-appellant,

vs.
MANUEL GASPAR, ET AL., defendants-appellees.

Alfredo Chicote for appellant.

F. Ortigas and Hartigan, Marple and Solignac for appellees.

WILLARD, J.:

There was no motion for a new trial in this case.

From the facts admitted by the pleadings and those found by the court, it appears that in November, 1900, there
existed in Manila a partnership composed of Macario Nicasio and the defendant Gaspar under the name
"Nicasio and Gaspar." It owned the steam launch Luisa, and its only business was the relating to this launch.

Desiring to increase this business, on the 24th day of November, 1900, a contract was made between the firm of
Nicasio and Gaspar on the one side, and on the other side the plaintiff, the defendants Eguia, Iboleon, and
Monserrat, and one Hermoso. This contract recites that Nicasio and Gaspar, by writing of the same date, have
enlarged the business of their partnership; have bought six lorchas, which are named, and that, needing money
with which to pay for the lorchas and the necessary repairs thereon, the parties of the second part have furnished
them 28,000 pesos as loan, the amount furnished by each being named. The firm of Nicasio and Gaspar then
acknowledges the receipt of these amounts. The fifth clause of the contract is as follows:

Fifth. The partnership of Nicasio and Gaspar undertakes to return to the said Eguia, Monserrat, Iboleon,
Pastor, and Hermoso the said total sum of 28,000 pesos within the period of ten years from the date of
the instrument, and to guarantee the fulfillment of said payment they pledge to said parties the said
lorchas Pepay, Lola, Consuelo, India, Niceta, and Castellana, in the sums respectively which said
parties have furnished for the purchase and repair of said vessels, as before stated, ceding and assigning
to said parties, in like proportions the profits and gains which may be realized from the exploitation of
said vessels; the said vessels to be the property of said Eguia, Monserrat, Iboleon, Pastor, and Hermoso,
and of the parties of the first part, proportionate with the sums which the said parties have invested in
said vessels; the management of said vessels during the time in which said debt remains unpaid to
remain with the partnership of Nicasio and Gaspar, with the understanding that whatever may be the
result of the business of said vessels, neither the said partnership nor the parties of the first part shall
become responsible for the payment of said debt, except in so far as the said vessels shall respond
therefor, and in no event shall they respond therefor with any other property; injuries to and all losses of
said lorchas to be shared by all the parties hereto, as well as crews' expenses and other outlays necessary
for the preservation of said vessels, in the proportion which corresponds to each party hereto according
to his investment; the parties of the first part binding themselves not to encumber or pledge said vessels
while said debt remains unsatisfied to the parties of the second part.

It was provided in the seventh clause that the launch Luisa was not included in this contract.
It is alleged in the complaint, and not denied by the answer, that the contract thus entered into on November 24,
1900, was in July, 1901, dissolved and terminated, and the lorchas sold by mutual consent.

The cause of action set forth in the complaint is that there was actually a partnership between the parties to the
contract of November 24, and that the consent of the agent of the plaintiff to its dissolution and the sale of the
lorchas was obtained by fraud of the defendants. The prayer of the complaint is that the dissolution of the
partnership and the sale of the lorchas be declared null, and that the plaintiff be restored to his rights therein,
and if this can not be done that he recover of the defendants damages in the sum of 42,500 pesos.

1. The plaintiff, who was defeated in the court below and who has appealed, claims that the contract of
November 24, 1900, created a partnership between the parties to it.

While all the court are of the opinion that the judgment should be affirmed, we are not agreed as to the proper
construction to be put upon this document. The opinion of the writer is that held by the court below, viz, that
upon the face of the contract the plaintiff was a creditor and not a partner. The contract is not clearly drawn, but
the following seem to indicate that the transaction was rather a loan than a contract of partnership: (1) In the
beginning it is twice stated positively that Nicasio and Gaspar are the only partners and the only persons
interested in the partnership of Nicasio and Gaspar. These statements the plaintiff assented to when he signed
the document. (2) In the second paragraph, and again in the fourth, it is stated, also, distinctly and positively,
that the money has been furnished as a loan. (3) In the fifth paragraph, hereinbefore quoted, Nicasio and Gaspar
bind themselves to repay the amount, something that they would not be bound to do were the contract one of
partnership. (4) In the same paragraph Nicasio and Gaspar create in favor of the plaintiff and his associates a
right of pledge over the lorchas, a thing inconsistent with the idea of partnership. this paragraph should not be
construed as transferring the ownership of the lorchas themselves to the second parties. Although the words "las
cuales" would grammatically refer to the preceding word "embarcaciones," yet such a construction would be
inconsistent with what has been before stated in the same paragraph as to the pledge. (5) By the same paragraph
Nicasio and Gaspar are to be considered consignees only as long as they do not pay the debt. This indicates that
they had a right to pay it. (6) By the last clause of this paragraph they bind themselves not to alienate the lorchas
until they had paid the debt, indicating clearly that by paying the debt they could do so, a thing consistent with
the idea of a partnership. (7) By the seventh paragraph of this contract it is stated that the launch Luisa is not
included in the contract.

The claim of the plaintiff that by this document he became a partner in the firm of Nicasio and Gaspar can not
in any event be sustained. That firm was engaged in business with the launch Luisa. With this the plaintiff and
his associates had nothing to do.

It appears, also, from this contract that when Nicasio and Gaspar enlarged their business they could devote
themselves not only to the launch Luisa and the six lorchas in question but also to other craft. With such other
business the plaintiff would have nothing to do. The most that he can claim is not that he was a partner in the
firm of Nicasio and Gaspar, but that he and his associates, in connection with that firm, had formed another
partnership to manage these lorchas. The fact that the plaintiff was to share in the profits and losses of the
business and that Nicasio and Gaspar should answer for the payment of the debt only with the lorchas, and not
with their own property, indicates that the plaintiff was a partner. But these provisions are not conclusive. This
is a suit between the parties to the contract. The rights of third persons are not concerned. Whether the plaintiff
would be a partner as to such third persons is not to be determined. As between themselves the parties could
make any contract that pleased them, provided that it was not illegal (art. 1255, Civil Code). They could, in
making this contract, if they chose, take some provision from the law of partnership and others from the law of
loans. Loans with a right to receive a part of the profits in lieu of interest are not uncommon. As between the
parties, such contract is not one of partnership.
The question on this branch of the case is whether the contract on its face creates a partnership or not. The court
finds that the plaintiff believed that he could not be a partner because he was a Spanish subject. There can
therefore be no doubt as to his intention in signing this contract. He did not believe that on its face it made him a
partner. If he had so believed, he would not have signed it. If he was willing to sign a contract which on its face
made him a partner, he and his associates would have joined with Nicasio and Gaspar in the amended articles of
partnership which they signed on this very day, and this second document would have been entirely
unnecessary. The inference from these facts is so strong that it can not be overcome by the fact that in
subsequent dealings the parties called themselves partners. The plaintiff undoubtedly wished to secure, as far as
he could, the rights of a partner without making himself one.

The contract, in the opinion of the writer, was that Nicasio and Gaspar should take the money of the other
parties to the contract, manage the business as they saw fit, pay the investors their share of the profits as long as
the business continued, and not to sell the lorchas until they had been so repaid. Anything more than this would
have made the investors partners according to the instrument itself, the one thing which they were seeking to
avoid. It may be added that, in a similar contract which the plaintiff made with Nicasio in April, 1900, he in
1902 considered himself a creditor and made a demand on Nicasio for the payment of the debt.

It is claimed by the plaintiff that even if the transaction was a loan, it could not be terminated without his
consent until the expiration of the period of ten years. Article 1127 of the Civil Code does not say that the
period allowed for the performance of an obligation is for the benefit of the creditor as well as the debtor. It says
that it shall be so presumed unless the contrary appears. In this case the contrary does appear in two clauses
hereinbefore cited under (5) and (6). Upon paying the loan at the end of ten years, they would have had the
undoubted right to mortgage or sell the lorchas, and then by the mere act of payment would have ceased to be
consignees thereof. No declaration of that kind in the contract was at all necessary. These rights would result as
a matter of law. The insertion of these clauses can only be explained on the theory that the period was for the
benefit of the debtors alone, and that they would be at liberty at any time, even before the expiration of ten
years, to sell the property, provided they repaid the loan.

2. It is further claimed by the plaintiff that, even if the contract itself did not make them partners, there was a
verbal agreement that they should be partners. The court refused to allow him to answer certain questions
relating to this matter. His exception is stated as follows in the bill of exceptions: "The plaintiff in his first
testimony attempted to set forth the verbal agreements by virtue of which he was in reality a partner in the firm
of Nicasio and Gaspar. The court ruled this evidence out for the reason that the name of the plaintiff does not
appear in the articles of partnership of Nicasio and Gaspar. The plaintiff excepted to the ruling."

There are several reasons why the court was correct in its ruling.

(1) Although the offer was to show that he was a partner in the firm of Nicasio and Gaspar something not
claimed in the complaint it is probable that the purpose was to show a contract of partnership between
Nicasio and Gaspar on the one hand and the plaintiff and his associates on the other. The statements at the trial
indicates this. The bill of exceptions does not show what verbal agreements the plaintiff, would have testified to
if he had been allowed to do so. But in his brief in this court he says:

(b) That the firm was organized verbally on said date for a period of ten years; (c) that the rights and
obligations of the partners were set forth in document No. 945 of the said date, although it may be stated
in said document that the contract in reference was a contract of pledge.

If, as thus appears, all the rights and obligations which were verbally agreed to were afterwards embodied in a
written instrument which was offered in evidence, the plaintiff has not been prejudiced by not being allowed to
testify that these agreements were first made verbally. All of them having been included in the written
document, he could testify to nothing more. If all the agreements as to the rights and obligations of the parties
were embodied in the written contract, the additional verbal agreement that they should be partners would be
but their opinion as to the nature of the said written contract and would add nothing to it.

(2) The parties made a verbal agreement which they afterwards reduced to writing. Section 285 of the Code of
Civil Procedure prohibits any parol evidence as to other terms not contained in the writing. Under this section,
even if there had been agreements other than those contained in the instrument and inconsistent therewith, the
plaintiff could not testify to them. The plaintiff claims that this section does not prohibit evidence as to the
surrounding circumstances. This is true, and the plaintiff was the trial allowed to testify that he brought the
lorchas himself in Iloilo; that he was paid $500 for so doing; that $20,000 was borrowed from the Banco
Espaol -- Filipino for the purpose of paying for them; and as to other details. There was no intrinsic ambiguity
in the contract which required explanation. When a written contract is vague and indefinite, it can be explained
by showing what the surrounding circumstances were (sec. 289), but not by showing by parol what the prior
agreement in fact was.

3. The court refused to receive in evidence a letter written by Hermoso to the plaintiff, and the latter excepted.
there was no error in this ruling. The plaintiff could not prove the facts stated in this letter in this way. He
should have called Hermoso or other persons as witnesses to do so, and given the defendants the right to cross-
examine them. (Sec. 381, Code of Civil Procedure.)

4. The following exception appears in the record:

During the examination of Lino Eguia, he was asked by the plaintiff to state, either by means of the
document or the answer to the complaint, who was intrusted with the purchase of the lorchas. The court
ruled out the question and the plaintiff excepted.

This ruling was correct for two reasons: (1) The documents themselves showed the facts. (2) The plaintiff had
already testified without objection that he brought the lorchas in Iloilo by direction of Nicasio and Gaspar. The
refusal to allow this witness to testify, on a matter as to which there was no dispute, could not have prejudiced
the plaintiff.

5. Nicasio was asked if the capital in Nicasio and Gaspar which stood in his name was all his own. This
question was ruled out and the plaintiff excepted. If the question referred to the original contract of partnership,
and the plaintiff desired to show that he had contributed money thereto, he could not have been prejudiced by
the ruling because the witness had already testified that it was contributed in fact by the plaintiff. This fact also
appeared during the trial from the document No. 325 of April 26, 1900, between the witness and the plaintiff. If
he wished to show that a part of the capital standing in the name of Nicasio, in the amended articles of
partnership, was furnished by the plaintiff and others, he was not prejudiced by the ruling, for this all appeared
from the contract of November 24, 1900, so many times referred to. If he desired to show that Nicasio had
borrowed a part of his capital from some person not connected with this suit, the question was immaterial and
was properly excluded. In such a case it would be no concern of the plaintiff whose money this was.

6. The following exception appears in the record:

During the examination of the witness Joaquin Salvador, he was asked on cross-examination by plaintiff
to state if he, as attorney in fact of the partner Hermoso in the meetings of the partners preliminary to the
sale of the lorchas, would have consented to the dissolution of the partnership had he known that the
 partnership would be immediately reorganized with the same lorchas and the same partners with the
exception of Nicasio, Hermoso, and Pastor. The court ruled the question out and the plaintiff excepted.

This ruling was correct. What Salvador would have done was of no importance. The plaintiff's agent was
allowed to testify that he would not have given the plaintiff's consent if he had known that the defendants
intended to continue the business.

7. The assignment of error as to the bills of Warner, Barnes and Co. is not sustained by the bill of exceptions. It
is stated therein (fol. 25) that these documents were admitted.

8. The question as to whether the power of attorney given by the plaintiff to Nicasio was sufficient to authorize
the latter to consent for the plaintiff to the cancellation of the contract was not raised by any exception at the
trial and is not the subject of any assignment of error in this court.

9. The claim of the plaintiff, as has been said before, was (1) that he was a partner, and (2) that the cancellation
of the agreement of partnership had been procured by fraud. The judge made a finding upon the first claim, but
not upon the second; although the finding that he made was sufficient to determine the case before him, yet he
should have found upon all the issues presented by the pleadings. But this omission does not require a reversal
of the judgment. If the court below was right in the construction of the document, it of course does not, for the
decision would then contain facts sufficient to justify the judgment. But even if it were not, the same thing
would result. It is a fact clearly admitted by the pleadings, and therefore not required to be stated in the
decision, that this contract of November 24, 1900, was canceled and the arrangement, whatever it was,
dissolved. To this dissolution the plaintiff through his agent consented. This is alleged in the complaint,
although it is there stated that such consent was obtained by fraud. The facts admitted in the pleadings and
stated in the decision showing, therefore, that the plaintiff had surrendered his rights, and there being no finding
that such surrender was obtained by fraud, the defendants are, on such admissions and findings, entitled to
judgment. We reach this conclusion the more willingly because a majority of the court is of the opinion that the
evidence in the case was not sufficient to show any fraud on the part of the defendants.lawphil.net

The judgment is affirmed, with the costs of this instance against the appellant. Judgment will be entered
accordingly twenty days after the filing of this decision.

Arellano, C.J., Torres, Mapa, and McDonough, JJ., concur.

Separate Opinions

COOPER, J., concurring:

The cause of action set forth in the complaint is that there was a partnership between the plaintiff and the
defendants, which was, in July, 1901, dissolved and terminated between the parties thereto, the plaintiff acting
through his agent in said dissolution; that the consent of the agent to the dissolution was obtained by the fraud
of the defendant, and the prayer of the complaint is that this dissolution of the partnership and the sale of the
lorchas be declared null and that the plaintiff be restored to this rights therein; and he prays in the alternative
that, if this can not be done, the recover of the defendants damages in the sum of 42,500 pesos. The issues thus
made were determined against the plaintiff by the judgment of the Court of First Instance. It is asked that we
review the evidence taken in the court below and retry the questions of fact involved in the decision of the case
that is, whether the dissolution was obtained by the fraud of the defendants.

It is expressly provided by section 497, Code of Civil Procedure, that in hearings upon bills of exceptions the
Supreme Court shall not review the evidence taken in the court below, nor retry the questions of fact except in
certain cases, one of which is: "If the excepting party filed a motion in the Court of First Instance for a new
trial, upon the grounds that the findings of fact were plainly and manifestly against the weight of evidence, and
the judge overruled said motion and due exception was taken to his overruling same the Supreme Court may
review the evidence and make such finding upon the facts and render such final judgment as justice and equity
require." There was no motion of this character, for a new trial in the Court of First Instance, nor upon the other
grounds mentioned in section 497; consequently we can not review the evidence contained in the bill of
exceptions. Upon this ground I concur in the decision.

I am of the opinion that the fifth clause of the agreement entered into on the 24th day of November, 1900, set
forth in the majority opinion, is sufficient to show that a partnership existed between Nicasio and Gaspar, Eugia,
Monserrat, Iboleon, Pastor, and Hermoso.

A partnership is defined in article 1665 of the Civil Code as "a contract by which two or more persons bind
themselves to place money, property, or industry in common with the intention of dividing the profits among
themselves.lawphil.net

The fact that the plaintiff was to share in the profits and loses of the business indicates that the plaintiff was a
partner in the business. It was expressly provided in this clause of the contract that the parties thereto should be
entitled "in like proportion to the profits and gains which may be realized from the exploitation of said vessels"
and that "the injuries to and all losses of said lorchas to be shared by all the parties hereto, as well ad the crew's
expense and other outlays necessary for the preservation of said vessels, in the proportion which corresponds to
each party, according to his investment."

The fact that the lorchas were to remain the property of Nicasio and Gaspar, and that these lorchas were pledged
for the return of the 28,000 pesos denominated as a loan, would not have the effect of changing the nature of the
agreement.

The stipulations contained in the contract were such as might be lawfully made between the parties themselves,
though they may not have been binding with respect to third persons.
G.R. No. L-21906 December 24, 1968

INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees,

vs.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, defendant-appellant.

Aportadera and Palabrica and Pelaez, Jalandoni and Jamir plaintiffs-appellees.

Ruiz Law Offices for defendant-appellant.

CASTRO, J.:

This is an appeal from the order of May 2, 1956, the decision of May 4, 1956 and the order of May 21, 1956, all
of the Court of First Instance of Davao, in civil case 629. The basic action is for specific performance, and
damages resulting from an alleged breach of contract.

In 1940 Nicanor Casteel filed a fishpond application for a big tract of swampy land in the then Sitio of Malalag
(now the Municipality of Malalag), Municipality of Padada, Davao. No action was taken thereon by the
authorities concerned. During the Japanese occupation, he filed another fishpond application for the same area,
but because of the conditions then prevailing, it was not acted upon either. On December 12, 1945 he filed a
third fishpond application for the same area, which, after a survey, was found to contain 178.76 hectares. Upon
investigation conducted by a representative of the Bureau of Forestry, it was discovered that the area applied for
was still needed for firewood production. Hence on May 13, 1946 this third application was disapproved.

Despite the said rejection, Casteel did not lose interest. He filed a motion for reconsideration. While this motion
was pending resolution, he was advised by the district forester of Davao City that no further action would be
taken on his motion, unless he filed a new application for the area concerned. So he filed on May 27, 1947 his
fishpond application 1717.

Meanwhile, several applications were submitted by other persons for portions of the area covered by Casteel's
application.

On May 20, 1946 Leoncio Aradillos filed his fishpond application 1202 covering 10 hectares of land found
inside the area applied for by Casteel; he was later granted fishpond permit F-289-C covering 9.3 hectares
certified as available for fishpond purposes by the Bureau of Forestry.

Victor D. Carpio filed on August 8, 1946 his fishpond application 762 over a portion of the land applied for by
Casteel. Alejandro Cacam's fishpond application 1276, filed on December 26, 1946, was given due course on
December 9, 1947 with the issuance to him of fishpond permit F-539-C to develop 30 hectares of land
comprising a portion of the area applied for by Casteel, upon certification of the Bureau of Forestry that the area
was likewise available for fishpond purposes. On November 17, 1948 Felipe Deluao filed his own fishpond
application for the area covered by Casteel's application.

Because of the threat poised upon his position by the above applicants who entered upon and spread themselves
within the area, Casteel realized the urgent necessity of expanding his occupation thereof by constructing dikes
and cultivating marketable fishes, in order to prevent old and new squatters from usurping the land. But lacking
financial resources at that time, he sought financial aid from his uncle Felipe Deluao who then extended loans
totalling more or less P27,000 with which to finance the needed improvements on the fishpond. Hence, a wide
productive fishpond was built.
Moreover, upon learning that portions of the area applied for by him were already occupied by rival applicants,
Casteel immediately filed the corresponding protests. Consequently, two administrative cases ensued involving
the area in question, to wit: DANR Case 353, entitled "Fp. Ap. No. 661 (now Fp. A. No. 1717), Nicanor
Casteel, applicant-appellant versus Fp. A. No. 763, Victorio D. Carpio, applicant-appellant"; and DANR Case
353-B, entitled "Fp. A. No. 661 (now Fp. A. No. 1717), Nicanor Casteel, applicant-protestant versus Fp. Permit
No. 289-C, Leoncio Aradillos, Fp. Permit No. 539-C, Alejandro Cacam, Permittees-Respondents."

However, despite the finding made in the investigation of the above administrative cases that Casteel had
already introduced improvements on portions of the area applied for by him in the form of dikes, fishpond
gates, clearings, etc., the Director of Fisheries nevertheless rejected Casteel's application on October 25, 1949,
required him to remove all the improvements which he had introduced on the land, and ordered that the land be
leased through public auction. Failing to secure a favorable resolution of his motion for reconsideration of the
Director's order, Casteel appealed to the Secretary of Agriculture and Natural Resources.

In the interregnum, some more incidents occurred. To avoid repetition, they will be taken up in our discussion
of the appellant's third assignment of error.

On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as party of the first part, and Nicanor Casteel
as party of the second part, executed a contract denominated a "contract of service" the salient provisions
of which are as follows:

That the Party of the First Part in consideration of the mutual covenants and agreements made herein to
the Party of the Second Part, hereby enter into a contract of service, whereby the Party of the First Part
hires and employs the Party of the Second Part on the following terms and conditions, to wit:

That the Party of the First Part will finance as she has hereby financed the sum of TWENTY SEVEN
THOUSAND PESOS (P27,000.00), Philippine Currency, to the Party of the Second Part who renders
only his services for the construction and improvements of a fishpond at Barrio Malalag, Municipality of
Padada, Province of Davao, Philippines;

That the Party of the Second Part will be the Manager and sole buyer of all the produce of the fish that
will be produced from said fishpond;

That the Party of the First Part will be the administrator of the same she having financed the construction
and improvement of said fishpond;

That this contract was the result of a verbal agreement entered into between the Parties sometime in the
month of November, 1947, with all the above-mentioned conditions enumerated; ...

On the same date the above contract was entered into, Inocencia Deluao executed a special power of attorney in
favor of Jesus Donesa, extending to the latter the authority "To represent me in the administration of the
fishpond at Malalag, Municipality of Padada, Province of Davao, Philippines, which has been applied for
fishpond permit by Nicanor Casteel, but rejected by the Bureau of Fisheries, and to supervise, demand, receive,
and collect the value of the fish that is being periodically realized from it...."

On November 29, 1949 the Director of Fisheries rejected the application filed by Felipe Deluao on November
17, 1948. Unfazed by this rejection, Deluao reiterated his claim over the same area in the two administrative
cases (DANR Cases 353 and 353-B) and asked for reinvestigation of the application of Nicanor Casteel over the
subject fishpond. However, by letter dated March 15, 1950 sent to the Secretary of Commerce and Agriculture
and Natural Resources (now Secretary of Agriculture and Natural Resources), Deluao withdrew his petition for
reinvestigation.

On September 15, 1950 the Secretary of Agriculture and Natural Resources issued a decision in DANR Case
353, the dispositive portion of which reads as follows:

In view of all the foregoing considerations, Fp. A. No. 661 (now Fp. A. No. 1717) of Nicanor Casteel
should be, as hereby it is, reinstated and given due course for the area indicated in the sketch drawn at
the back of the last page hereof; and Fp. A. No. 762 of Victorio D. Carpio shall remain rejected.

On the same date, the same official issued a decision in DANR Case 353-B, the dispositive portion stating as
follows:

WHEREFORE, Fishpond Permit No. F-289-C of Leoncio Aradillos and Fishpond Permit No. F-539-C
of Alejandro Cacam, should be, as they are hereby cancelled and revoked; Nicanor Casteel is required to
pay the improvements introduced thereon by said permittees in accordance with the terms and
dispositions contained elsewhere in this decision....

Sometime in January 1951 Nicanor Casteel forbade Inocencia Deluao from further administering the fishpond,
and ejected the latter's representative (encargado), Jesus Donesa, from the premises.

Alleging violation of the contract of service (exhibit A) entered into between Inocencia Deluao and Nicanor
Casteel, Felipe Deluao and Inocencia Deluao on April 3, 1951 filed an action in the Court of First Instance of
Davao for specific performance and damages against Nicanor Casteel and Juan Depra (who, they alleged,
instigated Casteel to violate his contract), praying inter alia, (a) that Casteel be ordered to respect and abide by
the terms and conditions of said contract and that Inocencia Deluao be allowed to continue administering the
said fishpond and collecting the proceeds from the sale of the fishes caught from time to time; and (b) that the
defendants be ordered to pay jointly and severally to plaintiffs the sum of P20,000 in damages.

On April 18, 1951 the plaintiffs filed an ex parte motion for the issuance of a preliminary injunction, praying
among other things, that during the pendency of the case and upon their filling the requisite bond as may be
fixed by the court, a preliminary injunction be issued to restrain Casteel from doing the acts complained of, and
that after trial the said injunction be made permanent. The lower court on April 26, 1951 granted the motion,
and, two days later, it issued a preliminary mandatory injunction addressed to Casteel, the dispositive portion of
which reads as follows:

POR EL PRESENTE, queda usted ordenado que, hasta nueva orden, usted, el demandado y todos usu
abogados, agentes, mandatarios y demas personas que obren en su ayuda, desista de impedir a la
demandante Inocencia R. Deluao que continue administrando personalmente la pesqueria objeto de esta
causa y que la misma continue recibiendo los productos de la venta de los pescados provenientes de
dicha pesqueria, y que, asimismo, se prohibe a dicho demandado Nicanor Casteel a desahuciar mediante
fuerza al encargado de los demandantes llamado Jesus Donesa de la pesqueria objeto de la demanda de
autos.

On May 10, 1951 Casteel filed a motion to dissolve the injunction, alleging among others, that he was the
owner, lawful applicant and occupant of the fishpond in question. This motion, opposed by the plaintiffs on
June 15, 1951, was denied by the lower court in its order of June 26, 1961.
The defendants on May 14, 1951 filed their answer with counterclaim, amended on January 8, 1952, denying
the material averments of the plaintiffs' complaint. A reply to the defendants' amended answer was filed by the
plaintiffs on January 31, 1952.

The defendant Juan Depra moved on May 22, 1951 to dismiss the complaint as to him. On June 4, 1951 the
plaintiffs opposed his motion.

The defendants filed on October 3, 1951 a joint motion to dismiss on the ground that the plaintiffs' complaint
failed to state a claim upon which relief may be granted. The motion, opposed by the plaintiffs on October 12,
1951, was denied for lack of merit by the lower court in its order of October 22, 1951. The defendants' motion
for reconsideration filed on October 31, 1951 suffered the same fate when it was likewise denied by the lower
court in its order of November 12, 1951.

After the issues were joined, the case was set for trial. Then came a series of postponements. The lower court
(Branch I, presided by Judge Enrique A. Fernandez) finally issued on March 21, 1956 an order in open court,
reading as follows: .

Upon petition of plaintiffs, without any objection on the part of defendants, the hearing of this case is
hereby transferred to May 2 and 3, 1956 at 8:30 o'clock in the morning.

This case was filed on April 3, 1951 and under any circumstance this Court will not entertain any other
transfer of hearing of this case and if the parties will not be ready on that day set for hearing, the court
will take the necessary steps for the final determination of this case. (emphasis supplied)

On April 25, 1956 the defendants' counsel received a notice of hearing dated April 21, 1956, issued by the
office of the Clerk of Court (thru the special deputy Clerk of Court) of the Court of First Instance of Davao,
setting the hearing of the case for May 2 and 3, 1956 before Judge Amador Gomez of Branch II. The
defendants, thru counsel, on April 26, 1956 filed a motion for postponement. Acting on this motion, the lower
court (Branch II, presided by Judge Gomez) issued an order dated April 27, 1956, quoted as follows:

This is a motion for postponement of the hearing of this case set for May 2 and 3, 1956. The motion is
filed by the counsel for the defendants and has the conformity of the counsel for the plaintiffs.

An examination of the records of this case shows that this case was initiated as early as April 1951 and
that the same has been under advisement of the Honorable Enrique A. Fernandez, Presiding Judge of
Branch No. I, since September 24, 1953, and that various incidents have already been considered and
resolved by Judge Fernandez on various occasions. The last order issued by Judge Fernandez on this
case was issued on March 21, 1956, wherein he definitely states that the Court will not entertain any
further postponement of the hearing of this case.

CONSIDERING ALL THE FOREGOING, the Court believes that the consideration and termination of
any incident referring to this case should be referred back to Branch I, so that the same may be disposed
of therein. (emphasis supplied)

A copy of the abovequoted order was served on the defendants' counsel on May 4, 1956.

On the scheduled date of hearing, that is, on May 2, 1956, the lower court (Branch I, with Judge Fernandez
presiding), when informed about the defendants' motion for postponement filed on April 26, 1956, issued an
order reiterating its previous order handed down in open court on March 21, 1956 and directing the plaintiffs to
introduce their evidence ex parte, there being no appearance on the part of the defendants or their counsel. On
the basis of the plaintiffs' evidence, a decision was rendered on May 4, 1956 the dispositive portion of which
reads as follows:

EN SU VIRTUD, el Juzgado dicta de decision a favor de los demandantes y en contra del demandado
Nicanor Casteel:

(a) Declara permanente el interdicto prohibitorio expedido contra el demandado;

(b) Ordena al demandado entregue la demandante la posesion y administracion de la mitad () del

"fishpond" en cuestion con todas las mejoras existentes dentro de la misma;

(c) Condena al demandado a pagar a la demandante la suma de P200.00 mensualmente en concepto de

danos a contar de la fecha de la expiracion de los 30 dias de la promulgacion de esta decision hasta que
entregue la posesion y administracion de la porcion del "fishpond" en conflicto;

(d) Condena al demandado a pagar a la demandante la suma de P2,000.00 valor de los pescado
beneficiados, mas los intereses legales de la fecha de la incoacion de la demanda de autos hasta el
completo pago de la obligacion principal;

(e) Condena al demandado a pagar a la demandante la suma de P2,000.00, por gastos incurridos por
aquella durante la pendencia de esta causa;

(f) Condena al demandado a pagar a la demandante, en concepto de honorarios, la suma de P2,000.00;

(g) Ordena el sobreseimiento de esta demanda, por insuficiencia de pruebas, en tanto en cuanto se refiere
al demandado Juan Depra;

(h) Ordena el sobreseimiento de la reconvencion de los demandados por falta de pruebas;

(i) Con las costas contra del demandado, Casteel.

The defendant Casteel filed a petition for relief from the foregoing decision, alleging, inter alia, lack of
knowledge of the order of the court a quo setting the case for trial. The petition, however, was denied by the
lower court in its order of May 21, 1956, the pertinent portion of which reads as follows:

The duty of Atty. Ruiz, was not to inquire from the Clerk of Court whether the trial of this case has been
transferred or not, but to inquire from the presiding Judge, particularly because his motion asking the
transfer of this case was not set for hearing and was not also acted upon.

Atty. Ruiz knows the nature of the order of this Court dated March 21, 1956, which reads as follows:

Upon petition of the plaintiff without any objection on the part of the defendants, the hearing of
this case is hereby transferred to May 2 and 3, 1956, at 8:30 o'clock in the morning.

This case was filed on April 3, 1951, and under any circumstance this Court will not entertain
any other transfer of the hearing of this case, and if the parties will not be ready on the day set for
hearing, the Court will take necessary steps for the final disposition of this case.
 In view of the order above-quoted, the Court will not accede to any transfer of this case and the duty of
Atty. Ruiz is no other than to be present in the Sala of this Court and to call the attention of the same to
the existence of his motion for transfer.

Petition for relief from judgment filed by Atty. Ruiz in behalf of the defendant, not well taken, the same
is hereby denied.

Dissatisfied with the said ruling, Casteel appealed to the Court of Appeals which certified the case to us for final
determination on the ground that it involves only questions of law.

Casteel raises the following issues:

(1) Whether the lower court committed gross abuse of discretion when it ordered reception of the
appellees' evidence in the absence of the appellant at the trial on May 2, 1956, thus depriving the
appellant of his day in court and of his property without due process of law;

(2) Whether the lower court committed grave abuse of discretion when it denied the verified petition for
relief from judgment filed by the appellant on May 11, 1956 in accordance with Rule 38, Rules of Court;
and

(3) Whether the lower court erred in ordering the issuance ex parte of a writ of preliminary injunction
against defendant-appellant, and in not dismissing appellees' complaint.

1. The first and second issues must be resolved against the appellant.

The record indisputably shows that in the order given in open court on March 21, 1956, the lower court set the
case for hearing on May 2 and 3, 1956 at 8:30 o'clock in the morning and empathically stated that, since the
case had been pending since April 3, 1951, it would not entertain any further motion for transfer of the
scheduled hearing.

An order given in open court is presumed received by the parties on the very date and time of
promulgation,1 and amounts to a legal notification for all legal purposes.2 The order of March 21, 1956, given in
open court, was a valid notice to the parties, and the notice of hearing dated April 21, 1956 or one month
thereafter, was a superfluity. Moreover, as between the order of March 21, 1956, duly promulgated by the lower
court, thru Judge Fernandez, and the notice of hearing signed by a "special deputy clerk of court" setting the
hearing in another branch of the same court, the former's order was the one legally binding. This is because the
incidents of postponements and adjournments are controlled by the court and not by the clerk of court, pursuant
to section 4, Rule 31 (now sec. 3, Rule 22) of the Rules of Court.

Much less had the clerk of court the authority to interfere with the order of the court or to transfer the cage from
one sala to another without authority or order from the court where the case originated and was being tried. He
had neither the duty nor prerogative to re-assign the trial of the case to a different branch of the same court. His
duty as such clerk of court, in so far as the incident in question was concerned, was simply to prepare the trial
calendar. And this duty devolved upon the clerk of court and not upon the "special deputy clerk of court" who
purportedly signed the notice of hearing.

It is of no moment that the motion for postponement had the conformity of the appellees' counsel. The
postponement of hearings does not depend upon agreement of the parties, but upon the court's discretion.3
The record further discloses that Casteel was represented by a total of 12 lawyers, none of whom had ever
withdrawn as counsel. Notice to Atty. Ruiz of the order dated March 21, 1956 intransferably setting the case for
hearing for May 2 and 3, 1956, was sufficient notice to all the appellant's eleven other counsel of record. This is
a well-settled rule in our jurisdiction.4

It was the duty of Atty. Ruiz, or of the other lawyers of record, not excluding the appellant himself, to appear
before Judge Fernandez on the scheduled dates of hearing Parties and their lawyers have no right to presume
that their motions for postponement will be granted.5 For indeed, the appellant and his 12 lawyers cannot
pretend ignorance of the recorded fact that since September 24, 1953 until the trial held on May 2, 1956, the
case was under the advisement of Judge Fernandez who presided over Branch I. There was, therefore, no
necessity to "re-assign" the same to Branch II because Judge Fernandez had exclusive control of said case,
unless he was legally inhibited to try the case and he was not.

There is truth in the appellant's contention that it is the duty of the clerk of court not of the Court to
prepare the trial calendar. But the assignment or reassignment of cases already pending in one sala to another
sala, and the setting of the date of trial after the trial calendar has been prepared, fall within the exclusive
control of the presiding judge.

The appellant does not deny the appellees' claim that on May 2 and 3, 1956, the office of the clerk of court of
the Court of First Instance of Davao was located directly below Branch I. If the appellant and his counsel had
exercised due diligence, there was no impediment to their going upstairs to the second storey of the Court of
First Instance building in Davao on May 2, 1956 and checking if the case was scheduled for hearing in the
said sala. The appellant after all admits that on May 2, 1956 his counsel went to the office of the clerk of court.

The appellant's statement that parties as a matter of right are entitled to notice of trial, is correct. But he was
properly accorded this right. He was notified in open court on March 21, 1956 that the case was definitely and
intransferably set for hearing on May 2 and 3, 1956 before Branch I. He cannot argue that, pursuant to the
doctrine in Siochi vs. Tirona,6 his counsel was entitled to a timely notice of the denial of his motion for
postponement. In the cited case the motion for postponement was the first one filed by the defendant; in the case
at bar, there had already been a series of postponements. Unlike the case at bar, the Siochi case was not
intransferably set for hearing. Finally, whereas the cited case did not spend for a long time, the case at bar was
only finally and intransferably set for hearing on March 21, 1956 after almost five years had elapsed from
the filing of the complaint on April 3, 1951.

The pretension of the appellant and his 12 counsel of record that they lacked ample time to prepare for trial is
unacceptable because between March 21, 1956 and May 2, 1956, they had one month and ten days to do so. In
effect, the appellant had waived his right to appear at the trial and therefore he cannot be heard to complain that
he has been deprived of his property without due process of law.7 Verily, the constitutional requirements of due
process have been fulfilled in this case: the lower court is a competent court; it lawfully acquired jurisdiction
over the person of the defendant (appellant) and the subject matter of the action; the defendant (appellant) was
given an opportunity to be heard; and judgment was rendered upon lawful hearing.8

2. Finally, the appellant contends that the lower court incurred an error in ordering the issuance ex parte of a
writ of preliminary injunction against him, and in not dismissing the appellee's complaint. We find this
contention meritorious.

Apparently, the court a quo relied on exhibit A the so-called "contract of service" and the appellees'
contention that it created a contract of co-ownership and partnership between Inocencia Deluao and the
appellant over the fishpond in question.
Too well-settled to require any citation of authority is the rule that everyone is conclusively presumed to know
the law. It must be assumed, conformably to such rule, that the parties entered into the so-called "contract of
service" cognizant of the mandatory and prohibitory laws governing the filing of applications for fishpond
permits. And since they were aware of the said laws, it must likewise be assumed in fairness to the parties
that they did not intend to violate them. This view must perforce negate the appellees' allegation that exhibit A
created a contract of co-ownership between the parties over the disputed fishpond. Were we to admit the
establishment of a co-ownership violative of the prohibitory laws which will hereafter be discussed, we shall be
compelled to declare altogether the nullity of the contract. This would certainly not serve the cause of equity
and justice, considering that rights and obligations have already arisen between the parties. We shall therefore
construe the contract as one of partnership, divided into two parts namely, a contract of partnership to exploit
the fishpond pending its award to either Felipe Deluao or Nicanor Casteel, and a contract of partnership to
divide the fishpond between them after such award. The first is valid, the second illegal.

It is well to note that when the appellee Inocencia Deluao and the appellant entered into the so-called "contract
of service" on November 25, 1949, there were two pending applications over the fishpond. One was Casteel's
which was appealed by him to the Secretary of Agriculture and Natural Resources after it was disallowed by the
Director of Fisheries on October 25, 1949. The other was Felipe Deluao's application over the same area which
was likewise rejected by the Director of Fisheries on November 29, 1949, refiled by Deluao and later on
withdrawn by him by letter dated March 15, 1950 to the Secretary of Agriculture and Natural Resources.
Clearly, although the fishpond was then in the possession of Casteel, neither he nor, Felipe Deluao was the
holder of a fishpond permit over the area. But be that as it may, they were not however precluded from
exploiting the fishpond pending resolution of Casteel's appeal or the approval of Deluao's application over the
same area whichever event happened first. No law, rule or regulation prohibited them from doing so. Thus,
rather than let the fishpond remain idle they cultivated it.

The evidence preponderates in favor of the view that the initial intention of the parties was not to form a co-
ownership but to establish a partnership Inocencia Deluao as capitalist partner and Casteel as industrial
partner the ultimate undertaking of which was to divide into two equal parts such portion of the fishpond as
might have been developed by the amount extended by the plaintiffs-appellees, with the further provision that
Casteel should reimburse the expenses incurred by the appellees over one-half of the fishpond that would
pertain to him. This can be gleaned, among others, from the letter of Casteel to Felipe Deluao on November 15,
1949, which states, inter alia:

... [W]ith respect to your allowing me to use your money, same will redound to your benefit because you
are the ones interested in half of the work we have done so far, besides I did not insist on our being
partners in my fishpond permit, but it was you "Tatay" Eping the one who wanted that we be partners
and it so happened that we became partners because I am poor, but in the midst of my poverty it never
occurred to me to be unfair to you. Therefore so that each of us may be secured, let us have a document
prepared to the effect that we are partners in the fishpond that we caused to be made here in Balasinon,
but it does not mean that you will treat me as one of your "Bantay" (caretaker) on wage basis but not
earning wages at all, while the truth is that we are partners. In the event that you are not amenable to
my proposition and consider me as "Bantay" (caretaker) instead, do not blame me if I withdraw all my
cases and be left without even a little and you likewise.
(emphasis supplied)9

Pursuant to the foregoing suggestion of the appellant that a document be drawn evidencing their partnership, the
appellee Inocencia Deluao and the appellant executed exhibit A which, although denominated a "contract of
service," was actually the memorandum of their partnership agreement. That it was not a contract of the services
of the appellant, was admitted by the appellees themselves in their letter10 to Casteel dated December 19, 1949
wherein they stated that they did not employ him in his (Casteel's) claim but because he used their money in
developing and improving the fishpond, his right must be divided between them. Of course, although exhibit A
did not specify any wage or share appertaining to the appellant as industrial partner, he was so entitled this
being one of the conditions he specified for the execution of the document of partnership.11

Further exchanges of letters between the parties reveal the continuing intent to divide the fishpond. In a
letter,12dated March 24, 1950, the appellant suggested that they divide the fishpond and the remaining capital,
and offered to pay the Deluaos a yearly installment of P3,000 presumably as reimbursement for the expenses
of the appellees for the development and improvement of the one-half that would pertain to the appellant. Two
days later, the appellee Felipe Deluao replied,13expressing his concurrence in the appellant's suggestion and
advising the latter to ask for a reconsideration of the order of the Director of Fisheries disapproving his
(appellant's) application, so that if a favorable decision was secured, then they would divide the area.

Apparently relying on the partnership agreement, the appellee Felipe Deluao saw no further need to maintain
his petition for the reinvestigation of Casteel's application. Thus by letter14 dated March 15, 1950 addressed to
the Secretary of Agriculture and Natural Resources, he withdrew his petition on the alleged ground that he was
no longer interested in the area, but stated however that he wanted his interest to be protected and his capital to
be reimbursed by the highest bidder.

The arrangement under the so-called "contract of service" continued until the decisions both dated September
15, 1950 were issued by the Secretary of Agriculture and Natural Resources in DANR Cases 353 and 353-B.
This development, by itself, brought about the dissolution of the partnership. Moreover, subsequent events
likewise reveal the intent of both parties to terminate the partnership because each refused to share the fishpond
with the other.

Art. 1830(3) of the Civil Code enumerates, as one of the causes for the dissolution of a partnership, "... any
event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it
on in partnership." The approval of the appellant's fishpond application by the decisions in DANR Cases 353
and 353-B brought to the fore several provisions of law which made the continuation of the partnership
unlawful and therefore caused its ipso facto dissolution.

Act 4003, known as the Fisheries Act, prohibits the holder of a fishpond permit (the permittee) from
transferring or subletting the fishpond granted to him, without the previous consent or approval of the Secretary
of Agriculture and Natural Resources.15 To the same effect is Condition No. 3 of the fishpond permit which
states that "The permittee shall not transfer or sublet all or any area herein granted or any rights acquired therein
without the previous consent and approval of this Office." Parenthetically, we must observe that in DANR Case
353-B, the permit granted to one of the parties therein, Leoncio Aradillos, was cancelled not solely for the
reason that his permit covered a portion of the area included in the appellant's prior fishpond application, but
also because, upon investigation, it was ascertained thru the admission of Aradillos himself that due to lack of
capital, he allowed one Lino Estepa to develop with the latter's capital the area covered by his fishpond permit
F-289-C with the understanding that he (Aradillos) would be given a share in the produce thereof.16

Sec. 40 of Commonwealth Act 141, otherwise known as the Public Land Act, likewise provides that

The lessee shall not assign, encumber, or sublet his rights without the consent of the Secretary of
Agriculture and Commerce, and the violation of this condition shall avoid the contract; Provided, That
assignment, encumbrance, or subletting for purposes of speculation shall not be permitted in any
case: Provided, further, That nothing contained in this section shall be understood or construed to permit
 the assignment, encumbrance, or subletting of lands leased under this Act, or under any previous Act, to
persons, corporations, or associations which under this Act, are not authorized to lease public lands.

Finally, section 37 of Administrative Order No. 14 of the Secretary of Agriculture and Natural Resources issued
in August 1937, prohibits a transfer or sublease unless first approved by the Director of Lands and under such
terms and conditions as he may prescribe. Thus, it states:

When a transfer or sub-lease of area and improvement may be allowed. If the permittee or lessee had,
unless otherwise specifically provided, held the permit or lease and actually operated and made
improvements on the area for at least one year, he/she may request permission to sub-lease or transfer
the area and improvements under certain conditions.

(a) Transfer subject to approval. A sub-lease or transfer shall only be valid when first approved by
the Director under such terms and conditions as may be prescribed, otherwise it shall be null and void. A
transfer not previously approved or reported shall be considered sufficient cause for the cancellation of
the permit or lease and forfeiture of the bond and for granting the area to a qualified applicant or bidder,
as provided in subsection (r) of Sec. 33 of this Order.

Since the partnership had for its object the division into two equal parts of the fishpond between the appellees
and the appellant after it shall have been awarded to the latter, and therefore it envisaged the unauthorized
transfer of one-half thereof to parties other than the applicant Casteel, it was dissolved by the approval of his
application and the award to him of the fishpond. The approval was an event which made it unlawful for the
business of the partnership to be carried on or for the members to carry it on in partnership.

The appellees, however, argue that in approving the appellant's application, the Secretary of Agriculture and
Natural Resources likewise recognized and/or confirmed their property right to one-half of the fishpond by
virtue of the contract of service, exhibit A. But the untenability of this argument would readily surface if one
were to consider that the Secretary of Agriculture and Natural Resources did not do so for the simple reason that
he does not possess the authority to violate the aforementioned prohibitory laws nor to exempt anyone from
their operation.

However, assuming in gratia argumenti that the approval of Casteel's application, coupled with the foregoing
prohibitory laws, was not enough to cause the dissolution ipso facto of their partnership, succeeding events
reveal the intent of both parties to terminate the partnership by refusing to share the fishpond with the other.

On December 27, 1950 Casteel wrote17 the appellee Inocencia Deluao, expressing his desire to divide the
fishpond so that he could administer his own share, such division to be subject to the approval of the Secretary
of Agriculture and Natural Resources. By letter dated December 29, 1950,18 the appellee Felipe Deluao
demurred to Casteel's proposition because there were allegedly no appropriate grounds to support the same and,
moreover, the conflict over the fishpond had not been finally resolved.

The appellant wrote on January 4, 1951 a last letter19 to the appellee Felipe Deluao wherein the former
expressed his determination to administer the fishpond himself because the decision of the Government was in
his favor and the only reason why administration had been granted to the Deluaos was because he was indebted
to them. In the same letter, the appellant forbade Felipe Deluao from sending the couple's encargado, Jesus
Donesa, to the fishpond. In reply thereto, Felipe Deluao wrote a letter20 dated January 5, 1951 in which he
reiterated his refusal to grant the administration of the fishpond to the appellant, stating as a ground his belief
"that only the competent agencies of the government are in a better position to render any equitable arrangement
relative to the present case; hence, any action we may privately take may not meet the procedure of legal order."
Inasmuch as the erstwhile partners articulated in the aforecited letters their respective resolutions not to share
the fishpond with each other in direct violation of the undertaking for which they have established their
partnership each must be deemed to have expressly withdrawn from the partnership, thereby causing its
dissolution pursuant to art. 1830(2) of the Civil Code which provides, inter alia, that dissolution is caused "by
the express will of any partner at any time."

In this jurisdiction, the Secretary of Agriculture and Natural Resources possesses executive and administrative
powers with regard to the survey, classification, lease, sale or any other form of concession or disposition and
management of the lands of the public domain, and, more specifically, with regard to the grant or withholding
of licenses, permits, leases and contracts over portions of the public domain to be utilized as fishponds.21, Thus,
we held in Pajo, et al. vs. Ago, et al. (L-15414, June 30, 1960), and reiterated in Ganitano vs. Secretary of
Agriculture and Natural Resources, et al.
(L-21167, March 31, 1966), that

... [T]he powers granted to the Secretary of Agriculture and Commerce (Natural Resources) by law
regarding the disposition of public lands such as granting of licenses, permits, leases, and contracts, or
approving, rejecting, reinstating, or cancelling applications, or deciding conflicting applications, are all
executive and administrative in nature. It is a well-recognized principle that purely administrative and
discretionary functions may not be interfered with by the courts (Coloso v. Board of Accountancy, G.R.
No. L-5750, April 20, 1953). In general, courts have no supervising power over the proceedings and
action of the administrative departments of the government. This is generally true with respect to acts
involving the exercise of judgment or discretion, and findings of fact. (54 Am. Jur. 558-559) Findings of
fact by an administrative board or official, following a hearing, are binding upon the courts and will not
be disturbed except where the board or official has gone beyond his statutory authority, exercised
unconstitutional powers or clearly acted arbitrarily and without regard to his duty or with grave abuse of
discretion... (emphasis supplied)

In the case at bar, the Secretary of Agriculture and Natural Resources gave due course to the appellant's
fishpond application 1717 and awarded to him the possession of the area in question. In view of the finality of
the Secretary's decision in DANR Cases 353 and 353-B, and considering the absence of any proof that the said
official exceeded his statutory authority, exercised unconstitutional powers, or acted with arbitrariness and in
disregard of his duty, or with grave abuse of discretion, we can do no less than respect and maintain unfettered
his official acts in the premises. It is a salutary rule that the judicial department should not dictate to the
executive department what to do with regard to the administration and disposition of the public domain which
the law has entrusted to its care and administration. Indeed, courts cannot superimpose their discretion on that
of the land department and compel the latter to do an act which involves the exercise of judgment and
discretion.22

Therefore, with the view that we take of this case, and even assuming that the injunction was properly issued
because present all the requisite grounds for its issuance, its continuation, and, worse, its declaration as
permanent, was improper in the face of the knowledge later acquired by the lower court that it was the
appellant's application over the fishpond which was given due course. After the Secretary of Agriculture and
Natural Resources approved the appellant's application, he became to all intents and purposes the legal
permittee of the area with the corresponding right to possess, occupy and enjoy the same. Consequently, the
lower court erred in issuing the preliminary mandatory injunction. We cannot overemphasize that an injunction
should not be granted to take property out of the possession and control of one party and place it in the hands of
another whose title has not been clearly established by law.23
However, pursuant to our holding that there was a partnership between the parties for the exploitation of the
fishpond before it was awarded to Casteel, this case should be remanded to the lower court for the reception of
evidence relative to an accounting from November 25, 1949 to September 15, 1950, in order for the court to
determine (a) the profits realized by the partnership, (b) the share (in the profits) of Casteel as industrial partner,
(e) the share (in the profits) of Deluao as capitalist partner, and (d) whether the amounts totalling about P27,000
advanced by Deluao to Casteel for the development and improvement of the fishpond have already been
liquidated. Besides, since the appellee Inocencia Deluao continued in possession and enjoyment of the fishpond
even after it was awarded to Casteel, she did so no longer in the concept of a capitalist partner but merely as
creditor of the appellant, and therefore, she must likewise submit in the lower court an accounting of the
proceeds of the sales of all the fishes harvested from the fishpond from September 16, 1950 until Casteel shall
have been finally given the possession and enjoyment of the same. In the event that the appellee Deluao has
received more than her lawful credit of P27,000 (or whatever amounts have been advanced to Casteel), plus 6%
interest thereon per annum, then she should reimburse the excess to the appellant.

ACCORDINGLY, the judgment of the lower court is set aside. Another judgment is hereby rendered: (1)
dissolving the injunction issued against the appellant, (2) placing the latter back in possession of the fishpond in
litigation, and (3) remanding this case to the court of origin for the reception of evidence relative to the
accounting that the parties must perforce render in the premises, at the termination of which the court shall
render judgment accordingly. The appellant's counterclaim is dismissed. No pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Fernando and Capistrano, JJ., concur.