CORP VS. BUSINESSORG INDEMNITY.

— The petitioner’s argument that the

respondents had no interest in the reinsurance contract as
175 SCRA 668 –Business Organization – Corporation this is strictly between the petitioner as insured and the
Law – When De Facto Partnership Does Not Exist reinsuring company pursuant to Section 91 (should be
Jacob Lim was the owner of Southern Air Lines, a single Section 98) of the Insurance Code has no basis. Under the
proprietorship. In 1965, Lim convinced Constancio provisions of Article 2207 of the Civil Code if a property is
Maglana, Modesto Cervantes, Francisco Cervantes, and insured and the owner receives the indemnity from the
Border Machinery and Heavy Equipment Company insurer, the insurer is deemed subrogated to the rights of
(BORMAHECO) to contribute funds and to buy two the insured against the wrongdoer and if the amount paid
aircrafts which would form part a corporation which will by the insurer does not fully cover the loss, then the
be the expansion of Southern Air Lines. Maglana et al aggrieved party is the one entitled to recover the
then contributed and delivered money to Lim. deficiency. Evidently, under this legal provision, the real
party in interest with regard to the portion of the
But instead of using the money given to him to pay in indemnity paid is the insurer and not the insured. (PAL v.
full the aircrafts, Lim, without the knowledge of Heald Lumber Co., 101 Phil. 1031; Manila Mahogany
Maglana et al, made an agreement with Pioneer Manufacturing Corporation v. Court of Appeals, 154 SCRA
Insurance for the latter to insure the two aircrafts which 650 [1987]
were brought in installment from Japan Domestic
Airlines (JDA) using said aircrafts as security. So when
Lim defaulted from paying JDA, the two aircrafts were 2. REMEDIAL LAW; ACTIONS; PARTIES; ONLY THE
foreclosed by Pioneer Insurance. REISURER OF THE INSURER ACTING AS AN ATTORNEY-IN-
It was established that no corporation was formally FACT OF THE REINSURER CAN COLLECT AGAINST THE
formed between Lim and Maglana et al. INDEMNITY AGREEMENT. — The appellate court did not
commit a reversible error in dismissing the petitioner’s
ISSUE: Whether or not Maglana et al must share in the complaint as against the respondents for the reason that
loss as general partners. the petitioner was not the real party in interest in the
HELD: No. There was no de facto partnership. complaint and, therefore, has no cause of action against
Ordinarily, when co-investors agreed to do business the respondents.
through a corporation but failed to incorporate, a de
facto partnership would have been formed, and as
such, all must share in the losses and/or gains of the 3. ID.; EVIDENCE; FINDINGS OF FACT OF THE TRIAL
venture in proportion to their contribution. But in this COURT UPHELD ON APPEAL. — We find the trial court’s
case, it was shown that Lim did not have the intent to findings on the matter replete with evidence to
form a corporation with Maglana et al. This can be substantiate its finding that the counter-indemnitors are
inferred from acts of unilaterally taking out a surety not liable to the petitioner. Pioneer, having foreclosed the
from Pioneer Insurance and not using the funds he got chattel mortgage on the planes and spare parts, no longer
from Maglana et al. The record shows that Lim was has any further action against the defendants as
acting on his own and not in behalf of his other would- indemnitors to recover any unpaid balance of the price.
be incorporators in transacting the sale of the airplanes The indemnity agreement was ipso jure extinguished
and spare parts. upon the foreclosure of the chattel mortgage. These
defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make
THIRD DIVISION payments to the latter. (Articles 2067 and 2080, New Civil
Code)

[G.R. No. 84197. July 28, 1989.]

PIONEER INSURANCE & SURETY CORPORATION,
Petitioner, v. THE HON. COURT OF APPEALS, BORDER
MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO),
CONSTANCIO M. MAGLANA and JACOB S. LIM,
Respondents.
[G.R. No. 84157. July 28, 1989.]
4. CIVIL LAW; CONTRACTS; A DE FACTO
PARTNERSHIP IS CREATED WHERE PERSONS ASSOCIATE
THEMSELVES BUT FAILED TO FORM A CORPORATION. —
Where persons associate themselves together under
articles to purchase property to carry on a business, and
their organization is so defective as to come short of
creating a corporation within the statute, they become in
legal effect partners inter se, and their rights as members
of the company to the property acquired by the company
will be recognized (Smith v. Schoodoc Pond Packing Co.,
84 A 268, 109 Me. 555; Whipple v. Parker, 29 Mich. 369).

JACOB S. LIM, Petitioner, v. COURT OF APPEALS,

PIONEER INSURANCE AND SURETY CORPORATION, 5. ID.; ID.; ID.; DOCTRINE NOT APPLICABLE WHERE
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC., THERE WAS REALLY NO INVENTION TO FORM A
FRANCISCO and MODESTO CERVANTES and CORPORATION; PARTIES NEED NOT SHARE IN LOSSES;
CONSTANCIO MAGLANA, Respondents. CASE AT BAR. — The petitioner never had the intention to
form a corporation with the respondents despite his
representations to them. This gives credence to the cross-
Eriberto D. Ignacio for Pioneer Insurance & Surety claims of the respondents to the effect that they were
Corporation. induced and lured by the petitioner to make contributions
to a proposed corporation which was never formed
because the petitioner reneged on their agreement.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim. Applying the principles of law earlier cited to the facts of
the case, necessarily, no de facto partnership was created
among the parties which would entitle the petitioner to a
Renato J. Robles for BORMAHECO, Inc. and Cervanteses. reimbursement of the supposed losses of the proposed
corporation. The record shows that the petitioner was
acting on his own and not in behalf of his other would-be
Leonardo B. Lucena for Constancio Maglana. incorporators in transacting the sale of the airplanes and
spare parts.

SYLLABUS
DECISION

1. CIVIL LAW; DAMAGES; INSURANCE; AN INSURER

IS SURROGATED TO THE RIGHTS OF THE INSURED GUTIERREZ, JR., J.:
AGAINST THE WRONGDOER UPON RECEIPT OF THE
The subject matter of these consolidated petitions is
the decision of the Court of Appeals in CA-G.R. CV No.
66195 which modified the decision of the then Court of
First Instance of Manila in Civil Case No. 66135. The
plaintiff’s complaint (petitioner in G.R. No. 84197)
against all defendants (respondents in G.R. No. 84197)
was dismissed but in all other respects the trial court’s
decision was affirmed.chanrobles law library : red
The dispositive portion of the trial court’s decision reads installments. One DC-3 Aircraft with Registry No. PIC-718,
as follows:jgc:chanrobles.com.ph
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was
engaged in the airline business as owner-operator of
Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines
(JDA) and Lim entered into and executed a sales contract
(Exhibit A) for the sale and purchase of two (2) DC-3A
Type aircrafts and one (1) set of necessary spare parts for
the total agreed price of US $109,000.00 to be paid in
arrived in Manila on June 7, 1965 while the other aircraft,
arrived in Manila on July 18, 1965.

"WHEREFORE, judgment is rendered against defendant

Jacob S. Lim requiring him to pay plaintiff the amount of
P311,056.02, with interest at the rate of 12% per
annum compounded monthly; plus 15% of the amount
awarded to plaintiff as attorney’s fees from July 2, 1966,
until full payment is made; plus P70,000.00 moral and
exemplary damages.
On May 22, 1965, Pioneer Insurance and Surety
Corporation (Pioneer, petitioner in G.R. No. 84197) as
surety executed and issued its Surety Bond No. 6639
(Exhibit C) in favor of JDA, in behalf of its principal, Lim,
for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment

"It is found in the records that the cross party plaintiffs
Company, Inc. (Bormaheco), Francisco and Modesto
incurred additional miscellaneous expenses aside from
Cervantes (Cervanteses) and Constancio Maglana
P151,000.00, making a total of P184,878.74. Defendant
(respondents in both petitions) contributed some funds
Jacob S. Lim is further required to pay cross party
used in the purchase of the above aircrafts and spare
plaintiff, Bormaheco, the Cervanteses one-half andparts. The funds were supposed to be their contributions
Maglana the other half, the amount of P184,878.74 with
to a new corporation proposed by Lim to expand his
interest from the filing of the cross-complaints until the
airline business. They executed two (2) separate
amount is fully paid; plus moral and exemplary indemnity agreements (Exhibits D-1 and D-2) in favor of
damages in the amount of P184,878.84 with interestPioneer, one signed by Maglana and the other jointly
from the filing of the cross-complaints until the amount
signed by Lim for SAL, Bormaheco and the Cervanteses.
is fully paid; plus moral and exemplary damages in the
The indemnity agreements stipulated that the indemnitors
amount of P50,000.00 for each of the two Cervanteses.
principally agree and bind themselves jointly and
severally to indemnify and hold and save harmless
Pioneer from and against any/all damages, losses, costs,
"Furthermore, he is required to pay P20,000.00 to damages, taxes, penalties, charges and expenses of
Bormaheco and the Cervanteses, and another whatever kind and nature which Pioneer may incur in
P20,000.00 to Constancio B. Maglana as attorney’s consequence of having become surety upon the
fees. bond/note and to pay, reimburse and make good to
Pioneer, its successors and assigns, all sums and amounts
of money which it or its representatives should or may
x x x pay or cause to be paid or become liable to pay on them
of whatever kind and nature.

"WHEREFORE, in view of all above, the complaint of On June 10, 1965, Lim doing business under the name
plaintiff Pioneer against defendants Bormaheco, the and style of SAL executed in favor of Pioneer as deed of
Cervanteses and Constancio B. Maglana, is dismissed. chattel mortgage as security for the latter’s suretyship in
Instead, plaintiff is required to indemnify the favor of the former. It was stipulated therein that Lim
defendants Bormaheco and the Cervanteses the transfer and convey to the surety the two aircrafts. The
amount of P20,000.00 as attorney’s fees and the deed (Exhibit D) was duly registered with the Office of the
amount of P4,379.21, per year from 1966 with legal Register of Deeds of the City of Manila and with the Civil
rate of interest up to the time it is paid. Aeronautics Administration pursuant to the Chattel
Mortgage Law and the Civil Aeronautics Law (Republic Act
No. 776), respectively.
"Furthermore, the plaintiff is required to pay Constancio
B. Maglana the amount of P20,000.00 as attorney’s fees
and costs. Lim defaulted on his subsequent installment payments
prompting JDA to request payments from the surety.
Pioneer paid a total sum of P298,626.12.
"No moral or exemplary damages is awarded against
plaintiff for this action was filed in good faith. The fact
that the properties of the Bormaheco and the Pioneer then filed a petition for the extrajudicial
Cervanteses were attached and that they were required foreclosure of the said chattel mortgage before the Sheriff
to file a counterbond in order to dissolve the of Davao City. The Cervanteses and Maglana, however,
attachment, is not an act of bad faith. When a man tries filed a third party claim alleging that they are co-owners
to protect his rights, he should not be saddled with of the aircrafts.
moral or exemplary damages. Furthermore, the rights
exercised were provided for in the Rules of Court, and it
was the court that ordered it, in the exercise of its On July 19, 1966, Pioneer filed an action for judicial
discretion. foreclosure with an application for a writ of preliminary
attachment against Lim and respondents, the
Cervanteses, Bormaheco and
"No damage is decided against Malayan Insurance Maglana.chanroblesvirtualawlibrary
Company, Inc., the third-party defendant, for it only
secured the attachment prayed for by the plaintiff
Pioneer. If an insurance company would be liable for In their Answers, Maglana, Bormaheco and the
damages in performing an act which is clearly within its Cervanteses filed cross-claims against Lim alleging that
power and which is the reason for its being, then they were not privies to the contracts signed by Lim and,
nobody would engage in the insurance business. No by way of counterclaim, sought for damages for being
further claim or counter-claim for or against anybody is exposed to litigation and for recovery of the sums of
declared by this Court." (Rollo — G.R. No. 24197, pp. money they advanced to Lim for the purchase of the
15-16) aircrafts in question.

After trial on the merits, a decision was rendered
holding Lim liable to pay Pioneer but dismissed
Pioneer’s complaint against all other defendants.
As stated earlier, the appellate court modified the trial
court’s decision in that the plaintiffs complaint against
all the defendants was dismissed. In all other respects
the trial court’s decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation
avers that:chanrob1es virtual 1aw library
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED
WHEN IT DISMISSED THE APPEAL OF PETITIONER ON
THE SOLE GROUND THAT PETITIONER HAD ALREADY
COLLECTED THE PROCEEDS OF THE REINSURANCE ON
ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS
IN THE TRIAL COURT. (Rollo — G.R. No. 84197, p. 10)
The records belie the petitioner’s contention that the
The petitioner questions the following findings of the issue on the reinsurance money was never raised by the
appellate court:jgc:chanrobles.com.ph parties.
"We find no merit in plaintiffs appeal. It is undisputed
that plaintiff Pioneer had reinsured its risk of liability
under the surety bond in favor of JDA and subsequently
collected the proceeds of such reinsurance in the sum
of P295,000.00. Defendants’ alleged obligation to
Pioneer amounts to P295,000.00, hence, plaintiff’s
instant action for the recovery of the amount of
P298,666.28 from defendants will no longer prosper.
Plaintiff Pioneer is not the real party in interest to
institute the instant action as it does not stand to be
benefited or injured by the judgment.
"Plaintiff Pioneer’s contention that it is representing the
reinsurer to recover the amount from defendants,
hence, it instituted the action is utterly devoid of merit.
Plaintiff did not even present any evidence that it is the
attorney-in-fact of the reinsurance company, authorized
to institute an action for and in behalf of the latter. To
qualify a person to be a real party in interest in whose
name an action must be prosecuted, he must appear to
be the present real owner of the right sought to be
enforced (Moran, Vol. I, Comments on the Rules of
Court, 1979 ed., p. 155.). It has been held that the real
party in interest is the party who would be benefited or
injured by the judgment or the party entitled to the
avails of the suit (Salonga v. Warner Barnes & Co., Ltd.,
88 Phil. 125, 131). By real party in interest is meant a
present substantial interest as distinguished from a
mere expectancy or a future, contingent, subordinate or
consequential interest (Garcia v. David, 67 Phil. 27;
Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600,
385 III, 414; Flowers v. Germana, 1 NW 2d 424; Weber
v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
"Based on the foregoing premises, plaintiff Pioneer
cannot be considered as the real party in interest as it
has already been paid by the reinsurer the sum of
P295,000.00 — the bulk of defendants’ alleged
obligation to Pioneer.
"In addition to the said proceeds of the reinsurance
received by plaintiff Pioneer from its reinsurer, the
former was able to foreclose extra-judicially one of the
subject airplanes and its spare engine, realizing the
total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00, to
the proceeds of the reinsurance amounting to
P295,000.00, it is patent that plaintiff has been
overpaid in the amount of P33,383.72 considering that
the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from
defendants the amount in excess of P298,666.28 would
be tantamount to unjust enrichment as it has already
been paid by the reinsurance company of the amount
plaintiff has paid to JDA as surety of defendant Lim vis-a-
vis defendant Lim’s liability to JDA. Well settled is the rule
that no person should unjustly enrich himself at the
expense of another (Article 22, New Civil Code)." (Rollo-
84197, pp. 24-25).
The petitioner contends that — (1) it is at a loss where
respondent court based its finding that petitioner was
paid by its reinsurer in the aforesaid amount, as this
matter has never been raised by any of the parties herein
both in their answers in the court below and in their
respective briefs with respondent court; (Rollo, p. 11) (2)
even assuming hypothetically that it was paid by its
reinsurer, still none of the respondents had any interest in
the matter since the reinsurance is strictly between the
petitioner and the re-insurer pursuant to section 91 of the
Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from
respondents Bormaheco and Maglana; and (4) the
principle of unjust enrichment is not applicable
considering that whatever amount he would recover from
the co-indemnitor will be paid to the reinsurer.
A cursory reading of the trial court’s lengthy decision
shows that two of the issues threshed out
were:chanrob1es virtual 1aw library
x x x
"1. Has Pioneer a cause of action against defendants
with respect to so much of its obligations to JDA as has
been paid with reinsurance money?
2. If the answer to the preceding question is in the
negative, has Pioneer still any claim against defendants,
considering the amount it has realized from the sale of
the mortgaged properties? (Record on Appeal, p. 359,
Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the
following findings:jgc:chanrobles.com.ph
"It appearing that Pioneer reinsured its risk of liability
under the surety bond it had executed in favor of JDA,
collected the proceeds of such reinsurance in the sum of
P295,000, and paid with the said amount the bulk of its
alleged liability to JDA under the said surety bond, it is
plain that on this score it no longer has any right to collect
to the extent of the said amount.
On the question of why it is Pioneer, instead of the
reinsurance (sic), that is suing defendants for the amount
paid to it by the reinsurers, notwithstanding that the
cause of action pertains to the latter, Pioneer says: ‘The
reinsurers opted instead that the Pioneer Insurance &
Surety Corporation shall pursue alone the case.’ ‘. . . .
Pioneer Insurance & Surety Corporation is representing
the reinsurers to recover the amount.’ In other words,
insofar as the amount paid to it by the reinsurers Pioneer
is suing defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication
in the complaint that Pioneer is suing as attorney-in-fact
of the reinsurers for any amount. Lastly, and most
important of all, Pioneer has no right to institute and
maintain in its own name an action for the benefit of the
reinsurers. It is well-settled that an action brought by an
attorney-in-fact in his own name instead of that of the
principal will not prosper, and this is so even where the said article that the insurer is deemed subrogated to the
name of the principal is disclosed in the complaint. rights of the insured against the wrongdoer and if the
amount paid by the insurer does not fully cover the loss,
then the aggrieved party is the one entitled to recover the
"‘Section 2 of Rule 3 of the Old Rules of Court provides deficiency. Evidently, under this legal provision, the real
that ‘Every action must be prosecuted in the name of party in interest with regard to the portion of the
the real party in interest.’ This provision is mandatory. indemnity paid is the insurer and not the insured."
The real party in interest is the party who would be (Emphasis supplied).
benefited or injured by the judgment or is the party
entitled to the avails of the suit.
It is clear from the records that Pioneer sued in its own
name and not as an attorney-in-fact of the reinsurer.
"‘This Court has held in various cases that an attorney-
in-fact is not a real party in interest, that there is no law
permitting an action to be brought by an attorney-in- Accordingly, the appellate court did not commit a
fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; reversible error in dismissing the petitioner’s complaint as
Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; against the respondents for the reason that the petitioner
Filipinas Industrial Corporation v. San Diego G.R. No. L- was not the real party in interest in the complaint and,
22347, 1968, 23 SCRA 706, 710-714.’" therefore, has no cause of action against the respondents.

"The total amount paid by Pioneer to JDA is
P299,666.29. Since Pioneer has collected P295,000.00
from the reinsurers, the uninsured portion of what it
paid to JDA is the difference between the two amounts,
or P3,666.28. This is the amount for which Pioneer may
sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the
amount realized from the sale of the mortgaged
chattels are P35,000.00 for one of the airplanes and
P2,050.00 for a spare engine, or a total of P37,050.00,
Pioneer is still overpaid by P33,383.72. Therefore,
Pioneer has no more claim against defendants." ‘
(Record on Appeal, pp. 360-363).
Nevertheless, the petitioner argues that the appeal as
regards the counter indemnitors should not have been
dismissed on the premise that the evidence on record
shows that it is entitled to recover from the counter
indemnitors. It does not, however, cite any grounds
except its allegation that respondent "Maglana’s defense
and evidence are certainly incredible" (p. 12, Rollo) to
back up its contention.
On the other hand, we find the trial court’s findings on the
matter replete with evidence to substantiate its finding
that the counter-indemnitors are not liable to the
petitioner. The trial court stated:jgc:chanrobles.com.ph

The payment to the petitioner made by the reinsurers

was not disputed in the appellate court. Considering
this admitted payment, the only issue that cropped up
was the effect of payment made by the reinsurers to
the petitioner. Therefore, the petitioner’s argument that
the respondents had no interest in the reinsurance
contract as this is strictly between the petitioner as
insured and the reinsuring company pursuant to
Section 91 (should be Section 98) of the Insurance Code
has no basis.
"In general a reinsurer, on payment of a loss acquires
the same rights by subrogation as are acquired in
similar cases where the original insurer pays a loss
(Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La.,
46 F 2nd 925).
"Apart from the foregoing proposition, the indemnity
agreement ceased to be valid and effective after the
execution of the chattel mortgage.
"Testimonies of defendants Francisco Cervantes and
Modesto Cervantes.
"Pioneer Insurance, knowing the value of the aircrafts and
the spare parts involved, agreed to issue the bond
provided that the same would be mortgaged to it, but this
was not possible because the planes were still in Japan
and could not be mortgaged here in the Philippines. As
soon as the aircrafts were brought to the Philippines, they
would be mortgaged to Pioneer Insurance to cover the
bond, and this indemnity agreement would be cancelled.

"The rules of practice in actions on original insurance

policies are in general applicable to actions or contracts "The following is averred under oath by Pioneer in the
of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire original complaint:jgc:chanrobles.com.ph
Ins. Co., 55 S.E. 330, 126 GA. 380, 7 Ann. Con. 1134)."

"‘The various conflicting claims over the mortgaged

Hence the applicable law is Article 2207 of the new Civil properties have impaired and rendered insufficient the
Code, to wit:jgc:chanrobles.com.ph security under the chattel mortgage and there is thus no
other sufficient security for the claim sought to be
enforced by this action.’"
"Art. 2207. If the plaintiffs property has been
insured, and he has received indemnity from the
insurance company for the injury or loss arising out of "This is judicial admission and aside from the chattel
the wrong or breach of contract complained of, the mortgage there is no other security for the claim sought
insurance company shall be subrogated to the rights of to be enforced by this action, which necessarily means
the insured against the wrongdoer or the person who that the indemnity agreement had ceased to have any
has violated the contract. If the amount paid by the force and effect at the time this action was instituted. Sec
insurance company does not fully cover the injury or 2, Rule 129, Revised Rules of Court.
loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or
injury."cralaw virtua1aw library "Prescinding from the foregoing, Pioneer, having
foreclosed the chattel mortgage on the planes and spare
parts, no longer has any further action against the
Interpreting the aforesaid provision, we ruled in the defendants as indemnitors to recover any unpaid balance
case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 of the price. The indemnity agreement was ipso jure
Phil. 1031 [1957]) which we subsequently applied in extinguished upon the foreclosure of the chattel
Manila Mahogany Manufacturing Corporation v. Court of mortgage. These defendants, as indemnitors, would be
Appeals (154 SCRA 650 [1987]):red:chanrobles.com.ph entitled to be subrogated to the right of Pioneer should
they make payments to the latter. Articles 2067 and 2080
of the New Civil Code of the Philippines.
"Note that if a property is insured and the owner
receives the indemnity from the insurer, it is provided in
Independently of the preceding proposition Pioneer’s thereby also extinguished. Applicable by analogy are the
election of the remedy of foreclosure precludes any rulings of the Supreme Court in the case of Kabankalan
further action to recover any unpaid balance of the Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of
price. Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

SAL or Lim, having failed to pay the second to the eight
and last installments to JDA and Pioneer as surety
having made of the payments to JDA, the alternative
remedies open to Pioneer were as provided in Article
1484 of the New Civil Code, known as the Recto Law.
"‘Art. 2079. An extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes
the guaranty. The mere failure on the part of the creditor
to demand payment after the debt has become due does
not of itself constitute any extension of time referred to
herein, (New Civil Code).’"

Pioneer exercised the remedy of foreclosure of the

chattel mortgage both by extrajudicial foreclosure and "Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. Vl, pp. 562-
the instant suit. Such being the case, as provided by 563, M.F. Stevenson & Co., Ltd., v. Climacom Et. Al. (C.A.)
the aforementioned provisions, Pioneer ‘shall have no 36 O.G. 1571.
further action against the purchaser to recover any
unpaid balance and any agreement to the contrary is
void.’ Cruz, Et. Al. v. Filipinas Investment & Finance "Pioneer’s liability as surety to JDA had already prescribed
Corp. No. L-24772, May 27, 1968, 23 SCRA 791, 795-6. when Pioneer paid the same. Consequently, Pioneer has
no more cause of action to recover from these
defendants, as supposed indemnitors what it has paid to
The operation of the foregoing provision cannot be JDA. By virtue of an express stipulation in the surety bond,
escaped from through the contention that Pioneer is not the failure of JDA to present its claim to Pioneer within ten
the vendor but JDA. The reason is that Pioneer is days from default of Lim or SAL on every installment,
actually exercising the rights of JDA as vendor, having released Pioneer from liability from the claim.
subrogated it in such rights. Nor may the application of
the provision be validly opposed on the ground that
these defendants and defendant Maglana are not the "Therefore, Pioneer is not entitled to exact reimbursement
vendee but indemnitors. Pascual, Et. Al. v. Universal from these defendants thru the indemnity.
Motors Corporation, G.R. No. L-27862, Nov. 20, 1974, 61
SCRA 124.
"‘Art. 1318. Payment by a solidary debtor shall not
entitle him to reimbursement from his co-debtors if such
The restructuring of the obligations of SAL or Lim, thru payment is made after the obligation has prescribed or
the change of their maturity dates discharged these became illegal.’"
defendants from any liability as alleged indemnitors.
The change of the maturity dates of the obligations of
Lim, or SAL, extinguished the original obligations thru "These defendants are entitled to recover damages and
novations, thus discharging the indemnitors. attorney’s fees from Pioneer and its surety by reason of
the filing of the instant case against them and the
attachment and garnishment of their properties. The
"‘The principal hereof shall be paid in eight equal instant action is clearly unfounded insofar as plaintiff
successive three months interval installments, the first drags these defendants and defendant Maglana." (Record
of which shall be due and payable 25 August 1965, the on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
remainder of which . . . shall be due and payable on the
26th day . . . of each succeeding three months and the
last of which shall be due and payable 26th May 1967.’" We find no cogent reason to reverse or modify these
findings.

"However, at the trial of this case, Pioneer produced a

memorandum executed by SAL, or Lim and JDA, Hence, it is our conclusion that the petition in G.R. No.
modifying the maturity dates of the obligations, as 84197 is not meritorious.
follows:jgc:chanrobles.com.ph

We now discuss the merits of G.R. No. 84157.

"‘The principal hereof shall be paid in eight equal
successive three month interval installments the first of
which shall be due and payable 4 September 1965, the Petitioner Jacob S. Lim poses the following
remainder of which . . . shall be due and payable on the issues:jgc:chanrobles.com.ph
4th day . . . of each succeeding months and the last of
which shall be due and payable 4th June 1967.’"
"1. What legal rules govern the relationship among
co-investors whose agreement was to do business
"Not only that, Pioneer also produced eight purported through the corporate vehicle but who failed to
promissory notes bearing maturity dates different from incorporate the entity in which they had chosen to invest?
that fixed in the aforesaid memorandum; the due date How are the losses to be treated in situations where their
of the first installment appears as October 15, 1965, contributions to the intended ‘corporation’ were invested
and those of the rest of the installments, the 15th of not through the corporate form? This Petition presents
each succeeding three months, that of the last these fundamental questions which we believe were
installment being July 15, 1967. resolved erroneously by the Court of Appeals (’CA’)."
(Rollo, p. 6).

"These restructuring of the obligations with regard to

their maturity dates, effected twice, were done without
the knowledge, much less, would have it believed that
these defendants Maglana (sic). Pioneer’s official
Numeriano Carbonel, would have it believed that these
defendants and defendant Maglana knew of and
consented to the modification of the obligations. But if
that were so, there would have been the corresponding
documents in the form of a written notice to as well as
written conformity of these defendants, and there are
no such document. The consequence of this was the
extinguishment of the obligations and of the surety
bond secured by the indemnity agreement which was
These questions are premised on the petitioner’s theory
that as a result of the failure of respondents Bormaheco,
Spouses Cervantes, Constancio Maglana and petitioner
Lim to incorporate, a de facto partnership among them
was created, and that as a consequence of such
relationship all must share in the losses and/or gains of
the venture in proportion to their contribution. The
petitioner, therefore, questions the appellate court’s
findings ordering him to reimburse certain amounts given
by the respondents to the petitioner as their contributions
to the intended corporation, to wit:jgc:chanrobles.com.ph
"However, defendant Lim should be held liable to pay
his co-defendants’ cross-claims in the total amount of
P184,878.74 as correctly found by the trial court, with
the interest from the filing of the cross-claims until the
amount is fully paid. Defendants Lim should pay one-
half of the said amount to Bormaheco and the
Cervanteses and the other one-half to defendant
Maglana. It is established in the records that defendant
Lim had duly received the amount of P151,000.00 from
defendants Bormaheco and Maglana representing the
latter’s participation in the ownership of the subject
airplanes and spare parts (Exhibit 58). In addition, the
cross-party plaintiffs incurred additional expenses,
hence, the total sum of P184,878.74."cralaw virtua1aw
library
We first state the principles.
"While it has been held that as between themselves the
rights of the stockholders in a defectively incorporated
association should be governed by the supposed
charter and the laws of the state relating thereto and
not by the rules governing partners (Cannon v. Brush
Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it
is ordinarily held that persons who attempt, but fail, to
form a corporation and who carry on business under the
corporate name occupy a position of partners inter se
(Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas.
1913A 1065). Thus, where persons associate
themselves together under articles to purchase
property to carry on a business, and their organization
is so defective as to come short of creating a
corporation within the statute, they become in legal
effect partners inter se, and their rights as members of
the company to the property acquired by the company
will be recognized (Smith v. Schoodoc Pond Packing Co.,
84 A 268, 109 Me. 555; Whipple v. Parker, 29 Mich.
369). So, where certain persons associated themselves
as a corporation for the development of land for
irrigation purposes, and each conveyed land to the
corporation, and two of them contracted to pay a third
the difference in the proportionate value of the land
conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the
associates in an action between them for an
accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds distributed
among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446).
However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the
relation of partners, as between themselves, when their
purpose is that no partnership shall exist (London Assur.
Corp. v. Drennen, Minn., 6 S. Ct. 442, 116 U.S. 461, 472,
29 L.Ed. 688), and it should be implied only when
necessary to do justice between the parties; thus, one
who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed
does not become a partner with other subscribers who
engage in business under the name of the pretended
corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution
(Ward v. Brigham, 127 Mass. 24). A partnership relation
between certain stockholders and other stockholders,
who were also directors, will not be implied in the
absence of an agreement, so as to make the former
liable to contribute for payment of debts illegally
contracted by the latter (Heald v. Owen, 44 N.W. 210,
79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464).
(Emphasis supplied).
In the instant case, it is to be noted that the petitioner chanrobles.com:chanrobles.com.ph
was declared non-suited for his failure to appear during
the pre-trial despite notification. In his answer, the
petitioner denied having received any amount from WHEREFORE, the instant petitions are DISMISSED. The
respondents Bormaheco, the Cervanteses and Maglana. questioned decision of the Court of Appeals is AFFIRMED.
The trial court and the appellate court, however, found
through Exhibit 58, that the petitioner received the
amount of P151,000.00 representing the participation SO ORDERED.
of Bormaheco and Atty. Constancio B. Maglana in the
ownership of the subject airplanes and spare parts. The
record shows that defendant Maglana gave P75,000.00
to petitioner Jacob Lim thru the Cervanteses.cralawnad
It is therefore clear that the petitioner never had the
intention to form a corporation with the respondents
despite his representations to them. This gives credence
to the cross-claims of the respondents to the effect that
they were induced and lured by the petitioner to make
contributions to a proposed corporation which was never
formed because the petitioner reneged on their
agreement. Maglana alleged in his cross-
claim:jgc:chanrobles.com.ph
". . . that sometime in early 1965, Jacob Lim proposed to
Francisco Cervantes and Maglana to expand his airline
business. Lim was to procure two DC-3’s from Japan and
secure the necessary certificates of public convenience
and necessity as well as the required permits for the
operation thereof. Maglana sometime in May 1965, gave
Cervantes his share of P75,000.00 for delivery to Lim
which Cervantes did and Lim acknowledged receipt
thereof Cervantes, likewise, delivered his share of the
undertaking. Lim in an undertaking sometime on or about
August 9, 1965, promised to incorporate his airline in
accordance with their agreement and proceeded to
acquire the planes on his own account. Since then up to
the filing of this answer, Lim has refused, failed and still
refuses to set up the corporation or return the money of
Maglana."cralaw virtua1aw library
(Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses
alleged in their answer, counterclaim, cross-claim and
third party complaint:jgc:chanrobles.com.ph
"Sometime in April 1965, defendant Lim lured and
induced the answering defendants to purchase two
airplanes and spare parts from Japan which the latter
considered as their lawful contribution and participation in
the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by
defendant Lim. Down payments were advanced by
defendants Bormaheco and the Cervanteses and
Constancio Maglana (Exh. E-1). Contrary to the agreement
among the defendants, defendant Lim in connivance with
the plaintiff, signed and executed the alleged chattel
mortgage and surety bond agreement in his personal
capacity as the alleged proprietor of the SAL. The
answering defendants learned for the first time of this
trickery and misrepresentation of the other, Jacob Lim,
when the herein plaintiff chattel mortgage (sic) allegedly
executed by defendant Lim, thereby forcing them to file
an adverse claim in the form of third party claim.
Notwithstanding repeated oral demands made by
defendants Bormaheco and Cervanteses, to defendant
Lim, to surrender the possession of the two planes and
their accessories and or return the amount advanced by
the former amounting to an aggregate sum of
P178,997.14 as evidenced by a statement of accounts,
the latter ignored, omitted and refused to comply with
them." (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the
facts of the case, necessarily, no de facto partnership was
created among the parties which would entitle the
petitioner to a reimbursement of the supposed losses of
the proposed corporation. The record shows that the
petitioner was acting on his own and not in behalf of his
other would-be incorporators in transacting the sale of the
airplanes and spare parts.chanrobles virtualawlibrary
 1. That plaintiff is entitled to the writ of preliminary attachment issued by
this Court on September 20, 1990;chanrobles virtual lawlibrary

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

a. P532,045.00 representing [the] unpaid purchase price of the fishing

nets covered by the Agreement plus P68,000.00 representing the unpaid price of
the floats not covered by said Agreement;

b. 12% interest per annum counted from date of plaintiff’s invoices and
computed on their respective amounts as follows:chanrob1es virtual 1aw library

i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80

dated February 9, 1990;

It was established that Lim Tong Lim requested Peter Yao to engage in
commercial fishing with him and one Antonio Chua. The three agreed to
purchase two fishing boats but since they do not have the money they
borrowed from one Jesus Lim (brother of Lim Tong Lim). They again
borrowed money and they agreed to purchase fishing nets and other fishing
equipments. Now, Yao and Chua represented themselves as acting in behalf of
“Ocean Quest Fishing Corporation” (OQFC) they contracted with Philippine
Fishing Gear Industries (PFGI) for the purchase of fishing nets amounting to
more than P500k.
They were however unable to pay PFGI and so they were sued in their own
names because apparently OQFC is a non-existent corporation. Chua admitted
liability and asked for some time to pay. Yao waived his rights. Lim Tong Lim
however argued that he’s not liable because he was not aware that Chua and
Yao represented themselves as a corporation; that the two acted without his
knowledge and consent.
ISSUE: Whether or not Lim Tong Lim is liable.
HELD: Yes. 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. 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.
Lim Tong Lim cannot argue that the principle of corporation by estoppels can
only be imputed to Yao and Chua. Unquestionably, Lim Tong Lim benefited
from the use of the nets found in his boats, the boat which has earlier been
proven to be an asset of the partnership. 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.
THIRD DIVISION
[G.R. No. 136448. November 3, 1999.]
LIM TONG LIM, Petitioner, v. PHILIPPINE FISHING GEAR INDUSTRIES,
INC, Respondent. SO ORDERED." 3chanroblesvirtuallawlibrary
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00
dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorney’s fees, plus P8,500.00 representing
P500.00 per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges
on the nets counted from September 20, 1990 (date of attachment) to September
12, 1991 (date of auction sale);chanroblesvirtuallawlibrary
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.

DECISION The Facts

PANGANIBAN, J.: 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).
A partnership may be deemed to exist among parties who agree to borrow They claimed that they were engaged in a business venture with Petitioner Lim
money to pursue a business and to divide the profits or losses that may arise Tong Lim, who however was not a signatory to the agreement. The total price of
therefrom, even if it is shown that they have not contributed any capital of their the nets amounted to P532,045. Four hundred pieces of floats worth P68,000 were
own to a "common fund." Their contribution may be in the form of credit or also sold to the Corporation. 4
industry, not necessarily cash or fixed assets. Being partners, they are all liable
The buyers, however, failed to pay for the fishing nets and the floats; hence,
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 private respondent filed a collection suit against Chua, Yao and Petitioner Lim
corporation may lie in a person who may not have directly transacted on its 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
behalf, but reaped benefits from that contract.chanroblesvirtuallawlibrary:red
"Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a
The Case 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
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the docked at the Fisheries Port, Navotas, Metro Manila.chanrobles law library : red
November 26, 1998 Decision of the Court of Appeals in CA-GR CV 41477, 1
which disposed as follows:jgc:chanrobles.com.ph 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
"WHEREFORE, [there being] no reversible error in the appealed decision, the to respondent some of the nets which were in his possession. Peter Yao filed an
same is hereby affirmed." 2 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
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
which was affirmed by the CA, reads as follows:jgc:chanrobles.com.ph 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,
"WHEREFORE, the Court rules:chanrob1es virtual 1aw library 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
 six months, with a monthly rental of P37,500 plus 25 percent of the gross catch of
On November 18, 1992, the trial court rendered its Decision, ruling that the boat.
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 We are not persuaded by the arguments of petitioner. The facts as found by the
Respondent. 8 two lower courts clearly showed that there existed a partnership among Chua, Yao
and him, pursuant to Article 1767 of the Civil Code which
The trial court ruled that a partnership among Lim, Chua and Yao existed based provides:jgc:chanrobles.com.ph
(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 "ARTICLE 1767. By the contract of partnership, two or more persons bind
and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a themselves to contribute money, property, or industry to a common fund, with the
declaration of nullity of commercial documents; (b) a reformation of contracts; intention of dividing the profits among themselves." chanrobles lawlibrary :
(c) a declaration of ownership of fishing boats; (d) an injunction and (e) rednad
damages. 10 The Compromise Agreement provided:chanroblesvirtualawlibrary
Specifically, both lower courts ruled that a partnership among the three existed
"a) That the parties plaintiffs & Lim Tong Lim agree to have the four based on the following factual findings: 15
(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 (1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
JL Holdings Corporation and/or Lim Tong Lim; commercial fishing to join him, while Antonio Chua was already Yao’s partner;

"b) If the four (4) vessel[s] and the fishing net will be sold at a higher (2) That after convening for a few times, Lim Chua, and Yao verbally
price than P5,750,000.00 whatever will be the excess will be divided into 3: agreed to acquire two fishing boats, the FB Lourdes and the FB Nelson for the
1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao; sum of P3.35 million;

"c) If the proceeds of the sale the vessels will be less than (3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner
P5,750,000.00 whatever the deficiency shall be shouldered and paid to JL Lim Tong Lim, to finance the venture.
Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao."
11 (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
The trial court noted that the Compromise Agreement was silent as to the Lim only to serve as security for the loan extended by Jesus Lim;
nature of their obligations, but that joint liability could be presumed from the
equal distribution of the profit and loss. 12 (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
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed Chua and Yao;
the RTC.
(6) That because of the "unavailability of funds," Jesus Lim again
Ruling of the Court of Appeals extended a loan to the partnership in the amount of P1 million secured by a check,
because of which, Yao and Chua entrusted the ownership papers of two other
boats, Chua’s FB Lady Anne Mel and Yao’s FB Tracy to Lim Tong
In affirming the trial court, the CA held that petitioner was a partner of Chua Lim.chanroblesvirtual|awlibrary
and Yao in a fishing business and may thus be held liable as such for the
fishing nets and floats purchased by and for the use of the partnership. The (7) That in pursuance of the business agreement, Peter Yao and Antonio
appellate court ruled:jgc:chanrobles.com.ph Chua bought nets from Respondent Philippine Fishing Gear, in behalf of "Ocean
Quest Fishing Corporation," their purported business name.
"The evidence establishes that all the defendants including herein appellant
Lim Tong Lim undertook a partnership for a specific undertaking, that is for (8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon
commercial fishing . . . . Obviously, the ultimate undertaking of the defendants RTC, Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a)
was to divide the profits among themselves which is what a partnership declaration of nullity of commercial documents; (b) reformation of contracts; (c)
essentially is . . . . By a contract of partnership, two or more persons bind declaration of ownership of fishing boats; (4) injunction; and (e) damages.
themselves to contribute money, property or industry to a common fund with
the intention of dividing the profits among themselves (Article 1767, New (9) That the case was amicably settled through a Compromise Agreement
Civil Code)." 13chanroblesvirtual|awlibrary executed between the parties-litigants the terms of which are already enumerated
above.
Hence, petitioner brought this recourse before this Court. 14
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim
The Issues 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
petitioner’s brother. In their Compromise Agreement, they subsequently revealed
In his Petition and Memorandum, Lim asks this Court to reverse the assailed their intention to pay the loan with the proceeds of the sale of the boats, and to
Decision on the following grounds:jgc:chanrobles.com.ph 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
"I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON fund" under Article 1767. The contribution to such fund need not be cash or fixed
A COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER assets; it could be an intangible like credit or industry. That the parties agreed that
LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP any loss or profit from the sale and operation of the boats would be divided
AGREEMENT EXISTED AMONG THEM. equally among them also shows that they had indeed formed a partnership.

"II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE Moreover, it is clear that the partnership extended not only to the purchase of the
WAS ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE boat, but also to that of the nets and the floats. The fishing nets and the floats, both
BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF essential to fishing, were obviously acquired in furtherance of their business. It
APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO would have been inconceivable for Lim to involve himself so much in buying the
PETITIONER LIM AS WELL. boat but not in the acquisition of the aforesaid equipment, without which the
business could not have proceeded.chanroblesvirtual|awlibrary
"III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE
AND ATTACHMENT OF PETITIONER LIM’S GOODS."cralaw virtua1aw Given the preceding facts, it is clear that there was, among petitioner, Chua and
library 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
In determining whether petitioner may be held liable for the fishing nets and proceeds from the sales and operations thereof would be divided among them.
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 We stress that under Rule 45, a petition for review like the present case should
a partnership.chanroblesvirtuallawlibrary 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
This Court’s Ruling 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.
The Petition is devoid of merit.
Compromise Agreement Not the Sole Basis of Partnership
First and Second Issues:chanrob1es virtual 1aw library
Petitioner argues that the appellate court’s sole basis for assuming the existence of
Existence of a Partnership and Petitioner’s Liability 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
In arguing that he should not be held liable for the equipment purchased from preexisting rights and obligations. His arguments are baseless. The Agreement was
respondent, petitioner controverts the CA finding that a partnership existed but an embodiment of the relationship extant among the parties prior to its
between him, Peter Yao and Antonio Chua. He asserts that the CA based its execution.
finding on the Compromise Agreement alone. Furthermore, he disclaims any
direct participation in the purchase of the nets, alleging that the negotiations A proper adjudication of claimants’ rights mandates that courts must review and
were conducted by Chua and Yao only, and that he has not even met the thoroughly appraise all relevant facts. Both lower courts have done so and have
representatives of the respondent company. Petitioner further argues that he found, correctly, a preexisting partnership among the parties. In implying that the
was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease" dated lower courts have decided on the basis of one piece of document alone, petitioner
February 1, 1990, showed that he had merely leased to the two the main asset fails to appreciate that the CA and the RTC delved into the history of the
of the purported partnership — the fishing boat F/B Lourdes. The lease was for document and explored all the possible consequential combinations in harmony
with law, logic and fairness. Verily, the two lower courts’ factual findings
mentioned above nullified petitioner’s argument that the existence of a
partnership was based only on the Compromise Agreement.chanrobles law
library
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioner’s argument that he was merely the lessor of
the boats to Chua and Yao, not a partner in the fishing venture. His argument
allegedly finds support in the Contract of Lease and the registration papers
showing that he was the owner of the boats, including F/B Lourdes where the
nets were found.
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:
19chanrobles.com.ph : virtual law library

His allegation defies logic. In effect, he would like this Court to believe that he "A litigation is not a game of technicalities in which one, more deeply schooled
consented to the sale of his own boats to pay a debt of Chua and Yao, with the and skilled in the subtle art of movement and position, entraps and destroys the
excess of the proceeds to be divided among the three of them. No lessor would other. It is, rather, a contest in which each contending party fully and fairly lays
do what petitioner did. Indeed, his consent to the sale proved that there was a before the court the facts in issue and then, brushing aside as wholly trivial and
preexisting partnership among all three. 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
Verily, as found by the lower courts, petitioner entered into a business rapier’s thrust. Technicality, when it deserts its proper office as an aid to justice
agreement with Chua and Yao, in which debts were undertaken in order to and becomes its great hindrance and chief enemy, deserves scant consideration
finance the acquisition and the upgrading of the vessels which would be used from courts. There should be no vested rights in technicalities."cralaw virtua1aw
in their fishing business. The sale of the boats, as well as the division among library
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 Third Issue:chanrob1es virtual 1aw library
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 Validity of Attachment
in this case is the petitioner himself. After all, he is the brother of the creditor,
Jesus Lim.chanrobles.com.ph : virtual law library 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
We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell and academic. As previously discussed, F/B Lourdes was an asset of the
his property to pay a debt he did not incur, if the relationship among the three partnership and that it was placed in the name of petitioner, only to assure
of them was merely that of lessor-lessee, instead of partners. 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
Corporation by Estoppel 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.
Petitioner argues that under the doctrine of corporation by estoppel, liability Besides, by specific agreement, ownership of the nets remained with Respondent
can be imputed only to Chua and Yao, and not to him. Again, we disagree. Philippine Fishing Gear, until full payment thereof.

Section 21 of the Corporation Code of the Philippines WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED.
provides:jgc:chanrobles.com.ph Costs against petitioner.chanrobles virtual lawlibrary

"SECTION 21. Corporation by estoppel. — All persons who assume to SO ORDERED.

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 Melo, Purisima and Gonzaga-Reyes, JJ., concur.
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 Separate Opinions
by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.
VITUG, J., concurring:chanrob1es virtual 1aw library
"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." I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice
chanrobles.com:cralaw:red Artemio V. Panganiban, particularly the finding that Antonio Chua, Peter Yao and
petitioner Lim Tong Lim have incurred the liabilities of general partners. I merely
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, would wish to elucidate a bit, albeit briefly, the liability of partners in a general
a party may be estopped from denying its corporate existence. "The reason partnership.
behind this doctrine is obvious — an unincorporated association has no
personality and would be incompetent to act and appropriate for itself the When a person by his act or deed represents himself as a partner in an existing
power and attributes of a corporation as provided by law; it cannot create partnership or with one or more persons not actual partners, he is deemed an agent
agents or confer authority on another to act in its behalf; thus, those who act or of such persons consenting to such representation and in the same manner, if he
purport to act as its representatives or agents do so without authority and at were a partner with respect to persons who rely upon the representation. 1 The
their own risk. And as it is an elementary principle of law that a person who association formed by Chua, Yao and Lim, should be, as it has been deemed, a de
acts as an agent without authority or without a principal is himself regarded as facto partnership with all the consequent obligations for the purpose of enforcing
the principal, possessed of all the right and subject to all the liabilities of a the rights of third persons. The liability of general partners (in a general
principal, a person acting or purporting to act on behalf of a corporation which partnership as so opposed to a limited partnership) is laid down in Article 1816 2
has no valid existence assumes such privileges and obligations and becomes which posits that all partners shall be liable pro rata beyond the partnership assets
personally liable for contracts entered into or for other acts performed as such for all the contracts which may have been entered into in its name, under its
agent." 17 signature, and by a person authorized to act for the partnership. This rule is to be
construed along with other provisions of the Civil Code which postulate that the
The doctrine of corporation by estoppel may apply to the alleged corporation partners can be held solidarily liable with the partnership specifically in these
and to a third party. In the first instance, an unincorporated association, which instances — (1) where, by any wrongful act or omission of any partner acting in
represented itself to be a corporation, will be estopped from denying its the ordinary course of the business of the partnership or with the authority of his
corporate capacity in a suit against it by a third person who relied in good faith co-partners, loss or injury is caused to any person, not being a partner in the
on such representation. It cannot allege lack of personality to be sued to evade partnership, or any penalty is incurred, the partnership is liable therefor to the
its responsibility for a contract it entered into and by virtue of which it received same extent as the partner so acting or omitting to act; (2) where one partner
advantages and benefits. acting within the scope of his apparent authority receives money or property of a
third person and misapplies it; and (3) where the partnership in the course of its
On the other hand, a third party who, knowing an association to be business receives money or property of a third person and the money or property
unincorporated, nonetheless treated it as a corporation and received benefits so received is misapplied by any partner while it is in the custody of the
from it, may be barred from denying its corporate existence in a suit brought partnership 3 — consistently with the rules on the nature of civil liability in delicts
against the alleged corporation. In such case, all those who benefited from the and quasi-delicts.chanrobles law library : red
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.chanrobles virtual lawlibrary

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