G.R. No.

L-47740 July 20, 1982

LIM PIN, petitioner,
vs.
SPS. CONCHITA LIAO TAN, and TAN CHO HUA and HONORABLE CANCIO C. GARCIA, PRESIDING
JUDGE OF BRANCH I, CITY COURT OF CALOOCAN CITY, respondents.
GUTIERREZ, JR., J.:
In this petition for certiorari with prayer for the issuance of a writ of preliminary injunction, the petitioner prays:
(1) that Judgment be rendered annulling or modifying the Judgment, dated October 19, 1977, of the
Respondent Judge rendered in Civil Case No. 11716, City Court of Caloocan City. (2) That a Writ of
Preliminary Injunction be issued requiring Private Respondents, and all persons acting in their behalf, to
refrain from the Execution of the Judgment, dated October 19, 1977, of the City Court of Caloocan City
in Civil Case No. 11716 until further order.
The basis of the judgment, subject matter of the petition, is a compromise agreement entered into between the petitioner,
represented by her son, George Hung and the private respondent Conchita Liao Tan both parties assisted by their
respective counsel, during the October 19, 1977 hearing of Civil Case No. 11716 for unlawful detainer. The complaint for
unlawful detainer was filed in the court a quo on August 12, 1977 by the private respondents against the petitioner. The
judgment incorporating the compromise agreement reads as follows:
When this case was caged for hearing this afternoon, October 19, 1977, plaintiffs and defendant, the latter
acting thru her son, George Hung, as her duly authorized representative, assisted by their respective
counsels, personally appeared before this Court and mutually agreed as follows:
1. The parties admit that the stipulated rental for the leased premises is as follows:
(a) For the months of April and May, 1977, at P1,500.00 a month; thereafter a monthly
increase of P500.00 until the rent al reaches to P 5,000.00 by December, 1977,
2. That defendant admits having been in arrears in the payment of her rental obligation since April, 1977
and that as of October, 1977, her total accrued rentals already amounted to P18,000.00, broken down as
follows:
April, 1977.........................P 1,500.00
May, 1977............................. 1,500.00
June, 1977............................. 2,000.00
July,1977............................... 2,500.00
August,1977......................... 3,000.00
September,1977.....................3,500.00
October,1977........................ 4,000.00
TOTAL P18,000.00
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3. That defendant binds herself to pay in full said accrued rentals of P18,000.00 and attorney's fee of P
2,000.00, not later than October 31, 1977.
4. That the rental for November, 1977, shall be P4,500.00 a month while the rentals for December, 1977
and for the succeeding months thereafter shall be P5,000.00, payable at the residence of plaintiff within
five (5) days of the current month.
5. That the Plaintiff hereby agrees to allow the defendant to remain in the leased premises at the rental
herein agreed upon.
6. That should defendant fails to pay her accrued rental of P18,000.00, plus attorney's fee of P2,000.00 by
October 31, 1977, Plaintiff shall be entitled to an immediate writ of execution to enforce defendant's
ejectment from the leased premises and the collection of all rental in arrears;
7. Defendant's representative, George Hung, affirmed before this court and the same is confirmed by
defendant's counsel, that he (George Hung) has the full authority of her mother, the herein defendant, to
act for her and to sign for and in behalf this amicable settlement.
WHEREFORE, this Court, as prayed for, hereby approves the foregoing compromise agreement and
consequently renders Judgment in accordance with the precise terms and conditions hereof. (Annex "D")
Spouses Conchita Liao Tan and Tan Cho Hua alleged in their complaint for unlawful detainer that the plaintiff Conchita
Liao Tan, as owner of a parcel of registered land with improvements located at Francisco Street, Caloocan City, had
leased a portion of it, more particularly known as 91 Francisco Street, Caloocan City to defendant Lim Pin on a month to
month basis but that the latter starting April, 1977 had not paid the agreed rental stipulated for such month and the
succeeding months thereafter based on the following schedule of payments: a) For the month of April, 1977 P 1,50000; b) For the month of May, 1977 P1,500-00: c) Commencing on the month of June, 1977 and for each calendar
month thereafter P6,000.00 per month; and that despite demand, the defendant refused to vacate the leased premises. In
addition to the actual damages, the plaintiffs asked for an attorney's fee in the amount of P3,000.00.
On August 25, 1977, the defendant Lim Pin, filed her Answer denying the material allegations of the complaint and
protesting the alleged highly "unconscionable and unreasonable" increase of rental demanded by plaintiffs. As a
counterclaim, she asked for an attorney's fee in the amount of P5,000.00. The counterclaim was denied in the plaintiffs'
Answer to Counterclaim, dated September 1, 1982.
The initial hearing set for September 1, 1977 was reset to September 14, 1977 upon the joint motion of the parties who
were trying to work out a possible amicable settlement. Upon the failure of the parties to reach an amicable settlement, the
September 14, 1977 hearing proceeded as scheduled during which plaintiff Conchita Liao Tan testified. For lack of
material time, Conchita Liao Tan's cross-examination was set for September 27, 1970 but this hearing was again cancelled
and reset to October 19, 1977.
On the scheduled October 19, 1977 hearing, defendant Lim Pin was absent. Her son George Hung who attended with his
mother all the previous hearings was present together with the defendant's counsel. Plaintiff Conchita Liao Tan together
with her counsel was also present. Through the initiative of the court a quo, the subject compromise agreement was
formulated and executed and it finally became the basis of the October 19, 1977 judgment in Civil Case No. 11716.
The aforesaid judgment was the subject of a motion for reconsideration filed on October 28, 1977 by defendant Lim Pin
on the following grounds: 1) that she never authorized her son nor her counsel on record (Atty. Pastor Mamaril) to enter
into such compromise agreement and 2) that had she been present when said agreement was prepared, she would not have
acceded thereto.
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The motion prompted the plaintiffs to file an "Opposition To Motion for Reconsideration With Prayer that defendant's son
George Hung and Atty. Pastor P. Mamaril be cited for contempt" in the event they should belatedly deny that George
Hung was duly authorized by his mother to enter into the compromise agreement dated November 5, 1982.
In the meantime, the plaintiffs, on November 3, 1977 filed an "Urgent Motion For Immediate Execution of Judgment
dated October 19, 1977."
All the foregoing motions were resolved by the respondent court in its Order dated January 26, 1978.
The dispositive portion of the Order reads:
IN VIEW OF ALL THE FOREGOING, defendants' 'Motion For Reconsideration,' is hereby DENIED,
For reason hereinbefore mentioned, defendant's son George Hung, is hereby declared in direct contempt
of court and is hereby sentenced to pay a fine of TWO HUNDRED (P200.00) Pesos, with subsidiary
imprisonment in case of insolvency. Finding the explanations given by Atty. Mamaril during the hearing
of November 18, 1977, to be meritorious, this Court finds no basis to hold him in contempt. As prayed for
by plaintiffs in their motion for execution, which this Court finds justified, let a writ of execution be
issued in this case.
A writ of execution was issued by the respondent court on the same date. Pursuant to the writ of execution, the City
Sheriff of Caloocan City, Metro Manila served a "Notice of Ejectment" and "Notice to Levy", both dated February 3,
1978, which were received by the plaintiff on February 3, 1978. Hence, this petition.
On February 8, 1978, We issued a temporary restraining order "enjoining respondent judge from enforcing the execution
of the judgment dated October 19, 1977 issued in Civil Case No. 11714." The petitioner raises two issues in this petition:
1) Whether the respondent Judge committed grave abuse of discretion in allowing the October 19, 1977
compromise agreement in the absence of the petitioner; and
2) Whether the respondent Judge committed grave abuse of discretion amounting to lack of jurisdiction in
denying the petitioner's motion for reconsideration on the October 19, 1977 judgment and in granting the
issuance of execution thereto upon motion of the private respondents.
Anent the first issue, the petitioner argues that the respondent Judge should not have allowed her son George Hung and
her then counsel, Atty. Pastor Mamaril in her absence to enter into the October 19, 1977 compromise agreement with the
private respondent Conchita Liao Tan assisted by her counsel. She further argues that "... considering that such
compromise agreement would impose onerous obligations upon Petitioner, such as a tremendous increase of rentals in the
premises being leased from Private Respondents from P1,500.00 a month to P5,000.00 a month," and that said agreement
contained admissions by petitioner, the respondent Judge should have required a written authority and power of attorney
from her son and counsel. Her objections to the validity of the compromise agreement are premised on Article 1878 of the
Civil Code and Rule 138, Section 23 of the Rules of Court.
The arguments are not well taken.
Article 1878 is found in Title X of the Civil Code on Agency. It states that a special power of attorney is necessary to
compromise, to submit questions to arbitration, to renounce the right to appeal from a judgment, to waive objections to the
venue of an action or to abandon a prescription already acquired.
Section 23 of Rule 138 on Attorneys and Admission to the Bar governs the authority of attorneys to bind their clients and
provides that "Attorneys have authority to bind their clients in any case by any agreement in relation thereto made in
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writing, and in taking appeal, and in an matters of ordinary Judicial Procedure, but they cannot, without special authority,
compromise their clients' litigation or receive anything in discharge of their clients' claims but the full amount in cash."
The requirements of a special power of attorney in Article 1878 of the Civil Code and of a special authority in Rule 138 of
the Rules of Court refer to the nature of the authorization and not its form. The requirements are met if there is a clear
mandate from the principal specifically authorizing the performance of the act. As early as 1906, this Court in Strong v.
Gutierrez-Repide (6 Phil. 680) stated that such a mandate may be either oral or written, the one vital thing being that it
shall be express. And more recently, We stated that, if the special authority is not written, then it must be duly established
by evidence:
... the Rules require, for attorneys to compromise the litigation of their clients, a special authority. And
while the same does not state that the special authority be in writing the Court has every reason to expect
that, if not in writing, the same be duly established by evidence other than the self-serving assertion of
counsel himself that such authority was verbally given him. (Home Insurance Company vs. United States
lines Company, et al., 21 SCRA 863; 866: Vicente vs. Geraldez, 52 SCRA 210; 225).
We are satisfied from the records of this case that Judge Cancio C. Garcia took the necessary precautionary measures and
acted on the basis of satisfactory evidence when he allowed the compromise agreement to be executed by George Hung
the petitioner's son.
The records show that prior to the October 19, 1977 hearing, the petitioner as defendant in Civil Case No. 11-116 had
repeatedly asked that the respondent Judge approve her proposals for a monthly increase of P500.00 starting April, 1977
and that the increases be pegged at that rate until the monthly rental reaches the sum of P5,000.00 on December, 1977.
Such a proposal was not acceptable at the time to the private respondents. Only at the October 19, 1977 hearing did
private respondent Conchita Liao Tan have a change of mind. She expressed a willingness to accomodate the proposals
originating from the petitioner prompting the court to suspend proceedings and initiate the execution of the compromise
agreement between the parties. Whereupon the following took place: (1) The court asked George Hung whether he was
willing to enter into the compromise agreement and whether he had the authority of his mother to enter into such a
compromise agreement; (2) The defendant's counsel confirmed in open court the assurance of George Hung that he had
the full authority of his mother to enter into a compromise agreement: (3) After the formulation of the compromise
agreement the Judge explained in Tagalog to both parties, including George Hung its terms and conditions after which the
same was reduced into writing; (4) George Hung willingly signed the compromise agreement, the terms and conditions of
which were those originally proposed by the petitioner herself. Hung was all the while assisted by their counsel.
There were other reasons which led the lower court to a finding that George Hung had the full authority to enter into the
compromise. The court itself observed during the earlier hearings and it is not disputed that ... defendant Lim Pin could
not decide on anything without first consulting her son." George Hung's later denial that he never manifested his authority
to represent his mother was rejected by the court. As a matter of fact, this sudden turnabout of George Hung led the court
to cite him for contempt. He was fined Two Hundred Pesos. The citation for contempt was never appealed.
And finally, even assuming that George Hung and the petitioner's counsel acted without authority, the compromise
agreement itself was not null and void. It would be merely unenforceable, capable of being ratified. (Dungo v. Lapena, 6
SCRA 1007). The compromise agreement was ratified by the petitioner when, on October 24, 1977, a few days after the
promulgation of the questioned judgment and before the filing of a motion for reconsideration, she filed an "Ex-Parte
Motion To Withdraw Deposits" in Civil Case No. 11709, a consignation case pending before the same court between the
same parties. The ex-parte motion in part reads:
xxx xxx xxx
3. That there is another case with this court assigned in Branch I docketed as Civil Case No. 11716, for
unlawful detainer, involving the same parties and subject property and in the said case, parties have
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entered into a compromise agreement whereby, among others, petitioner herein shall pay the accrued
monthly rentals to respondent (plaintiff in the aforementioned case);
4. That in order to implement the aforementioned compromise agreement, it is necessary that the deposits
made by petitioner be withdrawn, the same to be paid to respondent Conchita Liao Tan. (Annex "2" for
the private respondents, p. 71, rollo).
The second ground for this petition is consequently unmeritorious. The Petitioner alleged that the respondent Judge acted
with grave abuse of discretion amounting to lack of jurisdiction when he denied the motion for reconsideration of the
October 19, 1977 judgment. The motion was based on the same alleged absence of authority of the petitioner's son and her
counsel. A similar allegation regarding the writ of execution is likewise without merit. It is a well-settled rule that a
compromise judgment is final and executory and unappealable. We also note that on or before June 26, 1978 the petitioner
abandoned the disputed property, notwithstanding our February 8, 1978 temporary restraining order enjoining
enforcement of the writ of execution.
WHEREFORE, the instant petition is hereby DISMISSED for lack of merit. The temporary restraining order issued by
this Court dated February 8, 1978 is LIFTED. The judgment appealed from is AFFIRMED with costs against the
petitioner.

G.R. No. 120528

January 29, 2001

ATTY. DIONISIO CALIBO, JR., petitioner,

vs.
COURT OF APPEALS and DR. PABLO U. ABELLA, respondents.
QUISUMBING, J.:
Before us is the petition for review on certiorari by petitioner Dionisio Calibo, Jr., assailing the decision of the Court of
Appeals in CA-G.R. CV No. 39705, which affirmed the decision of the Regional Trial Court of Cebu, Branch 11,
declaring private respondent as the lawful possessor of a tractor subject of a replevin suit and ordering petitioner to pay
private respondent actual damages and attorney's fees.
The facts of the case, as summarized by respondent court, are undisputed.
"on January 25, 1979, plaintiff-appellee [herein petitioner] Pablo U. Abella purchased an MF 210 agricultural
tractor with Serial No. 00105 and Engine No. P126M00199 (Exhibit A; Record, p.5) which he used in his farm in
Dagohoy, Bohol.
Sometimes in October or November 1985, Pablo Abella's son, Mike abella rented for residential purpose the
house of defendant-appellant Dionosio R. Calibo, Jr., in Tagbilaran City.
In October 1986, Pablo Abella pulled out his aforementioned tractor from his farm in Dagohoy, Bohol, and left it
in the safekeeping of his son, Mike Abella, in Tagbilaran City. Mike kept the tractor in the garage of the house he
was leasing from Calibo.
Since he started renting Calibo's house, Mike had been religiously paying the monthly rentals therefor, but
beginning November of 1986, he stopped doing so. The following month, Calibo learned that Mike had never
paid the charges for electric and water consumption in the leased premises which the latter was duty-bound to
shoulder. Thus, Calibo confronted Mike about his rental arrears and the unpaid electric and water bills. During
this confrontation, Mike informed Calibo that he (Mike) would be staying in the leased property only until the end
of December 1986. Mike also assured Calibo that he would be settling his account with the latter, offering the
tractor as security. Mike even asked Calibo to help him find a buyer for the tractor so he could sooner pay his
outstanding obligation.1wphi1.nt
In January 1987 when a new tenant moved into the house formerly leased to Mike, Calibo had the tractor moved
to the garage of his father's house, also in Tagbilaran City.
Apprehensive over Mike's unsettled account, Calibo visited him in his Cebu City address in January, February
and March, 1987 and tried to collect payment. On all three occasions, Calibo was unable to talk to Mike as the
latter was reportedly out of town. On his third trip to Cebu City, Calibo left word with the occupants of the Abella
residence thereat that there was a prospective buyer for the tractor. The following week, Mike saw Calibo in
Tagbilaran City to inquire about the possible tractor buyer. The sale, however, did not push through as the buyer
did not come back anymore. When again confronted with his outstanding obligation, Mike reassured Calibo that
the tractor would stand as a guarantee for its payment. That was the last time Calibo saw or heard from Mike.
After a long while, or on November 22, 1988, Mike's father, Pablo Abella, came to Tagbilaran City to claim and
take possession of the tractor. Calibo, however, informed Pablo that Mike left the tractor with him as security for
the payment of Mike's obligation to him. Pablo offered to write Mike a check for P2,000.00 in payment of Mike's
unpaid lease rentals, in addition to issuing postdated checks to cover the unpaid electric and water bills the
correctness of which Pablo said he still had to verify with Mike. Calibo told Pablo that he would accept the
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P2,000.00-check only if the latter would execute a promissory note in his favor to cover the amount of the unpaid
electric and water bills. Pablo was not amenable to this proposal. The two of them having failed to come to an
agreement, Pablo left and went back to Cebu City, unsuccessful in his attempt to take possession of the tractor." 1
On November 25, 1988, private respondent instituted an action for replevin, claiming ownership of the tractor and seeking
to recover possession thereof from petitioner. As adverted to above, the trial court ruled in favor of private respondent; so
did the Court of Appeals when petitioner appealed.
The Court of Appeals sustained the ruling of the trial court that Mike Abella could not have validly pledged the subject
tractor to petitioner since he was not the owner thereof, nor was he authorized by its owner to pledge the tractor.
Respondent court also rejected petitioner's contention that, if not a pledge, then a deposit was created. The Court of
Appeals said that under the Civil Code, the primary purpose of a deposit is only safekeeping and not, as in this case,
securing payment of a debt.
The Court of Appeals reduced the amount of actual damages payable to private respondent, deducting therefrom the cost
of transporting the tractor from Tagbilaran, Bohol, to Cebu City.
Hence, this petition.
Essentially, petitioner claims that the tractor in question was validly pledged to him by private respondent's son Mike
Abella to answer for the latter's monetary obligations to petitioner. In the alternative, petitioner asserts that the tractor was
left with him, in the concept of an innkeeper, on deposit and that he may validly hold on thereto until Mike Abella pays
his obligations.
Petitioner maintains that even if Mike Abella were not the owner of the tractor, a principal-agent relationship may be
implied between Mike Abella and private respondent. He contends that the latter failed to repudiate the alleged agency,
knowing that his son is acting on his behalf without authority when he pledged the tractor to petitioner. Petitioner argues
that, under Article 1911 of the Civil Code, private respondent is bound by the pledge, even if it were beyond the authority
of his son to pledge the tractor, since he allowed his son to act as though he had full powers.
On the other hand, private respondent asserts that respondent court had correctly ruled on the matter.
In a contract of pledge, the creditor is given the right to retain his debtor's movable property in his possession, or in that of
a third person to whom it has been delivered, until the debt is paid. For the contract to be valid, it is necessary that: (1) the
pledge is constituted to secure the fulfillment of a principal obligation; (2) the pledgor be the absolute owner of the thing
pledged; and (3) the person constituting the pledge has the free disposal of his property, and in the absence thereof, that he
be legally authorized for the purpose.2
As found by the trial court and affirmed by respondent court, the pledgor in this case, Mike Abella, was not the absolute
owner of the tractor that was allegedly pledged to petitioner. The tractor was owned by his father, private respondent, who
left the equipment with him for safekeeping. Clearly, the second requisite for a valid pledge, that the pledgor be the
absolute owner of the property, is absent in this case. Hence, there is no valid pledge.
"He who is not the owner or proprietor of the property pledged or mortgaged to guarantee the fulfillment of a
principal obligation, cannot legally constitute such a guaranty as may validly bind the property in favor of his
creditor, and the pledgee or mortgagee in such a case acquires no right whatsoever in the property pledged or
mortgaged."3
There also does not appear to be any agency in this case. We agree with the Court of Appeals that:

"As indicated in Article 1869, for an agency relationship to be deemed as implied, the principal must know that
another person is acting on his behalf without authority. Here, appellee categorically stated that the only purpose
for his leaving the subject tractor in the care and custody of Mike Abella was for safekeeping, and definitely not
for him to pledge or alienate the same. If it were true that Mike pledged appeellee's tractor to appellant, then Mike
was acting not only without appellee's authority but without the latter's knowledge as well.
Article 1911, on the other hand, mandates that the principal is solidarily liable with the agent if the former
allowed the latter to act as though he had full powers. Again, in view of appellee's lack of knowledge of Mike's
pledging the tractor without any authority from him, it stands to reason that the former could not have allowed the
latter to pledge the tractor as if he had full powers to do so."4
There is likewise no valid deposit in this case. In a contract of deposit, a person receives an object belonging to another
with the obligation of safely keeping it and of returning the same.5 Petitioner himself states that he received the tractor not
to safely keep it but as a form of security for the payment of Mike Abella's obligations. There is no deposit where the
principal purpose for receiving the object is not safekeeping.6
Consequently, petitioner had no right to refuse delivery of the tractor to its lawful owner. On the other hand, private
respondent, as owner, had every right to seek to repossess the tractor, including the institution of the instant action for
replevin.1wphi1.nt
We do not here pass upon the other assignment of errors made by petitioner concerning alleged irregularities in the raffle
and disposition of the case at the trial court. A petition for review on certiorari is not the proper vehicle for such
allegations.
WHEREFORE, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in CA-G.R.
CV No. 39705 is AFFIRMED. Costs against petitioner.

G.R. No. 6906

September 27, 1911

FLORENTINO RALLOS, ET AL., plaintiff-appellee,

vs.
TEODORO R. YANGCO, defendant-appellant.
MORELAND, J.:
This is an appeal from a judgment of the Court of First Instance of the Province of Cebu, the Hon. Adolph Wislizenus
presiding, in favor of the plaintiffs, in the sum of P1,537.08, with interest at 6 per cent per annum from the month of July,
1909, with costs.
The defendant in this case on the 27th day of November, 1907, sent to the plaintiff Florentino Rallos, among others, the
following letter:
CIRCULAR NO. 1.
MANILA, November 27, 1907
MR. FLORENTINO RALLOS, Cebu.
DEAR SIR: I have the honor to inform you that I have on this date opened in my steamship office at No. 163
Muelle de la Reina, Binondo, Manila, P. I., a shipping and commission department for buying and selling leaf
tobacco and other native products, under the following conditions:
1. When the consignment has been received, the consignor thereof will be credited with a sum not to exceed twothirds of the value of the goods shipped, which may be made available by acceptance of a draft or written order of
the consignor on five to ten day's sight, or by his ordering at his option a bill of goods. In the latter case he must
pay a commission of 2 per cent.
2. No draft or written order will be accepted without previous notice forwarding the consignment of goods to
guarantee the same.
3. Expenses of freight, hauling and everything necessary for duly executing the commission will be charged in the
commission.
4. All advances made under sections (1) and (3) shall bear interest at 10 per cent a year, counting by the sale of
the goods shipped or remittance of the amount thereof.
5. A commission of 2 per cent will be collected on the amount realized from the sale of the goods shipped.
6. A Payment will be made immediately after collection of the price of the goods shipped.
7. Orders will be taken for the purchase of general merchandise, ship-stores, cloths, etc., upon remittance of the
amount with the commission of 2 per cent on the total value of the goods bought. Expenses of freight, hauling,
and everything necessary for properly executing the commission will be charged to the consignor.
8. The consignor of the good may not fix upon the consignee a longer period than four months, counting from the
date of receipt, for selling the same; with the understanding that after such period the consignee is authorized to
make the sale, so as to prevent the advance and cost of storage from amounting to more than the actual value of
said goods, as has often happened.
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9. The shipment to the consignors of the goods ordered on account of the amount realized from the sale of the
goods consigned and of the goods bought on remittance of the value thereof, under sections (1) and (3), will not
be insured against risk by sea and land except on written order of the interested parties.
10. On all consignments of goods not insured according to the next preceding section, the consignors will bear the
risk.
11. All the foregoing conditions will take effect only after this office has acknowledged the consignor's previous
notice.
12. All other conditions and details will be furnished at the office of the undersigned.
If you care to favor me with your patronage, my office is at No. 163 Muelle de la Reinna, Binondo, Manila, P. I.,
under the name of "Teodoro R. Yangco." In this connection it gives me great pleasure to introduce to you Mr.
Florentino Collantes, upon whom I have conferred public power of attorney before the notary, Mr. Perfecto Salas
Rodriguez, dated November 16, 1907, to perform in my name and on my behalf all acts necessary for carrying out
my plans, in the belief that through his knowledge and long experience in the business, along with my commercial
connections with the merchants of this city and of the provinces, I may hope to secure the most advantageous
prices for my patrons. Mr. Collantes will sign by power of attorney, so I beg that you make due note of his
signature hereto affixed.
Very respectfully,
(Sgd.) T. R. YANGCO.
(Sgd.) F. COLLANTES.
Accepting this invitation, the plaintiffs proceeded to do a considerable business with the defendant through the said
Collantes, as his factor, sending to him as agent for the defendant a good deal of produce to be sold on commission. Later,
and in the month of February, 1909, the plaintiffs sent to the said Collantes, as agent for the defendant, 218 bundles of
tobacco in the leaf to be sold on commission, as had been other produce previously. The said Collantes received said
tobacco and sold it for the sum of P1,744. The charges for such sale were P206.96. leaving in the hands of said Collantes
the sum of P1,537.08 belonging to the plaintiffs. This sum was, apparently, converted to his own use by said agent.
It appears, however, that prior to the sending of said tobacco the defendant had severed his relations with Collantes and
that the latter was no longer acting as his factor. This fact was not known to the plaintiffs; and it is conceded in the case
that no notice of any kind was given by the defendant to the plaintiffs of the termination of the relations between the
defendant and his agent. The defendant refused to pay the said sum upon demand of the plaintiffs, placing such refusal
upon the ground that at the time the said tobacco was received and sold by Collantes he was acting personally and not as
agent of the defendant. This action was brought to recover said sum.
As is seen, the only question for our decision is whether or not the plaintiffs, acting in good faith and without knowledge,
having sent produce to sell on commission to the former agent of the defendant, can recover of the defendant under the
circumstances above set forth. We are of the opinion that the defendant is liable. Having advertised the fact that Collantes
was his agent and having given them a special invitation to deal with such agent, it was the duty of the defendant on the
termination of the relationship of principal and agent to give due and timely notice thereof to the plaintiffs. Failing to do
so, he is responsible to them for whatever goods may have been in good faith and without negligence sent to the agent
without knowledge, actual or constructive, of the termination of such relationship.
For these reasons the judgment appealed from is confirmed, without special finding as to costs.
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G.R. No. 3188

March 12, 1907

THE UNITED STATES, plaintiff-appellee,

vs.
ALEC KIENE, defendant-appellant.
CARSON, J.:
The defendant was an insurance agent. As such agent there was paid over to him for the account of his employers, the
China Mutual Life Insurance Company, the sum of 1,539.20 pesos, Philippine currency, which he failed and refused to
turn over to them. For his failure and refusal so to do, he was convicted of the crime ofestafa in the Court of First Instance
of the city Manila in sentenced to be imprisoned for one year and six months in Bilibid, and to pay the costs of the trial.
The facts as stated above were fully established at the trial of the case; the accused offered no evidence on his own behalf
and rest his appeal substantially upon the alleged failure of the prosecution to establish the existence of a duty or
obligation imposed on the defendant to turn over his principal the funds which he is charged with appropriating to his own
use.
Counsel for the defendant contends that the trial court erroneously admitted in evidence a certain document purporting to
be a contract of agency signed by the defendant. The name of the accused is attached to this document, and one of the
witnesses, the district agent of the China Mutual Life Insurance Company, stated that it was the contract of agency it
purported to be, but failed to state specifically that the signature attached thereto was the signature of the defendant,
though he declared that he knew his signature and had seen him write it on various occasions.
An examination of the record seems to indicate that the failure of the witness to expressly identify the signature of the
defendant attached to the document was due to an oversight, but however this may be, it is contented that the execution of
the document was not formally established, and the trial court erred in taking into consideration one of its provisions
whereby the defendant appears to have expressly obligated himself to deliver to the China Mutual Life Insurance
Company the funds collected on its account, without deduction for any purpose whatever.
We do not deem it necessary to review the action of the court in admitting this document in evidence, because we are of
opinion that the obligation of the defendant to deliver the funds in question to his employers is determined by the
provision of article 1720 of the Civil Code, which is as follows:
Every agent is bound to give an account of his transactions and to pay to the principal all that he may have
received by virtue of the agency, even though what has been received is not owed to the principal.
Nothing to the contrary appearing in the record, and the existence of the agency and the collection of the funds on account
of the principal having been established, the obligation to deliver these funds to the principal must be held to have been
imposed upon the agent by virtue of the contract of agency.
Counsel for the appellant further contented that the court erred in admitting in evidence a certain letter written by the
defendant wherein he admitted the collection of certain funds on account of his principal, but we think that the execution
of this letter was conclusively established, and that it was properly admitted, being pertinent and material to the issue in
the case.
There were other objections to the admission of certain testimony at the trial of the case, but we find no error in the
proceedings prejudicial to the real rights of the accused, and it is unnecessary to discuss the assignments of error based on
these objections.

11

The crime of which the accused was convicted is defined and penalized in paragraph 5 of article 535, read together with
paragraph 3 of article 534, of the Penal Code, and the penalty prescribed is that of presidio correccional in its minimum
and medium degrees. There being no aggravating or extenuating circumstance to be taken into consideration, this penalty
should be imposed in its medium degree ,which, in accordance with the provisions of article 82 of the said code, is from
one year eight months and twenty-one days to two years eleven months and ten days of presidio correccional. The trial
court imposed the penalty of one year and six months of imprisonment in Bilibid, and failed to impose the accessory
penalties prescribed by law, and this sentence should therefore be reversed, and is hereby reversed, and instead thereof we
impose the penalty of one year eight months and twenty-one days' imprisonment ( presidio correccional), together with
the accessory penalties prescribed by law, and the payment to the agents of the China Mutual Life Insurance Company,
Limited, of the sum of 1,550.30 pesos, Philippine currency, with subsidiary imprisonment in case of insolvency, and the
costs in both instances. After the expiration of ten days let judgment be entered in accordance herewith, and ten days
thereafter let the case be remanded to the lower court for proper action. So ordered.

12

G.R. No. L-15092

May 18, 1962

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,

vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros, in its Civil Case No. 2603,
dismissing plaintiff's complaint that sought to compel the defendant Milling Company to increase plaintiff's share in the
sugar produced from their cane, from 60% to 62.33%, starting from the 1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the Limited co-partnership
Gonzaga and Company, had been and are sugar planters adhered to the defendant-appellee's sugar central mill under
identical milling contracts. Originally executed in 1919, said contracts were stipulated to be in force for 30 years starting
with the 1920-21 crop, and provided that the resulting product should be divided in the ratio of 45% for the mill and 55%
for the planters. Sometime in 1936, it was proposed to execute amended milling contracts, increasing the planters' share to
60% of the manufactured sugar and resulting molasses, besides other concessions, but extending the operation of the
milling contract from the original 30 years to 45 years. To this effect, a printed Amended Milling Contract form was
drawn up. On August 20, 1936, the Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a
resolution (Acts No. 11, Acuerdo No. 1) granting further concessions to the planters over and above those contained in the
printed Amended Milling Contract. The bone of contention is paragraph 9 of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx

xxx

xxx

Acuerdo No. 1. Previa mocion debidamente secundada, la Junta en consideracion a una peticion de los
plantadores hecha por un comite nombrado por los mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:
xxx

xxx

xxx

9.a Que si durante la vigencia de este contrato de Molienda Enmendado, lascentrales azucareras, de
Negros Occidental, cuya produccion anual de azucar centrifugado sea mas de una tercera parte de la
produccion total de todas lascentrales azucareras de Negros Occidental, concedieren a sus plantadores
mejores condiciones que la estipuladas en el presente contrato, entonces esas mejores condiciones se
concederan y por el presente se entenderan concedidas a los platadores que hayan otorgado este Contrato
de Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September 10, 1936, but a copy of the
resolution of August 10, 1936, signed by the Central's General Manager, was not attached to the printed contract until
April 17, 1937; with the notation
Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado, otorgado por y la
Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros sugar centrals (La Carlota, BinalbaganIsabela and San Carlos), with a total annual production exceeding one-third of the production of all the sugar central mills
13

in the province, had already granted increased participation (of 62.5%) to their planters, and that under paragraph 9 of the
resolution of August 20, 1936, heretofore quoted, the appellee had become obligated to grant similar concessions to the
plaintiffs (appellants herein). The appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging
that the stipulations contained in the resolution were made without consideration; that the resolution in question was,
therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond the powers of the corporate
directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant Milling company, and dismissed the
complaint. Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not stand. It must be remembered that the controverted
resolution was adopted by appellee corporation as a supplement to, or further amendment of, the proposed milling
contract, and that it was approved on August 20, 1936, twenty-one days prior to the signing by appellants on September
10, of the Amended Milling Contract itself; so that when the Milling Contract was executed, the concessions granted by
the disputed resolution had been already incorporated into its terms. No reason appears of record why, in the face of such
concessions, the appellants should reject them or consider them as separate and apart from the main amended milling
contract, specially taking into account that appellant Alfredo Montelibano was, at the time, the President of the Planters
Association (Exhibit 4, p. 11) that had agitated for the concessions embodied in the resolution of August 20, 1936. That
the resolution formed an integral part of the amended milling contract, signed on September 10, and not a separate
bargain, is further shown by the fact that a copy of the resolution was simply attached to the printed contract without
special negotiations or agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936 were supported by the
same causa or consideration underlying the main amended milling contract; i.e., the promises and obligations undertaken
thereunder by the planters, and, particularly, the extension of its operative period for an additional 15 years over and
beyond the 30 years stipulated in the original contract. Hence, the conclusion of the court below that the resolution
constituted gratuitous concessions not supported by any consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of the respondent sugar milling company to
make a gift to the planters would be relevant if the resolution in question had embodied a separate agreement after the
appellants had already bound themselves to the terms of the printed milling contract. But this was not the case. When the
resolution was adopted and the additional concessions were made by the company, the appellants were not yet obligated
by the terms of the printed contract, since they admittedly did not sign it until twenty-one days later, on September 10,
1936. Before that date, the printed form was no more than a proposal that either party could modify at its pleasure, and the
appellee actually modified it by adopting the resolution in question. So that by September 10, 1936 defendant corporation
already understood that the printed terms were not controlling, save as modified by its resolution of August 20, 1936; and
we are satisfied that such was also the understanding of appellants herein, and that the minds of the parties met upon that
basis. Otherwise there would have been no consent or "meeting of the minds", and no binding contract at all. But the
conduct of the parties indicates that they assumed, and they do not now deny, that the signing of the contract on
September 10, 1936, did give rise to a binding agreement. That agreement had to exist on the basis of the printed terms as
modified by the resolution of August 20, 1936, or not at all. Since there is no rational explanation for the company's
assenting to the further concessions asked by the planters before the contracts were signed, except as further inducement
for the planters to agree to the extension of the contract period, to allow the company now to retract such concessions
would be to sanction a fraud upon the planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can be no novation unless two distinct
and successive binding contracts take place, with the later designed to replace the preceding convention. Modifications
introduced before a bargain becomes obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not attached to the printed contract until
April 17, 1937. But, except in the case of statutory forms or solemn agreements (and it is not claimed that this is one), it is
the assent and concurrence (the "meeting of the minds") of the parties, and not the setting down of its terms, that
14

constitutes a binding contract. And the fact that the addendum is only signed by the General Manager of the milling
company emphasizes that the addition was made solely in order that the memorial of the terms of the agreement should be
full and complete.
Much is made of the circumstance that the report submitted by the Board of Directors of the appellee company in
November 19, 1936 (Exhibit 4) only made mention of 90%, the planters having agreed to the 60-40 sharing of the sugar
set forth in the printed "amended milling contracts", and did not make any reference at all to the terms of the resolution of
August 20, 1936. But a reading of this report shows that it was not intended to inventory all the details of the amended
contract; numerous provisions of the printed terms are alao glossed over. The Directors of the appellee Milling Company
had no reason at the time to call attention to the provisions of the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only major change was paragraph 9 heretofore quoted; but when the
report was made, that paragraph was not yet in effect, since it was conditioned on other centrals granting better
concessions to their planters, and that did not happen until after 1950. There was no reason in 1936 to emphasize a
concession that was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of the
Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting parties. The rule
is that
It is a question, therefore, in each case of the logical relation of the act to the corporate purpose expressed in the
charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving
corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote
and fanciful sense, it may fairly be considered within charter powers. The test to be applied is whether the act in
question is in direct and immediate furtherance of the corporation's business, fairly incident to the express powers
and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not. (Fletcher
Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not
it will cause losses or decrease the profits of the central, the court has no authority to review them.
They hold such office charged with the duty to act for the corporation according to their best judgment, and in so
doing they cannot be controlled in the reasonable exercise and performance of such duty. Whether the business of
a corporation should be operated at a loss during depression, or close down at a smaller loss, is a purely business
and economic problem to be determined by the directors of the corporation and not by the court. It is a wellknown rule of law that questions of policy or of management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to substitute its judgment of the board of directors;
the board is the business manager of the corporation, and so long as it acts in good faith its orders are not
reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian Philippines, San Carlos and
Binalbagan (which produce over one-third of the entire annual sugar production in Occidental Negros) have granted
progressively increasing participations to their adhered planter at an average rate of
62.333% for the 1951-52 crop year;
64.2%

for 1952-53;

64.3%

for 1953-54;

64.5%

for 1954-55; and

63.5%

for 1955-56,
15

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20, 1936, duty bound to
grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed sentencing the defendantappellee to pay plaintiffs-appellants the differential or increase of participation in the milled sugar in accordance with
paragraph 9 of the appellee Resolution of August 20, 1936, over and in addition to the 60% expressed in the printed
Amended Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants having received an additional 2%
corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all appellants thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they were withheld; and the right is reserved
to plaintiffs-appellants to sue for such additional increases as they may be entitled to for the crop years subsequent to
those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.

16

G.R. No. L-29640 June 10, 1971

GUILLERMO AUSTRIA, petitioner,
vs.
THE COURT OF APPEALS (Second Division), PACIFICO ABAD and MARIA G. ABAD, respondents.
REYES, J.B.L., J.:
Guillermo Austria petitions for the review of the decision rendered by the Court of Appeal (in CA-G.R. No. 33572-R), on
the sole issue of whether in a contract of agency (consignment of goods for sale) it is necessary that there be prior
conviction for robbery before the loss of the article shall exempt the consignee from liability for such loss.
In a receipt dated 30 January 1961, Maria G. Abad acknowledged having received from Guillermo Austria one (1)
pendant with diamonds valued at P4,500.00, to be sold on commission basis or to be returned on demand. On 1 February
1961, however, while walking home to her residence in Mandaluyong, Rizal, Abad was said to have been accosted by two
men, one of whom hit her on the face, while the other snatched her purse containing jewelry and cash, and ran away.
Among the pieces of jewelry allegedly taken by the robbers was the consigned pendant. The incident became the subject
of a criminal case filed in the Court of First Instance of Rizal against certain persons (Criminal Case No. 10649, People
vs. Rene Garcia, et al.).
As Abad failed to return the jewelry or pay for its value notwithstanding demands, Austria brought in the Court of First
Instance of Manila an action against her and her husband for recovery of the pendant or of its value, and damages.
Answering the allegations of the complaint, defendants spouses set up the defense that the alleged robbery had
extinguished their obligation.
After due hearing, the trial court rendered judgment for the plaintiff, and ordered defendants spouses, jointly and
severally, to pay to the former the sum of P4,500.00, with legal interest thereon, plus the amount of P450.00 as reasonable
attorneys' fees, and the costs. It was held that defendants failed to prove the fact of robbery, or, if indeed it was committed,
that defendant Maria Abad was guilty of negligence when she went home without any companion, although it was already
getting dark and she was carrying a large amount of cash and valuables on the day in question, and such negligence did
not free her from liability for damages for the loss of the jewelry.
Not satisfied with his decision, the defendants went to the Court of Appeals, and there secured a reversal of the judgment.
The appellate court overruling the finding of the trial court on the lack of credibility of the two defense witnesses who
testified on the occurrence of the robbery, and holding that the facts of robbery and defendant Maria Abad's possesion of
the pendant on that unfortunate day have been duly published, declared respondents not responsible for the loss of the
jewelry on account of a fortuitous event, and relieved them from liability for damages to the owner. Plaintiff thereupon
instituted the present proceeding.
It is now contended by herein petitioner that the Court of Appeals erred in finding that there was robbery in the case,
although nobody has been found guilty of the supposed crime. It is petitioner's theory that for robbery to fall under the
category of a fortuitous event and relieve the obligor from his obligation under a contract, pursuant to Article 1174 of the
new Civil Code, there ought to be prior finding on the guilt of the persons responsible therefor. In short, that the
occurrence of the robbery should be proved by a final judgment of conviction in the criminal case. To adopt a different
view, petitioner argues, would be to encourage persons accountable for goods or properties received in trust or
consignment to connive with others, who would be willing to be accused in court for the robbery, in order to be absolved
from civil liability for the loss or disappearance of the entrusted articles.
We find no merit in the contention of petitioner.

17

It is recognized in this jurisdiction that to constitute a caso fortuito that would exempt a person from responsibility, it is
necessary that (1) the event must be independent of the human will (or rather, of the debtor's or obligor's); (2) the
occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner; and that (3) the obligor
must be free of participation in or aggravation of the injury to the creditor. 1 A fortuitous event, therefore, can be produced
by nature, e.g., earthquakes, storms, floods, etc., or by the act of man, such as war, attack by bandits, robbery, 2 etc.,
provided that the event has all the characteristics enumerated above.
It is not here disputed that if respondent Maria Abad were indeed the victim of robbery, and if it were really true that the
pendant, which she was obliged either to sell on commission or to return to petitioner, were taken during the robbery, then
the occurrence of that fortuitous event would have extinguished her liability. The point at issue in this proceeding is how
the fact of robbery is to be established in order that a person may avail of the exempting provision of Article 1174 of the
new Civil Code, which reads as follows:
ART. 1174. Except in cases expressly specified by law, or when it is otherwise declared by stipulation, or
when the nature of the obligation requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen, or which, though foreseen, were inevitable.
It may be noted the reform that the emphasis of the provision is on the events, not on the agents or factors responsible for
them. To avail of the exemption granted in the law, it is not necessary that the persons responsible for the occurrence
should be found or punished; it would only be sufficient to established that the enforceable event, the robbery in this case
did take place without any concurrent fault on the debtor's part, and this can be done by preponderant evidence. To require
in the present action for recovery the prior conviction of the culprits in the criminal case, in order to establish the robbery
as a fact, would be to demand proof beyond reasonable doubt to prove a fact in a civil case.
It is undeniable that in order to completely exonerate the debtor for reason of a fortutious event, such debtor must, in
addition to the cams itself, be free of any concurrent or contributory fault or negligence. 3 This is apparent from Article
1170 of the Civil Code of the Philippines, providing that:
ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for damages.
It is clear that under the circumstances prevailing at present in the City of Manila and its suburbs, with their high
incidence of crimes against persons and property that renders travel after nightfall a matter to be sedulously avoided
without suitable precaution and protection, the conduct of respondent Maria G. Abad, in returning alone to her house in
the evening, carrying jewelry of considerable value would be negligent per se and would not exempt her from
responsibility in the case of a robbery. We are not persuaded, however, that the same rule should obtain ten years
previously, in 1961, when the robbery in question did take place, for at that time criminality had not by far reached the
levels attained in the present day.
There is likewise no merit in petitioner's argument that to allow the fact of robbery to be recognized in the civil case
before conviction is secured in the criminal action, would prejudice the latter case, or would result in inconsistency should
the accused obtain an acquittal or should the criminal case be dismissed. It must be realized that a court finding that a
robbery has happened would not necessarily mean that those accused in the criminal action should be found guilty of the
crime; nor would a ruling that those actually accused did not commit the robbery be inconsistent with a finding that a
robbery did take place. The evidence to establish these facts would not necessarily be the same.
WHEREFORE, finding no error in the decision of the Court of Appeals under review, the petition in this case is hereby
dismissed with costs against the petitioner.

18

G.R. No. 163720

December 16, 2004

GENEVIEVE LIM, petitioner,

vs.
FLORENCIO SABAN, respondents.
TINGA, J.:
Before the Court is a Petition for Review on Certiorari assailing the Decision1 dated October 27, 2003 of the Court of
Appeals, Seventh Division, in CA-G.R. V No. 60392.2
The late Eduardo Ybaez (Ybaez), the owner of a 1,000-square meter lot in Cebu City (the "lot"), entered into
anAgreement and Authority to Negotiate and Sell (Agency Agreement) with respondent Florencio Saban (Saban) on
February 8, 1994. Under the Agency Agreement, Ybaez authorized Saban to look for a buyer of the lot for Two Hundred
Thousand Pesos (P200,000.00) and to mark up the selling price to include the amounts needed for payment of taxes,
transfer of title and other expenses incident to the sale, as well as Sabans commission for the sale.3
Through Sabans efforts, Ybaez and his wife were able to sell the lot to the petitioner Genevieve Lim (Lim) and the
spouses Benjamin and Lourdes Lim (the Spouses Lim) on March 10, 1994. The price of the lot as indicated in the Deed of
Absolute Sale is Two Hundred Thousand Pesos (P200,000.00).4 It appears, however, that the vendees agreed to purchase
the lot at the price of Six Hundred Thousand Pesos (P600,000.00), inclusive of taxes and other incidental expenses of the
sale. After the sale, Lim remitted to Saban the amounts of One Hundred Thirteen Thousand Two Hundred Fifty Seven
Pesos (P113,257.00) for payment of taxes due on the transaction as well as Fifty Thousand Pesos (P50,000.00) as brokers
commission.5 Lim also issued in the name of Saban four postdated checks in the aggregate amount of Two Hundred
Thirty Six Thousand Seven Hundred Forty Three Pesos (P236,743.00). These checks were Bank of the Philippine Islands
(BPI) Check No. 1112645 dated June 12, 1994 for P25,000.00; BPI Check No. 1112647 dated June 19, 1994
for P18,743.00; BPI Check No. 1112646 dated June 26, 1994 for P25,000.00; and Equitable PCI Bank Check No.
021491B dated June 20, 1994 forP168,000.00.
Subsequently, Ybaez sent a letter dated June 10, 1994 addressed to Lim. In the letter Ybaez asked Lim to cancel all the
checks issued by her in Sabans favor and to "extend another partial payment" for the lot in his (Ybaezs) favor.6
After the four checks in his favor were dishonored upon presentment, Saban filed a Complaint for collection of sum of
money and damages against Ybaez and Lim with the Regional Trial Court (RTC) of Cebu City on August 3, 1994.7 The
case was assigned to Branch 20 of the RTC.
In his Complaint, Saban alleged that Lim and the Spouses Lim agreed to purchase the lot for P600,000.00, i.e.,with a
mark-up of Four Hundred Thousand Pesos (P400,000.00) from the price set by Ybaez. Of the total purchase price
of P600,000.00, P200,000.00 went to Ybaez, P50,000.00 allegedly went to Lims agent, andP113,257.00 was given to
Saban to cover taxes and other expenses incidental to the sale. Lim also issued four (4) postdated checks8 in favor of
Saban for the remaining P236,743.00.9
Saban alleged that Ybaez told Lim that he (Saban) was not entitled to any commission for the sale since he concealed the
actual selling price of the lot from Ybaez and because he was not a licensed real estate broker. Ybaez was able to
convince Lim to cancel all four checks.
Saban further averred that Ybaez and Lim connived to deprive him of his sales commission by withholding payment of
the first three checks. He also claimed that Lim failed to make good the fourth check which was dishonored because the
account against which it was drawn was closed.

19

In his Answer, Ybaez claimed that Saban was not entitled to any commission because he concealed the actual selling
price from him and because he was not a licensed real estate broker.
Lim, for her part, argued that she was not privy to the agreement between Ybaez and Saban, and that she issued stop
payment orders for the three checks because Ybaez requested her to pay the purchase price directly to him, instead of
coursing it through Saban. She also alleged that she agreed with Ybaez that the purchase price of the lot was
only P200,000.00.
Ybaez died during the pendency of the case before the RTC. Upon motion of his counsel, the trial court dismissed the
case only against him without any objection from the other parties.10
On May 14, 1997, the RTC rendered its Decision11 dismissing Sabans complaint, declaring the four (4) checks issued by
Lim as stale and non-negotiable, and absolving Lim from any liability towards Saban.
Saban appealed the trial courts Decision to the Court of Appeals.
On October 27, 2003, the appellate court promulgated its Decision12 reversing the trial courts ruling. It held that Saban
was entitled to his commission amounting to P236,743.00.13
The Court of Appeals ruled that Ybaezs revocation of his contract of agency with Saban was invalid because the agency
was coupled with an interest and Ybaez effected the revocation in bad faith in order to deprive Saban of his commission
and to keep the profits for himself.14
The appellate court found that Ybaez and Lim connived to deprive Saban of his commission. It declared that Lim is
liable to pay Saban the amount of the purchase price of the lot corresponding to his commission because she issued the
four checks knowing that the total amount thereof corresponded to Sabans commission for the sale, as the agent of
Ybaez. The appellate court further ruled that, in issuing the checks in payment of Sabans commission, Lim acted as an
accommodation party. She signed the checks as drawer, without receiving value therefor, for the purpose of lending her
name to a third person. As such, she is liable to pay Saban as the holder for value of the checks.15
Lim filed a Motion for Reconsideration of the appellate courts Decision, but her Motion was denied by the Court of
Appeals in a Resolution dated May 6, 2004.16
Not satisfied with the decision of the Court of Appeals, Lim filed the present petition.
Lim argues that the appellate court ignored the fact that after paying her agent and remitting to Saban the amounts due for
taxes and transfer of title, she paid the balance of the purchase price directly to Ybaez.17
She further contends that she is not liable for Ybaezs debt to Saban under the Agency Agreement as she is not privy
thereto, and that Saban has no one but himself to blame for consenting to the dismissal of the case against Ybaez and not
moving for his substitution by his heirs.18
Lim also assails the findings of the appellate court that she issued the checks as an accommodation party for Ybaez and
that she connived with the latter to deprive Saban of his commission.19
Lim prays that should she be found liable to pay Saban the amount of his commission, she should only be held liable to
the extent of one-third (1/3) of the amount, since she had two co-vendees (the Spouses Lim) who should share such
liability.20
In his Comment, Saban maintains that Lim agreed to purchase the lot for P600,000.00, which consisted of theP200,000.00
which would be paid to Ybaez, the P50,000.00 due to her broker, the P113,257.00 earmarked for taxes and other
20

expenses incidental to the sale and Sabans commission as broker for Ybaez. According to Saban, Lim assumed the
obligation to pay him his commission. He insists that Lim and Ybaez connived to unjustly deprive him of his
commission from the negotiation of the sale.21
The issues for the Courts resolution are whether Saban is entitled to receive his commission from the sale; and, assuming
that Saban is entitled thereto, whether it is Lim who is liable to pay Saban his sales commission.
The Court gives due course to the petition, but agrees with the result reached by the Court of Appeals.
The Court affirms the appellate courts finding that the agency was not revoked since Ybaez requested that Lim make
stop payment orders for the checks payable to Saban only after the consummation of the sale on March 10, 1994. At that
time, Saban had already performed his obligation as Ybaezs agent when, through his (Sabans) efforts, Ybaez executed
the Deed of Absolute Sale of the lot with Lim and the Spouses Lim.
To deprive Saban of his commission subsequent to the sale which was consummated through his efforts would be a
breach of his contract of agency with Ybaez which expressly states that Saban would be entitled to any excess in the
purchase price after deducting the P200,000.00 due to Ybaez and the transfer taxes and other incidental expenses of the
sale.22
In Macondray & Co. v. Sellner,23 the Court recognized the right of a broker to his commission for finding a suitable buyer
for the sellers property even though the seller himself consummated the sale with the buyer.24The Court held that it would
be in the height of injustice to permit the principal to terminate the contract of agency to the prejudice of the broker when
he had already reaped the benefits of the brokers efforts.
In Infante v. Cunanan, et al.,25 the Court upheld the right of the brokers to their commissions although the seller revoked
their authority to act in his behalf after they had found a buyer for his properties and negotiated the sale directly with the
buyer whom he met through the brokers efforts. The Court ruled that the sellers withdrawal in bad faith of the brokers
authority cannot unjustly deprive the brokers of their commissions as the sellers duly constituted agents.
The pronouncements of the Court in the aforecited cases are applicable to the present case, especially considering that
Saban had completely performed his obligations under his contract of agency with Ybaez by finding a suitable buyer to
preparing the Deed of Absolute Sale between Ybaez and Lim and her co-vendees. Moreover, the contract of agency very
clearly states that Saban is entitled to the excess of the mark-up of the price of the lot after deducting Ybaezs share
of P200,000.00 and the taxes and other incidental expenses of the sale.
However, the Court does not agree with the appellate courts pronouncement that Sabans agency was one coupled with
an interest. Under Article 1927 of the Civil Code, an agency cannot be revoked if a bilateral contract depends upon it, or if
it is the means of fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership in the
contract of partnership and his removal from the management is unjustifiable. Stated differently, an agency is deemed as
one coupled with an interest where it is established for the mutual benefit of the principal and of the agent, or for the
interest of the principal and of third persons, and it cannot be revoked by the principal so long as the interest of the agent
or of a third person subsists. In an agency coupled with an interest, the agents interest must be in the subject matter of the
power conferred and not merely an interest in the exercise of the power because it entitles him to compensation. When an
agents interest is confined to earning his agreed compensation, the agency is not one coupled with an interest, since an
agents interest in obtaining his compensation as such agent is an ordinary incident of the agency relationship.26
Sabans entitlement to his commission having been settled, the Court must now determine whether Lim is the proper party
against whom Saban should address his claim.
Sabans right to receive compensation for negotiating as broker for Ybaez arises from the Agency Agreement between
them. Lim is not a party to the contract. However, the record reveals that she had knowledge of the fact that Ybaez set
21

the price of the lot at P200,000.00 and that the P600,000.00the price agreed upon by her and Sabanwas more than the
amount set by Ybaez because it included the amount for payment of taxes and for Sabans commission as broker for
Ybaez.
According to the trial court, Lim made the following payments for the lot: P113,257.00 for taxes, P50,000.00 for her
broker, and P400.000.00 directly to Ybaez, or a total of Five Hundred Sixty Three Thousand Two Hundred Fifty Seven
Pesos (P563,257.00).27 Lim, on the other hand, claims that on March 10, 1994, the date of execution of the Deed of
Absolute Sale, she paid directly to Ybaez the amount of One Hundred Thousand Pesos (P100,000.00) only, and gave to
Saban P113,257.00 for payment of taxes and P50,000.00 as his commission,28and One Hundred Thirty Thousand Pesos
(P130,000.00) on June 28, 1994,29 or a total of Three Hundred Ninety Three Thousand Two Hundred Fifty Seven Pesos
(P393,257.00). Ybaez, for his part, acknowledged that Lim and her co-vendees paid him P400,000.00 which he said was
the full amount for the sale of the lot.30 It thus appears that he received P100,000.00 on March 10, 1994, acknowledged
receipt (through Saban) of theP113,257.00 earmarked for taxes and P50,000.00 for commission, and received the balance
of P130,000.00 on June 28, 1994. Thus, a total of P230,000.00 went directly to Ybaez. Apparently, although the amount
actually paid by Lim was P393,257.00, Ybaez rounded off the amount to P400,000.00 and waived the difference.
Lims act of issuing the four checks amounting to P236,743.00 in Sabans favor belies her claim that she and her covendees did not agree to purchase the lot at P600,000.00. If she did not agree thereto, there would be no reason for her to
issue those checks which is the balance of P600,000.00 less the amounts of P200,000.00 (due to Ybaez), P50,000.00
(commission), and the P113,257.00 (taxes). The only logical conclusion is that Lim changed her mind about agreeing to
purchase the lot at P600,000.00 after talking to Ybaez and ultimately realizing that Sabans commission is even more
than what Ybaez received as his share of the purchase price as vendor. Obviously, this change of mind resulted to the
prejudice of Saban whose efforts led to the completion of the sale between the latter, and Lim and her co-vendees. This
the Court cannot countenance.
The ruling of the Court in Infante v. Cunanan, et al., cited earlier, is enlightening for the facts therein are similar to the
circumstances of the present case. In that case, Consejo Infante asked Jose Cunanan and Juan Mijares to find a buyer for
her two lots and the house built thereon for Thirty Thousand Pesos (P30,000.00) . She promised to pay them five percent
(5%) of the purchase price plus whatever overprice they may obtain for the property. Cunanan and Mijares offered the
properties to Pio Noche who in turn expressed willingness to purchase the properties. Cunanan and Mijares thereafter
introduced Noche to Infante. However, the latter told Cunanan and Mijares that she was no longer interested in selling the
property and asked them to sign a document stating that their written authority to act as her agents for the sale of the
properties was already cancelled. Subsequently, Infante sold the properties directly to Noche for Thirty One Thousand
Pesos (P31,000.00). The Court upheld the right of Cunanan and Mijares to their commission, explaining that
[Infante] had changed her mind even if respondent had found a buyer who was willing to close the deal, is a
matter that would not give rise to a legal consequence if [Cunanan and Mijares] agreed to call off the transaction
in deference to the request of [Infante]. But the situation varies if one of the parties takes advantage of the
benevolence of the other and acts in a manner that would promote his own selfish interest. This act is unfair as
would amount to bad faith. This act cannot be sanctioned without according the party prejudiced the reward
which is due him. This is the situation in which [Cunanan and Mijares] were placed by [Infante]. [Infante] took
advantage of the services rendered by [Cunanan and Mijares], but believing that she could evade payment of their
commission, she made use of a ruse by inducing them to sign the deed of cancellation.This act of subversion
cannot be sanctioned and cannot serve as basis for [Infante] to escape payment of the commission agreed upon.31
The appellate court therefore had sufficient basis for concluding that Ybaez and Lim connived to deprive Saban of his
commission by dealing with each other directly and reducing the purchase price of the lot and leaving nothing to
compensate Saban for his efforts.
Considering the circumstances surrounding the case, and the undisputed fact that Lim had not yet paid the balance
of P200,000.00 of the purchase price of P600,000.00, it is just and proper for her to pay Saban the balance
of P200,000.00.
22

Furthermore, since Ybaez received a total of P230,000.00 from Lim, or an excess of P30,000.00 from his asking price
of P200,000.00, Saban may claim such excess from Ybaezs estate, if that remedy is still available,32 in view of the trial
courts dismissal of Sabans complaint as against Ybaez, with Sabans express consent, due to the latters demise on
November 11, 1994.33
The appellate court however erred in ruling that Lim is liable on the checks because she issued them as an accommodation
party. Section 29 of the Negotiable Instruments Law defines an accommodation party as a person "who has signed the
negotiable instrument as maker, drawer, acceptor or indorser, without receiving value therefor, for the purpose of lending
his name to some other person." The accommodation party is liable on the instrument to a holder for value even though
the holder at the time of taking the instrument knew him or her to be merely an accommodation party. The
accommodation party may of course seek reimbursement from the party accommodated.34
As gleaned from the text of Section 29 of the Negotiable Instruments Law, the accommodation party is one who meets all
these three requisites, viz: (1) he signed the instrument as maker, drawer, acceptor, or indorser; (2) he did not receive
value for the signature; and (3) he signed for the purpose of lending his name to some other person. In the case at bar,
while Lim signed as drawer of the checks she did not satisfy the two other remaining requisites.
The absence of the second requisite becomes pellucid when it is noted at the outset that Lim issued the checks in question
on account of her transaction, along with the other purchasers, with Ybaez which was a sale and, therefore, a reciprocal
contract. Specifically, she drew the checks in payment of the balance of the purchase price of the lot subject of the
transaction. And she had to pay the agreed purchase price in consideration for the sale of the lot to her and her co-vendees.
In other words, the amounts covered by the checks form part of the cause or consideration from Ybaezs end, as vendor,
while the lot represented the cause or consideration on the side of Lim, as vendee.35 Ergo, Lim received value for her
signature on the checks.
Neither is there any indication that Lim issued the checks for the purpose of enabling Ybaez, or any other person for that
matter, to obtain credit or to raise money, thereby totally debunking the presence of the third requisite of an
accommodation party.
WHEREFORE, in view of the foregoing, the petition is DISMISSED.

23

G.R. No. 150678

February 18, 2005

BIENVENIDO R. MEDRANO and IBAAN RURAL BANK, petitioners,

vs.
COURT OF APPEALS, PACITA G. BORBON, JOSEFINA E. ANTONIO and ESTELA A. FLOR, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review of the Decision1 of the Court of Appeals (CA) affirming in toto the Decision2 of the Regional
Trial Court (RTC) of Makati City, Branch 135, in Civil Case No. 15664 which awarded to the respondents their 5%
brokers commission.
The facts are as follows:
Bienvenido R. Medrano was the Vice-Chairman of Ibaan Rural Bank, a bank owned by the Medrano family. In 1986, Mr.
Medrano asked Mrs. Estela Flor, a cousin-in-law, to look for a buyer of a foreclosed asset of the bank,3a 17-hectare mango
plantation priced at P2,200,000.00, located in Ibaan, Batangas.4
Mr. Dominador Lee, a businessman from Makati City, was a client of respondent Mrs. Pacita G. Borbon, a licensed real
estate broker. The two met through a previous transaction where Lee responded to an ad in a newspaper put up by Borbon
for an 8-hectare property in Lubo, Batangas, planted with atis trees. Lee expressed that he preferred a land with mango
trees instead. Borbon promised to get back to him as soon as she would be able to find a property according to his
specifications.
Borbon relayed to her business associates and friends that she had a ready buyer for a mango orchard. Flor then advised
her that her cousin-in-law owned a mango plantation which was up for sale. She told Flor to confer with Medrano and to
give them a written authority to negotiate the sale of the property.5 Thus, on September 3, 1986, Medrano issued the Letter
of Authority, as follows:
Mrs. Pacita G. Borbon & Miss Josefina E. Antonio
Campos Rueda Building
Tindalo, Makati, M.M.
Mrs. Estela A. Flor & Miss Maria Yumi S. Karasig
23 Mabini Street
Quezon City, M.M.
Dear Mesdames:
This letter will serve as your authority* to negotiate with any prospective buyer for the sale of a certain real estate
property more specifically a mango plantation which is described more particularly therein below:
Location : Barrio Tulay-na-Patpat, Ibaan, Batangas
Lot Area : 17 hectares (more or less) per
attached Appendix "A"
Improvements : 720 all fruit-bearing mango trees
(carabao variety) and other trees
24

Price : P 2,200,000.00
For your labor and effort in finding a purchaser thereof, I hereby bind myself to pay you a commission of 5% of the total
purchase price to be agreed upon by the buyer and seller.
Very truly yours,
(Sgd.)
B.R. Medrano
Owner
* Subject to price sale.6
The respondents arranged for an ocular inspection of the property together with Lee which never materialized the first
time was due to inclement weather; the next time, no car was available for the tripping to Batangas.7 Lee then called up
Borbon and told her that he was on his way to Lipa City to inspect another property, and might as well also take a look at
the property Borbon was offering. Since Lee was in a hurry, the respondents could no longer accompany him at the time.
Thus, he asked for the exact address of the property and the directions on how to reach the lot in Ibaan from Lipa City.
Thereupon, Lee was instructed to get in touch with Medranos daughter and also an officer of the bank, Mrs. Teresa
Ganzon, regarding the property.81vvphi1.nt
Two days after the visit, respondent Josefina Antonio called Lee to inquire about the result of his ocular inspection. Lee
told her that the mango trees "looked sick" so he was bringing an agriculturist to the property. Three weeks thereafter,
Antonio called Lee again to make a follow-up of the latters visit to Ibaan. Lee informed her that he already purchased the
property and had made a down payment of P1,000,000.00. The remaining balance of P1,200,000.00 was to be paid upon
the approval of the incorporation papers of the corporation he was organizing by the Securities and Exchange
Commission. According to Antonio, Lee asked her if they had already received their commission. She answered "no," and
Lee expressed surprise over this.9
A Deed of Sale was eventually executed on November 6, 1986 between the bank, represented by its President/General
Manager Teresa M. Ganzon (as Vendor) and KGB Farms, Inc., represented by Dominador Lee (as Vendee), for the
purchase price of P1,200,000.00.10 Since the sale of the property was consummated, the respondents asked from the
petitioners their commission, or 5% of the purchase price. The petitioners refused to pay and offered a measly sum
of P5,000.00 each.11 Hence, the respondents were constrained to file an action against herein petitioners.
The petitioners alleged that Medrano issued the letter of authority in favor of all the respondents, upon the representation
of Flor that she had a prospective buyer. Flor was the only person known to Medrano, and he had never met Borbon and
Antonio. Medrano had asked that the name of their prospective buyer be immediately registered so as to avoid confusion
later on, but Flor failed to do so. Furthermore, the other officers of the bank had never met nor dealt with the respondents
in connection with the sale of the property. Ganzon also asked Lee if he had an agent and the latter replied that he had
none. The petitioners also denied that the purchase price of the property was P2,200,000.00 and alleged that the property
only cost P1,200,000.00. The petitioners further contended that the letter of authority signed by Medrano was not binding
or enforceable against the bank because the latter had a personality separate and distinct from that of Medrano. Medrano,
on the other hand, denied liability, considering that he was not the registered owner of the property, but the bank. The
petitioners, likewise, filed a counterclaim as they were constrained to hire the services of counsel and suffered damages.12
After the case was submitted for decision, Medrano died, but no substitution of party was made at this time.13
The trial court resolved the case based on the following common issues:

25

1. Whether or not the letter of authority is binding and enforceable against the defendant Bank only or both
defendants; and
2. Whether or not the plaintiffs are entitled to any commission for the sale of the subject property.14
On September 21, 1994, the trial court rendered a Decision in favor of the respondents. The petitioners were ordered to
pay, jointly and severally, the 5% brokers commission to herein respondents. The trial court found that the letter of
authority was valid and binding as against Medrano and the Ibaan Rural bank. Medrano signed the said letter for and in
behalf of the bank, and as owner of the property, promising to pay the respondents a 5% commission for their efforts in
looking for a purchaser of the property. He is, therefore, estopped from denying liability on the basis of the letter of
authority he issued in favor of the respondents. The trial court further stated that the sale of the property could not have
been possible without the representation and intervention of the respondents. As such, they are entitled to the brokers
commission of 5% of the selling price of P1,200,000.00 as evidenced by the deed of sale.15 The fallo of the decision reads
as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against the defendants, for
the latter, jointly and severally:
1. To pay plaintiffs the sum of P60,000.00 representing their five percent (5%) commission of the purchase price
of the property sold based on Exh. "D" or "9" plus legal interest from date of filing of the herein complaint until
fully paid;
2. To pay plaintiffs the sum of P20,000.00 as and for attorneys fees;
3. To pay the plaintiffs the sum of P10,000.00 as litigation expenses;
4. To pay the costs of the proceedings.16
Unable to agree with the RTC decision, petitioner Ibaan Rural Bank filed its notice of appeal.17
On October 10, 1994, the heirs of Bienvenido Medrano filed a Motion for Reconsideration18 praying that the late
Bienvenido Medrano be substituted by his heirs. They further prayed that the trial courts decision as far as Medrano was
concerned be set aside and dismissed considering his demise. The trial court denied the motion for
reconsideration.19 Hence, the heirs of Medrano also filed their notice of appeal.20
On appeal, the petitioners reiterated their stance that the letter of authority was not binding and enforceable, as the same
was signed by Medrano, who was not actually the owner of the property. They refused to give the respondents any
commission, since the latter did not perform any act to consummate the sale. The petitioners pointed out that the
respondents (1) did not verify the real owner of the property; (2) never saw the property in question; (3) never got in touch
with the registered owner of the property; and (4) neither did they perform any act of assisting their buyer in having the
property inspected and verified.21 The petitioners further raised the trial courts error in not dismissing the case against
Bienvenido Medrano considering his death.
On May 3, 2001, the CA promulgated the assailed decision affirming the finding of the trial court that the letter of
authority was valid and binding. Applying the principle of agency, the appellate court ruled that Bienvenido Medrano
constituted the respondents as his agents, granting them authority to represent and act on behalf of the former in the sale
of the 17-hectare mango plantation. The CA also ruled that the trial court did not err in finding that the respondents were
the procuring cause of the sale. Suffice it to state that were it not for the respondents, Lee would not have known that there
was a mango orchard offered for sale.1awphi1.nt

26

The CA further ruled that an action for a sum of money continues even after the death of the defendant, and shall remain
as a money claim against the estate of the deceased.
Undaunted by the CAs unfavorable decision, the petitioners filed the instant petition, raising eight (8) assignments of
errors, to wit:
I. THE COURT OF APPEALS ERRED WHEN IT FOUND THE PRIVATE RESPONDENTS TO BE THE
PROCURING CAUSE OF THE SALE;
II. THE COURT OF APPEALS ERRED IN GIVING CREDENCE TO THE LETTER-AUTHORITY OF
PETITIONER MR. MEDRANO;
III. THE COURT OF APPEALS MADE A MISTAKE WHEN IT CORRECTLY RECOGNIZED THE EXTENT
OF THE PRIVATE RESPONDENTS OBLIGATION AND AUTHORITY CONTAINED IN MEDRANOS
LETTER-AUTHORITY AND YET ERRONEOUSLY GRANTED THE PRIVATE-RESPONDENTS
DEMAND, NOTWITHSTANDING THE NON-PERFORMANCE OF THEIR OBLIGATION THEREUNDER;
IV. THE COURT OF APPEALS ERRED IN PRESUMING BAD FAITH UPON THE PETITIONERS;
V. THE COURT OF APPEALS ERRED IN PLACING THE BURDEN OF PROOF UPON THE
DEFENDANTS-PETITIONERS;
VI. THE COURT OF APPEALS FAILED TO SUBSTANTIATE ITS CONCLUSION WITH EVIDENCE AND
INSTEAD RELIED ON INFERENCE;
VII. THE COURT OF APPEALS FAILED TO SUBSTANTIATE ITS CONCLUSION WITH EVIDENCE AND
MERELY RELIED ON SPECULATION AND SURMISE;
VIII. THE COURT OF APPEALS MISAPPRECIATED THE FACTS PRESENTED BEFORE IT, AND
CONSEQUENTLY FAILED TO CONSIDER REASONABLY THE TWO (2) BASIC ARGUMENTS OF THE
PETITIONERS.22
The petition is denied.
The records disclose that respondent Pacita Borbon is a licensed real estate broker23 and respondents Josefina Antonio and
Estela A. Flor are her associates.24 A broker is generally defined as one who is engaged, for others, on a commission,
negotiating contracts relative to property with the custody of which he has no concern; the negotiator between other
parties, never acting in his own name but in the name of those who employed him; he is strictly a middleman and for
some purposes the agent of both parties. A broker is one whose occupation is to bring parties together, in matters of trade,
commerce or navigation.25 For the respondents participation in finding a buyer for the petitioners property, the
petitioners refuse to pay them commission, asserting that they are not the efficient procuring cause of the sale, and that the
letter of authority signed by petitioner Medrano is not binding against the petitioners.
"Procuring cause" is meant to be the proximate cause.26 The term "procuring cause," in describing a brokers activity,
refers to a cause originating a series of events which, without break in their continuity, result in accomplishment of prime
objective of the employment of the broker producing a purchaser ready, willing and able to buy real estate on the
owners terms.27 A broker will be regarded as the "procuring cause" of a sale, so as to be entitled to commission, if his
efforts are the foundation on which the negotiations resulting in a sale are begun.28 The broker must be the efficient agent
or the procuring cause of the sale. The means employed by him and his efforts must result in the sale. He must find the
purchaser, and the sale must proceed from his efforts acting as broker.29
27

Indeed, the evidence on record shows that the respondents were instrumental in the sale of the property to Lee. Without
their intervention, no sale could have been consummated. They were the ones who set the sale of the subject land in
motion.30 Upon being informed by Flor that Medrano was selling his mango orchard, Borbon lost no time in informing
Lee that they had found a property according to his specifications. An ocular inspection of the property together with Lee
was immediately planned; unfortunately, it never pushed through for reasons beyond the respondents control. Since Lee
was in a hurry to see the property, he asked the respondents the exact address and the directions on how to reach Ibaan,
Batangas. The respondents thereupon instructed him to look for Teresa Ganzon, an officer of the Ibaan Rural Bank and
the person to talk to regarding the property. While the letter-authority issued in favor of the respondents was nonexclusive, no evidence was adduced to show that there were other persons, aside from the respondents, who informed Lee
about the property for sale. Ganzon testified that no advertisement was made announcing the sale of the lot, nor did she
give any authority to other brokers/agents to sell the subject property.31 The fact that it was Lee who personally called
Borbon and asked for directions prove that it was only through the respondents that Lee learned about the property for
sale.32Significantly, too, Ms. Teresa Ganzon testified that there were no other persons other than the respondents who
inquired from her about the sale of the property to Lee.33 It can thus be readily inferred that the respondents were the only
ones who knew about the property for sale and were responsible in leading a buyer to its consummation. All these
circumstances lead us to the inescapable conclusion that the respondents were the procuring cause of the sale. When there
is a close, proximate and causal connection between the brokers efforts and the principals sale of his property, the broker
is entitled to a commission.34
The petitioners insist that the respondents are not entitled to any commission since they did not actually perform any acts
of "negotiation" as required in the letter-authority. They refuse to pay the commission since according to them, the
respondents participation in the transaction was not apparent, if not nil. The respondents did not even look at the property
themselves; did not introduce the buyer to the seller; did not hold any conferences with the buyer, nor take part in
concluding the sale. For the non-compliance of this obligation "to negotiate," the petitioners argue, the respondents are not
entitled to any commission.
We find the argument specious.l^vvphi1.net The letter of authority must be read as a whole and not in its truncated parts.
Certainly, it was not the intention of Medrano to expect the respondents to do just that (to negotiate) when he issued the
letter of authority. The clear intention is to reward the respondents for procuring a buyer for the property. Before
negotiating a sale, a broker must first and foremost bring in a prospective buyer. It has been held that a broker earns his
pay merely by bringing the buyer and the seller together, even if no sale is eventually made.35 The essential feature of a
brokers conventional employment is merely to procure a purchaser for a property ready, able, and willing to buy at the
price and on the terms mutually agreed upon by the owner and the purchaser. And it is not a prerequisite to the right to
compensation that the broker conduct the negotiations between the parties after they have been brought into contact with
each other through his efforts.36 The case ofMacondray v. Sellner37 is quite instructive:
The business of a real estate broker or agent, generally, is only to find a purchaser, and the settled rule as stated by the
courts is that, in the absence of an express contract between the broker and his principal, the implication generally is that
the broker becomes entitled to the usual commissions whenever he brings to his principal a party who is able and willing
to take the property and enter into a valid contract upon the terms then named by the principal, although the particulars
may be arranged and the matter negotiated and completed between the principal and the purchaser directly.
Notably, there are cases where the right of the brokers to recover commissions were upheld where they actually took no
part in the negotiations, never saw the customer, and even some in which they did nothing except advertise the property,
as long as it can be shown that they were the efficient cause of the sale.38
In the case at bar, the role of the respondents in the transaction is undisputed. Whether or not they participated in the
negotiations of the sale is of no moment. Armed with an authority to procure a purchaser and with a license to act as
broker, we see no reason why the respondents can not recover compensation for their efforts when, in fact, they are the
procuring cause of the sale.39

28

Anent the validity of the letter-authority signed by Medrano, we find no reversible error with the findings of the appellate
and trial courts that the petitioners are liable thereunder. Such factual findings deserve this Courts respect in the absence
of any cogent reason to reverse the same. Medranos obligation to pay the respondents commission for their labor and
effort in finding a purchaser or a buyer for the described parcel of land is unquestionable. In the absence of fraud,
irregularity or illegality in its execution, such letter-authority serves as a contract, and is considered as the law between the
parties. As such, Medrano can not renege on the promise to pay commission on the flimsy excuse that he is not the
registered owner of the property. The evidence shows that he comported himself to be the owner of the property. His
testimony is quite telling:
Q Mr. Medrano, do you know any of the plaintiffs in this case, Pacita Borbon, Josefina Antonio, and Stella (sic)
F. Flor?
WITNESS
A I know only Stella (sic) F. Flor. The rest, I do not know them. I have never met them, up to now.
Q How about the co-defendant Ibaan Rural Bank?
A I know co-defendant Ibaan Rural Bank, having been the founder and at one time or another, I have served
several capacities from President to Chairman of the Board.
Q Are you familiar with a certain parcel of land located at Barrio Tulay na Patpat, Ibaan, Batangas, with an area
of 17 hectares?
A Yes, Sir. I used to own that property but later on mortgaged it to Ibaan Rural Bank.
Q And what, if any, [did] the bank do to your property after you have mortgaged the same to it?
A After many demands for payment or redemption of my mortgage, which I failed to do so, the Ibaan Rural Bank
sold it.
Q After it was foreclosed?
A Yes, Sir.
Q Do you recall having made any transaction with plaintiff Stella (sic) F. Flor regarding the property?
A Yes, Sir. Since she is the first cousin of my wife, I remember [that] she came to my office once and requested
for a letter of authority which I issued [in] September 1986, I think, and I gave her the letter of authority.40
As to the liability of the bank, we quote with favor the disquisition of the respondent court, to wit:
Further, the appellants cannot use the flimsy excuse (only to evade liability) that "(w)hat Mr. Medrano represented to the
plaintiffs-appellees, without the knowledge or consent of the defendant Bank, did not bind the Bank. Res inter alios acta
alteri nocere non debet." (page 8 of the Appellants Brief; page 35 of the Rollo). While it may be true that technically the
Ibaan Rural Bank did not authorize Bienvenido R. Medrano to sell the land under litigation or that the latter was no longer
an officer of the said bank, still, these circumstances do not convince this Court fully well to absolve the bank. Note that,
as former President of the said bank, it is improbable that he (Bienvenido R. Medrano) was completely oblivious of the
developments therein. By reason of his past association with the officers of the said bank (who are, in fact, his relatives), it
is unbelievable that Bienvenido R. Medrano could simply have issued the said letter of authority without the knowledge of
the said officers. Granting por aguendothat Bienvenido R. Medrano did not act on behalf of the bank, however, We doubt
29

that he had no financial and/or material interest in the said sale a fact that could not possibly have eluded Our
attention.41
From all the foregoing, there can be no other conclusion than the respondents are indeed the procuring cause of the sale. If
not for the respondents, Lee would not have known about the mango plantation being sold by the petitioners. The sale was
consummated. The bank had profited from such transaction. It would certainly be iniquitous if the respondents would not
be rewarded their commission pursuant to the letter of authority.
WHEREFORE, the petition is DENIED due course. The Decision of the Court of Appeals is AFFIRMED.

30

G.R. No. 76969 June 9, 1997

INLAND REALTY INVESTMENT SERVICE, INC. and ROMAN M. DE LOS REYES, petitioners,
vs.
HON. COURT OF APPEALS, GREGORIO ARANETA, INC. and J. ARMANDO EDUQUE, respondents.
HERMOSISIMA, JR., J.:
Herein petitioners Inland Realty Investment Service, Inc. (hereafter, "Inland Realty") and Roman M. de los Reyes seek the
reversal of the Decision 1 of the Intermediate Appellate Court (now Court of Appeals) 2 which affirmed the trial court's
dismissal 3 of petitioners' claim for unpaid agent's commission for brokering the sales transaction involving 9,800 shares
of stock in Architects' Bldg., Inc. (hereafter, "Architects"') between private respondent Gregorio Araneta, Inc. (hereafter,
"Araneta, Inc.") as seller and Stanford Microsystems, Inc. (hereafter, "Stanford") as buyer.
Petitioners come to us with a two-fold agenda: (1) to obtain from us a declaration that the trial court and the respondent
appellate court gravely erred when appreciating the facts of the case by disregarding Exhibits "L," a Letter dated October
28, 1976 signed by Gregorio Araneta II, renewing petitioners' authority to act as sales agent for a period of thirty (30) days
from same date, and Exhibit "M," a Letter dated November 16, 1976 signed by petitioner de los Reyes, naming four (4)
other prospective buyers, respectively; and (2) to obtain from us a categorical ruling that a broker is automatically entitled
to the stipulated commission merely upon securing for, and introducing to, the seller the particular buyer who ultimately
purchases from the former the object of the sale, regardless of the expiration of the broker's contract of agency and
authority to sell.
Before we proceed to address petitioners' objectives, there is a need to unfold the facts of the case. For that purpose, we
quote hereunder the findings of fact of the Court of Appeals with which petitioners agree, except as to the respondent
appellate court's non-inclusion of the aforementioned Exhibits "L" and "M":
From the evidence, the following facts appear undisputed: On September 16, 1975, defendant corporation
thru its co-defendant Assistant General Manager J. Armando Eduque, granted to plaintiffs a 30-day
authority to sell its . . . 9,800 shares of stock in Architects' Bldg., Inc. as follows:
September 16, 1975
TO WHOM IT MAY CONCERN:
This is to authorize Mr. R.M. de los Reyes, representing Inland Realty, to sell on a first
come first served basis the total holdings of Gregorio Araneta, Inc. in Architects' [Bldg.],
Inc. equivalent to 98% or 9,800 shares of stock at the price of P1,500.00 per share for a
period of 30 days.
(SGD.) J. ARMANDO
EDUQUE
Asst. General Manager'
Plaintiff Inland Realty Investment Service, Inc. (Inland Realty for short) is a corporation engaged [in],
among others . . . the real estate business [and] brokerages, duly licensed by the Bureau of Domestic
Trade . . . [Inland Realty] planned their sales campaign, sending proposal letters to prospective buyers.
One such prospective buyer to whom a proposal letter was sent to was Stanford Microsystems, Inc. . . .
[that] counter-proposed to buy 9,800 shares offered at P1,000.00 per share or for a total of P9,800,000.00,
P4,900,000.00 payable in five years at 12% per annum interest until fully paid.
31

Upon plaintiffs' receipt of the said counter-proposal, it immediately [sic] wrote defendant a letter to
register Stanford Microsystems, Inc. as one of its prospective buyers . . . Defendant Araneta, Inc., thru its
Assistant General Manager J. Armando Eduque, replied that the price offered by Stanford was too low
and suggested that plaintiffs see if the price and terms of payment can be improved upon by Stanford . . .
Other prospective buyers were submitted to defendants among whom were Atty. Maximo F. Belmonte
and Mr. Joselito Hernandez. The authority to sell given to plaintiffs by defendants was extended several
times: the first being on October 2, 1975, for 30 days from said date (Exh. "J"), the second on October 28,
1975 for 30 days from said date (Exh. "L") and on December 2, 1975 for 30 days from said date (Exh.
"K").
Plaintiff Roman de los Reyes, manager of Inland Realty's brokerage division, who by contract with Inland
Realty would be entitled to 1/2 of the claim asserted herein, testified that when his company was initially
granted the authority to sell, he asked for an exclusive authority and for a longer period but Armando
Eduque would not give, but according to this witness, the life of the authority could always be extended
for the purpose of negotiation that would be continuing.
On July 8, 1977, plaintiffs finally sold the 9,800 shares of stock
[in] Architects' [Bldg.], Inc. to Stanford Microsystems, Inc. for P13,500,000.00 . . .
On September 6, 1977, plaintiffs demanded formally [from] defendants, through a letter of demand, for
payment of their 5% broker['s] commission at P13,500,000.00 or a total amount of P675,000.00 . . . which
was declined by [defendants] on the ground that the claim has no factual or legal basis. 4
Ascribing merit to private respondents' defense that, after their authority to sell expired thirty (30) days from December 2,
1975, or on January 1, 1976, petitioners abandoned the sales transaction and were no longer privy to the consummation
and documentation thereof, the trial court dismissed petitioners' complaint for collection of unpaid broker's commission.
Petitioners appealed, but the Court of Appeals was unswayed in the face of evidence of the expiration of petitioners'
agency contract and authority to sell on January 1, 1976 and the consummation of the sale to Stanford on July 8, 1977 or
more than one (1) year and five (5) months after petitioners' agency contract and authority to sell expired. Respondent
appellate court dismissed petitioners' appeal in this wise:
. . . The resolution would seem to hinge on the question of whether plaintiff was instrumental in the final
consummation of the sale to Stanford which was the same name of the company submitted to defendants
as a prospective buyer although their price was considered by defendant to be too low and defendants
wrote to plaintiff if the price may be improved upon by Stanford . . . This was on October 13, 1975. After
that, there was an extension for 30 days from October 28, 1975 of the authority (Exh. "L") and another on
December 2, 1975 for another 30 days from the said date . . . . There is nothing in the record or in the
testimonial evidence that the authority extended 30 days from the last date of extension was ever reserved
nor extended, nor has there been any communication made to defendants that the plaintiff was actually
negotiating with Stanford a better price than what was previously offered by it . . . .
In fact there was no longer any agency after the last extension. Certainly, the length of time which had
transpired from the date of last extension of authority to the final consummation of the sale with Stanford
of about one (1) year and five (5) months without any communication at all from plaintiffs to defendants
with respect to the suggestion or defendants that Stanford's offer was too low and suggested if plaintiffs
may make it better. We have a case of proposal and counter-proposal which would not constitute a
definite closing of the transaction just because it was plaintiff who solely suggested to defendants the
name of Stanford as buyer . . . . 5
Unable to accept the dismissal of its claim for unpaid broker's commission, petitioners filed the instant petition for review
asking us (1) to pass upon the factual issue of the alleged extension of their agency contract and authority to sell and (2) to
32

rule in favor of a broker's automatic entitlement to the stipulated commission merely upon securing for, and introducing
to, the seller, the particular buyer who ultimately purchases from the former the object of the sale, regardless of the
expiration of the broker's contract of agency and authority to sell.
We find for private respondents.
I
Petitioners take exception to the finding of the respondent Court of Appeals that their contract of agency and authority to
sell expired thirty (30) days from its last renewal on December 2, 1975. They insist that, in the Letter dated October 28,
1976, Gregorio Araneta III, in behalf of Araneta, Inc., renewed petitioner Inland Realty's authority to act as agent to sell
the former's 9,800 shares in Architects' for another thirty (30) days from same date. This Letter dated October 28, 1976,
petitioners claim, was marked as Exhibit "L" during the trial proceedings before the trial court.
This claim is a blatant lie. In the first place, petitioners have conspicuously failed to attach a certified copy of this Letter
dated October 28, 1976. They have, in fact, not attached even a machine copy thereof. All they gave this court is their
word that said Letter dated October 28, 1976 does exist, and on that basis, they expect us to accordingly rule in their
favor.
Such naivety, this court will not tolerate. We will not treat lightly petitioners' attempt to mislead this court by claiming
that the Letter dated October 28, 1976 was marked as Exhibit "L" by the trial court, when the truth is that the trial court
marked as Exhibit "L", and the respondent Court of Appeals considered as Exhibit "L," private respondent Araneta, Inc.'s
Letter dated October 28, 1975, not 1976. Needless to say, this blatant attempt to mislead this court, is contemptuous
conduct that we sternly condemn.
II
The Letter dated November 16, 1976, claimed by petitioners to have been marked as Exhibit "M", has no probative value,
considering that its very existence remains under a heavy cloud of doubt and that hypothetically assuming its existence, its
alleged content, namely, a listing of four (4) other prospective buyers, does not at all prove that the agency contract and
authority to sell in favor of petitioners was renewed or revived after it expired on January 1, 1976. As in the case of the
Letter dated October 28, 1976, petitioners have miserably failed to attach any copy of the Letter dated November 16,
1976. A copy thereof would not help petitioners' failing cause, anyway, especially considering that said letter was signed
by petitioner De los Reyes and would therefore take on the nature of a self-serving document that has no evidentiary value
insofar as petitioners are concerned.
III
Finally, petitioners asseverate that, regardless of whether or not their agency contract and authority to sell had expired,
they are automatically entitled to their broker's commission merely upon securing for and introducing to private
respondent Araneta, Inc. the buyer in the person of Stanford which ultimately acquired ownership over Araneta, Inc.'s
9,800 shares in Architects'.
Petitioners' asseverations are devoid of merit.
It is understandable, though, why petitioners have resorted to a campaign for an automatic and blanket entitlement to
brokerage commission upon doing nothing but submitting to private respondent Araneta, Inc., the name of Stanford as
prospective buyer of the latter's shares in Architects'. Of course petitioners would advocate as such because precisely
petitioners did nothing but submit Stanford's name as prospective buyer. Petitioners did not succeed in outrightly selling
said shares under the predetermined terms and conditions set out by Araneta, Inc., e.g., that the price per share is
P1,500.00. They admit that they could not dissuade Stanford from haggling for the price of P1,000.00 per share with the
33

balance of 50% of the total purchase price payable in five (5) years at 12% interest per annum. From September 16, 1975
to January 1, 1976, when petitioners' authority to sell was subsisting, if at all, petitioners had nothing to show that they
actively served their principal's interests, pursued to sell the shares in accordance with their principal's terms and
conditions, and performed substantial acts that proximately and causatively led to the consummation of the sale to
Stanford of Araneta, Inc.'s 9,800 shares in Architects'.
The Court of Appeals cannot be faulted for emphasizing the lapse of more than one (1) year and five (5) months between
the expiration of petitioners' authority to sell and the consummation of the sale to Stanford, to be a significant index of
petitioners' non-participation in the really critical events leading to the consummation of said sale, i.e., the negotiations to
convince Stanford to sell at Araneta, Inc.'s asking price, the finalization of the terms and conditions of the sale, the
drafting of the deed of sale, the processing of pertinent documents, and the delivery of the shares of stock to Stanford.
Certainly, when the lapse of the period of more than one (1) year and five (5) months between the expiration of
petitioners' authority to sell and the consummation of the sale, is viewed in the context of the utter lack of evidence of
petitioners' involvement in the negotiations between Araneta, Inc. and Stanford during that period and in the subsequent
processing of the documents pertinent to said sale, it becomes undeniable that the respondent Court of Appeals did not at
all err in affirming the trial court's dismissal of petitioners' claim for unpaid brokerage commission.
Petitioners were not the efficient procuring cause 6 in bringing about the sale in question an July 8, 1977 and are,
therefore, not entitled to the stipulated broker's commission of "5% on the total price."
WHEREFORE, the instant petition is HEREBY DISMISSED.

34

G.R. No. L-18170

August 31, 1963

NATIONAL BREWERY & ALLIED INDUSTRIES LABOR UNION OF THE PHILIPPINES, plaintiff-appellant,
vs.
SAN MIGUEL BREWERY, INC., THE INDEPENDENT SAN MIGUEL BREWERY WORKERS'
ASSOCIATION and
ALL OTHER UNKNOWN NON-UNION WORKERS OF THE SAN MIGUEL BREWERY, INC., defendantsappellees.
REGALA, J.:
This is an appeal directly coming from the Court of First Instance of Manila dismissing the complaint upon the petition of
the defendant San Miguel Brewery Workers' Association.
This case presents a question of first impression in this jurisdiction, namely, the validity of a union agency fee as a form
of union security.
Appellant National Brewery & Allied Industries Labor Union of the Philippines is the bargaining representative of all
regular workers paid on the daily basis and of route helpers of San Miguel Brewery, Inc.
On October 2, 1959, it signed a collective bargaining agreement with the company, which provided, among other things,
that
The COMPANY will deduct the UNION agency fee from the wages of workers who are not members of the
UNION, provided the aforesaid workers authorized the COMPANY to make such deductions in writing or if no
such authorization is given, if a competent court direct the COMPANY to make such deduction. (Art. II, Sec. 4)
Alleging that it had obtained benefits for all workers in the company and that "defendant Independent S.M.B. Workers'
Association refused and still refuses to pay UNION AGENCY FEE to the plaintiff UNION and defendant COMPANY
also refuses and still refuses to deduct the UNION AGENCY FEE from the wages of workers who are not members of the
plaintiff UNION and remit the same to the latter," the union brought suit in the Court of First Instance of Manila on
November 17, 1960 for the collection of union agency fees under the bargaining contract.
The lower court, in dismissing the complaint, held that there was nothing in the Industrial Peace Act (Republic Act No.
875) which would authorize the collection of agency fees and that neither may such collection be justified under the rules
of quasi contract because the workers had not neglected their business so as to warrant the intervention, of an officious
manager. The trial court also held the rules of agency inapplicable because there was no agreement between the union and
the workers belonging to the other union as to the payment of fee nor was there, said the court, any allegation in the
complaint that the amount of P4.00, which the union sought to collect from each employee, was the expense incurred by
the union in representing him.
Its motion for reconsideration having been denied, the union appealed to this Court.
The right of employees "to self-organization and to form, join or assist labor organizations of their own choosing" (Sec. 3,
Republic Act No. 875) is a fundamental right that yields only to the proviso that "nothing in this Act or statute of the
Republic of the Philippines shall preclude an employer from making an agreement with a labor organization to require as
a condition of employment membership therein, if such labor organization is the representative of the employees as
provided in Section twelve." (Sec. 4[a] [4]).
The only question here is whether such an agreement is a permissible form of union security under Section 4(a)(4) as
contended by the union.
35

In the case of General Motors Corp., 130 NLRB 481, the National Labor Relations Board was faced with a similar
question. In that case, the union proposed to the company that employees represented by it and new employees hired
thereafter be required as a condition of continued employment after 30 days, following the date of the supplementary
agreement or of their initial employment (whichever was later) to pay to the union a sum equal to the initiation fee and a
monthly sum equal to the regular dues required of union members at each location. The company contended that the
clause was illegal under Section 7 and Section 8(a) (1) of the National Labor Relations Act, as amended.1
In upholding the company's contention the Board held:
. . . any union-security agreement, including one providing for an agency shop, necessarily interferes with the
Section 7 right of employees to refrain from assisting a labor organization, and encourages membership in a labor
organization. Such an agreement is therefore clearly unlawful under Section 8(a) (1) and (3), unless it is saved by
the proviso to Section 8(a) (3) of the Act. That proviso permits an employer to make an agreement with a labor
organization "to require as a condition of employment membership therein on or after the thirtieth day following
the beginning of such employment or the effective date of such agreement, whichever is later .. [Emphasis
supplied] There is, however, no other provision in the Act which specifically legalizes the interference and
encouragement inherent in an agency-shop arrangement, and the only question here is whether such an
arrangement can be lawful under the National Labor Relations Act in a State like Indiana, where it is clear that an
agreement requiring literal membership is prohibited by State law. To hold the agency shop lawful, one would
have to conclude that Congress intended the word "membership" in Sections 7 and 8(a)(3) to encompass not only
literal membership, but also other relationships between employees and the union in the picture, while at the same
time intending that the same word in Section 14(b) 2 encompass only literal membership; or further, that
Congress intended the word "membership" to mean one thing in Indiana and a different thing somewhere else.
Such reasoning I am not prepared to accept. Thus, the conclusion is inescapable that an agency-shop arrangement,
whatever its status under Indiana law, cannot be lawful under the National Labor Relations Act in a State like
Indiana where employment cannot lawfully be conditioned on literal membership.
In support of their contention that an agency-shop agreement is lawful, the General Counsel and UAW rely on
Public Service Company of Colorado, 89 NLRB 418, and American Seating Company, 98 NLRB 800. Such
reliance seems misplaced as, unlike the instant matter, both cases involved a valid agreement, requiring
membership as a condition of employment, which was protected under the first proviso to Section 8(a) (3); and
neither case involved a right-to-work jurisdiction. Significantly, in both Public Service and American Seating, no
legal impediment existed to preclude the parties from entering into the contracts requiring all employees to be
union members, and they made such contracts. Thus they were free to waive membership and to require in lieu
thereof some lesser form of union security, such as an agency-shop clause.
The instant case is different in that, as indicated above, GM and UAW were not free under the National Labor
Relations Act to require of Indiana employees union membership as a condition of employment, and so they were
not free to require, as a condition of employment of such employees, any lesser form of union security, such as an
agency shop. For one cannot waive a right he does not have.
It may be argued that the Board reached this conclusion in view of the right-to-work law of Indiana and that a different
result might have been reached where, as in the Philippines, there is no right-to-work law. But the basic principle
underlying the decision in that case equally applies here, namely, that where the parties are not free to require of
employees membership in a union as a condition of employment, neither can they require a lesser form of union security.
"For one cannot waive a right he does not have." And herein lies the error into which the union has fallen in arguing that
the agency shop agreement in this case can be justified under Section 4 (a) (4) because "the lesser must of necessity be
included in the greater."
For although a closed-shop agreement may validly be entered into under Section 4 (a) (4) of the Industrial Peace Act
(National Labor Union v. Aguinaldo's Echague, Inc., 51 O.G. p. 2899, We held that the same cannot be made to apply to
employees who, like the employees in this case, are already in the service and are members of another union. (Freeman
36

Shirt Mfg. Co. v. Court of Industrial Relations, G.R. No. L-16561, January 28, 1961.) Hence, if a closed shop agreement
cannot be applied to these employees, neither may an agency fee, as a lesser form of union security, be imposed upon
them.
It is true, as the union claims, that whatever benefits the majority union obtains from the employer accrue to its members
as well as to nonmembers. But this alone does not justify the collection of agency fee from non-members. For the benefits
of a collective bargaining agreement are extended to all employees regardless of their membership in the union because to
withhold the same from the nonmembers would be to discriminate against them. (International Oil Factory Workers
Union (FFW) v. Martinez, et al., G.R. No. L-15560, Dec. 31, 1960).
Moreover, when a union bids to be the bargaining agent, it voluntarily assumes the responsibility of representing all the
employees in the appropriate bargaining unit. That is why Section 12 of the law states that "The labor organization
designated or selected for the purpose of collective bargaining by the majority of the employees in an appropriate
collective bargaining unit shall be the exclusive representative of all employees in such unit for the purpose of collective
bargaining in respect to rates of pay, wages, hours of employment, or other conditions of employment."
The union's contention, that nonmembers are "free riders" who should be made to pay for benefits received by them is
answered in the concurring opinion of Mr. Jenkin in the General Motors case, supra at 498, thus: This statement of the
limits to permissible encouragement of union membership restricts unions, in contractually guaranteeing their own
financial security against "free riders," to agreements of the types contemplated by Congress, i.e., "permitted union shop"
or "maintenance of membership contract," both being agreements explicitly "requiring membership."
And now We come to the next point raised by the union, namely, that nonmembers should be made to pay on the principle
of quasi contract. The union invokes Article 2142 of the Civil Code which provides that
Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end thatno
one shall be unjustly enriched or benefited at the expense of another. (Emphasis supplied)
But the benefits that accrue to nonmembers by reason of a collective bargaining agreement can hardly be termed "unjust
enrichment" because, as already pointed out, the same are extended to them precisely to avoid discrimination among
employees. (International Oil Factory Workers' Union (FFW) v. Martinez, et al., G.R. No. L-15560, Dec. 31, 1960).
Besides, as the trial court held, there is no allegation in the complaint that the amount of P4.00 represents the expense
incurred by the union in representing each employee. For the benefits extended to nonmembers are merely incidental.
Lastly, it is contended that the collection of agency fee may be justified on the principle of agency. In answer to this point,
it may be stated that when a union acts as the bargaining agent, it assumes the responsibility imposed upon it by law to
represent not only its members but all employees in the appropriate bargaining unit of which it is the agent. The Civil
Code states that agency is presumed to be for compensation unless there is proof to the contrary. (Art. 1875.) There can be
no better proof that the agency created by law between the bargaining representative and the employees in the unit is
without compensation than the fact that these employees in the minority voted against the appellant union.
WHEREFORE, the orders dated December 6, 1960 and December 20, 1960 of the Court of First Instance of Manila are
hereby affirmed, without pronouncement as to costs.

37

G.R. No. L-4845 December 24, 1952

L. G. MARQUEZ and Z. GUTIERREZ LORA, plaintiffs.
L. G. Marquez, plaintiff-appellant,
vs.
FRANCISCO VARELA and CARMEN VARELA, defendants-appellees.
LABRADOR, J.:
This is an appeal against an order of the Court of First Instance of manila dismissing the complaint as to plaintiff L.G.
Marquez. The pertinent allegations of the complaint are as follows : that plaintiff Gutierrez Lora was authorized by
defendants to negotiate the sale of their share or interest in a parcel of land on Plaza Goiti, Manila, and having meet his
co-plaintiff L. G. Marquez, a real estate broker, both of them agreed to work together for the sale of defendant's property;
that they found a ready, willing, and able buyer, which accepted defendants' price and terms, but that thereafter
defendants, without any justifiable reason, refused to carry out the sale and execute the necessary deed therefor; and that
as a consequence plaintiffs failed to receive the commission which they were entitled to receive. The defendants presented
a motion to dismiss the complaint as to L. G . Marquez on the ground that he has no cause of action against defendants ,
and this motion having been granted, plaintiff L. G. Marquez has prosecuted this appeal.
The complaint was dismissed on the alleged ground that it states no cause of action against the defendants. Is this
objection to the complaint justified? The term "cause of action" has been held to be synonymous with "right of action" (37
Words and Phrases, 642), but in the law of pleading (Code Pleading) one is distinguished from the other in that a right of
action is a remedial right belonging to some person, while a cause of action is a formal statement of the operative facts
that give rise to such remedial right. The one is a matter of right and depends on the substantive law, while the other is a
matter of statement and is governed by the law of procedure. (Phillips, Code Pleading, section 189, page 170.)
It is not denied that Lora, if he rendered the service alleged in the complaint, would have a right to be paid compensation
for the service he rendered jointly with Marquez. He acted as a broker, and a broker is entitled to a commission for his
services. (Article 277, Code of Commerce: Henry vs. Velasco, 34 Phil. 587; Perez de Tagle vs. Luzon Surety Co, 38 Off.
Gaz. 1213). There is no prohibition in law against the employment of a companion to look for a buyer; neither is it against
public policy. Neither was there even any implied understanding between Lora and the defendants that no part of the
compensation to which Lora would be entitled to receive could be paid to any companion or helper of Lora. Marquez's
right to compensation can not, therefore, be disputed under the operative facts set forth in the complaint.
The next issue is, is there a cause of action in favor of Marquez against the defendants? From the facts alleged in the
complaint, it is clear that there is a primary right in favor of Marquez (to be paid for his services even through Lora only)
and a corresponding duty devolving upon the defendants (to pay for said services). Since (as alleged) defendants refuse to
comply with their duty, Marquez now is entitled to enforce his legal right by an action in court. The complaint in the case
at bar, therefore, contains both the primary right and duty and the delict or wrong combined which constitute the cause of
action in the legal sense as used in Code Pleading (Pomeroy, Code Remedies, section 347), and the cause of action is full
and complete.
Objection to the complaint, however, is not that Marquez has no right to share in the compensation to be paid Lora, whom
defendants had directly engaged, but that Marquez can not join in this action and enforce therein his rights directly against
the defendants, evidently because defendants never dealt with Marquez, directly or indirectly, or, in other words, that both
Marquez and his services were not known to dismiss show that such in fact was the objection:
This paragraph clearly shows that the authority to sell was only given to plaintiff Z. Gutierrez Lora and not to the
other plaintiff L. G. Marquez. Attention is respectfully called to the word "plaintiff" used in said paragraph III and
expressed in singular form to the exclusion of the other plaintiff L. G. Marquez. If the plaintiff L. G. Marquez had
worked at all for the sale of the property at the instance of an invitation of his co- plaintiff Z. Gutierrez Lora, we
maintain that his action if there is any is against his co-plaintiff and not against the defendants herein.
38

As far as the defendant are concerned in this case, plaintiff L. G. Marquez is not only a stranger in this case but
also unknown to the defendants; and if he had worked at all for the sale of the defendants' share and participation
in the parcels of lands referred to in the complaint, the same was made not only at his own look-out, risk and
responsibility but also with no authority whatsoever. (Record on Appeal, pages 16, 17)
The principle underlying defendants' objection is one of substantive law, recognized under common law, where no one
could sue for a breach of a contract who was not a party thereto, and the action allowed to be brought only in the name of
the one holding the legal title. The requirement was based upon the doctrine of privity of contract.
Sec. 234. Plaintiffs in Action ex Contractu. When an action of contract concerns only the original parties to the
instrument, it is not difficult to determine who should be the plaintiff. Obviously the one seeking to enforce it is
the real party in interest. At common law no one could sue for the breach of contract who was not a party thereto.
Hence an action on contract, whether express or implied, was required to be brought in the name of the one who
held the legal interest. This requirement was based upon the doctrine of privity of contract. . . . (Phillips, Code
Pleading, page 226.)
Sec. 235. Privity of Contract. When necessary. It was a rule of the common law that before one may
complain of another for breach of contract, there must be some direct contractual relation, or privity, between
them; and this, with only a few exceptions, is a requirement of the law today. . . . (Phillips, code Pleading, page
227.)
At common law, in order that two or more persons may join in an action upon a contract, there must be
community of interest between them; that is, they must be parties to the contract and jointly interested in therein.
(47 . C. J. 54)lawphil.net
Persons subsequently admitted to the benefit of a contract, without the privity or assent of the promisor, can not
join in a suit on the contract. (47 C.J., 55)
But we did not import into this jurisdiction the common law procedure. Our original code of civil Procedure (Act 190)
was taken mainly from the code of Civil Procedure of California, and this in turn was based upon the Code of Civil
procedure of New York adopted in that stated in 1948. Our system of pleading is Code Pleading that system used in the
states of the Union that had adopted codes of procedure. The code system of pleading adopted in substance the rules of
equity practice as to parties, under which "all persons having an interest in the subject of the action, and in obtaining the
relief demanded, may be joined as plaintiffs". (Phillips, Code Pleading, section 251, page 247.) In New York and
California interest in the subject matter, or in any relief growing out of the same transaction or series of transactions is
sufficient to allow joinder. (Ibid, footnote 10a. page 247.)
Under the former Code of civil procedure "every action must be prosecuted in the name of the real party in interest," and
"all persons having an interest in the subject of the action and in obtaining the relief demanded shall be joined as
plaintiffs, " and " if any person having an interest and in obtaining the relief demanded refuses to join as plaintiff, he may
be made a defendant and the fact of his interest and refusal to join to be stated in the complaint." ( Section 114, Act 190)
The principle underlying the rule is that all persons having a material interest under the substantive law should be made
parties, as distinguished from that of the common law which allowed only a two-sided controversy, each party to be
opposed to the other. Phillips, Code Pleading, 2d ed. section 228, page 216.)
The above principles have not been changed by the reforms in the rules in 1940 and 1941. The action is still to be
prosecuted in the name of the real party in interest. Under section 6 of Rule 3, "All persons in whom . . . any right to relief
in respect to or arising out of the same transaction . . . is alleged to exist, whether jointly, severally, or in the alternative,
may, . . . join as plaintiffs . . . where any question of law or fact common to all such plaintiffs . . . may arise in the action;
Plaintiff Marquez, in the case at bar, clearly falls under the above rule. He is entitled to be paid his commission out of the
very contract of agency between Lora and the defendants; Lora and he acted jointly in rendering services to defendants
under Lora's contract, and the same questions of law and fact govern their claims. The rules do not require the existence of
39

privity of contract between Marquez and the defendants as required under the common law; all that they demand is that
Marquez has a material interest in the subject of the action, the right to share in the broker's commission to be paid Lora
under the latter's contract, which right Lora does not deny. This is sufficient to justify the joinder of Marquez as a party
plaintiff, even in the absence of privity of contract between him and the defendants.
We find, therefore, that the complaint of Marquez was improperly dismissed. The order of dismissal is hereby reversed,
with costs against defendants.
MONTEMAYOR, J., dissenting:
With all due respect to the learned majority opinion with its plausible arguments and citations of authorities, I believe that
the complaint of Marquez against the defendants-appellees was properly dismissed. There was absolutely no contractual
relation or privity of contract between Marquez and the defendants, and as far as the latter are concerned, Marquez never
rendered service, and he did not exist in their realm of contracts and obligations. I reproduce with favor the two
paragraphs contained in defendant's motion to dismiss and also reproduced in the majority opinion and which for the
purposes of reference I quote below:
This paragraph clearly shows that the authority to sell was only given to plaintiff Z. Gutierrez Lora and not to the
other plaintiff L.G. Marquez. Attention is respectfully called to the word plaintifff' used in paragraph III and
expressed in singular form to the exclusion of the other plaintiff L. G. Marquez. If the plaintiff L. G. Marquez had
worked at all for the sale of the property at the instance of an invitation of his co-plaintiff Z. Gutierrez Lora, we
maintain that his action if there is any is against his co-plaintiff and not against the defendants herein.
As far as the defendants are concerned in this case, plaintiff L. G. Marquez is not only a stranger in this case but
also unknown to the defendant; and if he had worked at all for the sale of the defendant's share and participation
in the parcels of lands referred to in the complaint, the same was made not only at his own lookout, risk and
responsibility but also with no authority whatsoever. (Record on Appeal, pages 16, 17.)
Marquez may have rendered some services in connection with the offer for sale and the supposed acceptance of said offer
by the alleged prospective buyer of the property ; but such service was clearly rendered at the instance of and for the
benefit of his co-plaintiff Z. Gutierrez Lora. His possible interest in this case would be a share in any money that may be
obtained or received by Gutierrez from the defendants as compensation for his services as broker by virtue of the contract
of employment between him and the defendants. Marquez may possibly intervene in this case for he is obviously
interested in the success of Gutierrez in obtaining a favorable judgment, but to proceed directly and file the claim against
the defendants, with whom he never contracted, who never saw him, much less employed him, he may not, in my opinion,
do legally.
To sustain a litigation or defend one's self against a suit in court involves embarrassment, expenditure of time and money
and vexation. A party has a right to be protected from being harassed, troubled and otherwise vexed by an action in court
brought by total stranger with whom the party made defendant has never dealt with, much less had any contractual
relation. In the field of torts, offenses, or violations or property rights such as forcible entry or detainer, etc. it is proper
that all the persons having an interest in obtaining damages for the tort or offense committed or for any other relief should
all be included as parties plaintiff against the tortfeasor, offender or the illegal occupant despite the absence of any
previous contract. But in the present case the relief sought is the performance of a contract. Consequently, only those who
were parties or privies to the contract can bring the action against the alleged violator of the agreement. Marquez in this
case is attempting to enforce a contract entered into not between him and the defendants but between him and his coplaintiff and defendants. To me, he has no right to do so. His right or cause of action lies against his co-plaintiff and not
against the defendants. Consequently, I hold that the dismissal of the complaint as to Marquez was warranted.

40

G.R. No. 3298

February 27, 1907

FELISA NEPOMUCENO AND MARCIANA CANON, plaintiffs-appellees,

vs.
GENARO HEREDIA, defendant-appellant.
CARSON, J.:
The complaint alleges that on the 24th of September, 1904, the defendant had in his possession for administration 500
pesos, the property of Felisa Nepomuceno, and 1,500 pesos, the property of Marciana Canon; that on that day he entered
into an agreement with them, in accordance with which he was to invest this money in a mortgage, or conditional
purchase of good real estate, the investment to bring in 1 per centum per month, and the principal to be payable in one
year; and that the defendant has failed to make the investment in accordance with his agreement and has refused, and
continues to refuse, to return the money.
The following facts are fully established by the evidence of record, and are substantially uncontroverted: That the
defendant is the business adviser of the plaintiff, Marciana Canon, and as such had in his hands 1,500 pesos paid to him
on her account on the 22d of September, 1904; that about the same time Felisa Nepomuceno, the other plaintiff, had an
unsecured debt due her of 500 pesos from one Marcelo Leao; that on demand for security her debtor proposed to give her
a deed of conditional sale (venta con pacto de retro) to a certain tract of land, together with the buildings and
improvements thereon, in consideration of 2,000 pesos, she to be credited with 500 pesos on the purchase price and that to
advance the balance of 1,500 pesos; that knowing that the defendant had in his hands that amount of money, the property
of her coplaintiff, Marciana Canon, she proposed to the said Marciana Canon that they make a joint investment in the
land; that together they discussed the proposition with the defendant and later directed him to draw up the necessary
documents; that a deed of conditional sale of the land was executed on the 24th of September, 1904, the vendor reserving
the privilege of repurchasing the land at the end of one year and obligating himself to make monthly payments in
considerations of the right to retain the land in possession in sufficient amount to bring the plaintiffs' interest on their
money at the rate of 17 per centum per annum, and the vendees, the plaintiffs in this action, paying to the vendor the sum
of 1,500 pesos, cash, and discharging the above mentioned credit of 500 pesos due the plaintiff, Felisa Nepomuceno; that
the title to the land under the deed was placed in the name of the defendant, Genaro Heredia; and that a few days
thereafter the defendant, at the request of the plaintiffs, executed before a notary public a formal memorandum of the fact
that the plaintiff had furnished the money with which the land had been purchased, said memorandum setting forth the
amount furnished by each and their proportionate interest in the investment.
The plaintiffs insists that the defendant took the deed to the land in his own name without their knowledge or consent, but
we think that the weight of the evidence sustains the defendant's claim that he did so by their express direction as their
agent, and for their convenience, and that in any event his action in this regard was ratified and approved by their request
for and acceptance of the memorandum setting out the facts and by their continuance in the enjoyment of the profits of the
transaction after the purchase and without making any effort to have the title transferred in their own names.
The plaintiffs also allege that the defendant, without express authority from them, undertook to extend, and did extend, the
period within which the vendor had the privilege or repurchase, but we think that this action in this contention was also
ratified, approved, and acquiesced in by the plaintiffs and that in any event it can have no bearing on the merits of the
question submitted on appeal.
More than a year after the transactions above set out, during which time the vendor of the land continued to pay, and the
plaintiff to receive, the stipulated payments in consideration of the right to retain possession, a cloud was cast on the title
to the land by the institution of proceedings for the recovery of possession by third parties, which proceedings are still
pending on appeal from the judgment of the Court of First Instance, and the plaintiffs thereupon brought this action in
which they are seeking to recover from the defendant the whole of the amount of money invested, with interest from the
date of the investment, alleging with that purchase of the land was not made in accordance with their instructions, or on
their account.
41

The trial court gave judgment in favor of the plaintiffs for the full amount claimed on the ground that while acting as their
agent the defendant invested their money in land to which the vendor had not a good and sufficient title, contrary to the
tenor of his instructions. On appeal the plaintiffs ask that this judgment be affirmed, not on the grounds assigned by the
trial judge, but because, as they insists, their money was invested by the defendant in his own name and on his account,
and not as their agent, or on behalf. The judgment can not be sustained on either ground.
It was clearly established at the trial that the defendant was acting merely as the agent for the plaintiffs throughout the
entire transaction; that the purchase of the land was made not only with their full knowledge and consent, but at their
suggestion; and that after the purchase had been effected, the plaintiffs, with full knowledge of the facts, approved and
ratified the actions of their agent in the premises. There is nothing in the record which would indicate that the defendant
failed to exercise reasonable care and diligence in the performance of his duty as such agent, or that he undertook to
guarantee the vendors title to the land purchased by direction of the plaintiffs.
The judgment of the lower court should be, and is hereby, reversed, with the costs against the plaintiffs in the first
instance and without special condemnation of costs in this instance. After the expiration of twenty days let judgment be
entered in accordance herewith, and ten days thereafter let the record be returned to the court wherein it originated for
execution. So ordered.

42

G.R. No. L-42465

November 19, 1936

INTERNATIONAL FILMS (CHINA), LTD., plaintiff-appellant,

vs.
THE LYRIC FILM EXCHANGE, INC., defendant-appellee.
VILLA-REAL, J.:
This is an appeal taken by the plaintiff company International Films (China), Ltd. from the judgment of the Court of First
Instance of Manila dismissing the complaint filed by it against the defendant company the Lyric Film Exchange, Inc., with
costs to said plaintiff.
In support of its appeal the appellant assigns six alleged errors as committed by the court a quo in its said judgment, which
will be discussed in the course of this decision.
The record shows that Bernard Gabelman was the Philippine agent of the plaintiff company International Films (China),
Ltd. by virtue of a power of attorney executed in his favor on April 5, 1933 (Exhibit 1). On June 2, 1933, the International
Films (China), Ltd., through its said agent, leased the film entitled "Monte Carlo Madness" to the defendant company, the
Lyric Film Exchange, Inc., to be shown in Cavite for two consecutive days, that is, on June 1 and 2, 1933, for 30 per cent
of the receipts; in the Cuartel de Espaa for one day, or on June 6, 1933, for P45; in the University Theater for two
consecutive days, or on June 8, and 9, 1933, for 30 per cent of the receipts; in Stotsenburg for two consecutive days, or on
June 18 and 19, 1933, for 30 per cent of the receipts, and in the Paz Theater for two consecutive days, or on June 21 and
22, 1933, for 30 per cent of the receipts (Exhibit C). One of the conditions of the contract was that the defendant company
would answer for the loss of the film in question whatever the cause. On June 23, 1933, following the last showing of the
film in question in the Paz Theater, Vicente Albo, then chief of the film department of the Lyric Film Exchange, Inc.,
telephoned said agent of the plaintiff company informing him that the showing of said film had already finished and
asked, at the same time, where he wished to have the film returned to him. In answer, Bernard Gabelman informed Albo
that he wished to see him personally in the latter's office. At about 11 o'clock the next morning, Gabelman went to
Vicente Albo's office and asked whether he could deposit the film in question in the vault of the Lyric Film Exchange,
Inc., as the International Films (China) Ltd. did not yet have a safety vault, as required by the regulations of the fire
department. After the case had been referred to O'Malley, Vicente Albo's chief, the former answered that the deposit could
not be made inasmuch as the film in question would not be covered by the insurance carried by the Lyric Film Exchange,
Inc. Bernard Gabelman then requested Vicente Albo to permit him to deposit said film in the vault of the Lyric Film
Exchange, Inc., under Gabelman's own responsibility. As there was a verbal contract between Gabelman and the Lyric
Film Exchange Inc., whereby the film "Monte Carlo Madness" would be shown elsewhere, O'Malley agreed and the film
was deposited in the vault of the defendant company under Bernard Gabelman's responsibility.
About July 27, 1933, Bernard Gabelman severed his connection with the plaintiff company, being succeeded by Lazarus
Joseph. Bernard Gabelman, upon turning over the agency to the new agent, informed the latter of the deposit of the film
"Monte Carlo Madness" in the vault of the defendant company as well as of the verbal contract entered into between him
and the Lyric Film Exchange, Inc., whereby the latter would act as a subagent of the plaintiff company, International
Films (China) Ltd., with authority to show this film "Monte Carlo Madness" in any theater where said defendant
company, the Lyric Film Exchange, Inc., might wish to show it after the expiration of the contract Exhibit C. As soon as
Lazarus Joseph had taken possession of the Philippine agency of the International Films (China) Ltd., he went to the
office of the Lyric Film Exchange, Inc., to ask for the return not only of the film "Monte Carlo Madness" but also of the
films "White Devils" and "Congress Dances". On August 13 and 19, 1933, the Lyric Film Exchange, Inc., returned the
films entitled "Congress Dances" and "White Devils" to Lazarus Joseph, but not the film "Monte Carlo Madness" because
it was to be shown in Cebu on August 29 and 30, 1933. Inasmuch as the plaintiff would profit by the showing of the film
"Monte Carlo Madness", Lazarus Joseph agreed to said exhibition. It happened, however, that the bodega of the Lyric
Film Exchange, Inc., was burned on August 19, 1933, together with the film "Monte Carlo Madness" which was not
insured.
43

The first question to be decided in this appeal, which is raised in the first assignment of alleged error, is whether or not the
court a quo erred in allowing the defendant company to amend its answer after both parties had already rested their
respective cases.
In Torres Viuda de Nery vs. Tomacruz (49 Phil., 913, 915), this court, through Justice Malcolm, said:
Sections 109 and 110 of the Philippine Code of Civil Procedure, relating to the subjects of Variance and
Amendments in General, should be equitably applied to the end that cases may be favorably and fairly presented
upon their merits, and that equal and exact justice may be done between the parties. Under code practice,
amendments to pleadings are favored, and should be liberally allowed in furtherance of justice. This liberality, it
has been said, is greatest in the early stages of a lawsuit, decreases as it progresses, and changes at times to a
strictness amounting to a prohibition. The granting of leave to file amended pleadings is a matter peculiarly within
the sound discretion of the trial court. The discretion will not be disturbed on appeal, except in case of an evident
abuse thereof. But the rule allowing amendments to pleadings is subject to the general but not inflexible limitation
that the cause of action or defense shall not be substantially changed, or that the theory of the case shall not be
altered. (21 R. C. L., pp. 572 et seq.; 3 Kerr's Cyc. Codes of California, sections 469, 470 and 473;
Ramirez vs. Murray [1855], 5 Cal., 222; Haydenvs. Hayden [1873], 46 Cal., 332; Hackett vs. Bank of California
[1881], 57 Cal., 335; Hancock vs. Board of Education of City of Santa Barbara [1903], 140 Cal., 554;
Dunphy vs. Dunphy [1911], 161 Cal., 87; 38 L. R. A. [N. S.], 818.)lawphi1.net
In the case of Gould vs. Stafford (101 Cal., 32, 34), the Supreme Court of California, interpreting section 473 of the Code
of Civil Procedure of said State, from which section 110 of our Code was taken, stated as follows:
The rule is that courts will be liberal in allowing an amendment to a pleading when it does not seriously impair
the rights of the opposite party and particularly an amendment to an answer. A defendant can generally set up
as many defenses as he may have. Appellant contends that the affidavits upon which the motion to amend was
made show that it was based mainly on a mistake of law made by respondent's attorney; but, assuming that to be,
so, still the power of a court to allow an amendment is not limited by the character of the mistake which calls
forth its exercise. The general rule that a party cannot be relieved from an ordinary contract which is in its nature
final, on account of a mistake of law, does not apply to proceedings in an action at law while it is pending and
undetermined. Pleadings are not necessarily final until after judgment. Section 473 of the Code of Civil Procedure
provides that the court may allow an amendment to a pleading to correct certain enumerated mistakes or "a
mistake in any other respect," and "in other particulars." The true rule is well stated in Ward vs. Clay (62 Cal.
502). In the case at bar evidence of the lease was given at the first trial; and we cannot see that the amendment
before the second trial put plaintiff in a position any different from that which he would have occupied if the
amendment had been made before the first trial.
In the case of Ward vs. Clay (82 Cal., 502, 510), the Supreme Court of said State stated:
The principal purpose of vesting the court with this discretionary power is to enable it "to mold and direct its
proceedings so as to dispose of cases upon their substantial merits," when it can be done without injustice to either
party, whether the obstruction to such a disposition of cases be a mistake of fact or a mistake as to the law;
although it may be that the court should require a stronger showing to justify relief from the effect of a mistake in
law than in case of a mistake as to matter of fact. The exercise of the power conferred by section 473 of the code,
however, should appear to have, been "in furtherance of justice," and the relief, if any, should be granted upon just
terms.
Lastly, in the case of Simpson vs. Miller (94 Pac., 253), the said Supreme Court of California said:
In an action to recover property which had vested in plaintiff's trustee in bankruptcy prior to the suit, an
amendment to the answer, made after both parties had rested, but before the cause was submitted, pleading
plaintiff's bankruptcy in bar to the action, was properly allowed in the discretion of the court.
44

Under the above-cited doctrines, it is discretionary in the court which has cognizance of a case to allow or not the
amendment of an answer for the purpose of questioning the personality of the plaintiff to bring the action, even after the
parties had rested their cases, as it causes no injustice to any of the parties, and this court will not interfere in the exercise
of said discretion unless there is an evident abuse thereof, which does not exist in this case.
The second question to be decided is whether or not the defendant company, the Lyric Film Exchange, Inc., is responsible
to the plaintiff, International Films (China) Ltd., for the destruction by fire of the film in question, entitled "Monte Carlo
Madness".
The plaintiff company claims that the defendant's failure to return the film "Monte Carlo Madness" to the former was due
to the fact that the period for the delivery thereof, which expired on June 22, 1933, had been extended in order that it
might be shown in Cebu on August 29 and 30, 1933, in accordance with an understanding had between Lazarus Joseph,
the new agent of the plaintiff company, and the defendant. The defendant company, on the other hand, claims that when it
wanted to return the film "Monte Carlo Madness" to Bernard Gabelman, the former agent of the plaintiff company,
because of the arrival of the date for the return thereof, under the contract Exhibit C, said agent, not having a safety vault,
requested Vicente Albo, chief of the film department of the defendant company, to keep said film in the latter's vault
under Gabelman's own responsibility, verbally stipulating at the same time that the defendant company, as subagent of the
International Films (China) Ltd., might show the film in question in its theaters.
It does not appear sufficiently proven that the understanding had between Lazarus Joseph, second agent of the plaintiff
company, and Vicente Albo, chief of the film department of the defendant company, was that the defendant company
would continue showing said film under the same contract Exhibit C. The preponderance of evidence shows that the
verbal agreement had between Bernard Gabelman, the former agent of the plaintiff company, and Vicente Albo, chief of
the film department of the defendant company, was that said film "Monte Carlo Madness" would remain deposited in the
safety vault of the defendant company under the responsibility of said former agent and that the defendant company, as
his subagent, could show it in its theaters, the plaintiff company receiving 5 per cent of the receipts up to a certain amount,
and 15 per cent thereof in excess of said amount.
If, as it has been sufficiently proven in our opinion, the verbal contract had between Bernard Gabelman, the former agent
of the plaintiff company, and Vicente Albo, chief of the film department of the defendant company, was a sub-agency or a
submandate, the defendant company is not civilly liable for the destruction by fire of the film in question because as a
mere submandatary or subagent, it was not obliged to fulfill more than the contents of the mandate and to answer for the
damages caused to the principal by his failure to do so (art. 1718, Civil Code). The fact that the film was not insured
against fire does not constitute fraud or negligence on the part of the defendant company, the Lyric Film Exchange, Inc.,
because as a subagent, it received no instruction to that effect from its principal and the insurance of the film does not
form a part of the obligation imposed upon it by law.
As to the question whether or not the defendant company having collected the entire proceeds of the fire insurance policy
of its films deposited in its vault, should pay the part corresponding to the film in question which was deposited therein,
the evidence shows that the film "Monte Carlo Madness" under consideration was not included in the insurance of the
defendant company's films, as this was one of the reasons why O'Malley at first refused to receive said film for deposit
and he consented thereto only when Bernard Gabelman, the former agent of the plaintiff company, insisted upon his
request, assuming all responsibility. Furthermore, the defendant company did not collect from the insurance company an
amount greater than that for which its films were insured, notwithstanding the fact that the film in question was included
in the vault, and it would have collected the same amount even if said film had not been deposited in its safety vault.
Inasmuch as the defendant company, The Lyric Film Exchange, Inc., had not been enriched by the destruction by fire of
the plaintiff company's film, it is not liable to the latter.
For the foregoing considerations, we are of the opinion and so hold: (1) That the court a quo acted within its discretionary
power in allowing the defendant company to amend its answer by pleading the special defense of the plaintiff company's
lack of personality to bring the action, after both parties had already rested their respective cases; (2) that the defendant
company, as subagent of the plaintiff in the exhibition of the film "Monte Carlo Madness", was not obliged to insure it
45

against fire, not having received any express mandate to that effect, and it is not liable for the accidental destruction
thereof by fire.
Wherefore, and although on a different ground, the appealed judgment is affirmed, with the costs to the appellant. So
ordered.

46

G.R. No. L-11442

May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, Branch II, and
SEGUNDINO REFUERZO, respondents.
FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order of the Court of First
Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving Segundino Refuerzo of liability for the contract
entered into between the former and the Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. The
facts of the case are as follows:
Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Maghobas, Poblacion, Burauen,
Teyte. On March 7, 1954, said landholder entered into a contract of lease with the Philippine Fibers Producers Co., Inc.,
allegedly a corporation "duly organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte,
Philippines, and with business address therein, represented in this instance by Mr. Segundino Q. Refuerzo, the President".
It was provided in said contract, among other things, that the lifetime of the lease would be for a period of 10 years; that
the land would be planted to kenaf, ramie or other crops suitable to the soil; that the lessor would be entitled to 30 per cent
of the net income accruing from the harvest of any, crop without being responsible for the cost of production thereof; and
that after every harvest, the lessee was bound to declare at the earliest possible time the income derived therefrom and to
deliver the corresponding share due the lessor.
Apparently, the aforementioned obligations imposed on the alleged corporation were not complied with because on April
5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of First Instance of Leyte a complaint against the Philippine
Fibers Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912).
She averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased property which crop was,
at the time of the commencement of the action, already harvested, processed and sold by defendants; that notwithstanding
that fact, defendants refused to render an accounting of the income derived therefrom and to deliver the lessor's share; that
the estimated gross income was P4,500, and the deductible expenses amounted to P1,000; that as defendants' refusal to
undertake such task was in violation of the terms of the covenant entered into between the plaintiff and defendant
corporation, a rescission was but proper.
As defendants apparently failed to file their answer to the complaint, of which they were allegedly notified, the Court
declared them in default and proceeded to receive plaintiff's evidence. On June 8, 1955, the lower Court rendered
judgment granting plaintiff's prayer, and required defendants to render a complete accounting of the harvest of the land
subject of the proceeding within 15 days from receipt of the decision and to deliver 30 per cent of the net income realized
from the last harvest to plaintiff, with legal interest from the date defendants received payment for said crop. It was further
provide that upon defendants' failure to abide by the said requirement, the gross income would be fixed at P4,200 or a net
income of P3,200 after deducting the expenses for production, 30 per cent of which or P960 was held to be due the
plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded.
No appeal therefrom having been perfected within the reglementary period, the Court, upon motion of plaintiff, issued a
writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the attachment of 3 parcels of land registered
in the name of Segundino Refuerzo. No property of the Philippine Fibers Producers Co., Inc., was found available for
attachment. On January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision rendered in
said Civil Case No. 1912 was null and void with respect to him, there being no allegation in the complaint pointing to his
personal liability and thus prayed that an order be issued limiting such liability to defendant corporation. Over plaintiff's
opposition, the Court a quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties
belonging to the movant that might have already been attached, after finding that the evidence on record made no mention
or referred to any fact which might hold movant personally liable therein. As plaintiff's petition for relief from said order
47

was denied, Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial Judge in issuing the order
complained of, acted with grave abuse of discretion and prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that the order sought to be nullified was issued by tile respondent Judge
upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of the Rules of Court. Section 3 of said Rule, however,
in providing for the period within which such a motion may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. A petition provided for in either of
the preceding sections of this rule must be verified, filed within sixty days after the petitioner learns of the
judgment, order, or other proceeding to be set aside, and not more than six months after such judgment or order
was entered, or such proceeding was taken; and must be must be accompanied with affidavit showing the fraud,
accident, mistake, or excusable negligence relied upon, and the facts constituting the petitioner is good and
substantial cause of action or defense, as the case may be, which he may prove if his petition be granted". (Rule
38)
The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment, and not more than 6
months after the judgment or order was rendered, both of which must be satisfied. As the decision in the case at bar was
under date of June 8, 1955, whereas the motion filed by respondent Refuerzo was dated January 31, 1956, or after the
lapse of 7 months and 23 days, the filing of the aforementioned motion was clearly made beyond the prescriptive period
provided for by the rules. The remedy allowed by Rule 38 to a party adversely affected by a decision or order is certainly
an alert of grace or benevolence intended to afford said litigant a penultimate opportunity to protect his interest.
Considering the nature of such relief and the purpose behind it, the periods fixed by said rule are non-extendible and never
interrupted; nor could it be subjected to any condition or contingency because it is of itself devised to meet a condition or
contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January 31, 1952). On this score alone, therefore, the petition for
a writ of certiorari filed herein may be granted. However, taking note of the question presented by the motion for relief
involved herein, We deem it wise to delve in and pass upon the merit of the same.
Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the obligation imposed on
defendant Philippine Fibers Producers Co., Inc., interposed the defense that the complaint filed with the lower court
contained no allegation which would hold him liable personally, for while it was stated therein that he was a signatory to
the lease contract, he did so in his capacity as president of the corporation. And this allegation was found by the Court a
quo to be supported by the records. Plaintiff on the other hand tried to refute this averment by contending that her failure
to specify defendant's personal liability was due to the fact that all the time she was under the impression that the
Philippine Fibers Producers Co., Inc., represented by Refuerzo was a duly registered corporation as appearing in the
contract, but a subsequent inquiry from the Securities and Exchange Commission yielded otherwise. While as a general
rule a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate
body is estopped from denying the same in an action arising out of such transaction or dealing, (Asia Banking Corporation
vs. Standard Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs.
Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a part in the said
transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that the Philippine Fibers Producers
Co., Inc., had no juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances
surrounding the execution of the contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra
was really made to believe that such corporation was duly organized in accordance with law.
There can be no question that a corporation with registered has a juridical personality separate and distinct from its
component members or stockholders and officers such that a corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and
conversely, a stockholder or member cannot be held personally liable for any financial obligation be, the corporation in
excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be
made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvioussince an organization which before the law is non-existent has no personality and would be incompetent to act and
appropriate for itself the powers and attribute of a corporation as provided by law; it cannot create agents or confer
48

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 rights 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 comes personally liable for contracts entered into or for other acts performed
as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of the Philippines, Fifth
Ed., P. 689-690). Considering that defendant Refuerzo, as president of the unregistered corporation Philippine Fibers
Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by acting as its representative,
his liability cannot be limited or restricted that imposed upon corporate shareholders. In acting on behalf of a corporation
which he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if any,
arising out of such transaction.
Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on this matter and ordering
the Provincial Sheriff of Leyte to release any and all properties of movant therein which might have been attached in the
execution of such judgment, is hereby set aside and nullified as if it had never been issued. With costs against respondent
Segundino Refuerzo. It is so ordered.

49

G.R. No. L-19375

May 21, 1969

DY PEH, AND/OR VICTORY RUBBER MANUFACTURING,petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE,respondent.
DIZON,J.:
Petition filed by Dy Peh for the review of the decision and resolution of the Court of Tax Appeals dated April 29 and
December 23, 1961, respectively, in C.T.A. Case No. 538, ordering him to pay deficiency percentage taxes in the total
amount of P51,939,27.
The following facts are not disputed: .
Petitioner, during all the time material to this case, was engaged in the business of manufacturing and selling rubber shoes
and allied products in the city of Cebu, under the registered firm name Victory Rubber Manufacturing.
Sometime in the year 1955 the Bureau of Internal Revenue unearthed anomalies committed in the office of the Treasurer
of the city of Cebu in connection with the payment of taxes by some taxpayers, amongst them petitioner herein. As a
result the respondent assessed against, and demanded from petitioner the payment of the following sums: P4,725,
including P100 as penalty, P29,980, including P50 as penalty, and P17,425 including P50 as penalty, on January 27, 1956,
November 12, 1955 and November 12, 1955, respectively. This assessment was based upon short payments in connection
with taxes due from petitioner during the periods covered by the assessment. The investigation of the anomalies disclosed
that the amounts of the taxes allegedly paid by him, as appearing in the original of every official receipt he had in his
possession, were bigger than the amounts appearing in the corresponding duplicate, triplicate and quadruplicate copies
thereof kept in the office of the City Treasurer of Cebu. Such discrepancies are hereunder tabulated as follows:
Official
Receipt
Number

Appearing in the Original

Date

Amount

Re 1st cause of action

Appearing in the Duplicate

Triplicate and/or
Quadruplicate
Date

Amount

Difference

699004

4-20-54

P3,227.47

4-20-54

P227.47

P3,000.00

704201

7-20-54

3,681.41

7-20-54

681.41

3,000.00

709008

10-20-54

1,892.78

10-20-54

192.78

1,700.00

A-210319

1-20-55

2,575.46

1-20-55

175.46

2,400.00

A-218105

4-20-55

3,968.68

4-20-55

168.69

3,800.00

Re 2nd cause of action

1923194

4-21-52

P4,380.37

4-21-52

P380.37

P4,000.00

1972817

7-21-52

4,140.29

7-21-52

140.29

4,000.00
50

6399188

10-20-52

2,113.07

10-20-52

113.07

2,000.00

7769180

1-17-53

1,457.42

4-7-53

6.00

1,451.42

7778387

4-18-53

4,057.56

4-18-52

57.56

4,000.00

8423087

7-20-53

2,850.63

7-20-53

50.63

2,800.00

8470851

10-20-53

2,901.87

10-20-53

101.87

2,800.00

693613

1-20-54

2,996.26

1-20-54

96.26

2,900.00

P3,815.18

1-17-52

P115.18

P3,700.00

Re 3rd cause of action

A-1709018

1-17-52

Petitioner's contention below and here is this: since the checks issued by him covered in full the amount due for each
quarter, and were accepted and deposited by the City Treasurer of Cebu; since the originals of the official receipts issued
by the latter show that the full amount of the taxes due from him had been paid, he must be deemed to have paid such
taxesin full, and any anomaly in the application of the amounts paid by him consisting in the diversion of part thereof to
pay the taxes of other taxpayers whether attributable solely to employees in the office of said Treasurer or to other
parties should not be held against him.
Respondent's contention, on the other hand, is that the amounts actually paid by petitioner were those appearing on the
duplicates, triplicates and quadruplicates of the official receipts mentioned heretofore; that the originals thereof were
falsified or altered to make them show payment in full of the taxes due from petitioner.
In connection with the issues thus joined petitioner tried to prove that the payments in question were made by him
personally, while, on the other hand, respondent claimed that said payments were made not by petitioner personally but by
Tan Chuan Liong, his authorized agent in the matter of payment of his taxes; that Bartolome Baguio, Chief of the Internal
Revenue Division of the City Treasurer's Office of Cebu, had allowed the wrongful practice of permitting Tan Chuan
Liong to prepare the official receipts in connection with tax payments made by him in behalf of his merchant clients; that
it was Tan Chuan Liong who applied a portion of the amounts given to him by petitioner to pay tax obligations of other
taxpayers, also his clients, and that therefore petitioner's recourse is against him.lawphi1.et
Whether it was petitioner, in person, who made the payment of his taxes herein involved, or it was his aforesaid agent, is
manifestly a question of fact squarely resolved by the Court of Tax Appeals as follows: "Petitioner sought to prove that he
never employed Tan Chuan Liong as a business agent in the payment of the tax in question. The preponderance of the
evidence shows otherwise. If, as alleged, petitioner paid the tax personally, why were the official receipts prepared by Tan
Chuan Liong and not by Bartolome Baguio or any authorized employee in the office of the City Treasurer of Cebu? It
appears that Tan Chuan Liong prepared the official receipts of payments of taxpayers who employed him as business
agent. It has not been shown that Tan Chuan Liong prepared any official receipt covering payment of taxpayers other than
those who employed him business agent."
After ruling against petitioner on this question, the Court of Tax Appeals said further:
Even assuming that Tan Chuan Liong was not employed by petitioner as business agent, petitioner is not entirely
blameless. The records show that the payments were made by checks. The number of the official receipts
covering the payments are indicated on the back of the checks. After the checks had been deposited and the
51

amounts credited in favor of the Government, the cancelled checks were returned to petitioner. Petitioner is,
therefore, charged with knowledge of the fact that the amount covered by each check was applied in payment not
only of his tax but also of taxes of other taxpayers, the numbers of the official receipts covering which are
indicated on the back of the check. The fact that he accepted the cancelled checks without protest is evidence of
his acquiescence to the manner in which the amount covered by each check was applied by the collecting officer.
He cannot now be heard to complain.lawphi1.et
We can hardly add any other consideration to strengthen the lower court's ruling.
Another question of fact vital to this case is whether or not the official receipts in petitioner's possession were falsified,
and if so by whom.
In this connection, We believe it established as a fact that petitioner had employed Tan Chuan Liong as a business agent
in the matter of payment of his taxes. The testimonies of Bartolome Baguio, Isidro Badana and Lauro Abalos on this
matter (T.s.n. pp. 200-201, 472-473, 483-484, 501-503, 508-510, 525, 535-539) were corroborated by the statement and
report of NBI handwriting expert Felipe Logan. That Tan Chuan Liong, as such petitioner's agent, actually paid to the
government less than the amounts of the taxes due from petitioner is also fully proven by their testimonies and the
duplicate, triplicate and quadruplicate copies of the official receipts which appear upon their face to be genuine or
authentic. The same thing cannot be claimed for the official receipts in question, because the lower court found that, as in
the case ofTiu Bon Sin vs. Collector etc., C.T.A. No. 286, andYap Pe Giok vs. Araas, C.T.A. No. 533, appellant
employed the same business agent who misappropriated a portion of the amounts entrusted to him and paid less than what
was due from his principals. In plain words, the lower court expressed the view that the official receipts in petitioner's
hands did not reflect the truth.
The trial court's ruling upon these questions must be sustained pursuant to our consistent ruling to the effect that in
reviews of the nature of the present, only errors of law are reviewable by this Court (G.R. L-12174, Maria B. Castro vs.
Collector, April 26, 1962; G.R. L-9738, Blas Gutierrez, et al. vs. Court of Tax Appeals; G.R. L-8556, Benito Sanchez vs.
Commissioner of Customs, Sept. 30, 1957 and 54 O.G. No. 2, p. 361, Eugenie Perez vs. Court of Tax Appeals, G.R. L10507, May 30, 1958; G.R. No. L-13387, Sy Chiuco vs. Collector, March 23, 1960; G.R. No. L-11622, Collector vs.
Fisher and G.R. No. L-1168, Fisher vs. Collector, January 28, 1961).
The foregoing disposes of the first two assignments of error submitted in petitioner's brief. In the third, it is his contention
that the Court a quo erred in holding that he is estopped from questioning the misapplication of his payments.
This is only a corollary of the questions raised in the previous assignments of error. Inasmuch as We have held in
resolving the latter that, in point of fact, Tan Chuan Liong was petitioner's agent, the conclusion must necessarily be that
the agent's acts bind his principal; without prejudice, of course, to the latter seeking recourse against him in an appropriate
civil or criminal action.
The fourth and last assignment of error has been impliedly resolved adversely to petitioner in our rulings upon the first
three.
PREMISES CONSIDERED, the decision appealed from is hereby affirmed, with costs.

52

G.R. No. 142616

July 31, 2001

PHILIPPINE NATIONAL BANK, petitioner,

vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE,respondents.
KAPUNAN, J.:
In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to annul and set aside
the Court of Appeals' decision in C.A. CV G.R. S.P. No. 55374 dated March 27, 2000, affirming the Order issuing a writ
of preliminary injunction of the Regional Trial Court of Makati, Branch 147 dated June 30, 1999, and its Order dated
October 4, 1999, which denied petitioner's motion to dismiss.
The antecedents of this case are as follows:
Petitioner Philippine National Bank is a domestic corporation organized and existing under Philippine law. Meanwhile,
respondents Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise are domestic corporations,
likewise, organized and existing under Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized and doing
business in Hong Kong, extended a letter of credit in favor of the respondents in the amount of US$300,000.00 secured by
real estate mortgages constituted over four (4) parcels of land in Makati City. This credit facility was later increased
successively to US$1,140,000.00 in September 1996; to US$1,290,000.00 in November 1996; to US$1,425,000.00 in
February 1997; and decreased to US$1,421,316.18 in April 1998. Respondents made repayments of the loan incurred by
remitting those amounts to their loan account with PNB-IFL in Hong Kong.
However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70. Pursuant to the terms of the real
estate mortgages, PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the real
estate mortgages and that the properties subject thereof were to be sold at a public auction on May 27, 1999 at the Makati
City Hall.
On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary
injunction and/or temporary restraining order before the Regional Trial Court of Makati. The Executive Judge of the
Regional Trial Court of Makati issued a 72-hour temporary restraining order. On May 28, 1999, the case was raffled to
Branch 147 of the Regional Trial Court of Makati. The trial judge then set a hearing on June 8, 1999. At the hearing of the
application for preliminary injunction, petitioner was given a period of seven days to file its written opposition to the
application. On June 15, 1999, petitioner filed an opposition to the application for a writ of preliminary injunction to
which the respondents filed a reply. On June 25, 1999, petitioner filed a motion to dismiss on the grounds of failure to
state a cause of action and the absence of any privity between the petitioner and respondents. On June 30, 1999, the trial
court judge issued an Order for the issuance of a writ of preliminary injunction, which writ was correspondingly issued on
July 14, 1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge for lack of merit.
Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the writ of preliminary injunction
before the Court of Appeals. In the impugned decision,1 the appellate court dismissed the petition. Petitioner thus seeks
recourse to this Court and raises the following errors:
1.
THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE COMPLAINT A QUO,
CONSIDERING THAT BY THE ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF ACTION EXISTS
53

AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEYIN-FACT AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.
2.
THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT TO ISSUE IN
EXCESS OR LACK OF JURISDICTION A WRIT OF PRELIMINARY INJUNCTION OVER AND BEYOND
WHAT WAS PRAYED FOR IN THE COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS.
GUADIZ JR., 101 SCRA 827.2
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the trial court's Orders dated
June 30, 1999 and October 4, 1999 be set aside and the dismissal of the complaint in the instant case.3
In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-IFL are two separate entities,
petitioner is still the party-in-interest in the application for preliminary injunction because it is tasked to commit acts of
foreclosing respondents' properties.4 Respondents maintain that the entire credit facility is void as it contains stipulations
in violation of the principle of mutuality of contracts.5 In addition, respondents justified the act of the court a quo in
applying the doctrine of "Piercing the Veil of Corporate Identity" by stating that petitioner is merely an alter ego or a
business conduit of PNB-IFL.6
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on alleged invalid provisions of the contract:
GROUNDS
I
THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE DISCRETION OF THE
DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF MUTUALITY OF CONTRACTS.
II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF INTEREST
AGREED UPON MAY BE UNILATERALLY MODIFIED BY DEFENDANT, THERE WAS NO
STIPULATION THAT THE RATE OF INTEREST SHALL BE REDUCED IN THE EVENT THAT THE
APPLICABLE MAXIMUM RATE OF INTEREST IS REDUCED BY LAW OR BY THE MONETARY
BOARD.7
Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from the foreclosure and eventual
sale of the property in order to protect their rights to said property by reason of void credit facilities as bases for the real
estate mortgage over the said property.8
The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In their complaint, respondents
admit that petitioner is a mere attorney-in-fact for the PNB-IFL with full power and authority to, inter alia, foreclose on
the properties mortgaged to secure their loan obligations with PNB-IFL. In other words, herein petitioner is an agent with
limited authority and specific duties under a special power of attorney incorporated in the real estate mortgage. It is not
privy to the loan contracts entered into by respondents and PNB-IFL.
The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's principal and the party to the
loan contracts, and the respondents. Yet, despite the recognition that petitioner is a mere agent, the respondents in their
54

complaint prayed that the petitioner PNB be ordered to re-compute the rescheduling of the interest to be paid by them in
accordance with the terms and conditions in the documents evidencing the credit facilities, and crediting the amount
previously paid to PNB by herein respondents.9
Clearly, petitioner not being a part to the contract has no power to re-compute the interest rates set forth in the contract.
Respondents, therefore, do not have any cause of action against petitioner.
The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL, is a wholly owned subsidiary of
defendant Philippine National Bank, the suit against the defendant PNB is a suit against PNB-IFL.10In justifying its ruling,
the trial court, citing the case of Koppel Phil. Inc. vs. Yatco,11 reasoned that the corporate entity may be disregarded where
a corporation is the mere alter ego, or business conduit of a person or where the corporation is so organized and controlled
and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.12
We disagree.
The general rule is that as a legal entity, a corporation has a personality distinct and separate from its individual
stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter.13The mere
fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being
treated as one entity. If used to perform legitimate functions, a subsidiary's separate existence may be respected, and the
liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business.
The courts may in the exercise of judicial discretion step in to prevent the abuses of separate entity privilege and pierce
the veil of corporate entity.
We find, however, that the ruling in Koppel finds no application in the case at bar. In said case, this Court disregarded the
separate existence of the parent and the subsidiary on the ground that the latter was formed merely for the purpose of
evading the payment of higher taxes. In the case at bar, respondents fail to show any cogent reason why the separate
entities of the PNB and PNB-IFL should be disregarded.
While there exists no definite test of general application in determining when a subsidiary may be treated as a mere
instrumentality of the parent corporation, some factors have been identified that will justify the application of the
treatment of the doctrine of the piercing of the corporate veil. The case of Garrett vs. Southern Railway Co.14is
enlightening. The case involved a suit against the Southern Railway Company. Plaintiff was employed by Lenoir Car
Works and alleged that he sustained injuries while working for Lenoir. He, however, filed a suit against Southern Railway
Company on the ground that Southern had acquired the entire capital stock of Lenoir Car Works, hence, the latter
corporation was but a mere instrumentality of the former. The Tennessee Supreme Court stated that as a general rule the
stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable
for the torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere sham, or unless the
control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. Said Court then
outlined the circumstances which may be useful in the determination of whether the subsidiary is but a mere
instrumentality of the parent-corporation:
The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the infinite
variations of fact that can arise but there are certain common circumstances which are important and which, if
present in the proper combination, are controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
55

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its
incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or no assets except those
conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a
department or division of the parent corporation, or its business or financial responsibility is referred to as the
parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take
their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of the capital stock of
Lenoir by Southern, and possibly subscription to the capital stock of Lenoir. . . The complaint must be dismissed.
Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is an equitable doctrine
developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful
purposes. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the
mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.15
In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the applicability of the doctrine of piercing the
veil of corporate fiction, to wit:
1. Control, not mere majority or complete control, but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own.
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and, unjust act in contravention of plaintiffs legal rights; and,
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality"
or "alter ego" doctrine, the courts are concerned with reality and not form, with how the corporation operated and
the individual defendant's relationship to the operation.17
56

Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing of the indicative
factors that the former corporation is a mere instrumentality of the latter are present. Neither is there a demonstration that
any of the evils sought to be prevented by the doctrine of piercing the corporate veil exists. Inescapably, therefore, the
doctrine of piercing the corporate veil based on the alter ego or instrumentality doctrine finds no application in the case at
bar.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship
involved in this case since the petitioner was not sued because it is the parent company of PNB-IFL. Rather, the petitioner
was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an
agent cannot without compelling reasons be considered a suit against the principal. Under the Rules of Court, every action
must be prosecuted or defended in the name of the real party-in-interest, unless otherwise authorized by law or these
Rules.18 In mandatory terms, the Rules require that "parties-in-interest without whom no final determination can be had,
an action shall be joined either as plaintiffs or defendants."19 In the case at bar, the injunction suit is directed only against
the agent, not the principal.
Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere provisional remedy but adjunct to
the main suit.20 A writ of preliminary injunction is an ancillary or preventive remedy that may only be resorted to by a
litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the principal action.
The dismissal of the principal action thus results in the denial of the prayer for the issuance of the writ. Further, there is no
showing that respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the 1997 Rules of Civil Procedure
provides:
SECTION 3. Grounds for issuance of preliminary injunction. A preliminary injunction may be granted when it
is established:
(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining
the commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts,
either for a limited period or perpetually,
(b) That the commission, continuance or non-performance of the acts or acts complained of during the litigation
would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering
to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action
or proceeding, and tending to render the judgment ineffectual.
Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences
which cannot be remedied under any standard compensation.21 Respondents do not deny their indebtedness. Their
properties are by their own choice encumbered by real estate mortgages. Upon the non-payment of the loans, which were
secured by the mortgages sought to be foreclosed, the mortgaged properties are properly subject to a foreclosure sale.
Moreover, respondents questioned the alleged void stipulations in the contract only when petitioner initiated the
foreclosure proceedings. Clearly, respondents have failed to prove that they have a right protected and that the acts against
which the writ is to be directed are violative of said right.22The Court is not unmindful of the findings of both the trial
court and the appellate court that there may be serious grounds to nullify the provisions of the loan agreement. However,
as earlier discussed, respondents committed the mistake of filing the case against the wrong party, thus, they must suffer
the consequences of their error.
All told, respondents do not have a cause of action against the petitioner as the latter is not privy to the contract the
provisions of which respondents seek to declare void. Accordingly, the case before the Regional Trial Court must be
dismissed and the preliminary injunction issued in connection therewith, must be lifted.

57

G.R. No. 16492

March 9, 1922

E. MACIAS & CO., importers and exporters, plaintiff-appellant,

vs.
WARNER, BARNES & CO., in its capacity as agents of "The China Fire Insurance Co.," of "The Yang-Tsze" and
of "The State Assurance Co., Ltd.," defendant-appellant.
The plaintiff is a corporation duly registered and domiciled in Manila. The defendant is a corporation duly licensed to do
business in the Philippine Islands, and is the resident agent of insurance companies "The China Fire Insurance Company,
Limited, of Hongkong," "The Yang-Tsze Insurance Association Limited, of Shanghai," and "The State Assurance
Company, Limited, of Liverpool. The plaintiff is an importer of textures and commercial articles for wholesale.
In the ordinary course of business, it applied for, and obtained, the following policies against loss by fire:
Policy No. 4143, issued by The China Fire Insurance
Co., Ltd., for ....................................................................... P12,000
Policy No. 4382, issued by The China Fire Insurance
Co., Ltd., for .......................................................................... 15,000
Policy No. 326, issued by The Yang-Tsze Insurance
Ass'n., Ltd., for ..................................................................... 10,000
Policy No. 796111, issued by The State Assurance
Co., Ltd., for ............................................................................ 8,000
Policy No. 4143, of P12,000, recites that Mrs. Rosario Vizcarra, having paid to the China Fire Insurance Company,
Limited, P102 for insuring against or damage by fire certain merchandise the description of which follows, "the company
agrees with the insured that, if the property above described, or any party thereof, shall be destroyed or damaged by fire
between September 16, 1918, and September 16, 1919," etc., "The company will, out of its capital, stock and funds, pay
or make good all such loss or damage, not exceeding" the amount of the policy. This policy was later duly assigned to the
plaintiff.
Policy No. 4382, for P15,000, was issued by the same company to, and in the name of, plaintiff.
Policy No. 326, for P10,000, was issued to, and in the name of policy No. 326, for P10,000, was issued to, and in the
name of the plaintiff by The Yang-Tsze Insurance Association, Limited, and recites that the premium of P125 was paid by
the plaintiff to the association, and that, in the event of loss by fire between certain dates, "the funds and property of the
said association shall be subject and liable to pay, reinstate, or make good to the said assured, their heirs, executors, or
administrators, such loss or damage as shall be occasioned by fire to the property above-mentioned and hereby insured,"
not exceeding the amount of the policy.
Policy No. 796111, for P8,000, was issued by The States Assurance Company, Limited, to the plaintiff for a premium of
P100, which was paid to the Assurance Company through the defendant, its authorized agent, and recites that "the
company agrees with the insured that in the event of loss by fire between certain dates, the company will, out of its
capital, stock and funds, pay the amount of such loss or damage," not exceeding the amount of the policy, and it is attested
by the defendant, through its "Cashier and Accountant and Manager, Agents, State Assurance Co., Ltd.," authorized
agents of the Assurance Company.

58

Policy No. 4143 is attested "on behalf of The China Fire Insurance Company, Limited," by the cashier and accountant and
manager of the defendant, as agents of The China Fire Insurance Company, Limited. The same is true as to policy no.
4382.
Policy No. 326 recites the payment of a premium of P125 by the plaintiff to The Yang-Tsze Insurance Association,
Limited, and that, in the event of loss, "the funds and property of the said association shall be subject and liable to pay,
reinstate, or make good to the said assured, their heirs, executors, or administrators, such loss or damage as shall be
occasioned by fire or lightning to the property" insured, not exceeding the amount of the policy, and it is attested by the
defendant, through its cashier and accountant and manager, as agents of the association "under the authority of a Power of
Attorney from The Yang-Tsze Insurance Association, Limited," "to sign, for and on behalf of the said Association, etc."
March 25, 1919, and while the policies were in force, a loss occurred in which the insured property was more or less
damaged by fire and the use of water resulting from the fire.
The plaintiff made a claim for damages under its policies, but could not agree as to the amount of loss sustained. It sold
the insured property in its then damaged condition, and brought this action against Warner, Barnes & Co., in its capacity
as agents, to recover the difference between the amount of the policies and the amount realized from the sale of the
property, and in the first cause of action, it prayed for judgment for P23,052.99, and in the second cause of action
P9,857.15.
The numbers and amounts of the policies and the names of the insurance companies are set forth and alleged in the
complaint.
The answer admits that the defendants is the resident agent of the insurance companies, the issuance of the policies, and
that a fire occurred on March 25, 1919, in the building in which the goods covered by the insurance policies were stored,
and that to extinguish the fire three packages of goods were damage by water not to exceed P500, and denies generally all
other material allegations of the complaint.
As a further and separate defense, the defendant pleads certain provisions in the policies, among which was a written
notice of loss, and all other insurance and certain detailed information. It is then alleged
That although frequently requested to do so, plaintiff failed and refused to deliver to defendant or to any other
person authorized to receive it, any claim in writing specifying the articles or items of property damaged or
destroyed and of the alleged amount of the loss or damage caused thereto.
That defendant was at all times ready and willing to pay, on behalf of the insurance companies by whom said
policies were issued, and to the extent for which each was proportionately liable, the actual damage to plaintiff's
goods covered by the risks insured against, upon compliance within the time limited, with the terms of the clause
of the contracts of insurance above set forth.
Defendants prays judgment for costs.
Before the trial, counsel for the defendant objected to the introduction of any evidence in the case, and moved "that
judgment be entered for the defendant on the pleadings upon the ground that it appears from the averment of the
complaint that the plaintiff has had no contractual relations with the defendant, and that the action has not been brought
against the real party in interest." The objection and motion was overruled and exception duly taken. After trial the court
found that there was due the plaintiff from the three insurance companies p18,493.29 with interest thereon at the rate of 6
per cent per annum, from the date of the commencement of the action, and costs, and rendered the following judgment:
It is, therefore, ordered that judgment be entered against Warner, Barnes & Co., Ltd., in its capacity as agent and
representative in the Philippine Islands for The China fire Insurance Company, Ltd., The Yang-Tsze Insurance
59

Association, Ltd., and The State Assurance Co., Ltd., for the payment to the plaintiff, E. Macias & Co., of the sum
of P18,493.29, the amount of this judgment to be prorated by Warner, Barnes & Co., among the three insurance
companies above-mentioned by it represented, in proportion to the interest insured by each of said three insurance
companies, according to the policies issued by them in favor of the plaintiff, and sued upon in this action.
The defendant then filed a motion to set aside the judgment and for a new trial, which was overruled and exception taken.
From this judgment the defendant appealed, claiming that "the court erred in overruling defendant's motion for judgment
on the pleadings; that the court erred in giving judgment for the plaintiff; that the court erred in denying defendants
motion for a new trial," and specifying other assignments which are not material to this opinion, Plaintiff also appealed.
JOHNS, J.:
The material facts are not in dispute it must be conceded that the policies in question were issued by the different
insurance companies, through the defendant as their respective agent; that they were issued in consideration of a premium
which was paid by the insured to the respective companies for the amount of the policies, as alleged; that the defendant
was, and is now, the resident agent in Manila of the companies, and was authorized to solicit and do business for them as
such agent; that each company is a foreign corporation. The principal office and place business of the The China Fire
Insurance Company is at Hongkong; of The Yang-Tsze Insurance Association is at Shanghai; and of The State Assurance
Company is at Liverpool. As such foreign corporations they were duly authorized and licensed to do insurance business in
the Philippine Islands, and, to that end and for that purpose, the defendant corporation, Warner, Barnes & Co., was the
agent of each company.
All of the policies are in writing, and recite that the premium was paid by the insured to the insurance company which
issued the policy, and that, in the event of a loss, the insurance company which issued it will pay to the insured the amount
of the policy.
This is not a case of an undisclosed agent or an undisclosed principal. It is a case of a disclosed agent and a disclosed
principal.
The policies on their face shows that the defendant was the agent of the respective companies, and that it was acting as
such agent in dealing with the plaintiff. That in the issuance and delivery of the policies, the defendant was doing business
in the name of, acting for, and representing, the respective insurance companies. The different policies expressly recite
that, in the event of a loss, the respective companies agree to compensate the plaintiff for the amount of the loss. the
defendant company did not insure the property of the plaintiff, or in any manner agree to pay the plaintiff the amount of
any loss. There is no contract of any kind. either oral or written, between the plaintiff and Warner, Barnes & Co. Plaintiff's
contracts are with the insurance companies, and are in writing, and the premiums were paid to the insurance companies,
and are in writing, and the premiums were paid to the insurance companies and the policies were issued by, and in the
name of, the insurance companies, and on the face of the policy itself, the plaintiff knew that the defendant was acting as
agent for, and was representing, the respective insurance companies in the issuance and deliver of the policies. The
defendant company did not contract or agree to do anything or to pay the plaintiff any money at any time or on any
condition, either as agent or principal.
There is a very important distinction between the power and duties of a resident insurance agent of a foreign company and
that of an executor, administrator, or receiver. An insurance agent as such is not responsible for, and does not have, any
control over the corpus or estate of the corporate property, as does an executor, administrator, or receiver. Subject only to
the order of the court, such officers are legal custodians and have actual possession of the corporate property. It is under
their control and within their jurisdiction.
As stated by counsel for Warner, Barnes & Co., an attorney of record for an insurance company has greater power and
authority to act for, and bind, the company than does a soliciting agent of an insurance company. Yet, no attorney would
contend that a personal action would lie against local attorneys who represent a foreign corporation to recover on a
60

contract made by the corporation. On the same principles by which plaintiff seeks to recover from the defendant, an action
could be maintained against the cashier of any bank on every foreign draft which he signed for, and on behalf of, the bank.
Every cause of action ex contractu must be founded upon a contract, oral or written, either express or implied.
Warner, Barnes & Co., as principal or agent, did not make any contract, either or written, with the plaintiff. The contracts
were made between the respective insurance companies and the insured, and were made by the insurance companies,
through Warner, Barnes & Co., as their agent.
As in the case of a bank draft, it is not the cashier of the bank who makes the contract to pay the money evidenced by the
draft, it is the bank, acting through its cashier, that makes the contract. So, in the instant case, it was the insurance
companies, acting through Warner, Barnes & Co., as their agent, that made the written contracts wit the insured.
The trial court attached much importance to the fact that in the further and separate answer, an admission was made "that
defendant was at all times ready and will not to pay, on behalf of the insurance companies by whom each was
proportionately liable, the actual damage" sustained by the plaintiff covered by the policies upon the terms and conditions
therein stated.
When analyzed, that is nothing more than a statement that the companies were ready and willing to prorate the amount
when the losses were legally ascertained. Again, there is not claim or pretense that Warner, Barnes & Co. had any
authority to act for, and represent the insurance companies in the pending action, or to appear for them or make any
admission which would bind them. As a local agent, it could not do that without express authority. That power could only
exercised by an executive officer of the company, or a person who was duly authorized to act for, and represent, the
company in legal proceedings, and there is no claim or pretense, either express or implied, that the defendant has any such
authority.
Plaintiff's cause of action, if any, is direct against the insurance companies that issued the policies and agreed to pay the
losses.
The only defendant in the instant case is "Warner, Barnes & Co., in its capacity as agents of:" the insurance companies.
Warner, Barnes & Co. did not make any contract with the plaintiff, and are not liable to the plaintiff on any contract,
either as principal or agent. For such reason, plaintiff is not entitled to recover its losses from Warner, Barnes & Co.,
either as principal or agent. There is no breach of any contract with the plaintiff by Warners, Barnes & Co., either as agent
or principal, for the simple reason that Warner, Barnes & Co., as agent or principal, never made any contract, oral or
written, with the plaintiff. This defense was promptly raised before the taking of the testimony, and again renewed on the
motion to set aside the judgment.
Plaintiff's own evidence shows that any cause of action it may have is against the insurance companies which issued the
policies.
The complaint is dismissed, and the judgment of the lower court is reversed, and one will be entered here in favor of
Warner, Barnes & Co., Ltd., against the plaintiff, for costs in both this and the lower court. So ordered.

61

G.R. No. L-2344

February 10, 1906

GONZALO TUASON, plaintiff-appellee,

vs.
DOLORES OROZCO, defendant-appellant.
MAPA, J.:
On November 19, 1888, Juan de Vargas y Amaya, the defendant's husband, executed a power of attorney to Enrique
Grupe, authorizing him, among other things, to dispose of all his property, and particularly of a certain house and lot
known as No. 24 Calle Nueva, Malate, in the city of Manila, for the price at which it was actually sold. He was also
authorized to mortgage the house for the purpose of securing the payment of any amount advanced to his wife, Dolores
Orozco de Rivero, who, inasmuch as the property had been acquired with funds belonging to the conjugal partnership,
was a necessary party to its sale or incumbrance.
On the 21st of January, 1890, Enrique Grupe and Dolores Orozco de Rivero obtained a loan from the plaintiff secured by
a mortgage on the property referred to in the power of attorney. In the caption of the instrument evidencing the debt it is
stated that Grupe and Dolores Orozco appeared as the parties of the first part and Gonzalo Tuason, the plaintiff, as the
party of the second part; that Grupe acted for himself and also in behalf of Juan Vargas by virtue of the power granted him
by the latter, and that Dolores Orozco appeared merely for the purpose of complying with the requirement contained in
the power of attorney. In the body of the instrument the following appears:
1. Enrique Grupe acknowledges to have this day received from Gonzalo Tuason as a loan, after deducting
therefrom the interest agreed upon, the sum of 3,500 pesos in cash, to his entire satisfaction, which sum he
promises to pay within one year from the date hereof.
2. Grupe also declares that of the 3,500 pesos, he has delivered to Dolores Orozco the sum of 2,200 pesos, having
retained the remaining 1,300 pesos for use in his business; that notwithstanding this distribution of the amount
borrowed, he assumes liability for the whole sum of 3,500 pesos, which he promises to repay in current gold or
silver coin, without discount, in this city on the date of the maturity of the loan, he otherwise to be liable for all
expenses incurred and damages suffered by his creditor by reason of his failure to comply with any or all of the
conditions stipulated herein, and to pay further interest at the rate of 1 per cent per month from the date of default
until the debt is fully paid.
3. Grupe pledges as special security for the payment of the debt 13 shares of stock in the "Compaia de los
Tranvias de Filipinas," which shares he has delivered to his creditor duly indorsed so that the latter in case of his
insolvency may dispose of the same without any further formalities.
4. To secure the payment of the 2,200 pesos delivered to Dolores Orozco as aforesaid he specially mortgages the
house and lot No. 24, Calle Nueva, Malate, in the city of Manila (the same house referred to in the power at
attorney executed by Vargas to Grupe).
5. Dolores Orozco states that, in accordance with the requirement contained in the power of attorney executed by
Vargas to Grupe, she appears for the purpose of confirming the mortgage created upon the property in question.
6. Gonzalo Tuason does hereby accept all rights and actions accruing to him under his contract.
This instrument was duly recorded in the Registry of Property, and it appears therefrom that Enrique Grupe, as attorney in
fact for Vargas, received from the plaintiff a loan of 2,200 pesos and delivered the same to the defendant; that to secure its
payment he mortgaged the property of his principal with defendant's consent as required in the power of attorney. He also
received 1,300 pesos. This amount he borrowed for his own use. The recovery of this sum not being involved in this
62

action, it will not be necessary to refer to it in this decision. The complaint refers only to the 2,200 pesos delivered to the
defendant under the terms of the agreement.
The defendant denies having received this sum, but her denial can not overcome the proof to the contrary contained in the
agreement. She was one of the parties to that instrument and signed it. This necessarily implies an admission on her part
that the statements in the agreement relating to her are true. She executed another act which corroborates the delivery to
her of the money in question that is, her personal intervention in the execution of the mortgage and her statement in the
deed that the mortgage had been created with her knowledge and consent. The lien was created precisely upon the
assumption that she had received that amount and for the purpose of securing its payment.
In addition to this the defendant wrote a letter on October 23, 1903, to the attorneys for the plaintiff promising to pay the
debt on or before the 5th day of November following. The defendant admits the authenticity of this letter, which is a
further evidence of the fact that she had received the amount in question. Thirteen years had elapsed since she signed the
mortgage deed. During all this time she never denied having received the money. On the contrary, she promised to settle
within a short time. The only explanation that we can find for this is that she actually received the money as set forth in
the instrument.
The fact that the defendant received the money from her husband's agent and not from the creditor does not affect the
validity of the mortgage in view of the conditions contained in the power of attorney under which the mortgage was
created. Nowhere does it appear in this power that the money was to be delivered to her by the creditor himself and not
through the agent or any other person. The important thing was that she should have received the money. This we think is
fully established by the record.
This being an action for the recovery of the debt referred to, the court below properly admitted the instrument executed
January 21, 1890, evidencing the debt.
The appellant claims that the instrument is evidence of a debt personally incurred by Enrique Grupe for his own benefit,
and not incurred for the benefit of his principal, Vargas, as alleged in the complaint. As a matter of fact, Grupe, by the
terms of the agreement, bound himself personally to pay the debt. The appellant's contention however, can not be
sustained. The agreement, so far as that amount is concerned, was signed by Grupe as attorney in fact for Vargas.
Pursuant to instructions contained in the power of attorney the money was delivered to Varga's wife, the defendant in this
case. To secure the payment of the debt, Varga's property was mortgaged. His wife took part in the execution of the
mortgage as required in the power of attorney. A debt thus incurred by the agent is binding directly upon the principal,
provided the former acted, as in the present case, within the scope of his authority. (Art. 1727 of the Civil Code.) The fact
that the agent has also bound himself to pay the debt does not relieve from liability the principal for whose benefit the
debt was incurred. The individual liability of the agent constitutes in the present case a further security in favor of the
creditor and does not affect or preclude the liability of the principal. In the present case the latter's liability was further
guaranteed by a mortgage upon his property. The law does not provide that the agent can not bind himself personally to
the fulfillment of an obligation incurred by him in the name and on behalf of his principal. On the contrary, it provides
that such act on the part of an agent would be valid. (Art. 1725 of the Civil Code.)
The above mortgage being valid and having been duly recorded in the Register of Property, directly subjects the property
thus encumbered, whoever its possessor may be, to the fulfillment of the obligation for the security of which it was
created. (Art. 1876 of the Civil Code and art. 105 of the Mortgage Law.) This presents another phase of the question.
Under the view we have taken of the case it is practically of no importance whether or not Enrique Grupe bound himself
personally to pay the debt in question. Be this as it may and assuming that Vargas, though principal in the agency, was not
the principal debtor, the right in rem arising from the mortgage would have justified the creditor in bringing his action
directly against the property encumbered had he chosen to foreclose the mortgage rather than to sue Grupe, the alleged
principal debtor. This would be true irrespective of the personal liability incurred by Grupe. The result would be
practically the same even though it were admitted that appellant's contention is correct.

63

The appellant also alleges that Enrique Grupe pledged to the plaintiff thirteen shares of stock in the "Compaia de los
Tranvias de Filipinas" to secure the payment of the entire debt, and contends that it must be shown what has become of
these shares, the value of which might be amply sufficient to pay the debt, before proceeding to foreclose the mortgage.
This contention can not be sustained in the face of the law above quoted to the effect that a mortgage directly subjects the
property encumbered, whoever its possessor may be, to the fulfillment of the obligation for the security of which it was
created. Moreover it was incumbent upon the appellant to show that the debt had been paid with those shares. Payment is
not presumed but must be proved. It is a defense which the defendant may interpose. It was therefore her duty to show this
fact affirmatively. She failed, however, to do so.
The appellant's final contention is that in order to render judgment against the mortgaged property it would be necessary
that the minor children of Juan de Vargas be made parties defendant in this action, they having an interest in the property.
Under article 154 of the Civil Code, which was in force at the time of the death of Vargas, the defendant had the parental
authority over her children and consequently the legal representation of their persons and property. (Arts. 155 and 159 of
the Civil Code.) It can not be said, therefore, that they were not properly represented at the trial. Furthermore this action
was brought against the defendant in her capacity as administratrix of the estate of the deceased Vargas. She did not deny
in her answer that she was such administratix.
Vargas having incurred this debt during his marriage, the same should not be paid out of property belonging to the
defendant exclusively but from that pertaining to the conjugal partnership. This fact should be borne in mind in case the
proceeds of the mortgaged property be not sufficient to ay the debt and interest thereon. The judgment of the court below
should be modified in so far as it holds the defendant personally liable for the payment of the debt.
The judgment thus modified is affirmed and the defendant is hereby ordered to pay to the plaintiff the sum of 2,200 pesos
as principal, together with interest thereon from the 21st day of January, 1891, until the debt shall have been fully
discharged. The appellant shall pay the costs of this appeal.
After the expiration of ten days let judgment be entered in accordance herewith and let the case be remanded to the court
below for execution. So ordered.

64

G.R. No. L-10919

February 28, 1958

LORETO LORCA, plaintiff-appellant,

vs.
JOSE S. DINEROS, defendant-appellee.
BENGZON, J.:
This action for damages against Deputy Sheriff Jose S. Dineros was dismissed by Hon. Pantaleon Pelayo, Judge of Iloilo,
on the ground that it is the Sheriff who is responsible, if at all not this deputy.
Such decision resulted from a motion for judgment on the pleadings. The facts are short and simple:
Pursuant to a writ of execution issued in Civil Case No. 1062 entitled "Rosario Suero vs. Jose Morata" Jose S. Dineros as
Deputy Sheriff and in the name of the Sheriff sold at public auction to Jose Bermejo and Rosario Suero the property
attached therein, disregarding the third-party claim of Loreto Lorca (herein Plaintiff) who asserted ownership over said
property. This suit for damages is the result of said auction sale. Defendant, in his answer, denied liability, pointing out,
that he had merely acted for and on behalf of Provincial Sheriff, Cipriano Cabaluna.
The appellant insists here that Dineros was responsible in view of sec. 334 of the Revised Administrative Code and sec.
15, Rule 39, Rules of Court, which provides as follows:
SEC. 334 Right of Bonded Officer to require Bond from Deputy or assistant. A sheriff or other accountable
official may require any of his deputies or assistants, not bonded in the fidelity fund, to give an adequate personal
bond as security against loss by reason of any wrong doing on the part of such deputy or assistant. The taking of
such security shall in no wise impair the independent civil liability of any of the parties.
. . . and in case the sheriff or attaching officer is sued for damages as a result of the attachment. . . .
In the light of section 330 of the Administrative Code we think the above provisions apply where the deputy acts in his
own name or is guilty of active malfeasance1 or possibly where he exceeds the limits of his agency. In this case it is clear
from the certificate of sale attached to the complaint as Annex C that Dineros acted all the time in the name of the ExOfficio Provincial Sheriff of Iloilo; and no allegations of misfeasance are made. The Sheriff is liable to third persons on
the acts of his deputy,2 in the same manner that the principal is responsible for the acts of his agent, that is why he is
required to post a bond for "the benefit of whom it may concern," (Section 330, Revised Administrative Code) for
instance the owners of property unlawfully sold by him on execution.3
The complaint should not have been dismissed, appellant argues, since the court could have included the Sheriff as party
defendant, in line with Rule 3, section 11 of the Rules of Court. However, what should have been done was not
"inclusion" as plaintiff asked, nor "exclusion" under said section 11. It was "substitution" of the deputy by the Sheriff.
Anyway, the word "may" in said see. 11 implies direction of the court; and we are shown no reasons indicating abuse
thereof.
This is not the first time an action is dismissed for the reason that the agent instead of his principal was made the
party defendant. (See Macias & Co. vs. Warner Barnes, 43 Phil., 155; Banque Generate Belge vs.Walter Bull & Co., 84
Phil., 164, 47 Off. Gaz., 138.)
Judgment affirmed, with costs against appellant.

65

G.R. No. L-2246

January 31, 1951

JOVITO R. SALONGA, plaintiff-appellee,

vs.
WARNER, BARNES AND CO., LTD., defendant-appellant.
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Manila ordering the defendant, as agent of Westchester
Fire Insurance Company of New York, to pay to the plaintiff the sum of P727. 82 with legal interest thereon from the
filing of the complaint until paid, and the costs. The case was taken to this court because it involves only questions of law.
On August 28, 1946, Westchester Fire Insurance Company of New York entered into a contract with Tina J. Gamboa
whereby said company insured one case of rayon yardage which said Tina J. Gamboa shipped from San Francisco,
California, on steamer Clovis Victory, to Manila, Philippines and consigned to Jovito Salonga, plaintiff herein. According
to the contract of insurance, the insurance company undertook to pay to the sender or her consignee the damages that may
be caused to the goods shipped subject to the condition that the liability of the company will be limited to the actual loss
which the insured may suffer not to the exceed the sum of (2,000. The ship arrived in Manila on September 10, 1946. On
October 7, the shipment was examined by C. B. Nelson and Co., marine surveyors, at the request of the plaintiff, and in
their examination the surveyors found a shortage in the shipment in the amount of P1,723,12. On October 9, plaintiff filed
a claim for damages in the amount of P1,723.12 against the American President Lines, agents of the ship Clovis Victory,
demanding settlement, and when apparently no action was taken on this claim, plaintiff demanded payment thereof from
Warner, Barnes and Co., Ltd., as agent of the insurance company in the Philippines, and this agent having refused to pay
the claim, on April 17, 1947, plaintiff instituted the present action.
In the meantime, the American President Lines, in a letter dated November 25, 1946, agreed to pay to the plaintiff the
amount of P476.17 under its liability in the bill of lading, and when this offer was rejected, the claim was finally settled in
the amount of P1,021.25. As a result, the amount claimed in the complaint as the ultimate liability of the defendant under
the insurance contract was reduced to P717.82 only.
After trial, at which both parties presented their respective evidence, the court rendered judgment as stated in the early
part of this decision. The motion for reconsideration filed by the defendant having been denied, the case was appealed to
this court.
Appellant now assigns the following errors:
I
The trial court erred in finding that the loss or damage of the case of rayon yardage (Pilferage, as found by the
marine surveyors)is included in the risks insured against as enunciated in the insurance policy.
II
The trial court erred in holding that defendant, as agent of Westchester Fire Insurance Company of New York,
United States of America, is responsible upon the insurance claim subject to the suit.
III
The trial court erred in denying defendant's motion for new trial and to set aside the decision. (Appellant's
assignments of error).
66

We will begin by discussing the second error assigned by appellant for the reason that if our view on the question raised is
in favor of the claim of appellant there would be no need to proceed with the discussion of the other errors assigned, for
that would put an end to the controversy.
As regards the second assignment of error, counsel claims that the defendant cannot be made responsible to pay the
amount in litigation because (1) said defendant has no contractual relation with either the plaintiff or his consignor; (2) the
defendant is not the real party in interest against whom the suit should be brought; and (3) a judgment for or against an
agent in no way binds the real party in interest.
1. We are of the opinion that the first point is well taken. It is a well known rule that a contractual obligation or liability,
or an action ex-contractu, must be founded upon a contract, oral or written, either express or implied. This is axiomatic. If
there is no contract, there is no corresponding liability, and no cause of action may arise therefrom. This is what is
provided for in article 1257 of the Civil Code. This article provides that contracts are binding upon the parties who make
them and their heirs, excepting, with respect to the latter, where the rights and obligations are not transmissible, and when
the contract contains a stipulation in favor of a third person, he may demand its fulfillment if he gives notice of his
acceptance before it is revoked. This is also the ruling laid down by this court in the case of E. Macias and Co. vs. Warner,
Barnes and Co. (43 Phil. 155) wherein, among others, the court said:
xxx

xxx

xxx

. . . There is no contract of any kind, either oral or written, between the plaintiff and Warner, Barnes and
Company. Plaintiff's contracts are with the insurance companies, and are in writing, and the premiums were paid
to the insurance companies and the policies were issued by, and in the name of, the insurance companies, and on
the face of the policy itself, the plaintiff knew that the defendant was acting as agent, for, and was representing,
the respective insurance companies in the issuance and delivery of the policies. The defendant company did not
contract or agree to do anything or to pay the plaintiff any money at any time or on any condition, either as agent
or principal.
xxx

xxx

xxx

Every cause of action ex-contractu must be founded upon a contract, oral or written, either express or implied.
Warner, Barnes and Co., as principal or agent, did not make any contract, either oral or written, with the plaintiff.
The contracts were made between the respective insurance companies and the insured, and were made by the
insurance companies, through Warner, Barnes and Co., as their agent.
As in the case of a bank draft, it is not the cashier of the bank who makes the contract to pay the money evidenced
by the draft, it is the bank, acting through its cashier, that makes the contract. So, in the instant case, it was the
insurance companies, acting through Warner, Barnes and Co., as their agent, that made the written contracts with
the insured. (E. Macias and Co. vs. Warner, Barnes and Co., 43 Phil., 155, 161, 162.)
Bearing in mind the above rule, we find that the defendant has not taken part, directly or indirectly, in the contract in
question. The evidence shows that the defendant did not enter into any contract either with the plaintiff or his consignor
Tina J. Gamboa. The contract of marine insurance, Exhibit C, was made and executed only by and between the
Westchester Fire Insurance Company of New York and Tina J. Gamboa. The contract was entered in New York. There is
nothing therein which may affect, in favor or adversely, the defendant, the fulfillment of which may be demanded by or
against it. That contract is purely bilateral, binding only upon Gamboa and the insurance company. When the lower court,
therefore, imposed upon the defendant an obligation which it has never assumed, either expressly or impliedly, or when it
extended to the defendant the effects of a contract which was entered into exclusively by and between the Westchester
Fire Insurance Company of New York and Tina J. Gamboa, the error it has committed is evident. This is contrary to law.
67

We do not find any material variance between this case and the case of E. Macias and Co. vs. Warner, Barnes and
Co., supra, as pointed out by counsel for appellee, in so far as the principle we are considering is concerned. Both cases
involve similar facts which call for the application of a similar ruling. In both cases the issue is whether an agent, who acts
within the scope of his authority, can assume personal liability for a contract entered into by him in behalf of his principal.
And in the Macias case we said that the agent did not assume personal liability because the only party bound was the
principal. And in this case this principle acquires added force and effect when we consider the fact that the defendant did
not sign the contract as agent of the foreign insurance company as the defendant did in the Macias case. The Macias case,
therefore, is on all fours with this case and is decisive of the question under consideration.
2. Counsel next contends that Warner, Barnes and Co., Ltd., is not the real party in interest against whom the suit should
be brought. It is claimed that this action should have been filed against its principal, the Westchester Fire Insurance
Company of New York. This point is also well taken. Section 2, Rule 3 of the Rules of Court requires that "every action
must be prosecuted in the name of the real party in interest." A corollary proposition to this rule is that an action must be
brought against the real party in interest, or against a party which may be bound by the judgment to be rendered therein
(Salmon and Pacific Commercial Co. vs. Tan Cueco, 36 Phil., 556). 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" (1 Sutherland, Court Pleading Practice
and Forms, p. 11). And in the case at bar, the defendant issued upon in its capacity as agent of Westchester Fire Insurance
Company of New York in spite of the fact that the insurance contract has not been signed by it. As we have said, the
defendant did not assume any obligation thereunder either as agent or as a principal. It cannot, therefore, be made liable
under said contract, and hence it can be said that this case was filed against one who is not the real party in interest.
We agree with counsel for the appellee that the defendant is a settlement and adjustment agent of the foreign insurance
company and that as such agent it has the authority to settle all the losses and claims that may arise under the policies that
may be issued by or in behalf of said company in accordance with the instructions it may receive from time to time from
its principal, but we disagree with counsel in his contention that as such adjustment and settlement agent, the defendant
has assumed personal liability under said policies, and, therefore, it can be sued in its own right. An adjustment and
settlement agent is no different from any other agent from the point of view of his responsibility, for he also acts in a
representative capacity. Whenever he adjusts or settles a claim, he does it in behalf of his principal, and his action is
binding not upon himself but upon his principal. And here again, the ordinary rule of agency applies. The following
authorities bear this out:
An insurance adjuster is ordinarily a special agent for the person or company for whom he acts, and his authority
is prima facie coextensive with the business intrusted to him. . . .
An adjuster does not discharge functions of a quasi-judicial nature, but represents his employer, to whom he owes
faithful service, and for his acts, in the employer's interest, the employer is responsible so long as the acts are done
while the agent is acting within the scope of his employment. (45 C. J. S., 1338-1340.)
It, therefore, clearly appears that the scope and extent of the functions of an adjustment and settlement agent do not
include personal liability. His functions are merely to settle and adjusts claims in behalf of his principal if those claims are
proven and undisputed, and if the claim is disputed or is disapproved by the principal, like in the instant case, the agent
does not assume any personal liability. The recourse of the insured is to press his claim against the principal.
3. This brings us to the consideration of the third point. It is claimed that a judgment, for or against an agent, in no way
binds the real party in interest. In our opinion this point is also well taken, for it is but a sequel to the principle we have
pointed out above. The reason is obvious. An action is brought for a practical purpose, nay to obtain actual and positive
relief. If the party sued upon is not the proper party, any decision that may be rendered against him would be futile, for it
cannot be enforced or executed. The effort that may be employed will be wasted. Such would be the result of this case if it
will be allowed to proceed against the defendant, for even if a favorable judgment is obtained against it, it cannot be
enforced because the real party is not involved. The defendant cannot be made to pay for something it is not responsible.
Thus, in the following authorities it was held:
68

. . . Section 114 of the Code of Civil Procedure requires an action to be brought in the name of the real party in
interest; and a corollary proposition requires that an action shall be brought against the persons or entities which
are to be bound by the judgment obtained therein. An action upon a cause of action pertaining to his principal
cannot be brought by an attorney-in-fact in his name (Arroyo vs. Granada and Gentero, 18 Phil., 484); nor can an
action based upon a right of action belonging to a principal be brought in the name of his representative
(Lichauco vs. Limjuco and Gonzalo, 19 Phil., 12). Actions must be brought by the real parties in interest and
against the persons who are to be bound by the judgment obtained therein. (Salmon and Pacific Commercial
Co. vs. Tan Cueco, 36 Phil., 557-558.)
xxx

xxx

xxx

An action to set aside an instrument of transfer of land should be brought in the name of the real party in interest.
An apoderado or attorney in fact is not a real party. He has no interest in the litigation and has absolutely no right
to bring the defendant into court or to put him to the expense of a suit, and there is no pro-vision of law permitting
action to be brought in such manner. A judgment for or against the apoderadoin no way binds or affects the real
party, and a decision in the suit would be utterly futile. It would touch no interest, adjust no question, bind no one,
and settle no litigation. Courts should not be required to spend their time solemnly considering and deciding cases
where no one could be bound and no interest affected by such deliberation and decision. (Arroyo vs. Granada and
Gentero, 18 Phil., 484.)
If the case cannot be filed against the defendant as we have pointed out, what then is the remedy of the plaintiff under the
circumstances? Is the case of the plaintiff beyond remedy? We believe that the only way by which the plaintiff can bring
the principal into this case or make it come under the courts in this jurisdiction is to follow the procedure indicated in
section 14, Rule 7, of the Rules of Court concerning litigations involving foreign corporations. This rule says that if the
defendant is a foreign corporation and it has not designated an agent in the Philippines on whom service may be made in
case of litigation, such service may be made on any agent it may have in the Philippines. And in our opinion the
Westchester Fire Insurance Company of new York comes within the import of this rule for even if it has not designated an
agent as required by law, it has however a settling agent who may serve the purpose. In other words, an action may be
brought against said insurance company in the Philippines and the process may be served on the defendant to give our
courts the necessary jurisdiction. This is the way we have pointed out in the case of General Corporation of the
Philippines and Mayon Investment Co. vs.Union Insurance Society of Canton Ltd. et al., (87 Phil., 313).
In view of the foregoing, we are of the opinion and so hold that the lower court erred in holding the defendant responsible
for the loss or damage claimed in the complaint. And having arrived at this conclusion, we do not deem it necessary to
pass upon the other errors assigned by the appellant.
Wherefore, the decision appealed from is hereby reversed. The complaint is hereby dismissed, with costs against the
appellee.

69

G.R. No. L-3407

June 29, 1951

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
BERNARDO BAGAMASPAD and BIENVENIDO M. FERRER, defendants-appellants.
MONTEMAYOR, J.:
On May 25, 1948, the plaintiff Philippine National Bank, a banking corporation organized and operating under the laws of
the Philippines, with main office in the City of Manila and agencies in different provinces like the province of Cotabato,
initiated this suit in the Court of First Instance of Cotabato for the purpose of collecting from the defendants Bernardo
Bagamaspad and Bienvenido M. Ferrer who, in the years 1946 and 1947, were its Agent and Assistant Agent,
respectively, in its Cotabato Agency, the sum of P704,903.18, said to have been disbursed and released by them as special
crop loans, without authority and in a careless manner to manifestly insolvent, unqualified or fictitious borrowers, all
contrary to the rules and regulations of the plaintiff Bank. In the course of the trial, upon petition of plaintiff's counsel, the
amount of the claim was reduced to P699,803.57, due to payments made by some of the borrowers. On March 31, 1949,
the trial court rendered judgment in favor of the plaintiff, ordering both defendants to pay jointly and severally to it the
sum of P699,803.57, representing the uncollected balance of the special crop loans improperly released by said
defendants, with legal interest thereon from the date of the filing of the complaint, plus costs. The two defendants
appealed from that decision. The appeal was first taken to the Court of Appeals but in view of the amount involved it was
certified to this Tribunal by the said Court of Appeals.
The uncontroverted facts in the present case may be briefly stated as follows. Because of the Pacific War and by reason of
the destruction and loss of animals of labor, farm implements, and damage to or abandonment of farm lands, after
liberation there was acute shortage of foodstuff. President Roxas in order to foment and encourage food production,
instructed the plaintiff Philippine National Bank to extend special facilities to farmers in the form of crop loans in order to
enable them to rehabilitate their farms. In pursuance of said instructions and to cooperate with the Administration, the
plaintiff Bank passed the corresponding resolution (Exhibit B) authorizing the granting of ten-month special crop loans to
bona fide food producers, land-owners or their tenants, under certain conditions. Delfin Buencamino, one of the VicePresident of the Bank and head of the Branches and Agencies Department of said institution, was entrusted with the
supervision of the granting of these loans. Juan Tueres, one of the Assistant Managers of said Department drafted the
corresponding rules and regulations regarding the granting of said specials crops loans. After approval by Buencamino,
these rules and regulations were embodied in a circular letter (Exhibit C), a copy of which was personally delivered to
defendant Ferrer. These rules and regulations were later amplified by another circular letter (Exhibit D). Besides
circularizing its branches and agencies with these rules and regulations, on June 14, 1946, the Bank held in Manila a
conference in of all its manager and Agents. Defendant Ferrer, Assistant Agent of the Cotabato Agency attended the
conference in representation of said Agency. He arrived late but Tueres explained to him what had been discussed during
the conference, emphasizing to him the necessity of exercising diligence and care in the granting of the crop loans to see
to it that they are granted only to bona fide planters, land-owners or tenants, as well as repeating to him the advice of
Vicente Carmona, President of the bank, that the Managers and Agents of the Bank should not allow themselves to be
fooled.
The Cotabato Agency under the management of the two defendants began granting these special crop loans in July, 1946,
and by March of the following year, 1947, said Agency had granted to over 5,000 borrowers, loans in the total amount of
a little over eight and half million pesos.
The theory on which the Bank's claim and complaint are based is that the two defendants Bagamaspad and Ferrer acting
as Agent and Assistant Agent of the Cotabato Agency, in granting new crop loans after November 13, 1946, violated the
instructions of the Bank, and that furthermore, in granting said crop loans, they acted negligently and did not exercise the
care and precaution required of them in order to prevent the release of crop loans to persons who were neither qualified
borrowers nor entitled to the assistance being rendered by the Government and the Bank, all contrary to the rules and
regulations issued by the Bank.
70

Because of the form heavy disbursements made by the Cotabato Agency in the form of crop loans and because of
exhaustion of its funds, said agency sent a telegram, Exhibit 11, dated November 11, 1946, requesting authority from the
central office to secure cash from the Zamboanga Agency. Replying to this telegram, Delfin Buencamino sent a letter,
Exhibit E, dated November 13, 1946, addressed to the Cotabato Agency stating among other things that the purposes of
these funds (to be obtained from the Zamboanga Agency was to meet the release of the second installment crop loans
being granted which according to the telegram aggregated P60,000 daily. The letter reminded the Agency's that the
Central office had not yet received the Agency's monthly reports on special crop loans granted, as required by the
regulations, and it emphasized the necessity of performing inspection of the field to verify whether the amount released as
first installment was actually used for the purpose for which it was granted, before releasing the second installment. In
relation with the said letter, Exhibit F, dated November 18, 1946, to the central office making reference to said Exhibit E,
reiterating the Agency's heavy disbursements on second installments for crop loans and stating that Ferrer had been
instructed to proceed to Zamboanga to secure the needed cash, and that Ferrer was able to secure P300,000 from the
Zamboanga Agency. Then making reference to and quoting a portion of the letter of Buencamino, Exhibit E, Bagamaspad
in his letter said:
In connection with the following portion:
"In this connection, we would like to state that the purpose of these funds is to meet the release of the second
installment of crop loans being granted by that agency, which, according to your said telegram, will run
to P600,000 daily."
of your above mentioned letter, may we know if could still entertain new applicants on Special Crop Loans? We
are constrained to request for this matter because there are now on file no less than 1,000 new applicants which
we could not entertain because of your above quoted statement. Yesterday they held a demonstration and copy of
the picture is hereto attached. In addition, there are about 5,000 settlers in Koronadal Valley who, according to
your indorsement of Oct. 31, 1946 to the Technical Assistant to the President of the Philippines, could be given
crop loans. If we could not therefore disburse from the funds taken from Zamboanga Agency against first
installment of applicants on crop loans, we shall appreciate if you could give us definite course of action towards
the clarifications of our stand to the public.
We are again sending Asst. Agent B.M. Ferrer to Zamboanga to despatch this letter without delay and wait there
for whatever instruction that you may give with reference to our desire to secure more cash from our Zamboanga
Agency, say P1,000,000 and whether we shall continue granting special crop loans or not.
With reference to the cash that we desire to secure more, we could tell you with assurance that the same shall
arrive their safely under guard on a chartered plane which will cost not more than P300 only.
From this letter of Bagamaspad of which his co-defendant and Ferrer must have been aware, because he himself prepared
it upon order of Bagamaspad(pp. 340-344, t.s.n.), particularly the portion above-quoted, it will be seen that without
waiting for authority to secure funds from the Zamboanga Agency, Ferrer obtained P300,000 from said Agency, and that
Bagamaspad again had sent Ferrer to Zamboanga to await instruction from the central office regarding their desire and
intention to secure in additional P1,000,000 for the Cotabato Agency. As matter of fact, however, once in Zamboanga,
and without waiting for instructions, Ferrer again secured P500,000 from the Zamboanga Agency. It was while Ferrer
already carrying the P500,000 was about to board the plane that was to taken him to Cotabato, that he received the answer
from the central office, Exhibit G, authorizing him to obtain only P3,0000,000 from the Zamboanga Agency, with the
statement that as soon as the said amount was exhausted, the Cotabato Agency may again request for replenishment. This
letter of the Central Office again emphasized the necessity of strict compliance with the rules and regulations regarding
the required field inspection before releasing the second installment. The said letter, Exhibit G, ended with the following:
Concerning the new special crop loan applications numbering about 1,000, we would like to be informed whether
the farms of the said applicants have already been actually planted, considering that at this periodplanting season
in low-land palay region is now over. As the purpose for which special crop loans are being granted by the Bank
71

is to provide the farmers with funds to meet the expenses of their farms and if said farms have already been
planted, we believe that the farmers may not need said credit facilities unless it has been found out by actual
investigation and verification that said loans are needed by them.
Please, therefore, let us hear from you regarding this matter. (Emphasis ours)
In answer to this letter, Exhibit G, defendants sent a telegram, Exhibit H, dated November 25, 1946 to the central office in
Manila, stating that for Cotabato, the planting season for second crops of December. In answer to Exhibit H, the central
office sent a telegram, Exhibit I, dated November 28, 1946, expressly instructing the Cotabato Agency to discontinue
granting new crop loans. The defendants claim that this telegram, Exhibit I, was received by them by mail on December 7,
1946.
In their brief the appellant contend that the trial court erred in finding and holding that extending new special crop loans
after November 26, 1946, amounting to P726,680, as they as Agent and Assistant Agent, respectively, of the of the
Cotabato Agency, did so at their own risk and in violation of the instructions received from the Manila office; also that the
court erred in holding that they (appellants) acted with extreme laxity, negligence and carelessness in granting said new
special crops loans. On the first assigned error appellants maintain that outside of the telegram, Exhibit I, which they
claim to have received only on December 7, 1946, there was no instruction by the central office stopping the granting of
new special crop loans.
It may be that there was no such express instruction couched in so many words directly ordering the defendants to stop
granting new special crop loans, but that said idea of the central office could be gathered from its letter, Exhibit E, and
that it was understood and clearly, by the defendants, is evident. If defendants did not so understand it, namely, that they
were no longer authorized to grant new special crop loans, how else may we interpret the contents of the letter of
Bagamaspad, Exhibit F, particularly that portion wherein after quoting a portion of the central office letter Exhibit E, he
asks if they (defendants) could still entertain new applications for special crop loans? At least, they then doubted their to
grant new special crop loans and until that doubt was cleared up and determined by new instructions from their superiors,
it was their bounden duty to stop granting new loans. Appellant Ferrer himself, in response to question asked by the trial
court during the hearing, said that in case of doubt as to whether or not to disburse funds of the bank, he should consult
and await instructions. Appellants asked for instructions as to whether or not they should grant new special crop loans.
This request for instructions is contained clearly in Bagamaspad's letter, Exhibit F, where in one paragraph he ask: "May
we know if we could still entertain new applications on special crop loans?" And, in another paragraph he says? "We are
again sending Asst. Agent B.M. Ferrer to Zamboanga . . . and wait there for further instructions that you may give . . . and
whether we shall continue granting special crops loans or not." The trouble is that without waiting for said requested
instructions, appellants proceeded to grant new special crop loans from November 26, 1946, to January 4, 1947.
Appellants not only granted new special crop loans after they were given to understand by the central office that they
should no longer grant said loans and before appellants received instructions as to what they should do in that regard, but
they also violated the express instructions of the Bank to the effect that funds received from the Zamboanga Agency
should be utilized only to pay second installments on special crop loans. Of course, defendants contend that the total of
P800,000 secured from the Zamboanga Agency were all used in paying second installments, but the contrary is amply
established by Exhibit T, a statement prepared by Felicisimo Lopez, Chief Examiner of the Bank showing that out of the
P500,000 secured from the Zamboanga Agency on or about November 18, 1946, the amount of P232,931.58 was paid on
account of new special crop loans or first installments. The plaintiff-appellee Bank in its brief explains in details this use
of part of the Zamboanga funds in paying first installments on new crop loans.
As to the alleged error committed by the trial court in finding and holding that the appellants were extremely lax,
negligent and careless in granting new special crop loans, we quote with approval a portion of the well considered
decision of the trial Judge, Hon. Arsenio Solidum, on this point:
From the evidence of record, one cannot help but be amazed at the extreme laxity, negligence and carelessness on
the part of the defendants in the granting of the special crop loans. It seems that all precautions to protect the
72

interest of the Philippine National Bank as the principal of the defendants were thrown overboard. From all
appearances, the door of the Cotabato Agency was left wide open by the defendants as an invitation for all
persons to come in secure from them special crop loans regardless of whether or not under the rules prescribed
therefor they were rightfully entitled thereto. . . . (p. 165, Record on Appeal)
xxx

xxx

xxx

What really happened was that in those days of crop loan boom, the borrowers made a holiday of the funds of the
Cotabato Agency of the Philippine National Bank with indulgence and tolerance of the defendants as the
managing officials of the Agency. And the saddest part of it all was that the money did not go to the farmers who
needed it most but to unscrupulous persons, who, taking undue advantage of the laxity and looseness of the
defendants in doling out these loans, secured special crop loan funds without the least idea of investing them in
food production campaign for which they were primarily intended. Part of the booty went to the pockets of those
who acted as intermediaries in the procurement of the loans under the very noses of the defendants fully knowing
that such practice was prohibited by the rules and regulations of the Philippine National Bank governing the
operation of the provincial agencies (Exhibits "W", "T-1", to "T-11", "U-1" to "U-2") . . . (pp. 176-177, Record on
Appeal)
The lower court as may be seen, severely critcized and condemned the acts of laxity, negligence and carelessness of the
appellants. But the severity of this criticism and condemnation would appear to be amply warranted by the evidence. Out
of the numerous acts of laxity, negligence and carelessness established by the record, a few cases may be cited. Exhibit C
and D which contain instructions and rules and regulations governing the granting of special crop loans, provide that
before a crop is granted the Agent or Sub-Agent of the Bank must be satisfied that the applicant is either landowner well
known to be possessing the particular property on which the crop is to be produced, the particular property on which the
crop ids to be produced, or if the applicant be tenant he must be recommended by the landowner concerned or in the
absence of said landowner must be properly identified that he is the bona fide tenant actually tilling the land from which
the crop to mortgage would be harvested.
The evidence shows that in violation of these instructions and regulations, the defendants released large loans aggregating
P348,768.22 to about 103 borrowers who were neither landowners or tenants but only public land sales applicants that is
to say, persons who have merely filed applications to buy public lands. It is a well known fact that when a person desires
to apply for the purchase of public lands usually containing trees, under brush, cogon or other wild vegetation, and never
previously cultivated, he merely goes over the land, takes it out and then files his application, tries to determine the
location of the land, its identity, proceeds to classify it to see if it is open to sale and if so, perhaps makes rough survey of
it to establish its exact location and fix boundaries with respect to the entire area of the public domain. The application
naturally carries no implication of occupancy, possession, much less cultivation and dominion. And yet, in spite of all this,
the applicants who were neither landowners or tenants.
The record further shows that Mr. Villamarzo, District Land Officer for Cotabato with whom these sale applications had
been filed, came to know that he had been issuing to the applicants, which were nothing but acknowledgements of the
filing of the applications, had been used by said applicants to secure special crop loans, and so he went to see the
appellants as early as the middle of August of 1946 and advised them that those certificates were issued merely to show
that applications had been filed with him but that it did not mean that said applications had already been investigated,
much less that the lands covered by them had been surveyed. Then about the end of the same month Villamarzo
accompanied by Almonte, a Division Land Inspector of the Bureau of Lands, again went to the defendants and repeated
the advice and warning. Despite all these, as already stated, appellants granted new special crop loans to 103 of these
public land sales applicants, knowing as they must have known that the borrowers were neither landowners nor tenants.
Furthermore, it should be remembered that these special crop loans according to regulations were payable in ten (10)
months, and were to be secured by chattel mortgages on the crops to be produced. A virgin land, especially if covered
with trees or underbrush, needs to be cleared and placed in condition for cultivation before crops may produced. That
work of clearing would take some time. A public land sale applicant, even assuming that he immediately began to clear
the land applied for even before favorable action on his application is taken, is hardly in a position to meet the
73

requirements of the regulations governing the granting of special crop loans, namely, to mortgage the crop he is going to
produce, and pay the loan within ten months.
Appellants in their over-enthusiasm and seemingly inordinate desire to grant as many loans as possible and in amounts
disproportionate to the needs of the borrowers, admitted and passed upon more loan applications than they could properly
handle. From July, 1946 to March, 1947 the total amount of about eight and half (81/2) million pesos was released in the
form of special crop loans to about 5,105 borrowers and this, in a relatively sparsely populated province like Cotabato. As
a consequence of this big volume of business the bookkeeper of the Agency could not keep up with the posting of the
daily transactions in his books and ledgers and he was several months behind. There were so many applications acted
upon and accepted that they could not all be carefully examined and many of them do not even bear the initials or
signatures of the appellants as required by regulations. Some of the chattel mortgages given to secure the payments of the
loans, contrary to regulations, do not show the number of cavans of palay to be produced on the land and to be mortgaged
in favor of the Bank.
Contrary to the Bank's rules and regulations regarding the granting of special crops loans, the defendants allowed
intermediaries to intervene in the granting of special crop loans. Many lawyers, business agents and other persons
intervened in the granting of the loans. We may have an idea of the of the part played by these intermediaries by referring
to a portion of the report, Exhibit V, prepared by Mr. Lagdameo, one of the Assistant Managers of the Agencies and
Branches Department of the plaintiff Bank, sent to Cotabato to investigate the crop loan anomalies in the Cotabato
Agency, which portion we quote below:
On top of this, were the heavy expenses incurred by the borrowers to secure crop loans. The rush was so
unprecendented that applicants had to stay had to stay for weeks in hotels in Cotabato to lobby for the approval of
their applications. They even went to the extent of engaging intermediaries who in the words of some borrowers
were the best ones to fix things with the agency for the approval and immediate release of the loan. These
intermediaries are government employees and business agents and particularly practicing attorneys who charged
fees up to 5 per cent of the total loans approved. Instances have been shown that the Agency itself collected the
attorney's fees and delivered them to the parties concerned. In other cases, the intermediaries themselves were the
ones who received the proceeds of the loans and distributed them to the borrowers. It has also been found that
loan papers including the preparation of promissory notes, debit tickets, etc., were prepared by said intermediaries
and submitted to the Agency already executed. . . ..
There is evidence to the effect that sometimes the fees of these intermediaries were collected by the Agency itself and
were later turned over to appellant Ferrer, perhaps to be later given by him to said intermediaries.
One of the provisions of the rules and regulations concerning the granting of loans is to the effect that loans to be released
by a Provincial Agency like that of the appellant's should be approved by loan Board to be composed of the Agent, like
defendant Bagamaspad; the Assistant Agent, like defendant Ferrer or the Inspector if there is no Assistant Agent; and the
Municipal Treasurer where the borrower resides. The evidence, however, shows that many of the special crop loans
released by the appellants have not been approved by this Board and others have not even been approved by anyone of
them.
It will be remembered that in the letter of Vice President Buencamino, Exhibit G, dated November 19, 1946, speaking of
the new special crop loan applications numbering about 1,000 mentioned by appellant Bagamaspad in his letter, Exhibit F,
the plaintiff Bank wanted to know whether on that date, November 19th, the farmers in Cotabato had already planted their
farms in which case there was no need for obtaining crop loans to meet the expenses of planting. Answering this query,
the Cotabato Agency under the appellants, sent a telegram (Exhibit H) dated November 25, 1946, to the plaintiff Bank
saying that the planting season for Cotabato for second crops ends in December. This was evidently intended to justify the
granting of special crop loans even at the end of the year. The evidence however, belies the correctness of this statement
and information. Mr. Aniceto Padilla, Assistant Provincial Agricultural Supervisor, a graduate of the College of
Agriculture of the University of the Philippines, told the court that his office, which is the Provincial Agricultural Station
in Cotabato, has determined the proper period for planting crops raised in that province and that for upland palay, the
74

planting season is during the months of March, April up to May; that for lowland palay is June and July; and that second
crops may be planted in September even as late as October. From this, one may conclude that it is not true as the
appellants informed the bank that the planting season for palay (second crop) in Cotabato ends in December. Whether this
incorrect information was given deliberately or thru negligence and carelessness, we deem it unnecessary to determine.
To give a further idea of the confusion, lack of care and method with which the Cotabato Agency was managed by the
appellants, the record shows that in January, 1947, Mr. Simeon Intal, Traveling Auditor of the Philippine National Bank,
was sent to Cotabato with instructions to make an audit of the accounts of the Cotabato Agency and to see for himself the
reported irregularities being committed in said Agency with respect to the granting of special crop loans. According to
Mr. Intal he found the Cotabato Agency like a market place full of people. He saw crop loan papers like promissory notes,
loan applications and chattel mortgages scattered all over the Agency, some on the desks of employees, on open shelves
or on top of filing cabinets, and others on the floor. He found that transactions which had taken place five months before
were not yet posted in the books of the Agency. In February, 1947, Mr. Amado Lagdameo, then one of the Assistant
Managers of the Branches and Agencies Department of the Bank, was also sent to Cotabato and there he found the same
condition found and reported by Intal. In order to make thorough investigation of the anomalies reportedly obtaining in
the Cotabato Agency, Felicisimo Lopez, a certified public accountant and Chief Examiner of the plaintiff Bank, was sent
to Cotabato in June, 1947. He checked up the findings of Intal about the deplorable condition of the books and records of
the Agency and he agreed with said findings. Lopez and Intal and assisted by Benjamin de Guzman, Branch Auditor of
the Bank at the Davao Branch, Mr. Macuja (who later succeeded Benjamin de Guzman), Mr. Juan B. Sanchez, now
Branch Auditor in Legaspi, Mr. Antonio Cruz of the Head Office, Mr. Danao from Oriental Misamis, Mr. Fernandez from
Zamboanga and Mr. Romena of the Davao Branch, went to work on the books and records of the books and records of the
Cotabato Agency and it took them almost four months to straighten out the special crop loan accounts and bring the books
up-to-date, after which, they found that as of June 10, 1947, the Cotabato Agency had released special crop loans in the
aggregate sum of P8,688,864.
To us who have always had the impression and the idea that the business of a Bank is conducted in an orderly, methodical
and businesslike manner, that its papers, especially those relating to loans with their corresponding securities, are properly
filed, well-kept and in a safe place, its books kept up-to-date, and that its funds are not given out in loans without careful
and scrupulous scrutiny of the responsibility and solvency of the borrowers and the sufficiency of the security given by
them, the conditions obtaining in the Cotabato Agency due to the apparent indifference, carelessness or negligence of the
appellants, is indeed shocking. And it is because of these shortcomings of the appellants their disregard of the elementary
rules and practice of banking and their violation of instructions of their superiors, that these anomalies resulting in
financial losses to the Bank were made possible.
The trial court based the civil liability of the appellants herein on the provisions of Arts. 1718 and 1719 of the Civil Code,
defining and enumerating the duties and obligations of an agent and his liability for failure to comply with such duties,
and Art. 259 of the Code of Commerce which provides that an agent must observe the provisions of law and regulations
with respect to business transactions entrusted to him otherwise he shall be responsible for the consequences resulting
from their breach or omissions; and also Art. 1902 of the Civil Code which provides for the liability of one for his tortious
act, that is to say, any act or omission which causes damage to another by his fault or negligence. Appellants while
agreeing with the meaning and scope of the legal provisions cited, nevertheless insist that those provisions are not
applicable to them inasmuch as they are not guilty of any violation of instructions or regulations of the plaintiff Bank; and
that neither are they guilty of negligence of carelessness as found by the trial court. A careful study and consideration of
the record, however, convinces us and we agree with the trial court that the defendants-appellants have not only violated
instructions of the plaintiff Bank, including things which said Bank wanted done or not done, all of which were fully
understood by them, but they (appellants) also violated standing regulations regarding the granting of loans; and, what is
more, thru their carelessness, laxity and negligence, they allowed loans to be granted to persons who were not entitled to
receive loans.
It is the contention of the appellants that the act of plaintiff Bank in filling suits against the borrowers to whom appellants
were said to have granted loans without authority, which suits resulted in the payment of part of said loans resulting in the
reduction of the original claim of the plaintiff Bank from P704,903.18 to P699,803.57, should be interpreted and
75

considered as a ratification of the acts of the appellants. What is more, it is more, it is contended that it would be
iniquitous for the plaintiff to go against the defendants for whatever amounts may have been loaned by the latter and at the
same time go against the individual borrowers for collection of the respective sums borrowed by them. That would be
enriching the plaintiff at the expense of the defendants." We cannot subscribe to this theory. As pointed out by Counsel
for appellee, ordinarily, a principal who collects either judicially or extrajudicially a loan made by an agent without
authority, thereby ratifies the said act of the agent. In the present case, however, in filing suits against some of the
borrowers to collect at least part of the unauthorized loans, there was no intention on the part of the plaintiff Bank to ratify
the acts of appellants. Neither did the plaintiff receive any substantial benefit by its act of filing these suits if we consider
the fact that the collections so far made, form a small or insignificant portion of the entire principal and interest. And, we
fail to see any iniquity in this act of the plaintiff in suing some of the borrowers to collect what it could at the same time
holding the appellants liable for the balance, because the plaintiff Bank is not trying to enrich itself at the expense of the
defendants but is merely trying to diminish as much as possible the loss to itself and automatically decrease the financial
liability of appellants. Considering the large amount for which appellants are found liable, it is a matter of serious doubt if
they are in a position to pay it. Moreover, whatever amount is collected by the plaintiff Bank from borrowers, serves to
diminish the financial liability of the appellants, in the same way that the original claim of P704,903.18, at the very
instance of plaintiff was reduced to P699,803.57. In other words, the act of the plaintiff Bank in the matter, far from being
iniquitous, is really beneficial to the appellants.
Appellants further contend that the present action is rather premature for the reason that there is no showing that the
borrowers to whom they allegedly gave loans without authority, are manifestly insolvent or unqualified, and that the loans
granted to them are uncollectible and have been written off the books of the Bank as "bad debts". We find this contention
untenable. It is not necessary for the plaintiff Bank to first go against the individual borrowers, exhaust all remedies
against them and then hold the defendants liable only for the balance which cannot be collected. The case of Corsicana
National Bank vs. Johnson, 64 L. ed. 141, cited by the trial court and by the plaintiff bank is in point. The issue in that
case whether or not a bank could proceed against one of its officials for losses which it had sustained in consequence of
the unauthorized loans released by said official, or whether it should first pursue its remedies against the borrowers or
await the liquidation of their estates. The Supreme Court of the United States in said case held that the cause of action of
the Bank accrued and the injury to it was complete on the very day that the amounts of the unauthorized loans were
released by the erring official. We quote a part of that decision:
Assuming the Fleming and Templeton notes were found to represent an excessive loan, knowingly participated in
or assented to by defendant as a director of the Bank, in our opinion the cause of action against him accrued on or
about June 10, 1907, when the Bank, through his act, parted with the money loaned, receiving in return only
negotiable paper that it could not lawfully accept because the transaction was prohibited by section 5200, Rev.
Stat. (Comp. Stat. section 9761, 6 Fed. Stat. Anno. 2d ed., p. 761). The damage as well as the injury was complete
at that time, and the Bank was not obliged to await the maturity of the notes, because immediately it became the
duty of the officers or directors who knowingly participated in making the excessive loan to undo the wrong done
by taking the notes off the hands of the Bank and restoring to it the money that had been loaned. Of course,
whatever of value the Bank recovered from the borrowers on account of the loan would go in diminution of the
damages; but the responsible officials would have no right to require the Bank to pursue its remedies against the
borrowers or await the liquidation of their estates. The liability imposed by the statute upon the director is a direct
liability, not contingent or collateral.
In view of all the foregoing, and finding no reversible error in the decision appealed from, the same is hereby affirmed
with costs against the appellants. So ordered.

76

G.R. Nos. L-25836-37 January 31, 1981

THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,
vs.
JOSE M. ARUEGO, defendant-appellant.
FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of First Instance of Manila,
Branch XIII, in Civil Case No. 42066 denying his motion to set aside the order declaring him in default, 1and from the
order of said court in the same case denying his motion to set aside the judgment rendered after he was declared in
default. 2 These two appeals of the defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R,
respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one consolidated record
on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the consolidated appeal to
the Supreme Court on the ground that only questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case No. 42066 for the
recovery of the total sum of about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid and
commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney's fees equivalent to 10% of the
total amount due and costs. 6 The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of
action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on different dates covering the
period from August 28, 1950 to March 14, 1951. 7 The sum sought to be recovered represents the cost of the printing of
"World Current Events," a periodical published by the defendant. To facilitate the payment of the printing the defendant
obtained a credit accommodation from the plaintiff. Thus, for every printing of the "World Current Events," the printer,
Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft being
sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press
and Photo-Engraving, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor of said bank
wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn
over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from
the draft. 8
Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On December 14, 1959
defendant filed an urgent motion for extension of time to plead, and set the hearing on December 16, 1959. 10 At the
hearing, the court denied defendant's motion for extension. Whereupon, the defendant filed a motion to dismiss the
complaint on December 17, 1959 on the ground that the complaint states no cause of action because:
a) When the various bills of exchange were presented to the defendant as drawee for acceptance, the amounts thereof had
already been paid by the plaintiff to the drawer (Encal Press and Photo Engraving), without knowledge or consent of the
defendant drawee.
b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an accommodating party
only for the drawer (Encal Press and Photo-Engraving) and win be liable in the event that the accommodating party
(drawer) fails to pay its obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy of which was received by the defendant on
December 24, 1959. 12
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On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting upon the motion for
reconsideration filed by the plaintiff, the trial court set aside its order dismissing the complaint and set the case for hearing
on March 15, 1960 at 8:00 in the morning. 14 A copy of the order setting aside the order of dismissal was received by the
defendant on March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of the deputy sheriff of Manila,
Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a motion to postpone the trial of the case
on the ground that there having been no answer as yet, the issues had not yet been joined. 15 On the same date, the
defendant filed his answer to the complaint interposing the following defenses: That he signed the document upon which
the plaintiff sues in his capacity as President of the Philippine Education Foundation; that his liability is only secondary;
and that he believed that he was signing only as an accommodation party. 16
On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the ground that the
defendant should have filed his answer on March 11, 1960. He contends that by filing his answer on March 12, 1960,
defendant was one day late. 17 On March 19, 1960 the trial court declared the defendant in default. 18 The defendant
learned of the order declaring him in default on March 21, 1960. On March 22, 1960 the defendant filed a motion to set
aside the order of default alleging that although the order of the court dated March 7, 1960 was received on March 11,
1960 at 5:00 in the afternoon, it could not have been reasonably expected of the defendant to file his answer on the last
day of the reglementary period, March 11, 1960, within office hours, especially because the order of the court dated
March 7, 1960 was brought to the attention of counsel only in the early hours of March 12, 1960. The defendant also
alleged that he has a good and substantial defense. Attached to the motion are the affidavits of deputy sheriff Mamerto de
la Cruz that he served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and
the affidavit of the defendant Aruego that he has a good and substantial defense. 19 The trial court denied the defendant's
motion on March 25, 1960. 20 On May 6, 1960, the trial court rendered judgment sentencing the defendant to pay to the
plaintiff the sum of P35,444.35 representing the total amount of his obligation to the said plaintiff under the twenty-two
(22) causes of action alleged in the complaint as of November 15, 1957 and the sum of P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying his motion to set
aside the order declaring him in default, an appeal bond in the amount of P60.00, and his record on appeal. The plaintiff
filed his opposition to the approval of defendant's record on appeal on May 13, 1960. The following day, May 14, 1960,
the lower court dismissed defendant's appeal from the order dated March 25, 1960 denying his motion to set aside the
order of default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's order dismissing
his appeal. 23 The plaintiff, on May 20, 1960, opposed the defendant's motion for reconsideration of the order dismissing
appeal. 24 On May 21, 1960, the trial court reconsidered its previous order dismissing the appeal and approved the
defendant's record on appeal. 25 On May 30, 1960, the defendant received a copy of a notice from the Clerk of Court dated
May 26, 1960, informing the defendant that the record on appeal filed ed by the defendant was forwarded to the Clerk of
Court of Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in default reiterating the
same ground previously advanced by him in his motion for relief from the order of default. 27 Upon opposition of the
plaintiff filed on June 3, 1960, 28 the trial court denied the defendant's motion to set aside the judgment by default in an
order of June 11, 1960. 29 On June 20, 1960, the defendant filed his notice of appeal from the order of the court denying
his motion to set aside the judgment by default, his appeal bond, and his record on appeal. The defendant's record on
appeal was approved by the trial court on June 25, 1960. 30 Thus, the defendant had two appeals with the Court of
Appeals: (1) Appeal from the order of the lower court denying his motion to set aside the order of default docketed as CAG.R. NO. 27734-R; (2) Appeal from the order denying his motion to set aside the judgment by default docketed as CAG.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.
78

II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT IN
DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM
WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER
OF DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31
It has been held that to entitle a party to relief from a judgment taken against him through his mistake, inadvertence,
surprise or excusable neglect, he must show to the court that he has a meritorious defense. 32 In other words, in order to set
aside the order of default, the defendant must not only show that his failure to answer was due to fraud, accident, mistake
or excusable negligence but also that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together with the summons on December 2, 1960; that
on December 17, 1960, the last day for filing his answer, Aruego filed a motion to dismiss; that on December 22, 1960 the
lower court dismissed the complaint; that on January 23, 1960, the plaintiff filed a motion for reconsideration and on
March 7, 1960, acting upon the motion for reconsideration, the trial court issued an order setting aside the order of
dismissal; that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon as
shown in the affidavit of the deputy sheriff; and that on the following day, March 12, 1960, the defendant filed his answer
to the complaint.
The failure then of the defendant to file his answer on the last day for pleading is excusable. The order setting aside the
dismissal of the complaint was received at 5:00 o'clock in the afternoon. It was therefore impossible for him to have filed
his answer on that same day because the courts then held office only up to 5:00 o'clock in the afternoon. Moreover, the
defendant immediately filed his answer on the following day.
However, while the defendant successfully proved that his failure to answer was due to excusable negligence, he has
failed to show that he has a meritorious defense. The defendant does not have a good and substantial defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a representative capacity, as the
then President of the Philippine Education Foundation Company, publisher of "World Current Events and Decision Law
Journal," printed by Encal Press and Photo-Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or additional party
obligor, to add to the security of said plaintiff bank. The reason for this statement is that unlike real bills of exchange,
where payment of the face value is advanced to the drawer only upon acceptance of the same by the drawee, in the case in
question, payment for the supposed bills of exchange were made before acceptance; so that in effect, although these
documents are labelled bills of exchange, legally they are not bills of exchange but mere instruments evidencing
indebtedness of the drawee who received the face value thereof, with the defendant as only additional security of the
same. 33
The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the Philippine Education
Foundation Company where he is president. Section 20 of the Negotiable Instruments Law provides that "Where the
instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words
79

describing him as an agent or as filing a representative character, without disclosing his principal, does not exempt him
from personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a
representative of the Philippine Education Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO
(Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he
accepted.
The defendant also contends that he signed the drafts only as an accommodation party and as such, should be made liable
only after a showing that the drawer is incapable of paying. This contention is also without merit.
An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value
therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder
for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation
party. 35 In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He
lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the
consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate
another. In the instant case, the defendant signed as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is
primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as an acceptor/drawee. In doing so, he
became primarily and personally liable for the drafts.
The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of evidence of
indebtedness because payments were made before acceptance. This is also without merit. Under the Negotiable
Instruments Law, a bill of exchange is an unconditional order in writting addressed by one person to another, signed by
the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future
time a sum certain in money to order or to bearer. 36 As long as a commercial paper conforms with the definition of a bill
of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the determination
of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of
exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will result in a new trial
which will serve no purpose and will just waste the time of the courts as well as of the parties because the defense is nil or
ineffective. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of Manila denying the
petition for relief from the judgment rendered in said case is hereby affirmed, without pronouncement as to costs.

80

G.R. No. 95641 September 22, 1994

SANTOS B. AREOLA and LYDIA D. AREOLA, petitioners-appellants,
vs.
COURT OF APPEALS and PRUDENTIAL GUARANTEE AND ASSURANCE, INC., respondents-appellees.
ROMERO, J.:
On June 29, 1985, seven months after the issuance of petitioner Santos Areola's Personal Accident Insurance Policy No.
PA-20015, respondent insurance company unilaterally cancelled the same since company records revealed that petitionerinsured failed to pay his premiums.
On August 3, 1985, respondent insurance company offered to reinstate same policy it had previously cancelled and even
proposed to extend its lifetime to December 17, 1985, upon a finding that the cancellation was erroneous and that the
premiums were paid in full by petitioner-insured but were not remitted by Teofilo M. Malapit, respondent insurance
company's branch manager.
These, in brief, are the material facts that gave rise to the action for damages due to breach of contract instituted by
petitioner-insured before
Branch 40 RTC, Dagupan City against respondent insurance company.
There are two issues for resolution in this case:
(1) Did the erroneous act of cancelling subject insurance policy entitle petitioner-insured to payment of damages?
(2) Did the subsequent act of reinstating the wrongfully cancelled insurance policy by respondent insurance company, in
an effort to rectify such error, obliterate whatever liability for damages it may have to bear, thus absolving it therefrom?
From the factual findings of the trial court, it appears that petitioner-insured, Santos Areola, a lawyer from Dagupan City,
bought, through
the Baguio City branch of Prudential Guarantee and Assurance, Inc. (hereinafter referred to as Prudential), a personal
accident insurance policy covering the one-year period between noon of November 28, 1984 and noon of November 28,
1985. 1 Under the terms of the statement of account issued by respondent insurance company, petitioner-insured was
supposed to pay the total amount of P1,609.65 which included the premium of P1,470.00, documentary stamp of P110.25
and 2% premium tax of P29.40. 2 At the lower left-hand corner of the statement of account, the following is legibly
printed:
This Statement of Account must not be considered a receipt. Official Receipt will be issued to you upon
payment of this account.
If payment is made to our representative, demand for a Provisional Receipt and if our Official Receipts is
(sic) not received by you within 7 days please notify us.
If payment is made to our office, demand for an OFFICIAL RECEIPT.
On December 17, 1984, respondent insurance company issued collector's provisional receipt No. 9300 to petitionerinsured for the amount of P1,609.65 3 On the lower portion of the receipt the following is written in capital letters:
Note: This collector's provisional receipt will be confirmed by our official receipt. If our official receipt is
not received by you within 7 days, please notify us. 4
81

On June 29, 1985, respondent insurance company, through its Baguio City manager, Teofilo M. Malapit, sent petitionerinsured Endorsement
No. BG-002/85 which "cancelled flat" Policy No. PA BG-20015 "for non-payment of premium effective as of inception
dated." 5 The same endorsement also credited "a return premium of P1,609.65 plus documentary stamps and premium tax"
to the account of the insured.
Shocked by the cancellation of the policy, petitioner-insured confronted Carlito Ang, agent of respondent insurance
company, and demanded the issuance of an official receipt. Ang told petitioner-insured that the cancellation of the policy
was a mistake but he would personally see to its rectification. However, petitioner-insured failed to receive any official
receipt from Prudential.
Hence, on July 15, 1985, petitioner-insured sent respondent insurance company a letter demanding that he be insured
under the same terms and conditions as those contained in Policy No. PA-BG-20015 commencing upon its receipt of his
letter, or that the current commercial rate of increase on the payment he had made under provisional receipt No. 9300 be
returned within five days. 6 Areola also warned that should his demands be unsatisfied, he would sue for damages.
On July 17, 1985, he received a letter from production manager Malapit informing him that the "partial payment" of
P1,000.00 he had made on the policy had been "exhausted pursuant to the provisions of the Short Period Rate Scale"
printed at the back of the policy. Malapit warned Areola that should be fail to pay the balance, the company's liability
would cease to operate. 7
In reply to the petitioner-insured's letter of July 15, 1985, respondent insurance company, through its Assistant VicePresident Mariano M. Ampil III, wrote Areola a letter dated July 25, 1985 stating that the company was verifying whether
the payment had in fact been issued therefor. Ampil emphasized that the official receipt should have been issued seven
days from the issuance of the provisional receipt but because no official receipt had been issued in Areola's name, there
was reason to believe that no payment had been made. Apologizing for the inconvenience, Ampil expressed the
company's concern by agreeing "to hold you cover (sic) under the terms of the referenced policy until such time that this
matter is cleared." 8
On August 3, 1985, Ampil wrote Areola another letter confirming that the amount of P1,609.65 covered by provisional
receipt No. 9300 was in fact received by Prudential on December 17, 1984. Hence, Ampil informed
Areola that Prudential was "amenable to extending PGA-PA-BG-20015 up to December 17, 1985 or one year from the
date when payment was received." Apologizing again for the inconvenience caused Areola, Ampil exhorted him to
indicate his conformity to the proposal by signing on the space provided for in the letter. 9
The letter was personally delivered by Carlito Ang to Areola on
August 13, 1985 10 but unfortunately, Areola and his wife, Lydia, as early as August 6, 1985 had filed a complaint for
breach of contract with damages before the lower court.
In its Answer, respondent insurance company admitted that the cancellation of petitioner-insured's policy was due to the
failure of Malapit to turn over the premiums collected, for which reason no official receipt was issued to him. However, it
argued that, by acknowledging the inconvenience caused on petitioner-insured and after taking steps to rectify its
omission by reinstating the cancelled policy prior to the filing of the complaint, respondent insurance company had
complied with its obligation under the contract. Hence, it concluded that petitioner-insured no longer has a cause of action
against it. It insists that it cannot be held liable for damages arising from breach of contract, having demonstrated fully
well its fulfillment of its obligation.
The trial court, on June 30, 1987, rendered a judgment in favor of petitioner-insured, ordering respondent insurance
company to pay the former the following:
a) P1,703.65 as actual damages;
82

b) P200,000.00 as moral damages; and

c) P50,000.00 as exemplary damages;
2. To pay to the plaintiff, as and for attorney's fees the amount of P10,000.00; and
3. To pay the costs.
In its decision, the court below declared that respondent insurance company acted in bad faith in unilaterally cancelling
subject insurance policy, having done so only after seven months from the time that it had taken force and effect and
despite the fact of full payment of premiums and other charges on the issued insurance policy. Cancellation from the date
of the policy's inception, explained the lower court, meant that the protection sought by petitioner-insured from the risks
insured against was never extended by respondent insurance company. Had the insured met an accident at the time, the
insurance company would certainly have disclaimed any liability because technically, the petitioner could not have been
considered insured. Consequently, the trial court held that there was breach of contract on the part of respondent insurance
company, entitling petitioner-insured to an award of the damages prayed for.
This ruling was challenged on appeal by respondent insurance company, denying bad faith on its part in unilaterally
cancelling subject insurance policy.
After consideration of the appeal, the appellate court issued a reversal of the decision of the trial court, convinced that the
latter had erred in finding respondent insurance company in bad faith for the cancellation of petitioner-insured's policy.
According to the Court of Appeals, respondent insurance company was not motivated by negligence, malice or bad faith
in cancelling subject policy. Rather, the cancellation of the insurance policy was based on what the existing records
showed, i.e., absence of an official receipt issued to petitioner-insured confirming payment of premiums. Bad faith, said
the Court of Appeals, is some motive of self-interest or ill-will; a furtive design of ulterior purpose, proof of which must
be established convincingly. On the contrary, it further observed, the following acts indicate that respondent insurance
company did not act precipitately or willfully to inflict a wrong on petitioner-insured:
(a) the investigation conducted by Alfredo Bustamante to verify if petitioner-insured had indeed paid the premium; (b) the
letter of August 3, 1985 confirming that the premium had been paid on December 17, 1984; (c) the reinstatement of the
policy with a proposal to extend its effective period to December 17, 1985; and (d) respondent insurance company's
apologies for the "inconvenience" caused upon petitioner-insured. The appellate court added that respondent insurance
company even relieved Malapit, its Baguio City manager, of his job by forcing him to resign.
Petitioner-insured moved for the reconsideration of the said decision which the Court of Appeals denied. Hence, this
petition for review on certiorari anchored on these arguments:
I
Respondent Court of Appeals is guilty of grave abuse of discretion and committed a serious and
reversible error in not holding Respondent Prudential liable for the cancellation of the insurance contract
which was admittedly caused by the fraudulent acts and bad faith of its own officers.
II
Respondent Court of Appeals committed serious and reversible error and abused its discretion in ruling
that the defenses of good faith and honest mistake can co-exist with the admitted fraudulent acts and
evident bad faith.
III
83

Respondent Court of Appeals committed a reversible error in not finding that even without considering
the fraudulent acts of its own officer in misappropriating the premium payment, the act itself in cancelling
the insurance policy was done with bad faith and/or gross negligence and wanton attitude amounting to
bad faith, because among others, it was
Mr. Malapit the person who committed the fraud who sent and signed the notice of cancellation.
IV
Respondent Court of Appeals has decided a question of substance contrary to law and applicable decision
of the Supreme Court when it refused to award damages in favor of herein Petitioner-Appellants.
It is petitioner-insured's submission that the fraudulent act of Malapit, manager of respondent insurance company's branch
office in Baguio, in misappropriating his premium payments is the proximate cause of the cancellation of the insurance
policy. Petitioner-insured theorized that Malapit's act of signing and even sending the notice of cancellation himself,
notwithstanding his personal knowledge of petitioner-insured's full payment of premiums, further reinforces the allegation
of bad faith. Such fraudulent act committed by Malapit, argued petitioner-insured, is attributable to respondent insurance
company, an artificial corporate being which can act only through its officers or employees. Malapit's actuation, concludes
petitioner-insured, is therefore not separate and distinct from that of respondent-insurance company, contrary to the view
held by the Court of Appeals. It must, therefore, bear the consequences of the erroneous cancellation of subject insurance
policy caused by the non-remittance by its own employee of the premiums paid. Subsequent reinstatement, according to
petitioner-insured, could not possibly absolve respondent insurance company from liability, there being an obvious breach
of contract. After all, reasoned out petitioner-insured, damage had already been inflicted on him and no amount of
rectification could remedy the same.
Respondent insurance company, on the other hand, argues that where reinstatement, the equitable relief sought by
petitioner-insured was granted at an opportune moment, i.e. prior to the filing of the complaint, petitioner-insured is left
without a cause of action on which to predicate his claim for damages. Reinstatement, it further explained, effectively
restored petitioner-insured to all his rights under the policy. Hence, whatever cause of action there might have been
against it, no longer exists and the consequent award of damages ordered by the lower court in unsustainable.
We uphold petitioner-insured's submission. Malapit's fraudulent act of misappropriating the premiums paid by petitionerinsured is beyond doubt directly imputable to respondent insurance company. A corporation, such as respondent insurance
company, acts solely thru its employees. The latters' acts are considered as its own for which it can be held to
account. 11 The facts are clear as to the relationship between private respondent insurance company and Malapit. As
admitted by private respondent insurance company in its answer, 12 Malapit was the manager of its Baguio branch. It is
beyond doubt that he represented its interest and acted in its behalf. His act of receiving the premiums collected is well
within the province of his authority. Thus, his receipt of said premiums is receipt by private respondent insurance
company who, by provision of law, particularly under Article 1910 of the Civil Code, is bound by the acts of its agent.
Article 1910 thus reads:
Art. 1910. The principal must comply with all the obligations which the agent may have contracted within
the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound except when
he ratifies it expressly or tacitly.
Malapit's failure to remit the premiums he received cannot constitute a defense for private respondent insurance company;
no exoneration from liability could result therefrom. The fact that private respondent insurance company was itself
defrauded due to the anomalies that took place in its Baguio branch office, such as the non-accrual of said premiums to its
84

account, does not free the same from its obligation to petitioner Areola. As held inPrudential Bank v. Court of
Appeals 13 citing the ruling in McIntosh v. Dakota Trust Co.: 14
A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course of
dealings of the officers in their representative capacity but not for acts outside the scope of their authority.
A bank holding out its officers and agent as worthy of confidence will not be permitted to profit by the
frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be
permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank
therefrom. Accordingly, a banking corporation is liable to innocent third persons where the representation
is made in the course of its business by an agent acting within the general scope of his authority even
though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a
fraud upon his principal or some other person, for his own ultimate benefit.
Consequently, respondent insurance company is liable by way of damages for the fraudulent acts committed by Malapit
that gave occasion to the erroneous cancellation of subject insurance policy. Its earlier act of reinstating the insurance
policy can not obliterate the injury inflicted on petitioner-insured. Respondent company should be reminded that a
contract of insurance creates reciprocal obligations for both insurer and insured. Reciprocal obligations are those which
arise from the same cause and in which each party is both a debtor and a creditor of the other, such that the obligation of
one is dependent upon the obligation of the other. 15
Under the circumstances of instant case, the relationship as creditor and debtor between the parties arose from a common
cause: i.e., by reason of their agreement to enter into a contract of insurance under whose terms, respondent insurance
company promised to extend protection to petitioner-insured against the risk insured for a consideration in the form of
premiums to be paid by the latter. Under the law governing reciprocal obligations, particularly the second paragraph of
Article 1191, 16 the injured party, petitioner-insured in this case, is given a choice between fulfillment or rescission of the
obligation in case one of the obligors, such as respondent insurance company, fails to comply with what is incumbent
upon him. However, said article entitles the injured party to payment of damages, regardless of whether he demands
fulfillment or rescission of the obligation. Untenable then is reinstatement insurance company's argument, namely, that
reinstatement being equivalent to fulfillment of its obligation, divests petitioner-insured of a rightful claim for payment of
damages. Such a claim finds no support in our laws on obligations and contracts.
The nature of damages to be awarded, however, would be in the form of nominal damages 17 contrary to that granted by
the court below. Although the erroneous cancellation of the insurance policy constituted a breach of contract, private
respondent insurance company, within a reasonable time took steps to rectify the wrong committed by reinstating the
insurance policy of petitioner. Moreover, no actual or substantial damage or injury was inflicted on petitioner Areola at
the time the insurance policy was cancelled. Nominal damages are "recoverable where a legal right is technically violated
and must be vindicated against an invasion that has produced no actual present loss of any kind, or where there has been a
breach of contract and no substantial injury or actual damages whatsoever have been or can be shown. 18
WHEREFORE, the petition for review on certiorari is hereby GRANTED and the decision of the Court of Appeals in
CA-G.R. No. 16902 on May 31, 1990, REVERSED. The decision of Branch 40, RTC Dagupan City, in Civil Case No. D7972 rendered on June 30, 1987 is hereby REINSTATED subject to the following modifications: (a) that nominal
damages amounting to P30,000.00 be awarded petitioner in lieu of the damages adjudicated by court a quo; and (b) that in
the satisfaction of the damages awarded therein, respondent insurance company is ORDERED to pay the legal rate of
interest computed from date of filing of complaint until final payment thereof.

85

G.R. No. L-56294

May 20, 1991

SMITH BELL AND COMPANY (PHILIPPINES), INC. and TOKYO MARINE AND FIRE INSURANCE CO.,
INC.,petitioners,
vs.
THE COURT OF APPEALS and CARLOS A. GO THONG AND CO., respondents.
FELICIANO, J.:
In the early morning of 3 May 1970at exactly 0350 hours, on the approaches to the port of Manila near Caballo Island,
a collision took place between the M/V "Don Carlos," an inter-island vessel owned and operated by private respondent
Carlos A. Go Thong and Company ("Go Thong"), and the M/S "Yotai Maru," a merchant vessel of Japanese registry. The
"Don Carlos" was then sailing south bound leaving the port of Manila for Cebu, while the "Yotai Maru" was approaching
the port of Manila, coming in from Kobe, Japan. The bow of the "Don Carlos" rammed the portside (left side) of the
"Yotai Maru" inflicting a three (3) cm. gaping hole on her portside near Hatch No. 3, through which seawater rushed in
and flooded that hatch and her bottom tanks, damaging all the cargo stowed therein.
The consignees of the damaged cargo got paid by their insurance companies. The insurance companies in turn, having
been subrogated to the interests of the consignees of the damaged cargo, commenced actions against private respondent
Go Thong for damages sustained by the various shipments in the then Court of First Instance of Manila.
Two (2) cases were filed in the Court of First Instance of Manila. The first case, Civil Case No. 82567, was commenced
on 13 March 1971 by petitioner Smith Bell and Company (Philippines), Inc. and Sumitomo Marine and Fire Insurance
Company Ltd., against private respondent Go Thong, in Branch 3, which was presided over by Judge Bernardo P.
Fernandez. The second case, Civil Case No. 82556, was filed on 15 March 1971 by petitioners Smith Bell and Company
(Philippines), Inc. and Tokyo Marine and Fire Insurance Company, Inc. against private respondent Go Thong in Branch 4,
which was presided over by then Judge, later Associate Justice of this Court, Serafin R. Cuevas.
Civil Cases Nos. 82567 (Judge Fernandez) and 82556 (Judge Cuevas) were tried under the same issues and evidence
relating to the collision between the "Don Carlos" and the "Yotai Maru" the parties in both cases having agreed that the
evidence on the collision presented in one case would be simply adopted in the other. In both cases, the Manila Court of
First Instance held that the officers and crew of the "Don Carlos" had been negligent that such negligence was the
proximate cause of the collision and accordingly held respondent Go Thong liable for damages to the plaintiff insurance
companies. Judge Fernandez awarded the insurance companies P19,889.79 with legal interest plus P3,000.00 as attorney's
fees; while Judge Cuevas awarded the plaintiff insurance companies on two (2) claims US $ 68,640.00 or its equivalent in
Philippine currency plus attorney's fees of P30,000.00, and P19,163.02 plus P5,000.00 as attorney's fees, respectively.
The decision of Judge Fernandez in Civil Case No. 82567 was appealed by respondent Go Thong to the Court of Appeals,
and the appeal was there docketed as C.A.-G.R. No. 61320-R. The decision of Judge Cuevas in Civil Case No. 82556 was
also appealed by Go Thong to the Court of Appeals, the appeal being docketed as C.A.-G.R. No. 61206-R. Substantially
identical assignments of errors were made by Go Thong in the two (2) appealed cases before the Court of Appeals.
In C.A.-G.R. No. 61320-R, the Court of Appeals through Reyes, L.B., J., rendered a Decision on 8 August 1978 affirming
the Decision of Judge Fernandez. Private respondent Go Thong moved for reconsideration, without success. Go Thong
then went to the Supreme Court on Petition for Review, the Petition being docketed as G.R. No. L-48839 ("Carlos A. Go
Thong and Company v. Smith Bell and Company [Philippines], Inc., et al."). In its Resolution dated 6 December 1978,
this Court, having considered "the allegations, issues and arguments adduced in the Petition for Review on Certiorari, of
the Decision of the Court of Appeals as well as respondent's comment", denied the Petition for lack of merit. Go Thong
filed a Motion for Reconsideration; the Motion was denied by this Court on 24 January 1979.

86

In the other (Cuevas) case, C.A.-G.R. No. 61206-R, the Court of Appeals, on 26 November 1980 (or almost two [2] years
after the Decision of Reyes, L.B., J., in C.A.-G.R. No. 61320-R, had been affirmed by the Supreme Court on Petition for
Review) through Sison, P.V., J., reversed the Cuevas Decision and held the officers of the "Yotai Maru" at fault in the
collision with the "Don Carlos," and dismissed the insurance companies' complaint. Herein petitioners asked for
reconsideration, to no avail.
The insurance companies are now before us on Petition for Review on Certiorari, assailing the Decision of Sison, P.V., J.,
in C.A.-G.R. No. 61206-R. Petitioners' principal contentions are:
a. that the Sison Decision had disregarded the rule of res judicata;
b. that Sison P.V., J., was in serious and reversible error in accepting Go Thong's defense that the question of fault
on the part of the "Yotai Maru" had been settled by the compromise agreement between the owner of the "Yotai
Maru" and Go Thong as owner of the "Don Carlos;" and
c. that Sison, P. V. J., was in serious and reversible error in holding that the "Yotai Maru" had been negligent and
at fault in the collision with the "Don Carlos."
I
The first contention of petitioners is that Sison, P. V. J. in rendering his questioned Decision, failed to apply the rule of res
judicata. Petitioners maintain that the Resolution of the Supreme Court dated 6 December 1978 in G.R. No. 48839 which
dismissed Go Thong's Petition for Review of the Decision of Reyes, L.B., J., in C.A.-G.R. No. 61320-R, had effectively
settled the question of liability on the part of the "Don Carlos." Under the doctrine of res judicata, petitioners contend,
Sison, P. V. J. should have followed the Reyes, L.B., J. Decision since the latter had been affirmed by the Supreme Court
and had become final and executory long before the Sison Decision was rendered.
Private respondent Go Thong, upon the other hand, argues that the Supreme Court, in rendering its minute Resolution in
G.R. No. L- 48839, had merely dismissed Go Thong's Petition for Review of the Reyes, L.B., J. Decision for lack of merit
but had not affirmed in toto that Decision. Private respondent, in other words, purports to distinguish between denial of a
Petition for Review for lack of merit and affirmance of the Court of Appeals' Decision. Thus, Go Thong concludes, this
Court did not hold that the "Don Carlos" had been negligent in the collision.
Private respondent's argument must be rejected. That this Court denied Go Thong's Petition for Review in a minute
Resolution did not in any way diminish the legal significance of the denial so decreed by this Court. The Supreme Court is
not compelled to adopt a definite and stringent rule on how its judgment shall be framed. 1 It has long been settled that this
Court has discretion to decide whether a "minute resolution" should be used in lieu of a full-blown decision in any
particular case and that a minute Resolution of dismissal of a Petition for Review oncertiorari constitutes an adjudication
on the merits of the controversy or subject matter of the Petition. 2 It has been stressed by the Court that the grant of due
course to a Petition for Review is "not a matter of right, but of sound judicial discretion; and so there is no need to fully
explain the Court's denial. For one thing, the facts and law are already mentioned in the Court of Appeals' opinion." 3 A
minute Resolution denying a Petition for Review of a Decision of the Court of Appeals can only mean that the Supreme
Court agrees with or adopts the findings and conclusions of the Court of Appeals, in other words, that the Decision sought
to be reviewed and set aside is correct.4
Private respondent Go Thong argues also that the rule of res judicata cannot be invoked in the instant case whether in
respect of the Decision of Reyes, L.B., J. or in respect of the Resolution of the Supreme Court in G.R. No. L-48839, for
the reason that there was no identity of parties and no identity of cause of action between C.A.-G.R. No. 61206-R and
C.A.-G.R. No. 61320-R.

87

The parties in C.A.-G.R. No. 61320-R Where the decision of Judge Fernandez was affirmed, involved Smith Bell and
Company (Philippines), Inc., and Sumitomo Marine and Fire Insurance Co., Ltd. while the petitioners in the instant case
(plaintiffs below) are Smith Bell and Co. (Philippines), Inc. and Tokyo Marine and Fire Insurance Co., Ltd. In other
words, there was a common petitioner in the two (2) cases, although the co-petitioner in one was an insurance company
different from the insurance company co-petitioner in the other case. It should be noted, moreover, that the co-petitioner
in both cases was an insurance company arid that both petitioners in the two (2) cases represented the same interest, i.e.,
the cargo owner's interest as against the hull interest or the interest of the shipowner. More importantly, both cases had
been brought against the same defendant, private respondent Go Thong, the owner of the vessel "Don Carlos." In sum,
C.A.-G.R. No. 61320R and C.A-G.R. No. 61206-R exhibited substantial identity of parties.
It is conceded by petitioners that the subject matters of the two (2) suits were not identical, in the sense that the cargo
which had been damaged in the one case and for which indemnity was sought, was not the very same cargo which had
been damaged in the other case indemnity for which was also sought. The cause of action was, however, the same in the
two (2) cases, i.e., the same right of the cargo owners to the safety and integrity of their cargo had been violated by the
same casualty, the ramming of the "Yotai Maru" by the "Don Carlos." The judgments in both cases were final judgments
on the merits rendered by the two (2) divisions of the Court of Appeals and by the Supreme Court, the jurisdiction of
which has not been questioned.
Under the circumstances, we believe that the absence of identity of subject matter, there being substantial identity of
parties and identity of cause of action, will not preclude the application of res judicata. 5
In Tingson v. Court of Appeals,6 the Court distinguished one from the other the two (2) concepts embraced in the principle
of res judicata, i.e., "bar by former judgment" and "conclusiveness of judgment:"
There is no question that where as between the first case Where the judgment is rendered and the second case
where such judgment is invoked, there is identity of parties, subject-matter and cause of action, the judgment on
the merits in the first case constitutes an absolute bar to the subsequent action not only as to every matter which
was offered and received to sustain or defeat the claim or demand, but also as to any other admissible matter
which might have been offered for that purpose and to all matters that could have been adjudged in that case. This
is designated as "bar by former judgment."
But where the second action between the same parties is upon a different claim or demand, the judgment in the
prior action operates as an estoppel only as to those matters in issue or points controverted, upon the
determination of which the finding or judgment was rendered. In fine, the previous judgment is conclusive in the
second case, only as those matters actually and directly controverted and determined and not as to matters merely
involved therein. This is the rule on 'conclusiveness of judgment' embodied in subdivision (c) of Section 49 of
Rule 39 of the Revised Rules of' Court.7 (Citations omitted) (Emphases supplied)
In Lopez v. Reyes, 8 the Court elaborated further the distinction between bar by former judgment which bars the
prosecution of a second action upon the same claim, demand or cause of action, and conclusiveness of judgment which
bars the relitigation of particular facts or issues in another litigation between the same parties on a different claim or cause
of action:
The doctrine of res judicata has two aspects. The first is the effect of a judgment as a bar to the prosecution of a
second action upon the same claim, demand or cause of action. The second aspect is that it precludes the
relitigation of a particular fact or issues in another action between the same parties on a different claim or cause of
action.
The general rule precluding the relitigation of material facts or questions which were in issue and adjudicated in
former action are commonly applied to all matters essentially connected with the subject matter of the litigation.
Thus, it extends to questions "necessarily involved in an issue, and necessarily adjudicated, or necessarily
implied in the final judgment, although no specific finding may have been made in reference thereto, and although
88

such matters were directly referred to in the pleadings and were not actually or formally presented. Under this
rule, if the record of the former trial shows that the judgment could not have been rendered without deciding the
particular matter it will be considered as having settled that matter as to all future actions between the parties,
and if a judgment necessarily presupposes certain premises, they are as conclusive as the judgment itself. Reasons
for the rule are that a judgment is an adjudication on all the matters which are essential to support it, and
that every proposition assumed or decided by the court leading up to the final conclusion and upon which such
conclusion is based is as effectually passed upon as the ultimate question which is finally solved. 9 (Citations
omitted) (Emphases supplied)
In the case at bar, the issue of which vessel ("Don Carlos" or "Yotai Maru") had been negligent, or so negligent as to have
proximately caused the collision between them, was an issue that was actually, directly and expressly raised, controverted
and litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision and held the "Don Carlos" to
have been negligent rather than the "Yotai Maru" and, as already noted, that Decision was affirmed by this Court in G.R.
No. L-48839 in a Resolution dated 6 December 1978. The Reyes Decision thus became final and executory approximately
two (2) years before the Sison Decision, which is assailed in the case at bar, was promulgated. Applying the rule of
conclusiveness of judgment, the question of which vessel had been negligent in the collision between the two (2) vessels,
had long been settled by this Court and could no longer be relitigated in C.A.-G.R. No. 61206- R. Private respondent Go
Thong was certainly bound by the ruling or judgment of Reyes, L.B., J. and that of this Court. The Court of Appeals fell
into clear and reversible error When it disregarded the Decision of this Court affirming the Reyes Decision. 10
Private respondent Go Thong also argues that a compromise agreement entered into between Sanyo Shipping Company as
owner of the "Yotai Maru" and Go Thong as owner of the "Don Carlos," under which the former paid P268,000.00 to the
latter, effectively settled that the "Yotai Maru" had been at fault. This argument is wanting in both factual basis and legal
substance. True it is that by virtue of the compromise agreement, the owner of the "Yotai Maru" paid a sum of money to
the owner of the "Don Carlos." Nowhere, however, in the compromise agreement did the owner of the "Yotai Maru "
admit or concede that the "Yotai Maru" had been at fault in the collision. The familiar rule is that "an offer of compromise
is not an admission that anything is due, and is not admissible in evidence against the person making the offer." 11 A
compromise is an agreement between two (2) or more persons who, in order to forestall or put an end to a law suit, adjust
their differences by mutual consent, an adjustment which everyone of them prefers to the hope of gaining more, balanced
by the danger of losing more.12 An offer to compromise does not, in legal contemplation, involve an admission on the part
of a defendant that he is legally liable, nor on the part of a plaintiff that his claim or demand is groundless or even
doubtful, since the compromise is arrived at precisely with a view to avoiding further controversy and saving the expenses
of litigation. 13 It is of the very nature of an offer of compromise that it is made tentatively, hypothetically and in
contemplation of mutual concessions. 14 The above rule on compromises is anchored on public policy of the most insistent
and basic kind; that the incidence of litigation should be reduced and its duration shortened to the maximum extent
feasible.
The collision between the "Yotai Maru" and the "Don Carlos" spawned not only sets of litigations but also administrative
proceedings before the Board of Marine Inquiry ("BMI"). The collision was the subject matter of an investigation by the
BMI in BMI Case No. 228. On 12 July 1971, the BMI through Commodore Leovegildo L. Gantioki, found both vessels to
have been negligent in the collision.
Both parties moved for reconsideration of the BMI's decision. The Motions for Reconsideration were resolved by the
Philippine Coast Guard ("PCG") nine (9) years later, in an order dated 19 May 1980 issued by PCG Commandant,
Commodore Simeon M. Alejandro. The dispositive portion of the PCG decision read as follows:
Premises considered, the Decision dated July 12, 1971 is hereby reconsidered and amended absolving the officers
of "YOTAI MARU" from responsibility for the collision. This Headquarters finds no reason to modify the
penalties imposed upon the officers of Don Carlos. (Annex "C", Reply, September 5, 1981).15
Go Thong filed a second Motion for Reconsideration; this was denied by the PCG in an order dated September 1980.
89

Go Thong sought to appeal to the then Ministry of National Defense from the orders of the PCG by filing with the PCG
on 6 January 1981 a motion for a 30-day extension from 7 January 1981 within which to submit its record on appeal. On 4
February 1981, Go Thong filed a second urgent motion for another extension of thirty (30) days from 7 February 1981.
On 12 March 1981, Go Thong filed a motion for a final extension of time and filed its record on appeal on 17 March
1981. The PCG noted that Go Thong's record on appeal was filed late, that is, seven (7) days after the last extension
granted by the PCG had expired. Nevertheless, on 1 July 1981 (after the Petition for Review on Certiorari in the case at
bar had been filed with this Court), the Ministry of Defense rendered a decision reversing and setting aside the 19 May
1980 decision of the PCG
The owners of the "Yotai Maru" then filed with the Office of the President a Motion for Reconsideration of the Defense
Ministry's decision. The Office of the President rendered a decision dated 17 April 1986 denying the Motion for
Reconsideration. The decision of the Office of the President correctly recognized that Go Thong had failed to appeal in a
seasonable manner:
MV "DON CARLOS" filed her Notice of Appeal on January 5, 1981. However, the records also show beyond
peradventure of doubt that the PCG Commandant's decision of May 19, 1980, had already become final and
executory When MV "DON CARLOS" filed her Record on Appeal on March 17, 1981, and When the motion for
third extension was filed after the expiry date.
Under Paragraphs (c), (d), (e) and (f), Chapter XVI, of the Philippine Merchant Marine Rules and Regulations,
decisions of the PCG Commandant shall be final unless, within thirty (30) days after receipt of a copy thereof, an
appeal to the Minister of National Defense is filed and perfected by the filing of a notice of appeal and a record
on appeal. Such administrative regulation has the force and effect of law, and the failure of MV "DON
CARLOS" to comply therewith rendered the PCG Commandant's decision on May 19, 1980, as final and
executory, (Antique Sawmills, Inc. vs. Zayco, 17 SCRA 316; Deslata vs. Executive Secretary, 19 SCRA 487;
Macailing vs. Andrada, 31 SCRA 126.) (Annex "A", Go Thong's Manifestation and Motion for Early Resolution,
November 24, 1986).16 (Emphases supplied)
Nonetheless, acting under the misapprehension that certain "supervening" events had taken place, the Office of the
President held that the Minister of National Defense could validly modify or alter the PCG Commandant's decision:
However, the records likewise show that, on November 26, 1980, the Court of Appeals rendered a decision in
CA-G.R. No. 61206-R (Smith Bell & Co., Inc., et al. vs. Carlos A. Go Thong & Co.) holding that the proximate
cause of the collision between MV "DON CARLOS" AND MS "YOTAI MARU" was the negligence, failure and
error of judgment of the officers of MS "YOTAI MARU". Earlier, or on February 27, 1976, the Court of First
Instance of Cebu rendered a decision in Civil Case No. R-11973 (Carlos A. Go Thong vs. San-yo Marine Co.)
holding that MS "YOTAI MARU" was solely responsible for the collision, which decision was upheld by the
Court of Appeals.
The foregoing judicial pronouncements rendered after the finality of the PCG Commandant's decision of May 19,
1980, were supervening causes or reasons that rendered the PCG Commandant's decision as no longer
enforceable and entitled MV "DON CARLOS" to request the Minister of National Defense to modify or alter the
questioned decision to harmonize the same with justice and tile facts. (De la Costa vs. Cleofas, 67 Phil. 686; City
of Bututan vs. Ortiz, 3 SCRA 659; Candelario vs. Canizares, 4 SCRA 738; Abellana vs. Dosdos, 13 SCRA
244). Under such precise circumstances, the Minister of National Defense may validly modify or alter the PCG
commandant's decision. (Sec. 37, Act 4007; Secs. 79(c) and 550, Revised Administrative Code; Province of
Pangasinan vs. Secretary of Public Works and Communications, 30 SCRA 134; Estrelia vs. Orendain, 37 SCRA
640). 17 (Emphasis supplied)
The multiple misapprehensions under which the Office of the President labored, were the following:

90

It took account of the Decision of Sison, P.V., J. in C.A.-G.R. No. 61206-R, the very decision that is the subject of review
in the Petition at bar and therefore not final. At the same time, the Office of the President either ignored or was unaware of
the Reyes, L.B., J., Decision in C.A.-G.R. No 61320-R finding the "Don Carlos" solely liable for the collision, and of the
fact that that Decision had been affirmed by the Supreme Court and had long ago become final and executory. A third
misapprehension of the Office of the President related to a decision in a Cebu Court of First Instance litigation which had
been settled by the compromise agreement between the Sanyo Marine Company and Go Thong. The Office of the
President mistakenly believed that the Cebu Court of First Instance had rendered a decision holding the "Yotai Maru"
solely responsible for the collision, When in truth the Cebu court had rendered a judgment of dismissal on the basis of the
compromise agreement. The Cebu decision was not, of course, appealed to the Court of Appeals.
It thus appears that the decision of the Office of the President upholding the belated reversal by the Ministry of National
Defense of the PCG'S decision holding the "Don Carlos" solely liable for the collision, is so deeply flawed as not to
warrant any further examination. Upon the other hand, the basic decision of the PCG holding the "Don Carlos" solely
negligent in the collision remains in effect.
II
In their Petition for Review, petitioners assail the finding and conclusion of the Sison Decision, that the "Yotai Maru" was
negligent and at fault in the collision, rather than the "Don Carlos." In view of the conclusions reached in Part I above, it
may not be strictly necessary to deal with the issue of the correctness of the Sison Decision in this respect. The Court
considers, nonetheless, that in view of the conflicting conclusions reached by Reyes, L.B.,J., on the one hand, and Sison,
P.V., J., on the other, and since in affirming the Reyes Decision, the Court did not engage in a detailed written
examination of the question of which vessel had been negligent, and in view of the importance of the issues of admiralty
law involved, the Court should undertake a careful review of the record of the case at bar and discuss those issues in
extenso.
The decision of Judge Cuevas in Civil Case No. 82556 is marked by careful analysis of the evidence concerning the
collision. It is worth underscoring that the findings of fact of Judge Fernandez in Civil Case No. 82567 (which was
affirmed by the Court of Appeals in the Reyes Decision and by this Court in G.R. No. L-48839) are just about identical
with the findings of Judge Cuevas. Examining the facts as found by Judge Cuevas, the Court believes that there are three
(3) principal factors which are constitutive of negligence on the part of the "Don Carlos," which negligence was the
proximate cause of the collision.
The first of these factors was the failure of the "Don Carlos" to comply with the requirements of Rule 18 (a) of the
International Rules of the Road ("Rules")," which provides as follows
(a) When two power-driven vessels are meeting end on, or nearly end on, so as to involve risk of collision, each
shall alter her course to starboard, so that each may pass on the port side of the other. This Rule only applies to
cases where vessels are meeting end on or nearly end on, in such a manner as to involve risk of collision, and does
not apply to two vessels which must, if both keep on their respective course, pass clear of each other. The only
cases to which it does apply are when each of two vessels is end on, or nearly end on, to the other; in other words,
to cases in which, by day, each vessel sees the masts of the other in a line or nearly in a line with her own; and by
night to cases in which each vessel is in such a position as to see both the sidelights of the other. It does not apply,
by day, to cases in which a vessel sees another ahead crossing her own course; or, by night, to cases where the red
light of one vessel is opposed to the red light of the other or where the green light of one vessel is opposed to the
green light of the other or where a red light without a green light or a green light without a red light is seen ahead,
or Where both green and red lights are seen anywhere but ahead. (Emphasis supplied)
The evidence on this factor was summarized by Judge Cuevas in the following manner:
Plaintiff's and defendant's evidence seem to agree that each vessel made a visual sighting of each other ten minute
before the collision which occurred at 0350. German's version of the incident that followed, was that "Don
91

Carlos" was proceeding directly to [a] meeting [on an] "end-on or nearly end-on situation" (Exh. S, page 8). He
also testified that "Yotai Maru's' headlights were "nearly in line at 0340 A.M." (t.s.n., June 6, 1974) clearly
indicating that both vessels were sailing on exactly opposite paths (t.s.n. June 6, 1974, page 56). Rule 18 (a) of the
International Rules of the Road provides as follows:
xxx

xxx

xxx

And yet German altered "Don Carlos" course by five degrees to the left at 0343 hours instead of to the right (t.s.n. June 6,
1974, pages 4445) which maneuver was the error that caused the collision in question. Why German did so is likewise
explained by the evidence on record. "Don Carlos" was overtaking another vessel, the "Don Francisco", and was then at
the starboard (right side) of the aforesaid vessel at 3:40 a.m. It was in the process of overtaking "Don
Francisco" that "Don Carlos' was finally brought into a situation where he was meeting end-on or nearly end-on "Yotai
Maru, thus involving risk of collision. Hence, German in his testimony before the Board of Marine inquiry stated:
Atty. Chung:
You said in answer to the cross-examination that you took a change of course to the left. Why did you not take a
course to the right instead?
German:
I did not take any course to the right because the other vessel was in my mind at the starboard side following me.
Besides, I don't want to get risk of the Caballo Island (Exh. 2, pages 209 and 210). 19(Emphasis supplied)
For her part, the "Yotai Maru" did comply with its obligations under Rule 18 (a). As the "Yotai Maru" found herself on an
"end-on" or a "nearly end-on" situation vis-a-vis the "Don Carlos, " and as the distance between them was rapidly
shrinking, the "Yotai Maru" turned starboard (to its right) and at the same time gave the required signal consisting of one
short horn blast. The "Don Carlos" turned to portside (to its left), instead of turning to starboard as demanded by Rule 18
(a). The "Don Carlos" also violated Rule 28 (c) for it failed to give the required signal of two (2) short horn blasts
meaning "I am altering my course to port." When the "Yotai Maru" saw that the "Don Carlos" was turning to port, the
master of the "Yotai Maru" ordered the vessel turned "hard starboard" at 3:45 a.m. and stopped her engines; at about 3:46
a.m. the "Yotai Maru" went "full astern engine." 20 The collision occurred at exactly 3:50 a.m.
The second circumstance constitutive of negligence on the part of the "Don Carlos" was its failure to have on board that
night a "proper look-out" as required by Rule I (B) Under Rule 29 of the same set of Rules, all consequences arising from
the failure of the "Don Carlos" to keep a "proper look-out" must be borne by the "Don Carlos." Judge Cuevas' summary
of the evidence said:
The evidence on record likewise discloses very convincingly that "Don Carlos" did not have "look-out" whose
sole and only duty is only to act as Such. . . . 21
A "proper look-out" is one who has been trained as such and who is given no other duty save to act as a look-out and who
is stationed where he can see and hear best and maintain good communication with the officer in charge of the vessel, and
who must, of course, be vigilant. Judge Cuevas wrote:
The "look-out" should have no other duty to perform. (Chamberlain v. Ward, 21, N.O.W. 62, U.S. 548, 571). He
has only one duty, that which its name impliesto keep "look-out". So a deckhand who has other duties, is not a
proper "look-out" (Brooklyn Perry Co. v. U.S., 122, Fed. 696). The navigating officer is not a sufficient "lookout" (Larcen B. Myrtle, 44 Fed. 779)Griffin on Collision, pages 277-278). Neither the captain nor the
[helmsman] in the pilothouse can be considered to be a "look-out" within the meaning of the maritime law. Nor
92

should he be stationed in the bridge. He should be as near as practicable to the surface of the water so as to be
able to see low-lying lights (Griffin on Collision, page 273).
On the strength of the foregoing authorities, which do not appear to be disputed even by the defendant, it is hardly
probable that neither German or Leo Enriquez may qualify as "look-out" in the real sense of the
word.22 (Emphasis supplied)
In the case at bar, the failure of the "Don Carlos" to recognize in a timely manner the risk of collision with the "Yotai
Maru" coming in from the opposite direction, was at least in part due to the failure of the "Don Carlos" to maintain a
proper look-out.
The third factor constitutive of negligence on the part of the "Don Carlos" relates to the fact that Second Mate Benito
German was, immediately before and during the collision, in command of the "Don Carlos." Judge Cuevas summed up
the evidence on this point in the following manner:
The evidence on record clearly discloses that "Don Carlos" was, at the time of the collision and immediately prior
thereto, under the command of Benito German, a second mate although its captain, Captain Rivera, was very
much in the said vessel at the time. The defendant's evidence appears bereft of any explanation as to why second
mate German was at the helm of the aforesaid vessel when Captain Rivera did not appear to be under any
disability at the time. In this connection, Article [633] of the Code of Commerce provides:
Art. [633] The second mate shall take command of the vessel in case of the inability or disqualification
of the captain and sailing mate, assuming, in such case, their powers and liability.
The fact that second mate German was allowed to be in command of "Don Carlos" and not the chief or the sailing
mate in the absence of Captain Rivera, gives rise to no other conclusion except that said vessel [had] no chief
mate. Otherwise, the defense evidence should have at least explained why it was German, only a second mate,
who was at the helm of the vessel "Don Carlos" at the time of the fatal collision.
But that is not all. Worst still, aside from German's being only a second mate, is his apparent lack of sufficient
knowledge of the basic and generally established rules of navigation. For instance, he appeared unaware of the
necessity of employing a "look- out" (t.s.n. June 6, 1974, page 27) which is manifest even in his testimony before
the Board of Marine Inquiry on the same subject (Exh. 2, page 209). There is, therefore, every reasonable ground
to believe that his inability to grasp actual situation and the implication brought about by inadequacy of
experience and technical know-how was mainly responsible and decidedly accounted for the collision of the
vessels involved in this case.. . . 23 (Emphasis supplied)
Second Mate German simply did not have the level of experience, judgment and skill essential for recognizing and coping
with the risk of collision as it presented itself that early morning when the "Don Carlos," running at maximum speed and
having just overtaken the "Don Francisco" then approximately one mile behind to the starboard side of the "Don
Carlos," found itself head-on or nearly head on vis-a-vis the "Yotai Maru. " It is essential to point out that this situation
was created by the "Don Carlos" itself.
The Court of Appeals in C.A.-G.R. No. 61206-R did not make any findings of fact which contradicted the findings of fact
made by Judge Cuevas. What Sison, P.V., J. actually did was to disregard all the facts found by Judge Cuevas, and
discussed above and, astonishingly, found a duty on the "Yotai Maru" alone to avoid collision with and to give way to the
"Don Carlos ". Sison, P.V., J., wrote:
At a distance of eight (8) miles and with ten (10) minutes before the impact, [Katoh] and Chonabayashi had ample
time to adopt effective precautionary measures to steer away from the Philippine vessel, particularly because both
[Katoh] and Chonabayashi also deposed that at the time they had first eyesight of the "Don Carlos" there was still
93

"no danger at all" of a collision.1wphi1 Having sighted the "Don Carlos" at a comparatively safe distance"no
danger at all" of a collisionthe Japanese ship should have observed with the highest diligence the course and
movements of the Philippine interisland vessel as to enable the former to adopt such precautions as will
necessarily present a collision, or give way, and in case of a collision, the former is prima facie at fault. In G.
Urrutia & Co. vs. Baco River Plantation Co., 26 Phil. 632, the Supreme Court held:
Nautical rules require that where a steamship and sailing vessel are approaching each other from opposite
directions, or on intersecting lines, the steamship, from the moment the sailing vessel is seen, shall watch
with the highest diligence her course and movements so as to enable it to adopt such timely means of
precaution as will necessarily prevent the two boats from coming in contact.' (Underscoring in the
original)
At 3:44 p.m., or 4 minutes after first sighting the "Don Carlos", or 6 minutes before contact time, Chonabayashi
revealed that the "Yotai Maru" gave a one-blast whistle to inform the Philippine vessel that the Japanese ship was
turning to starboard or to the right and that there was no blast or a proper signal from the "Don Carlos" (pp. 67-68.
Deposition of Chonabayashi, List of Exhibits). The absence of a reply signal from the "Don Carlos" placed
the "Yotai Maru" in a situation of doubt as to the course the "Don Carlos" would take. Such being the case, it was
the duty of the Japanese officers "to stop, reverse or come to a standstill until the course of the "Don Carlos" has
been determined and the risk of a collision removed(The Sabine, 21 F (2d) 121, 124, cited in Standard Vacuum,
etc. vs. Cebu Stevedoring, etc., 5 C.A.R. 2d 853, 861-862).. . . . 24 (Emphasis supplied)
The Court is unable to agree with the view thus taken by Sison, P.V., J. By imposing an exclusive obligation uponone of
the vessels, the "Yotai Maru, " to avoid the collision, the Court of Appeals not only chose to overlook all the above facts
constitutive of negligence on the part of the "Don Carlos;" it also in effect used the very negligence on the part of the
"Don Carlos" to absolve it from responsibility and to shift that responsibility exclusively onto the "Yotai Maru" the vessel
which had observed carefully the mandate of Rule 18 (a). Moreover, G. Urrutia and Company v. Baco River Plantation
Company 25 invoked by the Court of Appeals seems simply inappropriate and inapplicable. For the collision in
the Urrutia case was between a sailing vessel, on the one hand, and a power-driven vessel, on the other; the Rules, of
course, imposed a special duty on the power-driven vessel to watch the movements of a sailing vessel, the latter being
necessarily much slower and much less maneuverable than the power-driven one. In the case at bar, both the "Don
Carlos" and the "Yotai Maru" were power-driven and both were equipped with radar; the maximum speed of the "Yotai
Maru" was thirteen (13) knots while that of the "Don Carlos" was eleven (11) knots. Moreover, as already noted, the
"Yotai Maru" precisely took last minute measures to avert collision as it saw the "Don Carlos" turning to portside: the
"Yotai Maru" turned "hard starboard" and stopped its engines and then put its engines "full astern."
Thus, the Court agrees with Judge Cuevas (just as it had agreed with Reyes, L.B., J.), with Judge Fernandez and
Nocon, J., 26 that the "Don Carlos" had been negligent and that its negligence was the sole proximate cause of the
collision and of the resulting damages.
FOR ALL THE FOREGOING, the Decision of the Court of Appeals dated 26 November 1980 in C.A.-G.R. No. 61206-R
is hereby REVERSED and SET ASIDE. The decision of the trial court dated 22 September 1975 is hereby REINSTATED
and AFFIRMED in its entirety. Costs against private respondent.

94

G.R. No. L-30098 February 18, 1970

THE COMMISSIONER OF PUBLIC HIGHWAYS and the AUDITOR GENERAL, petitioners,
vs.
HON. LOURDES P. SAN DIEGO
TEEHANKEE, J.:
In this special civil action for certiorari and prohibition, the Court declares null and void the two questioned orders of
respondent Court levying upon funds of petitioner Bureau of Public Highways on deposit with the Philippine National
Bank, by virtue of the fundamental precept that government funds are not subject to execution or garnishment.
The background facts follow:
On or about November 20, 1940, the Government of the Philippines filed a complaint for eminent domain in the Court of
First Instance of Rizal1 for the expropriation of a parcel of land belonging to N. T. Hashim, with an area of 14,934 square
meters, needed to construct a public road, now known as Epifanio de los Santos Avenue. On November 25, 1940, the
Government took possession of the property upon deposit with the City Treasurer of the sum of P23,413.64 fixed by the
Court therein as the provisional value of all the lots needed to construct the road, including Hashim's property. The
records of the expropriation case were destroyed and lost during the second world war, and neither party took any step
thereafter to reconstitute the proceedings.
In 1958, however, the estate of N.T. Hashim, deceased, through its Judicial Administrator, Tomas N. Hashim, filed a
money claim with the Quezon City Engineer's Office in the sum of P522,620.00, alleging said amount to be the fair
market value of the property in question, now already converted and used as a public highway. Nothing having come out
of its claim, respondent estate filed on August 6, 1963, with the Court of First Instance of Rizal, Quezon City Branch,
assigned to Branch IX, presided by respondent judge,2 a complaint for the recovery of the fair market price of the said
property in the sum of P672,030.00 against the Bureau of Public Highways, which complaint was amended on August 26,
1963, to include as additional defendants, the Auditor General and the City Engineer of Quezon City.3
The issues were joined in the case with the filing by then Solicitor General Arturo A. Alafriz of the State's answer, stating
that the Hashim estate was entitled only to the sum of P3,203.00 as the fair market value of the property at the time that
the State took possession thereof on November 25, 1940, with legal interest thereon at 6% per annum, and that said
amount had been available and tendered by petitioner Bureau since 1958. The parties thereafter worked out a compromise
agreement, respondent estate having proposed on April 28, 1966, a payment of P14.00 per sq. m. for its 14,934 sq.m.parcel of land or the total amount of P209,076.00, equivalent to the land's total assessed value,4 which was confirmed,
ratified and approved in November, 1966 by the Commissioner of Public Highways and the Secretary of Public Works
and Communications. On November 7, 1966, the Compromise Agreement subscribed by counsel for respondent estate
and by then Solicitor General Antonio P. Barredo, now a member of this Court, was submitted to the lower Court and
under date of November 8, 1966, respondent judge, as prayed for, rendered judgment approving the Compromise
Agreement and ordering petitioners, as defendants therein, to pay respondent estate as plaintiff therein, the total sum of
P209,076.00 for the expropriated lot.
On October 10, 1968, respondent estate filed with the lower Court a motion for the issuance of a writ of execution,
alleging that petitioners had failed to satisfy the judgment in its favor. It further filed on October 12, 1968, an exparte motion for the appointment of respondent Benjamin Garcia as special sheriff to serve the writ of execution. No
opposition having been filed by the Solicitor General's office to the motion for execution at the hearing thereof on October
12, 1968, respondent judge, in an order dated October 14, 1968, granted both motions.
On the same date, October 14, 1968, respondent Garcia, as special sheriff, forthwith served a Notice of Garnishment,
together with the writ of execution dated October 14, 1968, issued by respondent Manuela C. Florendo as Deputy Clerk of
95

Court, on respondent Philippine National Bank, notifying said bank that levy was thereby made upon funds of petitioners
Bureau of Public Highways and the Auditor General on deposit, with the bank to cover the judgment of P209,076.00 in
favor of respondent estate, and requesting the bank to reply to the garnishment within five days. On October 16, 1968,
three days before the expiration of the five-day deadline, respondent Benjamin V. Corua in his capacity as Chief,
Documentation Staff, of respondent bank's Legal Department, allegedly acting in excess of his authority and without the
knowledge and consent of the Board of Directors and other ranking officials of respondent bank, replied to the notice of
garnishment that in compliance therewith, the bank was holding the amount of P209,076.00 from the account of petitioner
Bureau of Public Highways. Respondent bank alleged that when it was served with Notice to Deliver Money signed by
respondent Garcia, as special sheriff, on October 17, 1968, it sent a letter to the officials of the Bureau of Public Highways
notifying them of the notice of garnishment.
Under date of October 16, 1968, respondent estate further filed with the lower Court an ex-parte motion for the issuance
of an order ordering respondent bank to release and deliver to the special sheriff, respondent Garcia, the garnished amount
of P209,076.00 deposited under the account of petitioner Bureau, which motion was granted by respondent judge in an
order of October 18, 1968. On the same day, October 18, 1968, respondent Corua allegedly taking advantage of his
position, authorized the issuance of a cashier's check of the bank in the amount of P209,076.00, taken out of the funds of
petitioner Bureau deposited in current account with the bank and paid the same to respondent estate, without notice to said
petitioner.
Later on December 20, 1968, petitioners, through then Solicitor General Felix V. Makasiar, wrote respondent bank
complaining that the bank acted precipitately in having delivered such a substantial amount to the special sheriff without
affording petitioner Bureau a reasonable time to contest the validity of the garnishment, notwithstanding the bank's being
charged with legal knowledge that government funds are exempt from execution or garnishment, and demanding that the
bank credit the said petitioner's account in the amount of P209,076.00, which the bank had allowed to be illegally
garnished. Respondent bank replied on January 6, 1969 that it was not liable for the said garnishment of government
funds, alleging that it was not for the bank to decide the question of legality of the garnishment order and that much as it
wanted to wait until it heard from the Bureau of Public Highways, it was "helpless to refuse delivery under the teeth" of
the special order of October 18, 1968, directing immediate delivery of the garnished amount.
Petitioners therefore filed on January 28, 1969 the present action against respondents, in their capacities as above stated in
the title of this case, praying for judgment declaring void the question orders of respondent Court. Petitioners also sought
the issuance of a writ of preliminary mandatory injunction for the immediate reimbursement of the garnished sum of
P209,076.00, constituting funds of petitioner Bureau on deposit with the Philippine National Bank as official depository
of Philippine Government funds, to the said petitioner's account with the bank, so as to forestall the dissipation of said
funds, which the government had allocated to its public highways and infrastructure projects. The Court ordered on
January 31, 1969 the issuance of the writ against the principal respondents solidarily, including respondent judge therein
so that she would take forthwith all the necessary measures and processes to compel the immediate return of the said
government funds to petitioner Bureau's account with respondent bank.5
In compliance with the writ, respondent bank restored the garnished sum of P209,076.00 to petitioner Bureau's account
with it.6 The primary responsibility for the reimbursement of said amount to petitioner Bureau's account with the
respondent bank, however, rested solely on respondent estate, since it is the judgment creditor that received the amount
upon the questioned execution.
Strangely enough, as appears now from respondent bank's memorandum in lieu of oral argument,7 what respondent bank
did, acting through respondent Corua as its counsel, was not to ask respondent estate to reimburse it in turn in the same
amount, but to file with the probate court with jurisdiction over respondent estate,8 a motion for the estate to deposit the
said amount with it, purportedly in compliance with the writ. Respondent estate thereupon deposited with respondent bank
as a savings account the sum of P125,446.00, on which the bank presumably would pay the usual interest, besides. As to
the balance of P83,630.00, this sum had been in the interval paid as attorney's fees to Atty. Jesus B. Santos, counsel for
the estate, by the administrator, allegedly without authority of the probate court.9 Accordingly, respondent estate has not
96

reimbursed the respondent bank either as to this last amount, and the bank has complacently not taken any steps in the
lower court to require such reimbursement.
The ancillary questions now belatedly raised by the State may readily be disposed of. Petitioners may not invoke the
State's immunity from suit, since the case below was but a continuation in effect of the pre-war expropriation proceedings
instituted by the State itself. The expropriation of the property, which now forms part of Epifanio, de los Santos Avenue,
is a fait accompli and is not questioned by the respondent state. The only question at issue was the amount of the just
compensation due to respondent estate in payment of the expropriated property, which properly pertained to the
jurisdiction of the lower court. 10 It is elementary that in expropriation proceedings, the State precisely submits to the
Court's jurisdiction and asks the Court to affirm its lawful right to take the property sought to be expropriated for the
public use or purpose described in its complaint and to determine the amount of just compensation to be paid therefor.
Neither may the State impugn the validity of the compromise agreement executed by the Solicitor General on behalf of
the State with the approval of the proper government officials, on the ground that it was executed only by the lawyer of
respondent estate, without any showing of having been specially authorized to bind the estate thereby, because such
alleged lack of authority may be questioned only by the principal or client, and respondent estate as such principal has on
the contrary confirmed and ratified the compromise agreement. 11 As a matter of fact, the Solicitor General, in
representation of the State, makes in the petition no prayer for the annulment of the compromise agreement or of the
respondent court's decision approving the same.
On the principal issue, the Court holds that respondent Court's two questioned orders (1) for execution of the judgment, in
pursuance whereof respondent deputy clerk issued the corresponding writ of execution and respondent special sheriff
issued the notice of garnishment, and (2) for delivery of the garnished amount of P209,076.00 to respondent estate as
judgment creditor through respondent special sheriff, are null and void on the fundamental ground that government funds
are not subject to execution or garnishment.
1. As early as 1919, the Court has pointed out that although the Government, as plaintiff in expropriation proceedings,
submits itself to the jurisdiction of the Court and thereby waives its immunity from suit, the judgment that is thus rendered
requiring its payment of the award determined as just compensation for the condemned property as a condition precedent
to the transfer to the title thereto in its favor, cannot be realized upon execution.12 The Court there added that it is
incumbent upon the legislature to appropriate any additional amount, over and above the provisional deposit, that may be
necessary to pay the award determined in the judgment, since the Government cannot keep the land and dishonor the
judgment.
In another early case, where the government by an act of the Philippine Legislature, expressly consented to be sued by the
plaintiff in an action for damages and waived its immunity from suit, the Court adjudged the Government as not being
legally liable on the complaint, since the State under our laws would be liable only for torts caused by its special agents,
specially commissioned to carry out the acts complained of outside of such agents' regular duties. We held that the
plaintiff would have to look to the legislature for another legislative enactment and appropriation of sufficient funds, if the
Government intended itself to be legally liable only for the damages sustained by plaintiff as a result of the negligent act
of one of its employees. 13
The universal rule that where the State gives its consent to be sued by private parties either by general or special law, it
may limit claimant's action "only up to the completion of proceedings anterior to the stage of execution" and that the
power of the Courts ends when the judgment is rendered, since government funds and properties may not be seized under
writs of execution or garnishment to satisfy such judgments, is based on obvious considerations of public policy.
Disbursements of Public funds must be covered by the corresponding appropriation as required by law. The functions and
public services rendered by the State cannot be allowed to be paralyzed or disrupted by the diversion of public funds from
their legitimate and specific objects, as appropriated by law.
Thus, as pointed out by the Court in Belleng vs. Republic, 14 while the State has given its consent to be sued in
compensation cases, the pauper-claimant therein must look specifically to the Compensation Guarantee Fund provided by
97

the Workmen's Compensation Act for the corresponding disbursement in satisfaction of his claim, since the State in Act
3083, the general law waiving its immunity from suit "upon any money claim involving liability arising from contract
express or implied," imposed the limitation in Sec. 7 thereof that "no execution shall issue upon any judgment rendered by
any Court against the Government of the (Philippines) under the provisions of this Act;" and that otherwise, the claimant
would have to prosecute his money claim against the State under Commonwealth Act 327.
This doctrine was again stressed by. the Court in Republic vs. Palacio, 15 setting aside as null and void the order of
garnishment issued by the sheriff pursuant to the lower Court's writ of execution on funds of the Pump Irrigation Trust
Fund in the account of the Government's Irrigation Service Unit with the Philippine National Bank. The Court emphasized
then and re-emphasizes now that judgments against the State or its agencies and instrumentalities in cases where the State
has consented to be sued, operate merely to liquidate and establish the plaintiff's claim; such judgments may not be
enforced by writs of execution or garnishment and it is for the legislature to provide for their payment through the
corresponding appropriation, as indicated in Act 3083.
2. Respondent bank and its Chief, Documentation Staff, respondent Corua have advanced two specious arguments to
justify their wrongful delivery of the garnished public funds to respondent estate. Their first contention that the said
government funds by reason of their being deposited by petitioner Bureau under a current account subject to withdrawal
by check, instead of being deposited as special trust funds, "lost their kind and character as government funds," 16 is
untenable. As the official depositary of the Philippine Government, respondent bank and its officials should be the first
ones to know that all government funds deposited with it by any agency or instrumentality of the government, whether by
way of general or special deposit, remain government funds, since such government agencies or instrumentalities do not
have any non-public or private funds of their own.
Their second contention that said government funds lost their character as such "the moment they were deposited with the
respondent bank", 17 since the relation between a depositor and a depository bank is that of creditor and debtor, is just as
untenable, absolutely. Said respondents shockingly ignore the fact that said government funds were deposited with
respondent bank as the official depositary of the Philippine Government. Assuming for the nonce the creation of such
relationship of creditor and debtor, petitioner Bureau thereby held a credit against respondent bank whose obligation as
debtor was to pay upon demand of said petitioner-creditor the public funds thus deposited with it; even though title to the
deposited funds passes to the bank under this theory since the funds become mingled with other funds which the bank
may employ in its ordinary business, what was garnished was not the bank's own funds but the credit of petitioner bureau
against the bank to receive payment of its funds, as a consequence of which respondent bank delivered to respondent
estate the garnished amount of P209,076.00 belonging to said petitioner. Petitioner bureau's credit against respondent
bank thereby never lost its character as a credit representing government funds thus deposited. The moment the payment
is made by respondent bank on such deposit, what it pays out represents the public funds thus deposited which are not
garnishable and may be expended only for their legitimate objects as authorized by the corresponding legislative
appropriation. Neither respondent bank nor respondent Corua are the duly authorized disbursing officers and auditors of
the Government to authorize and cause payment of the public funds of petitioner Bureau for the benefit or private persons,
as they wrongfully did in this case.
3. Respondents bank and Corua next pretend that refusal on their part to obey respondent judge's order to deliver the
garnished amount, "which is valid and binding unless annulled, would have exposed them for contempt of court." 18 They
make no excuse for not having asked the lower court for time and opportunity to consult petitioner Bureau or the Solicitor
General with regard to the garnishment and execution of said deposited public funds which were allocated to specific
government projects, or for not having simply replied to the sheriff that what they held on deposit for petitioner Bureau
were non-garnishable government funds. They have not given any cogent reason or explanation, charged as they were
with knowledge of the nullity of the writ of execution and notice of garnishment against government funds, for in the
earlier case of Republic vs. Palacio, supra, they had then prudently and timely notified the proper government officials of
the attempted levy on the funds of the Irrigation Service Unit deposited with it, thus enabling the Solicitor General to take
the corresponding action to annul the garnishment for their failure to follow the same prudent course in this case.
Indeed, the Court is appalled at the improper haste and lack of circumspection with which respondent Corua and other
responsible officials of respondent bank precipitately allowed the garnishment and delivery of the large amount involved,
98

all within the period of just four days, even before the expiration of the five-day reglementary period to reply to the
sheriff's notice of garnishment. Failure on the State's part to oppose the issuance of the writ of execution, which was
patently null and void as an execution against government funds, could not relieve them of their own responsibility.
4. Respondents bank and Corua further made common cause with respondent estate beyond the legal issues that should
solely concern them, by reason of their having wrongfully allowed the garnishment and delivery of government funds,
instead assailing petitioners for not having come to court with "clean hands" and asserting that in fairness, justice and
equity, petitioners should not impede, obstruct or in any way delay the payment of just compensation to the land owners
for their property that was occupied way back in 1940. This matter of payment of respondent estate's judgment credit is of
no concern to them as custodian and depositary of the public funds deposited with them, whereby they are charged with
the obligation of assuring that the funds are not illegally or wrongfully paid out.
Since they have gone into the records of the expropriation case, then it should be noted that they should have considered
the vital fact that at the time that the compromise agreement therein was executed in November, 1966, respondent estate
was well aware of the fact that the funds for the payment of the property in the amount of P209,076.00 still had to be
released by the Budget Commissioner and that at the time of the garnishment, respondent estate was still making the
necessary representations for the corresponding release of such amount, pursuant to the Budget Commissioner's favorable
recommendation.19 And with regard to the merits of the case, they should have likewise considered that respondent estate
could have no complaint against the fair attitude of the authorities in not having insisted on their original stand in their
answer that respondent estate was entitled only to the sum of P3,203.00 as the fair market value of the property at the time
the State took possession thereof on November 25, 1940, with legal interests thereon, but rather agreed to pay therefor the
greatly revised and increased amount of P209,076.00 at P14.00 per square meter, not to mention the consequential
benefits derived by said respondent from the construction of the public highway with the resultant enhanced value of its
remaining properties in the area.
5. The manner in which respondent bank's counsel and officials proceeded to comply with the writ of preliminary
mandatory injunction issued by the Court commanding respondent estate, its judicial administrator and respondents bank
and Corua, in solidum, to reimburse forthwith the account of petitioner Bureau in the garnished amount of P209,076.00,
does not speak well of their fidelity to the bank's interests. For while respondent bank had restored with its own funds the
said amount of P209,076.00 to petitioner Bureau's account, it has not required respondent estate as the party primarily
liable therefor as the recipient of the garnished amount to reimburse it in turn in this same amount. Rather, said bank
officials have allowed respondent estate to keep all this time the whole amount of P209,076.00 wrongfully garnished by it.
For as stated above, respondent bank allowed respondent estate merely to deposit with it as a savings account, of
respondent estate, the lesser sum of P125,446.00 on which the bank presumably has paid and continues paying respondent
estate, besides the usual interest rates on such savings accounts, and neither has it taken any steps to require
reimbursement to it from respondent estate of the remainder of P83,630.00 which respondent estate of its own doing and
responsibility paid by way of attorney's fees.
It thus appears that all this time, respondent bank has not been reimbursed by respondent estate as the party primarily
liable for the whole amount of P209,076.00 wrongfully and illegally garnished and received by respondent estate. This
grave breach of trust and dereliction of duty on the part of respondent bank's officials should be brought to the attention of
respondent bank's Board of Directors and management for the appropriate administrative action and other remedial action
for the bank to recover the damages it has been made to incur thereby.
6. The Solicitor General has likewise questioned the legality of respondent Court's Order of October 14, 1968, appointing
respondent Garcia as "special sheriff" for the purpose of effecting service of the writ of execution, simply on respondent
estate's representation that it was desirable "for a speedy enforcement of the writ."
The Court finds this general practice of the lower courts of appointing "special sheriffs" for the service of writs of
execution to be unauthorized by law. The duty of executing all processes" of the courts in civil cases, particularly, writs of
execution, devolves upon the sheriff or his deputies, under Section 183 of the Revised Administrative Code and Rule 39,
section 8 of the Rules of Court. Unlike the service of summons which may be made, aside from the sheriff or other proper
99

court officers, "for special reasons by any person especially authorized by the judge of the court issuing the summons"
under Rule 14, section 5 of the Rules of Court, the law requires that the responsibility of serving writs of execution, which
involve the taking delivery of money or property in trust for the judgment creditor, should be carried out by regularly
bonded sheriffs or other proper court officers. (Sections 183 and 330, Revised Administrative Code). The bond required
by law of the sheriff is conditioned inter alia, "for the delivery or payment to the Government, or the persons entitled
thereto, of all the property or sums of money that shall officially come into his or their (his deputies') hands" (Section
330, idem), and thus avoids the risk of embezzlement of such properties and moneys.
Section 185 of the Revised Administrative Code restrictively authorizes the judge of the Court issuing the process or writ
to deputize some suitable person only "when the sheriff is party to any action or proceeding or is otherwise incompetent to
serve process therein." The only other contingency provided by law is when the office of sheriff is vacant, and the judge is
then authorized, "in case of emergency, (to) make a temporary appointment to the office of sheriff ... pending the
appointment and qualification of the sheriff in due course; and he may appoint the deputy clerk of the court or other
officer in the government service to act in said capacity." (Section 189, idem).
None of the above contingencies having been shown to be present, respondent Court's order appointing respondent Garcia
as "special sheriff" to serve the writ of execution was devoid of authority.
7. No civil liability attaches, however, to respondents special sheriff and deputy clerk, since they acted strictly pursuant to
orders issued by respondent judge in the discharge of her judicial functions as presiding judge of the lower court, and
respondent judge's immunity from civil responsibility covers them, although the said orders are herein declared null and
void. 20
ACCORDINGLY, the writs of certiorari and prohibition are granted. The respondent court's questioned Orders of
October 14, and 18, 1968, are declared null and void, and all further proceedings in Civil Case No. Q-7441 of the Court of
First Instance of Rizal, Quezon City, Branch IX are abated. The writ of preliminary mandatory injunction heretofore
issued is made permanent, except as to respondent judge who is excluded therefrom, without prejudice to any cause of
action that private respondents may have, inter se. Respondent estate and respondent Tomas N. Hashim as prayed for by
respondent Philippine National Bank in its Answer, are ordered jointly and severally to reimburse said respondent bank in
the amount of P209,076.00 with legal interest until the date of actual reimbursement. Respondents Estate of N. T. Hashim,
Philippine National Bank and Benjamin Corua are ordered jointly to pay treble costs.
The Clerk of Court is directed to furnish copies of this decision to the Board of Directors and to the president of
respondent Philippine National Bank for their information and appropriate action. So ordered.

100

G.R. No. L-29161

December 29, 1928

JAMES J. RAFFERTY, plaintiff-appellant,

vs.
PROVINCE OF CEBU, defendant-appellee.
STATEMENT
For cause of action in case No. 6336 in the lower court, plaintiff alleges that he is the owner of lot No. 522 in question,
and that the defendant usurped a large portion of it for a park, and for such purpose constructed a house thereon and
enclosed it with wire. That thereafter the plaintiff made numerous demands for the possession of the land and the removal
of the improvements, all of which have been refused. As second cause of action, plaintiff alleges that lots Nos. 522 and
523 of the Hacienda Banilad did not have access to any street, and he asked for a right of way through lots Nos. 525 and
524, under article 565 of the Civil Code, stating that he is willing to pay a reasonable price for a strip 8 meters wide.
Plaintiff's third cause of action is in the nature of a supplemental complaint, in which he alleges that he is a resident of San
Francisco, California, and that the defendant refused to show his attorneys the document which purports to have been
executed by plaintiff in 1912, in which for the sum of P226 he transferred to the defendant lots Nos. 523 and 541, and
6,723 square meters of lot No. 522, by reason of which plaintiff had to come to the Philippines to attend the trial of this
case, and that in doing so he incurred expenses amounting to P1,920, and was deprived of the profit of his ordinary work,
for which he prays judgment against the defendant for P4,420, with legal interest. 1awphi1.net
The motion to file a supplemental complaint was denied by the court.
In his amended complaint in case No. 6362 in the lower court, plaintiff alleges that he is the owner of lot No. 541
consisting of 4,030 square meters across which the municipality of Cebu constructed the Fructuoso Ramos Street, thereby
appropriating to itself 1,154 square meters without the consent of the plaintiff, by reason of which the plaintiff has been
damaged in the sum of P1,600, for which he prays a corresponding judgment.
For answer to the two different complaints, the defendants made a general and specific denial, and as a special defense
alleged that on March 15, 1912, the plaintiff sold to the defendant for the sum of two hundred twenty-six pesos 6,723
square meters from and out of lot No. 522, together with lots Nos. 523 and 541, and because of the fact that at the time of
the sale, the titles were still in the name of the Government of the Philippines, the plaintiff could not transfer title to the
defendant. That since that time the defendant has been occupying and possessing the land as owner peacefully, quietly and
adversely to the whole world and with the knowledge and consent of the plaintiff, and in case No. 6362, as a special
defense the defendant alleged that lot No. 541, together with lots Nos. 523 and 522-B, as stated in the first special defense,
was acquired by purchase by the defendant from the plaintiff for a consideration of P226, and the Province of Cebu
transferred sublot No. 541-B to the municipality of Cebu for the construction of Fructuoso Ramos Street, for the
occupation, possession and use of said property, since which time the defendant has been in possession as owner
peacefully and adversely, and as a cross-complaint, the defendant, Province of Cebu, alleges that it is a public corporation
organized and existing under the laws of the Philippine Islands with authority to acquire real property, and that as such
owner of the land in question, and through such adverse possession, and having made public improvements thereon, it
prays that the complaint be dismissed, and that the plaintiff be ordered to execute to the defendant the necessary deeds for
the transfer of the title to lots Nos. 523 and 541, and to the 6,723 square meters of lot No. 522, known as sublot No. 522B, and that it have judgment against him for costs.
To this cross-complaint, the plaintiff invokes the provisions of paragraph 5 of section 335 of Act No. 190, and certain
provisions of the Jones Law, and alleges that the defedant is estopped to claim and assert that it is the owner of the land in
question, and in substance that the defendant is not the owner of the land; that it has never been in possession of it, and
that the plaintiff is the owner and entitled to its possession of it, and that any title which the defendant may have or claim
was obtained through fraud, and for such reason is null and void.

101

Upon such issues the two cases were tried as one, and in an exhaustive opinion the lower court found all of the material
facts for the defendant, dismissed plaintiff's complaint, and rendered judgment for the defendants as prayed for in its
cross-complaint, from which plaintiff appeals and files a brief of one hundred fifty-six pages, in which he makes forty-one
assignments of error.
JOHNS, J.:
The record in this case is voluminous, and the trial court made a careful and detailed analysis of all of the material facts
which he found for the defendant. Although the appellant makes numerous assignments of error, yet in the main the real
questions involved on this appeal are questions of fact and the legal force and effect of the instrument which purports to
have been executed by the plaintiff on November 23, 1910, by and through E. Michael, as his agent and attorney-in-fact,
in and by which, for a consideration of P226, Michael undertook to convey all of the right, title and interest of the plaintiff
in and to about 6,723 square meters of a part of lot No. 522, 2,042 square meters of lot No. 523, and 4,030 square meters
of lot No. 541, which were expropriated within the provincial park.
The record is conclusive that the P226 was paid to the plaintiff at the time of this alleged conveyance, and that he received
and accepted the money and that the defendant relying thereon entered in, and upon, and took possession of, the land in
question, and made permanent improvements therein, and claimed to be its owner, and that in truth and in fact, the
plaintiff never questioned the right or title of the defendant until these actions were brought on December 5, 1926. If it be
true, as plaintiff now contends, that Michael had no authority to execute the instrument in question, he ought not to have
accepted and receipted for its consideration, and having done so, he could not wait for fifteen years to rescind and set it
aside upon the ground of fraud. The actions of the defendant after the instrument was executed in taking possession of the
land and making improvements thereon were open and notorious and were a matter of common knowledged and were
known or legally should have been known to the plaintiff.
Plaintiff having receipt for and accepted the consideration for the instrument executed November 23, 1910, and the
defendant having relied thereon and having entered upon and taken possession and made valuable improvements on the
land, we are clearly of the opinion that he cannot, fifteen years later, maintain an action to set aside that instrument upon
the ground of fraud and deceit in its execution.
The lands in question are now a portion of what is known as the Osmena Park in the City of Cebu, and the plaintiff
undertook to justify his neglect and delay upon the ground that he was not previously in a position to cope with such a
powerful influence. That position is not tenable or even plausible, and does not in the least justify plaintiff for his delay
and neglect to assert his legal right, if any, he had.
Assuming, as he now contends, that at one time the plaintiff may have had some legal rights, he could not sleep upon
them for fifteen years, during all of which time the defendant relied in good faith on the instrument executed by his agent
on November 23, 1910, and had made valuable improvements on the lands in question, and then obtain legal relief from
his own delay and neglect. Those legal principles apply with equal force and effect to the facts in both cases.
With all due respects to the able and vigorious brief for the appellant and the numerous assigments of error, the main
question involved on this appeal are founded upon questions of fact, all of which were found by the trial court in favor of
the defendant, and there is ample evidence to sustain its findings.
The judgment of the lower court is affirmed in both cases, with costs on the appeal. So ordered.

102

G.R. No. 11897

September 24, 1918

J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-appellants.
STREET, J.:
The Orientalist Company is a corporation, duly organized under the laws of the Philippine Islands, and in 1913 and 1914,
the time of the occurrences which gave rise to this lawsuit, was engaged in the business of maintaining and conducting a
theatre in the city of Manila for the exhibition of cinematographic films. Under the articles of incorporation the company
is authorized to manufacture, buy, or otherwise obtain all accessories necessary for conducting such a business. The
plaintiff J. F. Ramirez was, at the same time, a resident of the city of Paris, France, and was engaged in the business of
marketing films for a manufacturer or manufacturers, there engaged in the production or distribution of cinematographic
material. In this enterprise the plaintiff was represented in the city of Manila by his son, Jose Ramirez.
In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila, became apprised of the fact that
the plaintiff in Paris had control of the agencies for two different marks of films, namely, the "Eclair Films" and the
"Milano Films;" and negotiations were begun with said officials of the Orientalist Company by Jose Ramirez, as agent of
the plaintiff, for the purpose of placing the exclusive agency of these films in the hands of the Orientalist Company. The
defendant Ramon J. Fernandez, one of the directors of the Orientalist Company and also its treasure, was chiefly active in
this matter, being moved by the suggestions and representations of Vicente Ocampo, manage of the Oriental Theater, to
the effect that the securing of the said films was necessary to the success of the corporation.
Near the end of July of the year aforesaid, Jose Ramirez, as representative of his father, placed in the hands of Ramon J.
Fernandez an offer, dated July 4, 1913, stating detail the terms upon which the plaintiff would undertake to supply from
Paris the aforesaid films. This officer was declared to be good until the end of July; and as only about for the Orientalist
Company to act on the matter speedily, if it desired to take advantage of said offer. Accordingly, Ramon J. Fernandez, on
July 30, had an informal conference with all the members of the company's board of directors except one, and with
approval of those with whom he had communicated, addressed a letter to Jose Ramirez, in Manila, accepting the offer
contained in the memorandum of July 4th for the exclusive agency of the Eclair films. A few days later, on August 5, he
addressed another letter couched in the same terms, likewise accepting the office of the exclusive agency for
the Milano Films.
The memorandum offer contained a statement of the price at which the films would be sold, the quantity which the
representative of each was required to take and information concerning the manner and intervals of time for the respective
shipments. The expenses of packing, transportation and other incidentals were to be at the cost of the purchaser. There
was added a clause in which J. F. Ramirez described his function in such transactions as that of a commission agent and
stated that he would see to the prompt shipment of the films, would pay the manufacturer, and take care that the films
were insured his commission for such services being fixed at 5 per cent.
What we consider to be the most portion of the two letters of acceptance written by R. J. Fernandez to Jose Ramirez is in
the following terms:
We willingly accepted the officer under the terms communicated by your father in his letter dated at Paris on July
4th of the present year.
These communications were signed in the following form, in which it will be noted the separate signature of R. J.
Fernandez, as an individual, is placed somewhat below and to the left of the signature of the Orientalist Company as
singed by R. J. Fernandez, in the capacity of treasurer:
103

THE ORIENTALIST COMPANY,

By R. J. FERNANDEZ,
Treasurer,
R. J. FERNANDEZ.
Both of these letters also contained a request that Jose Ramirez should at once telegraph to his father in Paris that his offer
had been accepted by the Orientalist Company and instruct him to make a contract with the film companies, according to
the tenor of the offer, and in the capacity of attorney-in-fact for the Orientalist Company. The idea behind the latter
suggestion apparently was that the contract for the films would have to be made directly between the film-producing
companies and the Orientalist Company; and it seemed convenient, in order to save time, that the Orientalist Company
should clothed J. F. Ramirez with full authority as its attorney-in-fact. This idea was never given effect; and so far as the
record shows, J. F. Ramirez himself procured the films upon his own responsibility, as he indicated in the officer of July 4
that he would do, with the result that the only contracting parties in this case are J. F. Ramirez of the one part, and the
Orientalist Company, with Ramon J. Fernandez of the other.
In due time the films began to arrive in Manila, a draft for the cost and expenses incident to each shipment being attached
to the proper bill of lading. It appears that the Orientalist Company was without funds to meet these obligations and the
first few drafts were dealt with in the following manner: The drafts, upon presented through the bank, were accepted in
the name of the Orientalist Company by its president B. Hernandez, and were taken up by the latter with his own funds.
As the drafts had thus been paid by B. Hernandez, the films which had been procured by he payment of said drafts were
treated by him as his own property; and they in fact never came into the actual possession of the Orientalist Company as
owner at all, though it is true Hernandez rented the films to the Orientalist Company and they were exhibited by it in the
Oriental Theater under an arrangement which was made between him and the theater's manager.
During the period between February 27, 1914, and April 30, 1914, there arrived in the city of Manila several remittances
of films from Paris, and it is these shipments which have given occasion for the present action. All of the drafts
accompanying these films were drawn, as on former occasions, upon the Orientalist Company; and all were accepted in
the name of B. Hernandez, except the last, which was accepted by B. Hernandez individually. None of the drafts thus
accepted were taken up by the drawee or by B. Hernandez when they fell due; and it was finally necessary for the plaintiff
himself to take them up as dishonored by non-payment.
Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist Company, and Ramon J.
Fernandez. As the films which accompanied the dishonored were liable to deteriorate, the court, upon application of the
plaintiff, and apparently without opposition on the part of the defendants, appointed a receiver who took charge of the
films and sold them. The amount realized from this sale was applied to the satisfaction of the plaintiff's claim and was
accordingly delivered to him in part payment thereof. At trial judgment was given for the balance due to the plaintiff,
namely P6,018.93, with interest from May 19, 1914, the date of the institution of the action. In the judgment of the trial
court the Orientalist Company was declared to be a principal debtor and Ramon J. Fernandez was declared to be liable
subsidiarily as guarantor. From this judgment both of the parties defendant appealed.
In this Court neither of the parties appellant make any question with respect to the right of the plaintiff to recover from
somebody the amount awarded by the lower court; but each of the defendants insists the other is liable for the whole. It
results that the real contention upon this appeal is between the two defendants.
It is stated in the brief of the appellant Ramon J. Fernandez and the statement is not challenged by the Orientalist
Company that the judgment has already been executed as against the company is exclusively and primarily liable the
entire indebtedness, the question as to the liability of Ramon J. Fernandez would be academic. But if the latter is liable as
principal obligor for the whole or any part of the debt, it will be necessary to modify the judgment in order to adjust the
rights of the defendants in accordance with such finding.
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It will be noted that the action is primarily founded upon the liability created by the letters dated July 30th and August 5,
1913, in connection with the plaintiff's offer of July 4, 1913; and both of the letters mentioned are copied into the
complaint as the foundation of the action. The action is not based upon the dishonored drafts which were accepted by B.
Hernandez in the name of the Orientalist Company; and although these drafts, as well as the last draft, which was
accepted by B. Hernandez individually, have been introduced in evidence, this was evidently done for the purpose of
proving the amount of damages which the plaintiff was entitled to recover.
In the discussion which is to follow we shall consider, first, the question of the liability of the corporation upon the
contracts contained in the letters of July 30 and August 5, 1913, and, secondly the question of the liability of Ramon J.
Fernandez, based upon his personal signature to the same documents.
As to the liability of the corporation a preliminary point of importance arises upon the pleadings. The action, as already
stated, is based upon documents purporting to be signed by the Orientalist Company, and copies of the documents are set
out in the complaint. It was therefore incumbent upon the corporation, if it desired to question the authority of Fernandez
to bind it, to deny the due execution of said contracts under oath, as prescribed in section 103 of the Code of Civil
procedure. Said section, in the part pertinent to the situation now under consideration, reads as follows:
When an action is brought upon a written instrument and the complaint contains or has annexed or has annexed a
copy of such instrument, the genuineness and due execution of the instrument shall be deemed admitted, unless
specifically denied under oath in the answer.
No sworn answer denying the genuineness and due execution of the contracts in question or questioning the authority of
Ramon J. Fernandez to bind the Orientalist Company was filed in this case; but evidence was admitted without objection
from the plaintiff, tending to show that Ramon J. Fernandez had no such authority. This evidence consisted of extracts
from the minutes of the proceedings of the company's board of directors and also of extracts from the minutes of the
proceedings of the company's stockholders, showing that the making of this contract had been under consideration in both
bodies and that the authority to make the same had been withheld by the stockholders. It therefore becomes necessary for
us to consider whether the administration resulting from the failure of the defendant company to deny the execution of the
contracts under oath is binding upon it for all purposes of this lawsuit, or whether such failure should be considered a
mere irregularity of procedure which was waived when the evidence referred to was admitted without objection from the
plaintiff. The proper solution of this problem makes it necessary to consider carefully the principle underlying the
provision above quoted.
That the situation was one in which an answer under oath denying the authority of the agent should have been interposed,
supposing that the company desired to contest this point, is not open to question. In the case of Merchant vs. International
Banking Corporation, (6 Phil. Rep., 314), it appeared that one Brown has signed the name of the defendant bank as
guarantor of a promissory note. The bank was sued upon this guaranty and at the hearing attempted to prove that Brown
had no authority to bind the bank by such contract. It was held that buy failing to deny the contract under oath, the bank
had admitted the genuineness and due execution thereof, and that this admission extended not only to the authenticity of
the signature of Brown but also to his authority. Said Justice Willard: "The failure of the defendant to deny the
genuineness and due execution of this guaranty under oath was an admission not only of the signature of Brown, but also
his authority to make the contract in behalf of the defendant and of the power the contract in behalf of the defendant and
of the power of the defendant to enter into such a contract.
The rule thus stated is in entire accord with the doctrine prevailing in the United States, as will be seen by reference to the
following, among other authorities:
The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a mining corporation upon an appeal
bond. The name of the company had been affixed to the obligation by an agent, and no sufficient affidavit was filed by the
corporation questioning its signature or the authority of the agent to bind the company. It was held that the plaintiff did
not have to prove the due execution of the bond and that the corporation as to be taken as admitting the authority of the
agent to make the signature. Among other things the court said: "But it is said that the authority of Barrett to execute the
105

bond is distinguishable from the signing and, although the signature must be denied under oath, the authority of the agent
need not be. Upon this we observe that the statute manifestly refers to the legal effect of the signature, rather than the
manual act of singing. If the name of the obligor, in a bond, is subscribed by one in his presence, and by his direction, the
effect is the same as if his name should be signed with his own hand, and under such circumstances we do not doubt that
the obligor must deny his signature under oath, in order to put the obligee to proof of the fact. Quit facit per aliam facit
per se, and when the name is signed by one thereunto authorized, it is as much as the signature of the principal as if
written with his own hand. Therefore, if the principal would deny the authority of the agent, as the validity of the
signature is thereby directly attacked, the denial must be under oath.
In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory note purporting to have been
given by on A. B., as the treasurer of the defendant company. Said the court: "Under the Judiciary Act of 1799, requiring
the defendant to deny on oath an instrument of writing, upon which he is sued, the plea in this case should have been
verified.
If the person who signed this note for the company, and upon which they are sued, was not authorized to make it, let them
say so upon oath, and the onus is then on the plaintiff to overcome the plea."
It should be noted that the provision contained in section 103 of our Code of Civil Procedure is embodied in some form or
other in the statutes of probably all of the American States, and it is not by any means peculiar to the laws of California,
though it appears to have been taken immediately from the statutes of that State. (Secs. 447, 448, California Code of Civil
Procedure.)
There is really a broader question here involved than that which relates merely to the formality of verifying the answer
with an affidavit. This question arises from the circumstance that the answer of the corporation does not in any was
challenge the authority of Ramon J. Fernandez to bind it by the contracts in question and does not set forth, as a special
defense, any such lack of authority in him. Upon well-established principles of pleading lack of authority in an officer of a
corporation to bind it by a contract executed by him in its name is a defense which should be specially pleaded and this
quite apart from the requirement, contained in section 103, that the answer setting up such defense should be verified by
oath. But is should not here escape observation that section 103 also requires in denial contemplated in that section
shall be specific. An attack on the instrument in general terms is insufficient, even though the answer is under oath.
(Songco vs. Sellner, 37 Phil. Rep., 254.)
In the first edition of a well-known treatise on the laws of corporations we find the following proposition:
If an action is brought against a corporation upon a contract alleged to be its contract, if it desires to set up the
defense that the contract was executed by one not authorized as its agent, it must plead non est factum.
(Thompson on Corporations, 1st ed., vol. 6, sec. 7631.)
Again, says the same author:
A corporation can not avail itself of the defense that it had no power to enter into the obligation to enforce which
the suit is brought, unless it pleads that defense. This principle applies equally where the defendant intends to
challenge the power of its officer or agent to execute in its behalf the contract upon which the action brought and
where it intends to defend on the ground of total want of power in the corporation to make such a contract. (Opus
citat. sec. 7619.)
In Simon vs. Calfee (80 Ark., 65), it was said:
Though the power of the officers of a business corporation to issue negotiable paper in its name is not presumed,
such corporation can not avail itself of a want of power in its officers to bind it unless the defense was made on
such ground.
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The rule has been applied where the question was whether corporate officer, having admitted power to make a contract,
had in the particular instance exceeded that authority, (Merill vs. Consumers' Coal Co., 114 N.Y., 216); and it has been
held that where the answer in a suit against a corporation on its note relies simply on the want of power of the corporation
to issue notes, the defendant can not afterwards object that the plaintiff has not shown that the officer executing the note
were empowered to do so. (Smith vs. Eureka Flour Mills Co., 6 Cal., 1.)
The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In dealing with
corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a
corporation with the external indicia of authority, any person, not having notice of want of authority, may usually rely
upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby
held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit
supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have
been granted. The public is not supposed nor required to know the transactions which happen around the table where the
corporate board of directors or the stockholders are from time to time convoked. Whether a particular officer actually
possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not
readily accessible to the stranger who deals with the corporation on the faith of the ostensible authority exercised by some
of the corporate officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its
name, that the corporation should be required, if it denies his authority, to state such defense in its answer. By this means
the plaintiff is apprised of the fact that the agent's authority is contested; and he is given an opportunity to adduce
evidence showing either that the authority existed or that the contract was ratified and approved.
We are of the opinion that the failure of the defendant corporation to make any issue in its answer with regard to the
authority of Ramon J. Fernandez to bind it, and particularly its failure to deny specifically under oath the genuineness and
due execution of the contracts sued upon, have the effect of elimination the question of his authority from the case,
considered as a matter of mere pleading. The statute (sec. 103) plainly says that if a written instrument, the foundation of
the suit, is not denied upon oath, it shall be deemed to be admitted. It is familiar doctrine that an admission made in a
pleading can not be controverted by the party making such admission; and all proof submitted by him contrary thereto or
inconsistent therewith should simply be ignored by the court, whether objection is interposed by the opposite party or not.
We can see no reason why a constructive admission, created by the express words of the statute, should be considered to
have less effect than any other admission.
The parties to an action are required to submit their respective contentions to the court in their complaint and answer.
These documents supply the materials which the court must use in order to discover the points of contention between the
parties; and where the statute says that the due execution of a document which supplies the foundation of an action is to be
taken as admitted unless denied under oath, the failure of the defendant to make such denial must be taken to operate as a
conclusive admission, so long as the pleadings remain that form.
It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial variances between the allegations
of a pleading and the proof shall be disregarded and the facts shall be found according to the evidence. The same section,
however, recognizes the necessity for an amendment of the pleadings. And judgment must be in conformity with the case
made in conformity with the case made in the pleadings and established by the proof, and relief can not be granted that is
substantially inconsistent with either. A party can no more succeed upon a case proved but not alleged than upon a case
alleged but nor proved. This rule of course operates with like effect upon both parties, and applies equality to the
defendants special defense as to the plaintiffs cause of action.
Of course this Court, under section 109 of the Code of Civil Procedure, has authority even now to permit the answer of
the defendant to be amended; and if we believed that the interests of justice so required, we would either exercise that
authority or remand the cause for a new trial in court below. As will appear further on in this opinion, however, we think
that the interests of justice will best be promoted by deciding the case, without more ado, upon the issues presented in the
record as it now stands.

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That we may not appear to have overlooked the matter, we will observe that two cases are cited from California in which
the Supreme Court of the State has held that where a release is pleaded by way of defense and evidence tending to destroy
its effect is introduced without objection, the circumstance that it was not denied under oath is immaterial. In the earlier of
these cases, Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought against a railroad company to recover
damages for the death of the plaintiff's minor son, alleged to have been killed by the negligence of the defendant. The
defendant company pleaded by way of defense a release purporting to be signed by the plaintiff, and in its answer inserted
a copy of the release. The execution of the release was not denied under oath; but at the trial evidence was submitted on
behalf of the plaintiff tending to show that at the time he signed the release, he was incompetent by reason of drunkenness
to bind himself thereby. It was held that inasmuch as this evidence had been submitted by the plaintiff without objection,
it was proper for the court to consider it. We do not question the propriety of that decision, especially as the issue had
been passed upon by a jury; but we believe that the decision would have been more soundly planted if it had been said that
the incapacity of the plaintiff, due to his drunken condition, was a matter which did not involve either the genuineness or
due execution of the release. Like the defenses of fraud, coercion, imbecility, and mistake, it was a matter which could be
proved under the general issue and did not have to be set up in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432,
433.) A somewhat similar explanation can, we think, be given of the case of Clark vs. Child in which the rule declared in
the earlier case was followed. With respect to both decisions which we merely observe that upon point of procedure which
they are supposed to maintain, the reasoning of the court is in our opinion unconvincing.
We shall now consider the liability of the defendant company on the merits just as if that liability had been properly put in
issue by a specific answer under oath denying the authority of Fernandez go to bind it. Upon this question it must at the
outset be premised that Ramon J. Fernandez, as treasurer, had no independent authority to bind the company by signing its
name to the letters in question. It is declared by signing its name to the letters in question. It is declared in section 28 of
the Corporation Law that corporate power shall be exercised, and all corporate business conducted by the board of
directors; and this principle is recognized in the by-laws of the corporation in question which contain a provision
declaring that the power to make contracts shall be vested in the board of directors. It is true that it is also declared in the
same by-laws that the president shall have the power, and it shall be his duty, to sign contract; but this has reference rather
to the formality of reducing to proper form the contract which are authorized by the board and is not intended to confer an
independent power to make contract binding on the corporation.
The fact that the power to make corporate contract is thus vested in the board of directors does not signify that a formal
vote of the board must always be taken before contractual liability can be fixed upon a corporation; for the board can
create liability, like an individual, by other means than by a formal expression of its will. In this connection the case of
Robert Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is instructive. If there appeared that the secretary of the
defendant corporation had signed an obligation on its behalf binding it as guarantor of the performance of an important
contract upon which the name of another corporation appeared as principal. The defendant company set up by way of
defense that is secretary had no authority to bind it by such an engagement. The court found that the guaranty was given
with the knowledge and consent of the president and directors, and that this consent of the president and directors, and
that this consent was given with as much observance of formality as was customary in the transaction of the business of
the company. It was held that, so far as the authority of the secretary was concerned, the contract was binding. In
discussing this point, the court quoted with approval the following language form one of its prior decisions:
The authority of the subordinate agent of a corporation often depends upon the course of dealings which the
company or its director have sanctioned. It may be established sometimes without reference to official record of
the proceedings of the board, by proof of the usage which the company had permitted to grow up in business, and
of the acquiescence of the board charged with the duty of supervising and controlling the company's business.
It appears in evidence, in the case now before us, that on July 30, the date upon which the letter accepting the offer of the
Eclair films was dispatched the board of directors of the Orientalist Company convened in special session in the office of
Ramon J. Fernandez at the request of the latter. There were present the four members, including the president, who had
already signified their consent to the making of the contract. At this meeting, as appears from the minutes, Fernandez
informed the board of the offer which had been received from the plaintiff with reference to the importation of films. The
108

minutes add that terms of this offer were approved; but at the suggestion of Fernandez it was decided to call a special
meeting of the stockholders to consider the matter and definite action was postponed.
The stockholders meeting was convoked upon September 18, 1913, upon which occasion Fernandez informed those
present of the offer in question and of the terms upon which the films could be procured. He estimated that the company
would have to make an outlay of about P5,500 per month, if the offer for the two films should be accepted by it.
The following extracts from the minutes of this meeting are here pertinent:
Mr. Fernandez informed the stockholders that, in view of the urgency of the matter and for the purpose of
avoiding that other importers should get ahead of the corporation in this regard, he and Messrs. B. Hernandez,
Leon Monroy, and Dr. Papa met for the purpose of considering the acceptance of the offer together with the
responsibilities attached thereto, made to the corporation by the film manufacturers ofEclair and Milano of Paris
and Italy respectively, inasmuch as the first shipment of films was then expected to arrive.
At the same time he informed the said stockholders that he had already made arrangements with respect to renting
said films after they have been once exhibited in the Cine Oriental, and that the corporation could very well meet
the expenditure involved and net a certain profit, but that, if we could enter into a contract with about nine
cinematographs, big gains would be obtained through such a step.
The possibility that the corporation might not see fit to authorize the contract, or might for lack of funds be unable to
make the necessary outlay, was foreseen; and in such contingency the stockholders were informed, that the four
gentlemen above mentioned (Hernandez, Fernandez, Monroy, and Papa) "would continue importing said films at their
own account and risk, and shall be entitled only to a compensation of 10 per cent of their outlay in importing the films,
said payment to be made in shares of said corporation, inasmuch as the corporation is lacking available funds for the
purpose, and also because there are 88 shares of stock remaining still unsold."
In view of this statement, the stockholders adopted a resolution to the effect that the agencies of the Eclair and Milano
films should be accepted, if the corporation could obtain the money with which to meet the expenditure involved, and to
this end appointed a committee to apply to the bank for a credit. The evidence shows that an attempt was made, on behalf
of the corporation, to obtain a credit of P10,000 from the Bank of the Philippine Islands for the purpose indicated, but the
bank declined to grant his credit. Thereafter another special meeting of the shareholders of the defendant corporation was
called at which the failure of their committee to obtain a credit from the bank was made known. A resolution was
thereupon passed to the effect that the company should pay to Hernandez, Fernandez, Monroy, and Papa an amount equal
to 10 per cent of their outlay in importing the films, said payment to be made in shares of the company in accordance with
the suggestion made at the previous meeting. At the time this meeting was held three shipment of the films had already
been received in Manila.
We believe it is a fair inference from the recitals of the minutes of the stockholders meeting of September 18, and
especially from the first paragraph above quoted, that this body was then cognizant that the officer had already been
accepted in the name of the Orientalist Company and that the films which were then expected to arrive were being
imported by virtue of such acceptance. Certainly four members of the board of directors there present were aware of this
fact, as the letter accepting the offer had been sent with their knowledge and consent. In view of this circumstance, a
certain doubt arises whether they meant to utilize the financial assistance of the four so-called importers in order that the
corporation might bet the benefit of the contract for the films, just as it would have utilized the credit of the bank if such
credit had been extended. If such was the intention of the stockholders their action amounted to a virtual, though indirect,
approval of the contract. It is not however, necessary to found the judgment on this interpretation of the stockholders
proceedings, inasmuch as we think for reasons presently to be stated, that the corporation is bound, and we will here
assume that in the end the contract were not approved by the stockholders.
It will be observed that Ramon J. Fernandez was the particular officer and member of the board of directors who was most
active in the effort to secure the films for the corporation. The negotiations were conducted by him with the knowledge
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and consent of other members of the board; and the contract was made with their prior approval. As appears from the
papers in this record, Fernandez was the person to who keeping was confided the printed stationery bearing the official
style of the corporation, as well as rubber stencil with which the name of the corporation could be signed to documents
bearing its name.
Ignoring now, for a moment, the transactions of the stockholders, and reverting to the proceedings of the board of
directors of the Orientalist Company, we find that upon October 27, 1913, after Fernandez had departed from the
Philippine Islands, to be absent for many months, said board adopted a resolution conferring the following among other
powers on Vicente Ocampo, the manager of the Oriental theater, namely:
(1) To rent a box for the films in the "Kneeler Building."
(4) To be in charge of the films and of the renting of the same.
(5) To advertise in the different newspapers that we are importing films to be exhibited in the Cine Oriental.
(6) Not to deliver any film for rent without first receiving the rental therefor or the guaranty for the payment
thereof.
(7) To buy a book and cards for indexing the names of the films.
(10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the Hon. R. Acua to enter into
agreements with cinematograph proprietors in the provinces for the purpose of renting films from us.
It thus appears that the board of directors, before the financial inability of the corporation to proceed with the project was
revealed, had already recognized the contract as being in existence and had proceeded to take the steps necessary to utilize
the films. Particularly suggestive is the direction given at this meeting for the publication of announcements in the
newspapers to the effect that the company was engaged in importing films. In the light of all the circumstances of the
case, we are of the opinion that the contracts in question were thus inferentially approved by the company's board of
directors and that the company is bound unless the subsequent failure of the stockholders to approve said contracts had the
effect of abrogating the liability thus created.
Both upon principle and authority it is clear that the action of the stockholders, whatever its character, must be ignored.
The functions of the stockholders of a corporation are, it must be remembered, of a limited nature. The theory of a
corporation is that the stockholders may have all the profits but shall turn over the complete management of the enterprise
to their representatives and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing
directors, making by-laws, and exercising certain other special powers defined by-law. In conformity with this idea it is
settled that contract between a corporation and third person must be made by the director and not by the stockholders. The
corporation, in such matters, is represented by the former and not by the latter. (Cook on Corporations, sixth ed., secs.
708, 709.) This conclusion is entirely accordant with the provisions of section 28 of our Corporation Law already referred
to. It results that where a meeting of the stockholders is called for the purpose of passing on the propriety of making a
corporate contract, its resolutions are at most advisory and not in any wise binding on the board.
In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is made. Naturally he can have little or no information as to what
occurs in corporate meetings; and he must necessarily rely upon the external manifestations of corporate consent. The
integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon
it by its agents in accordance with law, and we would be sorry to announce a doctrine which would permit the property of
a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without recourse
against the corporations whose name and authority had been used in the manner disclosed in this case. As already
observed, it is familiar doctrine that if a corporation knowingly permits one of its officer, or any other agent, to do acts
110

within the scope of an apparent authority, and thus hold him out to the public as possessing power to do those acts, the
corporation will as against any one who has in good faith dealt with the corporation through such agent, be estopped from
denying his authority; and where it is said "if the corporation permits" this means the same as "if the thing is permitted by
the directing power of the corporation."
It being determined that the corporation is bound by the contract in question, it remains to consider the character of the
liability assumed by R. J. Fernandez, in affixing his personal signature to said contract. The question here is whether
Fernandez is liable jointly with the Orientalists Company as a principal obligor, or whether his liability is that of a
guarantor merely.
As appears upon the face of the contracts, the signature of Fernandez, in his individual capacity, is not in line with the
signature of the Orientalist Company, but is set off to the left of the company's signature and somewhat who sign contracts
in some capacity other than that of principal obligor to place their signature alone would justify a court in holding that
Fernandez here took upon himself the responsibility of a guarantor rather than that of a principal obligor. We do, however,
think, that the form in which the contract is signed raises a doubt as to what the real intention was; and we feel justified, in
looking to the evidence to discover that intention. In this connection it is entirely clear, from the testimony of both
Ramirez and Ramon J. Fernandez, that the responsibility of the latter was intended to be that of guarantor. There is, to be
sure, a certain difference between these witnesses as to the nature of this guaranty, inasmuch as Fernandez would have us
believe that his name was signed as a guaranty that the contract would be approved by the corporation, while Ramirez
says that the name was put on the contract for the purpose of guaranteeing, not the approval of the contract, but its
performance. We are convinced that the latter was the real intention of the contracting parties.
We are not unmindful of the force of that rule of law which declares that oral evidence is admissible to show the character
in which the signature was affixed. This conclusion is perhaps supported by the language of the second paragraph of
article 1281 of the Civil Code, which declares that if the words of a contract should appear contrary to the evident
intention of the parties, the intention shall prevail. But the conclusion reached is, we think, deducible from the general
principle that in case of ambiguity parol evidence is admissible to show the intention of the contracting parties.
It should be stated in conclusion that as the issues in this case have been framed, the only question presented to this court
is: To what extent are the signatory parties to the contract liable to the plaintiff J. F. Ramirez? No contentious issue is
raised directly between the defendants, the Orientalist Company and Ramon H. Fernandez; nor does the present the
present action involve any question as to the undertaking of Fernandez and his three associates to effect the importation of
the films upon their own account and risk. Whether they may be bound to hold the company harmless is a matter upon
which we express no opinion.
The judgment appealed from is affirmed, with costs equally against the two appellant. So ordered.

111

G.R. No. L-12986

March 31, 1966

THE SPOUSES BERNABE AFRICA and SOLEDAD C. AFRICA, and the HEIRS OF DOMINGA
ONG,petitioners-appellants,
vs.
CALTEX (PHIL.), INC., MATEO BOQUIREN and THE COURT OF APPEALS, respondents-appellees.
MAKALINTAL., J.:
This case is before us on a petition for review of the decision of the Court of Appeals, which affirmed that of the Court of
First Instance of Manila dismissing petitioners' second amended complaint against respondents.
The action is for damages under Articles 1902 and 1903 of the old Civil Code. It appears that in the afternoon of March
18, 1948 a fire broke out at the Caltex service station at the corner of Antipolo street and Rizal Avenue, Manila. It started
while gasoline was being hosed from a tank truck into the underground storage, right at the opening of the receiving tank
where the nozzle of the hose was inserted. The fire spread to and burned several neighboring houses, including the
personal properties and effects inside them. Their owners, among them petitioners here, sued respondents Caltex (Phil.),
Inc. and Mateo Boquiren, the first as alleged owner of the station and the second as its agent in charge of operation.
Negligence on the part of both of them was attributed as the cause of the fire.
The trial court and the Court of Appeals found that petitioners failed to prove negligence and that respondents had
exercised due care in the premises and with respect to the supervision of their employees.
The first question before Us refers to the admissibility of certain reports on the fire prepared by the Manila Police and Fire
Departments and by a certain Captain Tinio of the Armed Forces of the Philippines. Portions of the first two reports are as
follows:
1. Police Department report:
Investigation disclosed that at about 4:00 P.M. March 18, 1948, while Leandro Flores was transferring
gasoline from a tank truck, plate No. T-5292 into the underground tank of the Caltex Gasoline Station
located at the corner of Rizal Avenue and Antipolo Street, this City, an unknown Filipino lighted a
cigarette and threw the burning match stick near the main valve of the said underground tank. Due to the
gasoline fumes, fire suddenly blazed. Quick action of Leandro Flores in pulling off the gasoline hose
connecting the truck with the underground tank prevented a terrific explosion. However, the flames
scattered due to the hose from which the gasoline was spouting. It burned the truck and the following
accessorias and residences.
2. The Fire Department report:
In connection with their allegation that the premises was (sic) subleased for the installation of a coca-cola and
cigarette stand, the complainants furnished this Office a copy of a photograph taken during the fire and which is
submitted herewith. it appears in this picture that there are in the premises a coca-cola cooler and a rack which
according to information gathered in the neighborhood contained cigarettes and matches, installed between the
gasoline pumps and the underground tanks.
The report of Captain Tinio reproduced information given by a certain Benito Morales regarding the history of the
gasoline station and what the chief of the fire department had told him on the same subject.
The foregoing reports were ruled out as "double hearsay" by the Court of Appeals and hence inadmissible. This ruling is
now assigned as error. It is contended: first, that said reports were admitted by the trial court without objection on the part
112

of respondents; secondly, that with respect to the police report (Exhibit V-Africa) which appears signed by a Detective
Zapanta allegedly "for Salvador Capacillo," the latter was presented as witness but respondents waived their right to crossexamine him although they had the opportunity to do so; and thirdly, that in any event the said reports are admissible as an
exception to the hearsay rule under section 35 of Rule 123, now Rule 130.
The first contention is not borne out by the record. The transcript of the hearing of September 17, 1953 (pp. 167-170)
shows that the reports in question, when offered as evidence, were objected to by counsel for each of respondents on the
ground that they were hearsay and that they were "irrelevant, immaterial and impertinent." Indeed, in the court's resolution
only Exhibits J, K, K-5 and X-6 were admitted without objection; the admission of the others, including the disputed ones,
carried no such explanation.
On the second point, although Detective Capacillo did take the witness stand, he was not examined and he did not testify
as to the facts mentioned in his alleged report (signed by Detective Zapanta). All he said was that he was one of those who
investigated "the location of the fire and, if possible, gather witnesses as to the occurrence, and that he brought the report
with him. There was nothing, therefore, on which he need be cross-examined; and the contents of the report, as to which
he did not testify, did not thereby become competent evidence. And even if he had testified, his testimony would still have
been objectionable as far as information gathered by him from third persons was concerned.
Petitioners maintain, however, that the reports in themselves, that is, without further testimonial evidence on their
contents, fall within the scope of section 35, Rule 123, which provides that "entries in official records made in the
performance of his duty by a public officer of the Philippines, or by a person in the performance of a duty specially
enjoined by law, are prima facie evidence of the facts therein stated."
There are three requisites for admissibility under the rule just mentioned: (a) that the entry was made by a public officer,
or by another person specially enjoined by law to do so; (b) that it was made by the public officer in the performance of
his duties, or by such other person in the performance of a duty specially enjoined by law; and (c) that the public officer or
other person had sufficient knowledge of the facts by him stated, which must have been acquired by him personally or
through official information (Moran, Comments on the Rules of Court, Vol. 3 [1957] p. 398).
Of the three requisites just stated, only the last need be considered here. Obviously the material facts recited in the reports
as to the cause and circumstances of the fire were not within the personal knowledge of the officers who conducted the
investigation. Was knowledge of such facts, however, acquired by them through official information? As to some facts the
sources thereof are not even identified. Others are attributed to Leopoldo Medina, referred to as an employee at the gas
station were the fire occurred; to Leandro Flores, driver of the tank truck from which gasoline was being transferred at the
time to the underground tank of the station; and to respondent Mateo Boquiren, who could not, according to Exhibit VAfrica, give any reason as to the origin of the fire. To qualify their statements as "official information" acquired by the
officers who prepared the reports, the persons who made the statements not only must have personal knowledge of the
facts stated but must have the duty to give such statements for record.1
The reports in question do not constitute an exception to the hearsay rule; the facts stated therein were not acquired by the
reporting officers through official information, not having been given by the informants pursuant to any duty to do so.
The next question is whether or not, without proof as to the cause and origin of the fire, the doctrine of res ipsa
loquitur should apply so as to presume negligence on the part of appellees. Both the trial court and the appellate court
refused to apply the doctrine in the instant case on the grounds that "as to (its) applicability ... in the Philippines, there
seems to he nothing definite," and that while the rules do not prohibit its adoption in appropriate cases, "in the case at bar,
however, we find no practical use for such doctrine." The question deserves more than such summary dismissal. The
doctrine has actually been applied in this jurisdiction, in the case of Espiritu vs. Philippine Power and Development Co.
(CA-G.R. No. 3240-R, September 20, 1949), wherein the decision of the Court of Appeals was penned by Mr. Justice
J.B.L. Reyes now a member of the Supreme Court.
The facts of that case are stated in the decision as follows:
113

In the afternoon of May 5, 1946, while the plaintiff-appellee and other companions were loading grass between
the municipalities of Bay and Calauan, in the province of Laguna, with clear weather and without any wind
blowing, an electric transmission wire, installed and maintained by the defendant Philippine Power and
Development Co., Inc. alongside the road, suddenly parted, and one of the broken ends hit the head of the plaintiff
as he was about to board the truck. As a result, plaintiff received the full shock of 4,400 volts carried by the wire
and was knocked unconscious to the ground. The electric charge coursed through his body and caused extensive
and serious multiple burns from skull to legs, leaving the bone exposed in some parts and causing intense pain
and wounds that were not completely healed when the case was tried on June 18, 1947, over one year after the
mishap.
The defendant therein disclaimed liability on the ground that the plaintiff had failed to show any specific act of
negligence, but the appellate court overruled the defense under the doctrine of res ipsa loquitur. The court said:
The first point is directed against the sufficiency of plaintiff's evidence to place appellant on its defense. While it
is the rule, as contended by the appellant, that in case of noncontractual negligence, or culpa aquiliana, the burden
of proof is on the plaintiff to establish that the proximate cause of his injury was the negligence of the defendant,
it is also a recognized principal that "where the thing which caused injury, without fault of the injured person, is
under the exclusive control of the defendant and the injury is such as in the ordinary course of things does not
occur if he having such control use proper care, it affords reasonable evidence, in the absence of the explanation,
that the injury arose from defendant's want of care."
And the burden of evidence is shifted to him to establish that he has observed due care and diligence. (San Juan
Light & Transit Co. v. Requena, 244, U.S. 89, 56 L. ed. 680.) This rule is known by the name of res ipsa
loquitur (the transaction speaks for itself), and is peculiarly applicable to the case at bar, where it is unquestioned
that the plaintiff had every right to be on the highway, and the electric wire was under the sole control of
defendant company. In the ordinary course of events, electric wires do not part suddenly in fair weather and injure
people, unless they are subjected to unusual strain and stress or there are defects in their installation, maintenance
and supervision; just as barrels do not ordinarily roll out of the warehouse windows to injure passersby, unless
some one was negligent. (Byrne v. Boadle, 2 H & Co. 722; 159 Eng. Reprint 299, the leading case that
established that rule). Consequently, in the absence of contributory negligence (which is admittedly not present),
the fact that the wire snapped suffices to raise a reasonable presumption of negligence in its installation, care and
maintenance. Thereafter, as observed by Chief Baron Pollock, "if there are any facts inconsistent with negligence,
it is for the defendant to prove."
It is true of course that decisions of the Court of Appeals do not lay down doctrines binding on the Supreme Court, but we
do not consider this a reason for not applying the particular doctrine of res ipsa loquitur in the case at bar. Gasoline is a
highly combustible material, in the storage and sale of which extreme care must be taken. On the other hand, fire is not
considered a fortuitous event, as it arises almost invariably from some act of man. A case strikingly similar to the one
before Us is Jones vs. Shell Petroleum Corporation, et al., 171 So. 447:
Arthur O. Jones is the owner of a building in the city of Hammon which in the year 1934 was leased to the Shell
Petroleum Corporation for a gasoline filling station. On October 8, 1934, during the term of the lease, while
gasoline was being transferred from the tank wagon, also operated by the Shell Petroleum Corporation, to the
underground tank of the station, a fire started with resulting damages to the building owned by Jones. Alleging
that the damages to his building amounted to $516.95, Jones sued the Shell Petroleum Corporation for the
recovery of that amount. The judge of the district court, after hearing the testimony, concluded that plaintiff was
entitled to a recovery and rendered judgment in his favor for $427.82. The Court of Appeals for the First Circuit
reversed this judgment, on the ground the testimony failed to show with reasonable certainty any negligence on
the part of the Shell Petroleum Corporation or any of its agents or employees. Plaintiff applied to this Court for a
Writ of Review which was granted, and the case is now before us for decision.1wph1.t
In resolving the issue of negligence, the Supreme Court of Louisiana held:
114

Plaintiff's petition contains two distinct charges of negligence one relating to the cause of the fire and the other
relating to the spreading of the gasoline about the filling station.
Other than an expert to assess the damages caused plaintiff's building by the fire, no witnesses were placed on the
stand by the defendant.
Taking up plaintiff's charge of negligence relating to the cause of the fire, we find it established by the record that
the filling station and the tank truck were under the control of the defendant and operated by its agents or
employees. We further find from the uncontradicted testimony of plaintiff's witnesses that fire started in the
underground tank attached to the filling station while it was being filled from the tank truck and while both the
tank and the truck were in charge of and being operated by the agents or employees of the defendant, extended to
the hose and tank truck, and was communicated from the burning hose, tank truck, and escaping gasoline to the
building owned by the plaintiff.
Predicated on these circumstances and the further circumstance of defendant's failure to explain the cause of the
fire or to show its lack of knowledge of the cause, plaintiff has evoked the doctrine of res ipsa loquitur. There are
many cases in which the doctrine may be successfully invoked and this, we think, is one of them.
Where the thing which caused the injury complained of is shown to be under the management of defendant or his
servants and the accident is such as in the ordinary course of things does not happen if those who have its
management or control use proper care, it affords reasonable evidence, in absence of explanation by defendant,
that the accident arose from want of care. (45 C.J. #768, p. 1193).
This statement of the rule of res ipsa loquitur has been widely approved and adopted by the courts of last resort.
Some of the cases in this jurisdiction in which the doctrine has been applied are the following, viz.: Maus v.
Broderick, 51 La. Ann. 1153, 25 So. 977; Hebert v. Lake Charles Ice, etc., Co., 111 La. 522, 35 So. 731, 64
L.R.A. 101, 100 Am. St. Rep. 505; Willis v. Vicksburg, etc., R. Co., 115 La. 63, 38 So. 892; Bents v. Page, 115
La. 560, 39 So. 599.
The principle enunciated in the aforequoted case applies with equal force here. The gasoline station, with all its
appliances, equipment and employees, was under the control of appellees. A fire occurred therein and spread to and
burned the neighboring houses. The persons who knew or could have known how the fire started were appellees and their
employees, but they gave no explanation thereof whatsoever. It is a fair and reasonable inference that the incident
happened because of want of care.
In the report submitted by Captain Leoncio Mariano of the Manila Police Department (Exh. X-1 Africa) the following
appears:
Investigation of the basic complaint disclosed that the Caltex Gasoline Station complained of occupies a lot
approximately 10 m x 10 m at the southwest corner of Rizal Avenue and Antipolo. The location is within a very
busy business district near the Obrero Market, a railroad crossing and very thickly populated neighborhood where
a great number of people mill around t
until
gasoline
tever be theWactjvities of these peopleor lighting a cigarette cannot be excluded and this constitute a secondary
hazard to its operation which in turn endangers the entire neighborhood to conflagration.

115

Furthermore, aside from precautions already taken by its operator the concrete walls south and west adjoining the
neighborhood are only 2-1/2 meters high at most and cannot avoid the flames from leaping over it in case of fire.
Records show that there have been two cases of fire which caused not only material damages but desperation and
also panic in the neighborhood.
Although the soft drinks stand had been eliminated, this gasoline service station is also used by its operator as a
garage and repair shop for his fleet of taxicabs numbering ten or more, adding another risk to the possible
outbreak of fire at this already small but crowded gasoline station.
The foregoing report, having been submitted by a police officer in the performance of his duties on the basis of his own
personal observation of the facts reported, may properly be considered as an exception to the hearsay rule. These facts,
descriptive of the location and objective circumstances surrounding the operation of the gasoline station in question,
strengthen the presumption of negligence under the doctrine of res ipsa loquitur, since on their face they called for more
stringent measures of caution than those which would satisfy the standard of due diligence under ordinary circumstances.
There is no more eloquent demonstration of this than the statement of Leandro Flores before the police investigator.
Flores was the driver of the gasoline tank wagon who, alone and without assistance, was transferring the contents thereof
into the underground storage when the fire broke out. He said: "Before loading the underground tank there were no
people, but while the loading was going on, there were people who went to drink coca-cola (at the coca-cola stand) which
is about a meter from the hole leading to the underground tank." He added that when the tank was almost filled he went to
the tank truck to close the valve, and while he had his back turned to the "manhole" he, heard someone shout "fire."
Even then the fire possibly would not have spread to the neighboring houses were it not for another negligent omission on
the part of defendants, namely, their failure to provide a concrete wall high enough to prevent the flames from leaping
over it. As it was the concrete wall was only 2-1/2 meters high, and beyond that height it consisted merely of galvanized
iron sheets, which would predictably crumple and melt when subjected to intense heat. Defendants' negligence, therefore,
was not only with respect to the cause of the fire but also with respect to the spread thereof to the neighboring houses.
There is an admission on the part of Boquiren in his amended answer to the second amended complaint that "the fire was
caused through the acts of a stranger who, without authority, or permission of answering defendant, passed through the
gasoline station and negligently threw a lighted match in the premises." No evidence on this point was adduced, but
assuming the allegation to be true certainly any unfavorable inference from the admission may be taken against
Boquiren it does not extenuate his negligence. A decision of the Supreme Court of Texas, upon facts analogous to
those of the present case, states the rule which we find acceptable here. "It is the rule that those who distribute a dangerous
article or agent, owe a degree of protection to the public proportionate to and commensurate with a danger involved ... we
think it is the generally accepted rule as applied to torts that 'if the effects of the actor's negligent conduct actively and
continuously operate to bring about harm to another, the fact that the active and substantially simultaneous operation of
the effects of a third person's innocent, tortious or criminal act is also a substantial factor in bringing about the harm, does
not protect the actor from liability.' (Restatement of the Law of Torts, vol. 2, p. 1184, #439). Stated in another way, "The
intention of an unforeseen and unexpected cause, is not sufficient to relieve a wrongdoer from consequences of
negligence, if such negligence directly and proximately cooperates with the independent cause in the resulting injury."
(MacAfee, et al. vs. Traver's Gas Corporation, 153 S.W. 2nd 442.)
The next issue is whether Caltex should be held liable for the damages caused to appellants. This issue depends on
whether Boquiren was an independent contractor, as held by the Court of Appeals, or an agent of Caltex. This question, in
the light of the facts not controverted, is one of law and hence may be passed upon by this Court. These facts are: (1)
Boquiren made an admission that he was an agent of Caltex; (2) at the time of the fire Caltex owned the gasoline station
and all the equipment therein; (3) Caltex exercised control over Boquiren in the management of the state; (4) the delivery
truck used in delivering gasoline to the station had the name of CALTEX painted on it; and (5) the license to store
gasoline at the station was in the name of Caltex, which paid the license fees. (Exhibit T-Africa; Exhibit U-Africa; Exhibit
X-5 Africa; Exhibit X-6 Africa; Exhibit Y-Africa).
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In Boquiren's amended answer to the second amended complaint, he denied that he directed one of his drivers to remove
gasoline from the truck into the tank and alleged that the "alleged driver, if one there was, was not in his employ, the
driver being an employee of the Caltex (Phil.) Inc. and/or the owners of the gasoline station." It is true that Boquiren later
on amended his answer, and that among the changes was one to the effect that he was not acting as agent of Caltex. But
then again, in his motion to dismiss appellants' second amended complaint the ground alleged was that it stated no cause
of action since under the allegations thereof he was merely acting as agent of Caltex, such that he could not have incurred
personal liability. A motion to dismiss on this ground is deemed to be an admission of the facts alleged in the complaint.
Caltex admits that it owned the gasoline station as well as the equipment therein, but claims that the business conducted at
the service station in question was owned and operated by Boquiren. But Caltex did not present any contract with
Boquiren that would reveal the nature of their relationship at the time of the fire. There must have been one in existence at
that time. Instead, what was presented was a license agreement manifestly tailored for purposes of this case, since it was
entered into shortly before the expiration of the one-year period it was intended to operate. This so-called license
agreement (Exhibit 5-Caltex) was executed on November 29, 1948, but made effective as of January 1, 1948 so as to
cover the date of the fire, namely, March 18, 1948. This retroactivity provision is quite significant, and gives rise to the
conclusion that it was designed precisely to free Caltex from any responsibility with respect to the fire, as shown by the
clause that Caltex "shall not be liable for any injury to person or property while in the property herein licensed, it being
understood and agreed that LICENSEE (Boquiren) is not an employee, representative or agent of LICENSOR (Caltex)."
But even if the license agreement were to govern, Boquiren can hardly be considered an independent contractor. Under
that agreement Boquiren would pay Caltex the purely nominal sum of P1.00 for the use of the premises and all the
equipment therein. He could sell only Caltex Products. Maintenance of the station and its equipment was subject to the
approval, in other words control, of Caltex. Boquiren could not assign or transfer his rights as licensee without the consent
of Caltex. The license agreement was supposed to be from January 1, 1948 to December 31, 1948, and thereafter until
terminated by Caltex upon two days prior written notice. Caltex could at any time cancel and terminate the agreement in
case Boquiren ceased to sell Caltex products, or did not conduct the business with due diligence, in the judgment of
Caltex. Termination of the contract was therefore a right granted only to Caltex but not to Boquiren. These provisions of
the contract show the extent of the control of Caltex over Boquiren. The control was such that the latter was virtually an
employee of the former.
Taking into consideration the fact that the operator owed his position to the company and the latter could remove
him or terminate his services at will; that the service station belonged to the company and bore its tradename and
the operator sold only the products of the company; that the equipment used by the operator belonged to the
company and were just loaned to the operator and the company took charge of their repair and maintenance; that
an employee of the company supervised the operator and conducted periodic inspection of the company's gasoline
and service station; that the price of the products sold by the operator was fixed by the company and not by the
operator; and that the receipts signed by the operator indicated that he was a mere agent, the finding of the Court
of Appeals that the operator was an agent of the company and not an independent contractor should not be
disturbed.
To determine the nature of a contract courts do not have or are not bound to rely upon the name or title given it by
the contracting parties, should thereby a controversy as to what they really had intended to enter into, but the way
the contracting parties do or perform their respective obligations stipulated or agreed upon may be shown and
inquired into, and should such performance conflict with the name or title given the contract by the parties, the
former must prevail over the latter. (Shell Company of the Philippines, Ltd. vs. Firemens' Insurance Company of
Newark, New Jersey, 100 Phil. 757).
The written contract was apparently drawn for the purpose of creating the apparent relationship of employer and
independent contractor, and of avoiding liability for the negligence of the employees about the station; but the
company was not satisfied to allow such relationship to exist. The evidence shows that it immediately assumed
control, and proceeded to direct the method by which the work contracted for should be performed. By reserving
the right to terminate the contract at will, it retained the means of compelling submission to its orders. Having
117

elected to assume control and to direct the means and methods by which the work has to be performed, it must be
held liable for the negligence of those performing service under its direction. We think the evidence was sufficient
to sustain the verdict of the jury. (Gulf Refining Company v. Rogers, 57 S.W. 2d, 183).
Caltex further argues that the gasoline stored in the station belonged to Boquiren. But no cash invoices were presented to
show that Boquiren had bought said gasoline from Caltex. Neither was there a sales contract to prove the same.
As found by the trial court the Africas sustained a loss of P9,005.80, after deducting the amount of P2,000.00 collected by
them on the insurance of the house. The deduction is now challenged as erroneous on the ground that Article 2207 of the
New Civil Code, which provides for the subrogation of the insurer to the rights of the insured, was not yet in effect when
the loss took place. However, regardless of the silence of the law on this point at that time, the amount that should be
recovered be measured by the damages actually suffered, otherwise the principle prohibiting unjust enrichment would be
violated. With respect to the claim of the heirs of Ong P7,500.00 was adjudged by the lower court on the basis of the
assessed value of the property destroyed, namely, P1,500.00, disregarding the testimony of one of the Ong children that
said property was worth P4,000.00. We agree that the court erred, since it is of common knowledge that the assessment
for taxation purposes is not an accurate gauge of fair market value, and in this case should not prevail over positive
evidence of such value. The heirs of Ong are therefore entitled to P10,000.00.
Wherefore, the decision appealed from is reversed and respondents-appellees are held liable solidarily to appellants, and
ordered to pay them the aforesaid sum of P9,005.80 and P10,000.00, respectively, with interest from the filing of the
complaint, and costs.

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G.R. No. 122544 January 28, 1999

REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BLAZA, ESTER ABAD DIZON and JOSEPH
ANTHONY DIZON, RAYMUND A. DIZON, GERARD A. DIZON, and JOSE A. DIZON, JR., petitioners,
vs.
COURT OF APPEALS and OVERLAND EXPRESS LINES, INC., respondents.
MARTINEZ, J.:
Two consolidated petitions were filed before us seeking to set aside and annul the decisions and resolutions of respondent
Court of Appeals. What seemed to be a simple ejectment suit was juxtaposed with procedural intricacies which finally
found its way to this Court.
G.R. No. 122544:
On May 23, 1974, private respondent Overland Express Lines, Inc. (lessee) entered into a Contract of Lease with Option
to Buy with petitioners 1 (lessors) involving a 1,755.80 square meter parcel of land situated at corner MacArthur Highway
and South "H" Street, Diliman, Quezon City. The term of the lease was for one (1) year commencing from May 16, 1974
up to May 15, 1975. During this period, private respondent was granted an option to purchase for the amount of P3,000.00
per square meter. Thereafter, the lease shall be on a per month basis with a monthly rental of P3,000.00.
For failure of private respondent to pay the increased rental of P8,000.00 per month effective June 1976, petitioners filed
an action for ejectment (Civil Case No. VIII-29155) on November 10, 1976 before the then City Court (now Metropolitan
Trial Court) of Quezon City, Branch VIII. On November 22, 1982, the City Court rendered judgment 2 ordering private
respondent to vacate the leased premises and to pay the sum of P624,000.00 representing rentals in arrears and/or as
damages in the form of reasonable compensation for the use and occupation of the premises during the period of illegal
detainer from June 1976 to November 1982 at the monthly rental of P8,000.00, less payments made, plus 12% interest per
annum from November 18, 1976, the date of filing of the complaint, until fully paid, the sum of P8,000.00 a month
starting December 1982, until private respondent fully vacates the premises, and to pay P20,000.00 as and by way of
attorney's fees.
Private respondent filed a certiorari petition praying for the issuance of a restraining order enjoining the enforcement of
said judgment and dismissal of the case for lack of jurisdiction of the City Court.
On September 26, 1984, the then Intermidiate Appellate Court 3 (now Court of Appeals) rendered a decision 4 stating that:
. . ., the alleged question of whether petitioner was granted an extension of the option to buy the property;
whether such option, if any, extended the lease or whether petitioner actually paid the alleged
P300,000.00 to Fidela Dizon, as representative of private respondents in consideration of the option and,
whether petitioner thereafter offered to pay the balance of the supposed purchase price, are all merely
incidental and do not remove the unlawful detainer case from the jurisdiction or respondent court. In
consonance with the ruling in the case of Teodoro, Jr. vs. Mirasol (supra), the above matters may be
raised and decided in the unlawful detainer suit as, to rule otherwise, would be a violation of the principle
prohibiting multiplicity of suits. (Original Records, pp. 38-39).
The motion for reconsideration was denied. On review, this Court dismissed the petition in a resolution dated June 19,
1985 and likewise denied private respondent's subsequent motion for reconsideration in a resolution dated September 9,
1985. 5
On October 7, 1985, private respondent filed before the Regional Trial Court (RTC) of Quezon City (Civil Case No. Q45541) an action for Specific Performance and Fixing of Period for Obligation with prayer for the issuance of a
119

restraining order pending hearing on the prayer for a writ of preliminary injunction. It sought to compel the execution of a
deed of sale pursuant to the option to purchase and the receipt of the partial payment, and to fix the period to pay the
balance. In an Order dated October 25, 1985, the trial court denied the issuance of a writ of preliminary injunction on the
ground that the decision of the then City Court for the ejectment of the private respondent, having been affirmed by the
then Intermediate Appellate Court and the Supreme Court, has become final and executory.
Unable to secure an injunction, private respondent also filed before the RTC of Quezon City, Branch 102 (Civil Case No.
Q-46487) on November 15, 1985 a complaint for Annulment of and Relief from Judgment with injunction and damages.
In its decision 6 dated May 12, 1986, the trial court dismissed the complaint for annulment on the ground of res judicata,
and the writ of preliminary injunction previously issued was dissolved. It also ordered private respondent to pay
P3,000.00 as attorney's fees. As a consequence of private respondent's motion for reconsideration, the preliminary
injunction was reinstated, thereby restraining the execution of the City Court's judgment on the ejectment case.
The two cases were the after consolidated before the RTC of Quezon City, Branch 77. On April 28, 1989, a decision 7 was
rendered dismissing private respondent's complaint in Civil Case No. Q-45541 (specific performance case) and denying
its motion for reconsideration in Civil Case No. 46487 (annulment of the ejectment case). The motion for reconsideration
of said decision was likewise denied.
On appeal, 8 respondent Court of Appeals rendered a decision 9 upholding the jurisdiction of the City Court of Quezon
City in the ejectment case. It also concluded that there was a perfected contract of sale between the parties on the leased
premises and that pursuant to the option to buy agreement, private respondent had acquired the rights of a vendee in a
contract of sale. It opined that the payment by private respondent of P300,000.00 on June 20, 1975 as partial payment for
the leased property, which petitioners accepted (through Alice A. Dizon) and for which an official receipt was issued, was
the operative act that gave rise to a perfected contract of sale, and that for failure of petitioners to deny receipt thereof,
private respondent can therefore assume that Alice A. Dizon, acting as agent of petitioners, was authorized by them to
receive the money in their behalf. The Court of Appeals went further by stating that in fact, what was entered into was a
"conditional contract of sale" wherein ownership over the leased property shall not pass to the private respondent until it
has fully paid the purchase price. Since private respondent did not consign to the court the balance of the purchase price
and continued to occupy the subject premises, it had the obligation to pay the amount of P1,700.00 in monthly rentals
until full payment of the purchase price. The dispositive portion of said decision reads:
WHEREFORE, the appealed decision in Case No. 46387 is AFFIRMED. The appealed decision in Case
No. 45541 is, on the other hand, ANNULLED and SET ASIDE. The defendants-appellees are ordered to
execute the deed of absolute sale of the property in question, free from any lien or encumbrance
whatsoever, in favor of the plaintiff-appellant, and to deliver to the latter the said deed of sale, as well as
the owner's duplicate of the certificate of title to said property upon payment of the balance of the
purchase price by the plaintiff-appellant. The plaintiff-appellant is ordered to pay P1,700.00 per month
from June 1976, plus 6% interest per annum, until payment of the balance of the purchase price, as
previously agreed upon by the parties.
SO ORDERED.
Upon denial of the motion for partil reconsideration (Civil Case No. Q-45541) by respondent Court of
Appeals, 10petitioners elevated the case via petition for certiorari questioning the authority of Alice A. Dizon as agent of
petitioners in receiving private respondent's partial payment amounting to P300,000.00 pursuant to the Contract of Lease
with Option to Buy. Petitioner also assail the propriety of private respondent's exercise of the option when it tendered the
said amount on June 20, 1975 which purportedly resulted in a perfected contract of sale.
G.R. No. 124741:
Petitioners filed with respondent Court of Appeals a motion to remand the records of Civil Case No. 38-29155 (ejectment
case) to the Metropolitan Trial Court (MTC), then City Court of Quezon City, Branch 38, for execution of the
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judgment 11 dated November 22, 1982 which was granted in a resolution dated June 29, 1992. Private respondent filed a
motion to reconsider said resolution which was denied.
Aggrieved, private respondent filed a petition for certiorari, prohibition with preliminary injunction and/or restraining
order with this Court (G.R. Nos. 106750-51) which was dismissed in a resolution dated September 16, 1992 on the ground
that the same was a refiled case previously dismissed for lack of merit. On November 26, 1992, entry of judgment was
issued by this Court.
On July 14, 1993, petitioners filed an urgent ex-parte motion for execution of the decision in Civil Case No. 38-29155
with the MTC of Quezon City, Branch 38. On September 13, 1993, the trial court ordered the issuance of a third alias writ
of execution. In denying private respondent's motion for reconsideration, it ordered the immediate implementation of the
third writ of execution without delay.
On December 22, 1993, private respondent filed with the Regional Trial Court (RTC) of Quezon City, Branch 104 a
petition for certiorari and prohibition with preliminary injunction/restraining order (SP. PROC. No. 93-18722)
challenging the enforceability and validity of the MTC judgment as well as the order for its execution.
On January 11, 1994, RTC of Quezon City, Branch 104 issued an
order 12 granting the issuance of a writ of preliminary injunction upon private respondent's' posting of an injunction bond
of P50,000.00.
Assailing the aforequoted order after denial of their motion for partial reconsideration, petitioners filed a
petition 13for certiorari and prohibition with a prayer for a temporary restraining order and/or preliminary injunction with
the Court of Appeals. In its decision, 14 the Court of Appeals dismissed the petition and ruled that:
The avowed purpose of this petition is to enjoin the public respondent from restraining the ejectment of
the private respondent. To grant the petition would be to allow the ejectment of the private respondent.
We cannot do that now in view of the decision of this Court in CA-G.R. CV Nos. 25153-54. Petitioners'
alleged right to eject private respondent has been demonstrated to be without basis in the said civil case.
The petitioners have been shown, after all, to have no right to eject private respondents.
WHEREFORE, the petition is DENIED due course and is accordingly DISMISSED.
SO ORDERED. 15
Petitioners' motion for reconsideration was denied in a resolution 16 by the Court of Appeals stating that:
This court in its decision in CA-G.R. CV Nos. 25153-54 declared that the plaintiff-appellant (private
respondent herein) acquired the rights of a vendee in a contract of sale, in effect, recognizing the right of
the private respondent to possess the subject premises. Considering said decision, we should not allow
ejectment; to do so would disturb the status quo of the parties since the petitioners are not in possession of
the subject property. It would be unfair and unjust to deprive the private respondent of its possession of
the subject property after its rights have been established in a subsequent ruling.
WHEREFORE, the motion for reconsideration is DENIED for lack of merit.
SO ORDERED. 17
Hence, this instant petition.
We find both petitions impressed with merit.
121

First. Petitioners have established a right to evict private respondent from the subject premises for non-payment of rentals.
The term of the Contract of Lease with Option to Buy was for a period of one (1) year (May 16, 1974 to May 15, 1975)
during which the private respondent was given an option to purchase said property at P3,000.00 square meter. After the
expiration thereof, the lease was for P3,000.00 per month.
Admittedly, no definite period beyond the one-year term of lease was agreed upon by petitioners and private respondent.
However, since the rent was paid on a monthly basis, the period of lease is considered to be from month to month in
accordance with Article 1687 of the New Civil Code. 18 Where the rentals are paid monthly, the lease, even if verbal may
be deemed to be on a monthly basis, expiring at the end of every month pursuant to Article 1687, in relation to Article
1673 of the Civil Code. 19 In such case, a demand to vacate is not even necessary for judicial action after the expiration of
every month. 20
When private respondent failed to pay the increased rental of P8,000.00 per month in June 1976, the petitioners had a
cause of action to institute an ejectment suit against the former with the then City Court. In this regard, the City Court
(now MTC) had exclusive jurisdiction over the ejectment suit. The filing by private respondent of a suit with the Regional
Trial Court for specific performance to enforce the option to purchase did not divest the then City Court of its jurisdiction
to take cognizance over the ejectment case. Of note is the fact that the decision of the City Court was affirmed by both the
Intermediate Appellate Court and this Court.
Second. Having failed to exercise the option within the stipulated one-year period, private respondent cannot enforce its
option to purchase anymore. Moreover, even assuming arguendo that the right to exercise the option still subsists at the
time private respondent tendered the amount on June 20, 1975, the suit for specific performance to enforce the option to
purchase was filed only on October 7, 1985 or more than ten (10) years after accrual of the cause of action as provided
under Article 1144 of the New Civil Code. 21
In this case, there was a contract of lease for one (1) year with option to purchase. The contract of lease expired without
the private respondent, as lessee, purchasing the property but remained in possession thereof. Hence, there was an implicit
renewal of the contract of lease on a monthly basis. The other terms of the original contract of lease which are revived in
the implied new lease under Article 1670 of the New Civil Code 22 are only those terms which are germane to the lessee's
right of continued enjoyment of the property leased. 23 Therefore, an implied new lease does not ipso facto carry with it
any implied revival of private respondent's option to purchase (as lessee thereof) the leased premises. The provision
entitling the lessee the option to purchase the leased premises is not deemed incorporated in the impliedly renewed
contract because it is alien to the possession of the lessee. Private respondent's right to exercise the option to purchase
expired with the termination of the original contract of lease for one year. The rationale of this Court is that:
This is a reasonable construction of the provision, which is based on the presumption that when the lessor
allows the lessee to continue enjoying possession of the property for fifteen days after the expiration of
the contract he is willing that such enjoyment shall be for the entire period corresponding to the rent
which is customarily paid in this case up to the end of the month because the rent was paid monthly.
Necessarily, if the presumed will of the parties refers to the enjoyment of possession the presumption
covers the other terms of the contract related to such possession, such as the amount of rental, the date
when it must be paid, the care of the property, the responsibility for repairs, etc. But no such presumption
may be indulged in with respect to special agreements which by nature are foreign to the right of
occupancy or enjoyment inherent in a contract of lease. 24
Third. There was no perfected contract of sale between petitioners and private respondent. Private respondent argued that
it delivered the check of P300,000.00 to Alice A. Dizon who acted as agent of petitioners pursuant to the supposed
authority given by petitioner Fidela Dizon, the payee thereof. Private respondent further contended that petitioners' filing
of the ejectment case against it based on the contract of lease with option to buy holds petitioners in estoppel to question
the authority of petitioner Fidela Dizon. It insisted that the payment of P300,000.00 as partial payment of the purchase
price constituted a valid exercise of the option to buy.
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Under Article 1475 of the New Civil Code, "the contract of sale is perfected at the moment there is a meeting of minds
upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally
demand performance, subject to the provisions of the law governing the form of contracts." Thus, the elements of a
contract of sale are consent, object, and price in money or its equivalent. It bears stressing that the absence of any of these
essential elements negates the existence of a perfected contract of sale. Sale is a consensual contract and he who alleges it
must show its existence by competent proof. 25
In an attempt to resurrect the lapsed option, private respondent gave P300,000.00 to petitioners (thru Alice A. Dizon) on
the erroneous presumption that the said amount tendered would constitute a perfected contract of sale pursuant to the
contract of lease with option to buy. There was no valid consent by the petitioners (as co-owners of the leased premises)
on the supposed sale entered into by Alice A. Dizon, as petitioners' alleged agent, and private respondent. The basis for
agency is representation and a person dealing with an agent is put upon inquiry and must discover upon his peril the
authority of the agent. 26 As provided in Article 1868 of the New Civil Code, 27there was no showing that petitioners
consented to the act of Alice A. Dizon nor authorized her to act on their behalf with regard to her transaction with private
respondent. The most prudent thing private respondent should have done was to ascertain the extent of the authority of
Alice A. Dizon. Being negligent in this regard, private respondent cannot seek relief on the basis of a supposed agency.
In Bacaltos Coal Mines vs. Court of Appeals, 28 we explained the rule in dealing with an agent:
Every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of
the agent. If he does not make such inquiry, he is chargeable with knowledge of the agent's authority, and
his ignorance of that authority will not be any excuse. Persons dealing with an assumed agency, whether
the assumed agency be a general or special one, are bound at their peril, if they would hold the principal,
to ascertain not only the fact of the agency but also the nature and extent of the authority, and in case
either is controverted, the burden of proof is upon them to establish it.
For the long years that private respondent was able to thwart the execution of the ejectment suit rendered in favor of
petitioners, we now write finis to this controversy and shun further delay so as to ensure that this case would really attain
finality.
WHEREFORE, in view of the foregoing, both petitions are GRANTED. The decision dated March 29, 1994 and the
resolution dated October 19, 1995 in CA-G.R. CV No. 25153-54, as well as the decision dated December 11, 1995 and
the resolution dated April 23, 1997 in CA-G.R. SP No. 33113 of the Court of Appeals are hereby REVERSED and SET
ASIDE.
Let the records of this case be remanded to the trial court for immediate execution of the judgment dated November 22,
1982 in Civil Case No. VIII-29155 of the then City Court (now Metropolitan Trial Court) of Quezon City, Branch VIII as
affirmed in the decision dated September 26, 1984 of the then Intermediate Appellate Court (now Court of Appeals) and
in the resolution dated June 19, 1985 of this Court.
However, petitioners are ordered to REFUND to private respondent the amount of P300,000.00 which they received
through Alice A. Dizon on June 20, 1975.1wphi1.nt

123

G.R. No. L-9184

February 2, 1916

MACONDRAY & CO., INC., plaintiff-appellee,

vs.
GEORGE S. SELLNER, defendant-appellant.
CARSON, J.:
This action was brought to recover the sum of P17, 175 by way of damages alleged to have been suffered by the plaintiff
as a result of the sale of a parcel of land which it is alleged was made by the defendant for and on behalf of the plaintiff
after authority to make the sale had been revoked. Judgment was rendered in favor of the plaintiff for the sum of P3,435,
together with interest at 6 per cent per annum from the date of the institution of this action. From this judgment defendant
appealed, and brought the case have on his duly certified bill of exceptions.
Early in 1912 the defendant, a real estate broker, sold the parcel of land described in the complaint to the plaintiff
company for P17,175. The formal deed of sale was not executed and accepted until July 29, 1912, the agreement to
purchase being conditioned on the delivery of a Torrens title, which was not secured until early in that month. In the
meantime the land was flooded by high tides, and the plaintiff company became highly dissatisfied with its purchase.
When the final transfer was made the plaintiff company informed defendant that the land was wholly unsuited for use as a
coal-yard, for which it had been purchased, and requested him to find another purchaser. At that time it was expressly
understood and agreed that the plaintiff company was willing to dispose of the land for P17,175, and that defendant was to
have as his commission for securing a purchaser anything over that amount which he could get.
A short time thereafter, defendant reported to plaintiff that he had a purchaser for the land in the person of Antonio M.
Barretto, who was willing to pay P2.75 per square meter, or a total of P18,892.50. Plaintiff thereupon executed a formal
deed of conveyance which, together with the certificate of title (Torrens), was delivered to defendant, with the
understanding that he was to conclude the sale, deliver the title-deed and certificate to Barretto, and received from him the
purchase price. The deed was dated August 21, 1912. Thereafter defendant advised Barretto that plaintiff had executed the
title-deed and that he was ready to close the deal. Barretto agreed to accept the land if, upon examination, the title and the
deed should prove satisfactory; and defendant left the deed of conveyance with him, with the understanding that if the title
and the deed of conveyance were as represented, Barretto would give him his check for the amount of the purchase price.
Defendant retained possession of the Torrens certificate of title. A few days afterwards Barretto was compelled to go to
Tayabas on business and was detained by a typhoon which delayed his return until the 31st of August.
During Barretto's absence the plaintiff company advised defendant that he must consummate the sale and collect the
purchase money without delay upon Barretto's return to Manila. On the arrival of Barretto on Saturday, August 31st,
defendant called upon him and informed him that the plaintiff company desired to close up the transaction at once, and
Barretto, who was somewhat indisposed from his trip, promised to examine the papers as soon as he could get to them,
and assured the defendant that he would send his check for the purchased price in a day or two if he found the documents
in proper shape. These assurance were reported to Young, the plaintiff company's general manager and representative
throughout the transaction, on Monday morning, September 2d. Young then formally notified defendant that unless the
purchase price was paid before five o'clock of that same afternoon the deal would be off. Defendants again called upon
Barretto, who informed him that if he would turn over the Torrens certificate of title he would let him have a check for the
purchase price. Defendant sent the certificate as requested, but did not receive the check until thirty-six hours afterwards,
on Wednesday morning. On receipt of Barretto's check he immediately tendered plaintiff company a check for the agreed
selling price, P17,175. Plaintiff's manager refused to accept the check and soon thereafter filed this action, claiming that
the sale had been "cancelled" upon the failure of defendant to turn over the purchase price on the afternoon of Monday,
September 2nd.
The following is a copy of plaintiff company's letter to defendant advising him that the sale would be "cancelled" unless
the purchase price was paid at five o'clock of the day on which it was written.
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SEPT. 2, 1912.
Mr. GEO. C. SELLNER, Manila.
DEAR SIR: In accordance with our conversation today, this is to notify you that we consider the sale of our lot in
Nagtajan to Antonio M. Barretto as cancelled in view of the nonpayment of the purchase price before five o'clock
this afternoon.
Please confirm.
Yours very truly,
MACONDRAY & CO., INC.,
(Sgd.) CARLOS YOUNG,
General Manager.
As to the facts just narrated there is practically no dispute, the only matters of facts as to which there is any real contention
in the record being limited to question as to the value of the land, and as to the original instructions to defendant in regard
to the delivery of the title deeds.
Plaintiffs' manager testified that as he had no confidence in Barretto, he expressly instructed defendant not to deliver the
title deeds until Barretto turned over the purchase price. Defendant swore that he had received no such instruction. Upon
this conflict of testimony we do not deem it necessary to make an express finding, because, as we view the transaction, it
could in no event affect our disposition of this appeal.
We are of opinion that the disputed evidence clearly discloses that on August 21st the plaintiff company, through the
defendant real estate broker, agreed to sell the land to Barretto for P18,892.50, and that Barretto agreed to buy the land at
that price on the usual condition precedent that before turning over the purchase price the title deeds and deed of transfer
from the company should be found to be in due and legal form. That for the purpose of consummating the sale the
plaintiff company turned over to the defendant a deed of transfer to Barretto, together with a Torrens title certificate to the
land, executed as of the day when the agreement to sell was entered into. That the defendant, with full authority from
plaintiff company, agreed to deliver the deed and certificate to Barretto on payment of the purchase price. That from the
very nature of the transaction it was understood that the purchaser should have a reasonable time in which to examine the
deed of transfer and the other documents of title, and that defendant exercising an authority impliedly if not expressly
conferred upon him, gave the purchaser a reasonable time in which to satisfy himself as to the legality and correctness of
the documents of title. That the company through its manager Young, acquiesced in and ratified what had been done by
defendant in this regard when, with full knowledge of all the facts, Young advised the defendant, during Barretto's
absence in Tayabas, that the deal must be closed up without delay on Barretto's return to Manila.
No reason appears, nor had any reason been assigned for the demand by the plaintiff company for the delivery of the
purchase price at the hour specified under threat in the event of failure to make payment at that hour it would decline to
carry out the agreement, other than that the manager of the plaintiff company had been annoyed by the delays which
occurred during the earlier stage of the negotiations, and had changed his mind as to the desirability of making the sale at
the price agreed upon, either because he believed that he could get a better price elsewhere, or that the land was worth
more to his company than the price he had agreed to take for it. It is very evident that plaintiff company's manager hoped
that by setting a limit of a few hours upon the time within which he would receive the money, his company would be
relieved of the obligation to carry out its contract.

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Upon the question of the value of the land we think that the evidence clearly discloses that at the date of the sale its actual
and its true market value was not more than the amount paid for it by Barretto, that is to say, P18,892.50. The evidence
discloses that it had been in the hands of an expert real estate agent for many months prior to the sale, with every
inducement to him to secure the highest cash price which could be gotten for it. That he actually sold it to the plaintiff
company, a few months prior to the sale to Barretto, for P17,175. That the plaintiff company was highly dissatisfied with
its purchase, and readily agreed to resell at that price. That the defendant, in his company was highly dissatisfied with its
purchase, and readily agreed to resell at that price. That the defendant, in his capacity as a real estate agent, with a
personal and direct interest in securing the highest possible price for the land, sold it to Barretto for P18,892.50.
The only evidence in the record tending to prove that the land had a higher market value than the price actually paid for it
under such circumstances is the testimony of a rival real estate broker, who had never been on the land, but claimed that
he was familiar with its general location from maps and description, and asserted that in his opinion it was worth
considerably more than the price actually paid for it, and that he thought he could have sold the land for P3 a meter, or
approximately P20,610. Of course an expert opinion of this kind, however sincere and honest the witness may have been
in forming it, is wholly insufficient to maintain a finding that the land was worth any more than it actually brought when
sold under the conditions above set forth.
It may be that the land has a speculative value much higher than the actual market value at the time of the sale, so that if
held for an opportune turn in the market, or until a buyer of some special need for it happened to present himself, a price
approximating that indicated by this witness might be secured for it. But the question of fact ruled upon is the actual
market value of the land at the time of its sale to Barretto, and not any speculative value which might be assigned to it in
anticipation of unknown, indefinite and uncertain contingencies.
Among other definitions of "market value" to be found in "Words and Phrases," vol. 5, p. 4383, and supported by citation
of authority, are the following:
The "market value" of property is the price which the property will bring in a fair market after fair and reasonable
efforts have been made to find a purchaser who will give the highest price for it.
xxx

xxx

xxx

The market value of land is the price that would in all probability result form fair negotiations where the seller is
willing to sell and the buyer desires to buy.
Upon the foregoing statement of the facts disclosed by the record, we are of opinion that the judgment entered in the court
below should be reversed and the complaint dismissed without costs in this instance.
1. Even were we to admit, which we do not, that the plaintiff company had the right to terminate the negotiations at the
time indicated by its manager, and to direct its real estate not make the sale of Barretto after the hour indicated,
nevertheless we would be compelled to hold, upon the evidence before us, that the plaintiff company has no cause of
action for monetary damages against the defendant real estate agent.
The measure of the damages which the plaintiff would be entitled to recover from the real estate agent for the
unauthorized sale of its property would be the actual market value of the property, title to which had been lost as a result
of the sale. We are not now considering any question as to the right of the owner, under such circumstances, to recover the
property from the purchaser, or damages for its detention or like; but merely his right to recover monetary damages from
his agent should he elect, as the plaintiff company did in this case, to ratify the sale and recoup from the agent any loss
resulting from his alleged unauthorized consummation of the sale.
The market value of the land in question was P18,892.50. Of this the plaintiff company has received P17,175, leaving a
balance of P1,717.50 unpaid. But, whatever may be the view which should taken as to the right of the plaintiff company to
126

terminate the negotiations for the sale of the property to Barretto at the time fixed by it in its letter to the defendant real
estate agent, there can be no question as to the liability of the plaintiff company to the real estate agent, in the event that it
did so terminate the negotiations, for the amount of the commission which it agreed to pay him should he find a purchaser
for the land at the price agreed upon in his agency contract. The commission agreed upon was all over P17,175 which the
defendant could secure from the property, and it is clear that allowing the defendant this commission, and offsetting it
against the unpaid balance of the market value of the land, the plaintiff company is not entitled to a money judgment
against defendant.
We do not mean to question the general doctrine as to the power of a principal to revoke the authority of his agent at will,
in the absence of a contract fixing the duration of the agency (subject, however, to some well defined exceptions). Our
ruling is that at the time fixed by the manager of the plaintiff company for the termination of the negotiations, the
defendant real estate agent had already earned the commissions agreed upon, and could not be deprived thereof by the
arbitrary action of the plaintiff company in declining to execute the contract of sale for some reason personal to itself.
The question as to what constitutes a sale so as to entitle a real estate broker to his commissions is extensively annotated
in the case of Lunney vs. Healey (Nebraska) 56313 reported in 44 Law Rep. Ann., 593 [Note], and the long line of
authorities there cited support the following rule:
The business of a real estate broker or agent, generally, is only to find a purchaser, and the settled rule as stated by
the courts is that, in the absence of an express contract between the broker and his principal, the implication
generally is that the broker becomes entitled to the usual commissions whenever he brings to his principal a party
who is able and willing to take the property and enter into a valid contract upon the terms then named by the
principal, although the particulars may be arranged and the matter negotiated and completed between the principal
and the purchaser directly.
In the case of Watson vs. Brooks (17 Fed. Rep., 540; 8 Sawy., 316), it was held that a sale of real property entitling a
broker to his commissions, was an agreement by the vendor for a certain valuable consideration then or thereafter to be
paid, and was complete without conveyance, although the legal title remained in the vendor.
The rights of a real estate broker to be protected against the arbitrary revocation of his agency, without remuneration for
services rendered in finding a suitable purchaser prior to the revocation, are clearly and forcefully stated in the following
citation form the opinion in the case of Blumenthal vs. Goodall (89 Cal., 251).
The act of the agent in finding a purchaser required time and labor for its completion, and within three days of the
execution of the contract, and prior to its revocation, he had placed the matter in the position that success was
practically certain and immediate, and it would be the height of injustice to permit the principal then to withdraw
the authority and terminate the agency as against an express provision of the contract, and perchance reap the
benefit of the agent's labors, without being liable to him for his commissions. This would be to make the contract
an unconscionable one, and would offer a premium for fraud by enabling one of the parties to take advantage of
his own wrong and secure the labor of the other without remuneration.
2. We are of opinion that under all the circumstances surrounding the negotiations as disclosed by the practically
undisputed evidence of record, the plaintiff company could not lawfully terminate the negotiations at the time it attempted
to do so and thereafter decline to convey the land to Barretto, who had accepted an offer of sale made to him by the
plaintiff's duly authorized agent, subject only to an examination of the documents of title, and stood ready to pay the
purchase price upon the delivery of the duly executed deed of conveyance and other necessary documents of title. We are
not now considering the right or the power of the plaintiff company to terminate or revoke the agency of the defendant at
that time. The revocation of the agent's authority at that time could in no wise relieve the plaintiff company of its
obligation to sell the land to Barretto for the price and on the terms agreed upon before the agency was revoked.

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If we are correct in our conclusions in this regard, it follows, of course that no matter hat was the actual value of the land,
the plaintiff company suffered no damage by the delivery of the title deeds to Barretto, and the consummation of the sale
by the defendant upon the terms and at the price agreed upon prior to the revocation of his agency.
Without considering any of the disputed questions of fact it clearly appears that before the manager of the plaintiff
company wrote the letter dated September 2, 1912, which is set forth in the foregoing statement of facts, and before the
conversation was had to which that letter refers, the defendant real estate agent had offered to sell the land to Barretto for
P18,892.50 and that he did so with the knowledge and consent, and under the authority of the plaintiff company. It further
clearly appears that this offer had been duly accepted by Barretto, who stood ready and willing to pay over the agreed
purchase price, upon the production and delivery of the necessary documents of title, should these documents be found,
upon examination, to be executed in due and legal form. The only question, then, which we need consider, is whether the
plaintiff company could lawfully "cancel" or rescind this agreement for the sale and purchase of the land, on the sole
ground that the purchase price was not paid at the hour designated in the letter to the defendant.
The only reasons assigned for the sudden and arbitrary demand for the payment of the purchase price which was made
with the manifest hope that it would defeat the agent's deal with Barretto, are that the plaintiff company's manager had
become satisfied that the land was worth more than he had agreed to accept for it; and that he was piqued and annoyed at
the delays which marked the earlier stages of the negotiations.
Time does not appear to have been of the essence of the contract. The agreement to sell was made without any express
stipulation as to the time within which the purchase price was to be paid, except that the purchaser reserved the right to
examine the documents of title before making payment of the purchase price, though it was understood that the sale was
for cash upon the delivery of the documents of title executed in due form. Under the agreement with the agent of the
plaintiff company, the purchaser had a perfect right to examine the documents of title; and in the absence of an express
agreement fixing the time to be allowed therefore, he was clearly entitled to such time as might be reasonably necessary
for that purpose.
The plaintiff company, through its agent, had given Barretto an opportunity to examine the documents of title, with the
express understanding that if they were satisfactory he would hand the agent his check for the purchase price, and it is
very clear that the plaintiff company could not arbitrarily, and for its own convenience, deprive Barretto of this
opportunity to make such examination of the documents as might be reasonably necessary.
Of course we are not to be understood as denying the right of the vendor to couple his agreement to sell with a stipulation
that the purchase price must be paid at a specific day, hour and minute; nor that the obligation to pay over the purchase
price forthwith may not be inferred from all the circumstances surrounding the transaction in a particular case. Time may
be, and often is of the very essence of the contract. But in a contract for the sale of real estate, where no agreement to the
contrary appears, it may fairly be assumed that it was the intention of the parties to allow a reasonable time for the
examination of the documents of title; and in any case in which time has been expressly allowed for that purpose, the
vendor cannot arbitrarily demand the payment of the purchase price before the expiration of the time reasonably necessary
therefor.
The doctrine supported by citation of authority is set forth as follows on page 165, "Maupin on Marketable Title to Real
Estate:"
The contract of sale usually specifies a time in which the purchaser may examine the title before completing the
purchase. If no time be specified, he will be entitled to a reasonable time for that purpose, but cannot keep the
contract open indefinitely so as to avail himself of a rise in the value of the property or escape loss in case of
depreciation. He cannot be required to pay the purchase money before he has examined the abstract, unless he has
expressly stipulated so to do. It has been held that if the contract provide that the purchaser shall be furnished an
abstract of title, and shall have a specified time in which to examine the title and pay the purchase money, the
purchaser must determine in that time whether he will take the title, and that he cannot tender the purchase money
after that time, even though no abstract of the title was furnished.
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The purchaser is entitled to a reasonable time within which to determine by investigation the validity of apparent
liens disclosed by the record. After the purchaser has examined the abstract, or investigated the title in the time
allowed for that purpose, it is his duty to point out or make known his objections to the title, if any, so as to give
the vendor an opportunity to remove them.
In the case of Hoyt vs. Tuxbury (70 Ill., 331, 332), the rule is stated as follows:
Where the purchase of land is made upon condition the title is found good, the purchaser is only entitled to a
reasonable time in which to determine whether he will take the title the vendor has, or reject it. He cannot keep
the contract open indefinitely, so as to avail of a rise in the value of the property, or relieve himself in case of a
depreciation.
In the case of Easton vs. Montgomery (90 Cal., 307), the rule is set forth as follows:
A contract for the sale of land which provides "title to prove good or no sale," without specifying the time within
which the examination is to be made, implies a reasonable time.
In 39 Cyc., 1332, the general rule, supported by numerous citations, is set forth as follows:
If the contract of sale does not specify the time of performance, a reasonable time will be implied. In other words
a reasonable time for performance will be allowed, and performance within a reasonable time will be required.
What is a reasonable time necessarily depends upon the facts and circumstances of the particular case. The rule
permitting and requiring performance within a reasonable time applies both to the time for making and executing
the conveyance by the vendor, and to the time for making or tendering payment by the purchaser; and where some
precedent act or demand is necessary, the rule applies to the time of performance after such act is done, or after
such demand has been made. It also applies to the time within which any conditions precedent is to be performed,
or within which a contingency upon which the transaction depends is to happen, and to the performance of
various acts by the parties such as the furnishing of an abstract of title, or making a survey, or any act which is to
precede or may affect the time of conveyance or payment, or which one of the parties may do at his option which
may affect the rights of the parties under the contract. If the purchaser is entitled to an examination of the title a
reasonable time therefor will be implied.
Under all the circumstances surrounding the transaction in the case at bar, as they appear from the evidence of record, we
have no hesitation in holding that the plaintiff company's letter of September 2, 1912 demanding payment before five
o'clock of the afternoon of that day, under penalty of the cancellation of its agreement to sell, was an arbitrary
unreasonable attempt to deny to the purchaser the reasonable opportunity to inspect the documents of title, to which he
was entitled by virtue of the express agreement of the plaintiff company's agent before any attempt was made to revoke
his agency. It follows that Barretto's right to enforce the agreement to sell was in no wise affected by the attempt of the
plaintiff company to "cancel" the agreement; and that the plaintiff company suffered no damage by the consummation of
the agreement by the acceptance of the stipulated purchase price by the defendant real estate agent.
Perhaps we should indicate that in arriving at these conclusions we have not found it necessary to pass upon the disputed
question of fact, as to whether or not the plaintiff company's manager instructed the defendant not to deliver the title-deed
until he had received the purchase price. On this point there is a direct conflict of evidence. But as we understand the
transaction, it was clearly understood that the purchaser would have a reasonable opportunity to inspect and examine the
documents of title before paying over a large sum of money in exchange therefor, whether the agent did or did not have
the authority to make actual delivery of the title deed for that purpose.
Twenty days hereafter let judgment be entered reversing the judgment entered in the court below without costs in this
instance, and directing the dismissal of the complaint with the costs in first instance against the plaintiff company, and ten
days thereafter let the record be returned to the court wherein it originated. So ordered.
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G.R. No. 15823

September 12, 1921

JULIO DANON, plaintiff-appellee,

vs.
ANTONIO A. BRIMO & CO., defendant-appellant.
JOHNSON, J.:
This action was brought to recover the sum of P60,000, alleged to be the value of services rendered to the defendant by
the plaintiff as a broker. The plaintiff alleges that in the month of August, 1918, the defendant company, through its
manager, Antonio A. Brimo, employed him to look for a purchaser of its factory known as "Holland American Oil Co.,"
for the sum of P1,200,000, payable in cash; that the defendant promised to pay the plaintiff, as compensation for his
services, a commission of five per cent on the said sum of P1,200,000, if the sale was consummated, or if the plaintiff
should find a purchaser ready, able and willing to buy said factory for the said sum of P1,200,000; that subsequently the
plaintiff found such a purchaser, but that the defendant refused to sell the said factory without any justifiable motive or
reason therefor and without having previously notified the plaintiff of its desistance or variation in the price and terms of
the sale.
To that complaint the defendant interposed a general denial. Upon the issue thus presented, the Honorable Simplicio del
Rosario, judge, after hearing and considering the evidence adduced during the trial of the cause, rendered a judgment in
favor of the plaintiff and against the defendant for the sum of P60,000, with costs. From that judgment the defendant
appealed to this court.
The proof with regard to the authority of the plaintiff to sell the factory in question for the defendant, on commission, is
extremely unsatisfactory. It consists solely of the testimony of the plaintiff, on the one hand, and of the manager of the
defendant company, Antonio A. Brimo, on the other. From a reading of their testimony we believe that neither of them
has been entirely free from prevarications. However, after giving due weight to the finding of the trial court in this regard
and after carefully considering the inherent probability or improbability of the testimony of each of said witnesses, we
believe we are approximating the truth in finding: (1) That Antonio A. Brimo, in a conversation with the plaintiff, Julio
Danon, about the middle of August, 1918, informed the latter that he (Brimo) desired to sell his factory, the Holland
American Oil Co., for the sum of P1,200,000; (2) that he agreed and promised to pay to the plaintiff a commission of 5
per cent provided the latter could sell said factory for that amount; and (3) that no definite period of time was fixed within
which the plaintiff should effect the sale. It seems that another broker, Sellner, was also negotiating the sale, or trying to
find a purchaser for the same property and that the plaintiff was informed of the fact either by Brimo himself or by
someone else; at least, it is probable that the plaintiff was aware that he was not alone in the field, and his whole effort
was to forestall his competitor by being the first to find a purchaser and effect the sale. Such, we believe. was the contract
between the plaintiff and the defendant, upon which the present action is based.
The next question to determine is whether the plaintiff had performed all that was required of him under that contract to
entitle him to recover the commission agreed upon. The proof in this regard is no less unsatisfactory. It seems that
immediately after having an interview with Mr. Brimo, as above stated, the plaintiff went to see Mr. Mauro Prieto,
president of the Santa Ana Oil Mill, a corporation, and offered to sell to him the defendant's property at P1,200,000. The
said corporation was at that time in need of such a factory as the plaintiff was offering for sale, and Mr. Prieto, its
president, instructed the manager, Samuel E. Kane, to see Mr. Brimo and ascertain whether he really wanted to sell said
factory, and, if so, to get permission from him to inspect the premises. Mr. Kane inspected the factory and, presumably,
made a favorable report to Mr. Prieto. The latter asked for an appointment with Mr. Brimo to perfect the negotiation. In
the meantime Sellner, the other broker referred to, had found a purchaser for the same property, who ultimately bought it
for P1,300,000. For that reason Mr. Prieto, the would be purchaser found by the plaintiff, never came to see Mr. Brimo to
perfect the proposed negotiation.
Under the proofs in this case, the most that can be said as to what the plaintiff had accomplished is, that he had found a
person who might have bought the defendant's factory if the defendant had not sold it to someone else. The evidence does
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not show that the Santa Ana Oil Mill had definitely decided to buy the property in question at the fixed price of
P1,200,000. The board of directors of said corporation had not resolved to purchase said property; and even if its president
could legally make the purchase without previous formal authorization of the board of directors, yet said president does
not pretend that he had definitely and formally agreed to buy the factory in question on behalf of his corporation at the
price stated. On direct examination he testified for the plaintiff as follows:
Q.
You say that we were going to accept or that it was beneficial for us; will you say to whom your refer,
when you say "we?"
A.

Our company, the Santa Ana Oil Mill.

Q.

And is that company able to pay the sum of P1,200,000?

A.

Yes, sir.

Q.

And you accepted it at that price of P1,200.000?

A.
Surely, because as I already said before, we were in the difficult position of not being able to operate
our factory, because of the obstacle placed by the Government.
Q.

And did you inform Mr. Danon of this acceptance?

A.

I did not explain to Mr. Danon.

On cross-examination the same witness testified:

Q.
What actions did the board of directors of the Santa Ana Oil Mill take in order to acquire or to make an
offer to Mr. Brimo of the Holland American Oil Company?
A.
But nothing was effected, because Mr. Danon stated that the property had been sold when I was going
to deal with him.
Q.

But do you not say that you made an offer of P1,200,000?

A.
No; it was Mr. Danon who made the offer and we were sure to put the deal through because we have
bound ourselves.
The plaintiff claims that the reasons why the sale to the Santa Ana Mill was not consummated was because Mr. Brimo
refused to sell to a Filipino firm and preferred an American buyer; that upon learning such attitude of the defendant the
plaintiff endeavored to procure another purchaser and found a Mr. Leas, who delivered to the plaintiff a letter addressed to
Mr. Brimo, offering to buy the factory in question at P1,200,000. the offer being good for twenty-four; that said offer was
not accepted by Brimo because while he was reading the letter of Leas, Sellner came in, drew Brimo into another room,
and then and there closed the deal at P1,300,000. The last statement is admitted by the defendant.
Such are the facts in this case, as nearly accurate as we can gather them from the conflicting evidence before us. Under
those facts, is the plaintiff entitled to recover the sum of P60,000, claimed by him as compensation for his services? It will
be noted that, according to the plaintiff's own testimony, the defendant agreed and promised to pay him a commission of 5
per cent provided he (the plaintiff) could sell the factory at P1,200.000 ("con tal que V. me venda la fabrica en
P1,200.000"). It will also be noted that all that the plaintiff had accomplished by way of performance of his contract was,
that he had found a person who might have bought the factory in question had not the defendant sold it to someone else.
(Beaumont vs. Prieto, 41 Phil., 670; 249 U.S., 554.)
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Under these circumstances it is difficult to see how the plaintiff can recover anything in the premises. The plaintiff's
action is not one for damages for breach of contract; it is an action to recover "the reasonable value" of services rendered.
this is unmistakable both from the plaintiff's complaint and his testimony as a witness during the trial.
Q.

And what is the reasonable value of the services you rendered to Mr. Brimo?

A.

Five per cent of the price at which it was sold.

Q.

Upon what do you base your qualification that those services were reasonable?

A.
First, because that is the common rate in the city, and, secondly, because of the big gain that he obtained
from the sale.
What benefit did the plaintiff, by his "services," bestow upon the defendant to entitle him to recover from the latter the
sum of P60,000? It is perfectly clear and undisputed that his "services" did not any way contribute towards bringing about
the sale of the factory in question. He was not "the efficient agent or the procuring cause of the sale."
The broker must be the efficient agent or the procuring cause of sale. The means employed by him and his efforts
must result in the sale. He must find the purchaser, and the sale must proceed from his efforts acting as broker.
(Wylie vs. Marine National Bank, 61 N. Y., 414; 416; citing: McClure vs. Paine, 49 N. Y., 561;
Lloyd vs. Mathews, 51 id., 124; Lyon vs. Mitchell, 36 id., 235; Briggs vs. Rowe, 4 Keyes, 424; Murrayvs. Currie,
7 Carr. and Payne, 584; Wilkinson vs. Martin, 8 id., 5.)
A leading case on the subject is that of Sibbald vs. Bethlehem Iron Co. (83 N. Y., 378; 38 Am. Rep., 441). In the case,
after an exhaustive review of various cases, the Court of Appeals of New York stated the rule as follows:
In all the cases, under all and varying forms of expression, the fundamental and correct doctrine, is, thatthe duty
assumed by the broker is to bring the minds of the buyer and seller to an agreement for a sale, and the price and
terms on which it is to be made, and until that is done his right to commissions does not accrue.
(McGavock vs. Woodlief, 20 How., 221; Barnes vs. Roberts, 5 Bosw., 73; Holly vs. Gosling, 2 E. D., Smith, 262;
Jacobs vs. Kolff, 2 Hilt., 133; Kock vs. Emmerling, 22 How., 72; Corning vs. Calvert, 2 Hilt., 56; Trundy vs. N.Y.
and Hartf. Steamboat Co., 6 Robt., 312; Van Lien vs. Burns, 1 Hilt., 134.)
xxx

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It follows, as a necessary deduction from the established rule, that a broker is never entitled to commissions for
unsuccessful efforts. The risk of a failure is wholly his. The reward comes only with his success. That is the plain
contract and contemplation of the parties. The broker may devote his time and labor, and expend his money with
ever so much of devotion to the interest of his employer, and yet if he fails, if without effecting an agreement or
accomplishing a bargain, he abandons the effort, or his authority is fairly and in good faith terminated, he gains no
right to commissions. He loses the labor and effort which was staked upon success. And in such event it matters
not that after his failure, and the termination of his agency, what he has done proves of use and benefit to the
principal. In a multitude of cases that must necessarily result. He may have introduced to each other parties who
otherwise would have never met; he may have created impressions, which under later and more favorable
circumstances naturally lead to and materially assist in the consummation of a sale; he may have planted the very
seed from which others reap the harvest; but all that gives him no claim. It was part of his risk that failing himself,
not successful in fulfilling his obligation, others might be left to some extent to avail themselves of the fruit of his
labors. As we said in Wylie vs. Marine National Bank (61 N.Y., 416), in such a case the principal violates no right
of the broker by selling to the first party who offers the price asked, and it matters not that sale is to the very party
with whom the broker had been negotiating. He failed to find or produce a purchaser upon the terms prescribed in
his employment, and the principal was under no obligation to wait longer that he might make further efforts. The
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failure therefore and its consequences were the risk of the broker only. This however must be taken with one
important and necessary limitation. If the efforts of the broker are rendered a failure by the fault of the employer;
if capriciously he changes his mind after the purchaser, ready and willing, andconsenting to the prescribed terms,
is produced; or if the latter declines to complete the contract because of some defect of title in the ownership of
the seller, some unremoved incumbrance, some defect which is the fault of the latter, then the broker does not lose
his commissions. And that upon the familiar principle that no one can avail himself of the nonperformance of a
condition precedent, who has himself occasioned its nonperformance. But this limitation is not even an exception
to the general rule affecting the broker's right for it goes on the ground that the broker has done his duty, that he
has brought buyer and seller to an agreement, but that the contract is not consummated and fails though the afterfault of the seller. The cases are uniform in this respect. (Moses vs. Burling, 31 N.Y., 462; Glentworth vs. Luther,
21 Barb., 147; Van Lien vs. Burns, 1 Hilt., 134.)
One other principle applicable to such a contract as existed in the present case needs to be kept in view.Where no
time for the continuance of the contract is fixed by its terms either party is at liberty to terminate it at will, subject
only to the ordinary requirements of good faith. Usually the broker is entitled to a fair and reasonable opportunity
to perform his obligation, subject of course to the right of the seller to sell independently. But having been granted
him, the right of the principal to terminate his authority is absoluteand unrestricted, except only that he may not
do it in bad faith, and as a mere device to escape the payment of the broker's commissions. Thus, if in the midst of
negotiations instituted by the broker, and which were plainly and evidently approaching success, the seller should
revoke the authority of the broker,with the view of concluding the bargain without his aid, and avoiding the
payment of commission about to be earned, it might be well said that the due performance his obligation by the
broker was purposely prevented by the principal. But if the latter acts in good faith, not seeking to escape the
payment of commissions, but moved fairly by a view of his own interest, he has the absolute right before a
bargain is made while negotiations remain unsuccessful, before commissions are earned, to revoke the broker's
authority, and the latter cannot thereafter claim compensation for a sale made by the principal, even though it be
to a customer with whom the broker unsuccessfully negotiated, and even though, to some extent, the seller might
justly be said to have availed himself of the fruits of the broker's labor. (Ibid. pp. 444, 445 and 446.)
The rule laid down in the foregoing case was adopted and followed in the cases of Zeimer vs. Antisell (75 Cal. 509), and
Ayres vs. Thomas (116 Cal., 140).
The undertaking to procure a purchaser requires of the party so undertaking, not simply to name or introduce a
person who may be willing to make any sort of contract in reference to the property, but to produce a party
capable, and who ultimately becomes the purchaser. (Kimberly vs. Henderson and Lupton, 29 Md., 512, 515,
citing: Keener vs. Harrod and Brooke, 2 Md. 63; McGavock vs. Woodlief, 20 How., 221. See also Richards,
Executor, vs. Jackson, 31 Md., 250.)
The defendant sent a proposal to a broker in these words: If you send or cause to be sent to me, by advertisement
or otherwise, any party with whom I may see fit and proper to effect a sale or exchange of my real estate, above
described I will pay you the sum of $200. The broker found a person who proposed to purchase the property, but
the sale was not affected. Held: That the broker was not entitled to compensation. (Walker vs. Tirrel, 3 Am. Rep.,
352.)
It is clear from the foregoing authorities that, although the present plaintiff could probably have effected the sale of the
defendant's factory had not the defendant sold it to someone else, he is not entitled to the commissions agreed upon
because he had no intervention whatever in, and much sale in question. It must be borne in mind that no definite period
was fixed by the defendant within which the plaintiff might effect the sale of its factory. Nor was the plaintiff given by the
defendant the exclusive agency of such sale. Therefore, the plaintiff cannot complaint of the defendant's conduct in selling
the property through another agent before the plaintiff's efforts were crowned with success. "One who has employed a
broker can himself sell the property to a purchaser whom he has procured, without any aid from the broker."
(Hungerford vs. Hicks, 39 Conn., 259; Wylie vs. Marine National Bank, 61 N.Y., 415, 416.)
133

G.R. No. L-58794 August 24, 1984

SPOUSES LYDIA TERRADO & MARTIN ROSARIO, and DOMINGO FERNANDEZ, petitioners,
vs.
HON. COURT OF APPEALS, HON. FELICIDAD CARANDANG VILLALON, Judge, CFI of Pangasinan,
Deputy Sheriff OSCAR SIBUNA of Pangasinan, and GERUNCIO LACUESTA, respondents.
GUERRERO, J.:
Pursuant to Act No. 4041 of the Philippine Legislature approved January 21, 1983, the Fisheries situated in the locality
known as Mangabul, Bayambang, Pangasinan, and falling within Plan No. Ipd Ninety-two of the Bureau of Lands and
recently declared by the courts as public land was reserved and the usufruct thereof ceded to the municipality of
Bayambang, Province of Pangasinan, to be used or disposed of in accordance with the general municipal law relative to
the letting of fisheries in municipal waters: Provided, That the timber and other forest products therein shall be placed
under the administration and control of the forest service; Provided further, that the cession shall not be interpreted as
limiting the power of the Secretary of Agriculture and Natural Resources to prescribe rules and regulations for the
protection of game birds, mammals or fish within the area ceded to the municipality of Bayambang. (Section 1, Act 4041.
This Act was declared enforced by Proclamation No. 545 (1933).
On May 15, 1974, the Sanggunian Bayan of Bayambang, Pangasinan passed Resolution No. 35 enacting Ordinance NO.
8, series of 1974, establishing the Bayambang Fishery and Hunting Park and Municipal Water Shed embracing all the vast
area of the Mangabul Fisheries consisting of about 2,061 hectares with 19 fishponds and not less than 1,500 hectares of
watershed area. In the said ordinance, the municipality designated appointed and constituted private respondent Geruncio
Lacuesta as Manager-Administrator for a period of 25 years, renewable for another 25 years, under the condition that said
respondent shall pay the municipality. a sum equivalent to 10% of the annual gross income that may be derived from the
sale of forest products, wild game and fish, which amount shall not be less than P200,000.00 annually. He was further
required to post a bond in the amount of P200,000.00 to guaranty payment of the 10% due the municipality.
Municipal Ordinance No. 8 was approved by the Provincial Board of Pangasinan on October 11, 1974 and thereafter was
forwarded to the then Secretary of Agriculture and Natural Resources for approval pursuant to the provisions of the
Fisheries Act, Act No. 4003.
On April 4, 1975, the Secretary disapproved the Ordinance because it grants fishery privileges to respondent Lacuesta
without the benefit of competitive public hearing in contravention of the provisions of Act 4003 as amended.
Respondent Lacuesta interposed an appeal from the disapproval by the Secretary of Agriculture and Natural Resources to
the Office of the President but the appeal was withdrawn by said respondent in his letter dated July 14, 1977.
The Municipality then informed respondent Lacuesta of the disapproval of the Ordinance by the Secretary of Agriculture
& Natural Resources and directed him to refrain and desist from acting as Administrator-Manager under the contract but
the latter refused and insisted in maintaining possession of the fisheries. Inspite of such refusal, the Sanggunian Bayan of
Bayambang, Pangasinan passed Resolution No. 31, series of 1977, resolving to advertise for public bidding all fisheries at
the Mangabul area for four years and to direct the Municipal Treasurer to prepare the necessary notices of public bidding,
and accordingly, the Municipal Mayor and the Municipal Treasurer caused to issue a Notice of Public Bidding scheduled
July 5, 6, and 7, 1977. Among the winning bidders were the petitioners herein, the spouses Lydia Terrado and Martin
Rosario and Domingo Fernandez who were immediately placed in possession of the Mangabul fisheries as of July 6,
1977.
Private respondent Geruncio Lacuesta immediately filed on July 8, 1977 a petition for prohibition and mandamus with
damages with the Court of First Instance of Pangasinan, Branch IX in San Carlos City, presided by Judge Augusto Saroca
against the Municipal Mayor, the Municipal Treasurer, the Sanggunian Bayan and the members thereof, praying that the
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respondent municipal officials named therein be prohibited from executing any contract of lease with the winning bidders
and from enforcing Resolution No. 31, series of 1977, and further asked that a temporary restraining order be issued
against said respondent officials from performing the acts enjoined.
Pursuant to the prayer in the petition for prohibition in Civil Case No. 516, Judge Saroca issued a restraining order
enjoining and prohibiting all the respondents, their agents, representatives and/or anybody acting for and on their own
behalf, from executing any contract of lease with the winning bidders in the biddings conducted on July 5, 6, and 7, 1977
and from enforcing Resolution No. 31, series of 1977 until further orders from the court. Respondents in this Civil Case
No. 516 filed a motion to dissolve the temporary restraining order but was denied on August 17, 1977.
Upon ex-parte motion by Lacuesta asking that the Sheriff of the court be authorized to enforce the restraining order of
July 11, 1977 and to arrest and keep in his custody all persons violating the same, Judge Saroca issued on October 7, 1977
an order directing Deputy Sheriff Alberto V. Soriano to proceed to the Mangabul fisheries and enforce the restraining
order of July 11, 1977 against the respondent municipal officials, their agents and representatives and to arrest and keep in
custody any and - all persons found to be violating said order. Thereafter, the Deputy Sheriff informed the court on
October 26, 1977 that he served copies of the restraining order dated July 11, 1977 on all parties concerned and that they
peacefully vacated and gave the possession of the fisheries without interposing any formal objection, to the plaintiffs,
Geruncio Lacuesta, et al.
Still in Civil Case No. 516, Lacuesta filed a petition dated September 16, 1977 asking that the defendants named in said
petition including the spouses Lydia Terrado Rosario and Martin Rosario and others be ordered to explain why they
should not be punished for contempt and that they be arrested immediately and kept in custody until they stop violating
the restraining order of July 11, 1977, further alleging that said spouses employing misrepresentation, strategies, deceit,
threat and force took over the Mayor fishery and illegally fished therein and are continuing to fish the same including the
Manansan Alangigan, Tubor and Banawang na Dueg Fisheries which they had previously took over from the movant
Lacuesta.
The situation became serious as on October 10, 1977 the Sanggunian Bayan passed Resolution No. 34, series of 1977
"requesting the assistance from the Department of Natural Resources, the Philippine Constabulary, Department of Justice,
the Provincial Fiscal, the Provincial Governor and other agencies, for them to enjoin respondent from disturbing and
interfering with the administration by the Municipality of Mangabul Fisheries and other areas."
In the meantime that these incidents were pending before Judge Saroca, the members of the Sanggunian Bayan as
petitioners filed on November 15, 1977 a petition for certiorari with the defunct Court of Appeals against Judge Saroca,
the INP Station Commander, Deputy Sheriff Soriano, and Geruncio Lacuesta and others assailing the order issued on July
11, 1977 as well as the order issued October 7, 1977 as null and void, the same having been issued without jurisdiction
and with grave abuse of discretion, the case docketed as CA-G.R. No. SP-07252-R. The appellate court denied the petition
for certiorari and held that Judge Saroca did not act without or in excess of jurisdiction or with grave abuse of discretion
in issuing the restraining order of July 11, 1977. The Sanggunian Bayan members elevated the case on a petition for
review on certiorari, G.R. No. 49064 but was denied for lack of merit per Our resolution dated October 16, 1978.
While the certiorari proceeding was pending before the Court of Appeals, the resolution on the motion for contempt
before Judge Saroca was held in abeyance but upon final decision by the court, Lacuesta moved the court on July 15, 1979
to resolve the contempt motion as well as for the order of their arrest. After hearing, Judge Saroca issued the order dated
August 30, 1979 holding that the continued possession of the spouses Lydia Terrado Rosario and Martin Rollo Rosario as
winning bidders constituted disobedience to and unlawful interference with the temporary restraining order of July 11,
1977 and directed Deputy Sheriff Soriano to enforce the July 11 and October 7, 1977 orders, to cause the arrest of said
Rosario spouses including their agents and representatives and any and all person representing themselves as winning
bidders in the public bidding held on July v, 1977 and to hold them in custody until further orders of the court, unless said
spouses and their agents and the winning bidders voluntarily refrain from disobeying and interfering with the process of
the court, in which case they may be discharged from custody. In the same order, Judge Saroca set a pre-trial conference
and hearing on the merits on September 25, 26, and 27, 1979.
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Having been adjudged in contempt of court and their immediate arrest ordered by Judge Saroca in the order mentioned
above dated August 30, 1979, the spouses Lydia Terrado Rosario and Martin Rosario filed the petition for prohibition
with the prayer for a writ of preliminary mandatory injunction assailing the questioned order as null and void, having been
issued in grave abuse of discretion amounting to lack of jurisdiction and praying that respondent Judge Saroca be
restrained from implementing the same, the petition docketed as CA-G.R. No. SP-09724.
Resolving the petition (CA-G.R. No. SP-09724), the Court of Appeals, acting through the Former Eleventh Division with
Justices Victoriano, J., ponente, and Reyes and Nocon, JJ., concurring, ruled and set aside the assailed order of August 30,
1979, holding that the Rosario spouses were not parties to the case, hence, they could not be bound by the restraining
order of July 11, 1977 which enjoined and prohibited the parties: "(1) from executing any contract of lease with the
winning bidders in the bidding conducted on July 5, 6, and 7, 1977; and/or (2) from enforcing resolution No. 31, series of
1977 of the Sangguniang Bayan of Bayambang, Pangasinan, until further orders from this court." The order of Judge
Saroca dated August 30, 1979 was, therefore, ordered set aside as having been issued in excess of jurisdiction and with
grave abuse of discretion. The decision of the Court of Appeals in CA-G.R. No. SP-09724 was promulgated January 24,
1980 thereby upholding the possession of the spouses Lydia Terrado and Martin Rosario.
Meanwhile, the Municipality of Bayambang, represented by Mayor Jaime P. Junio and the Sangguniang Bayan of
Bayambang represented by the members thereof, filed on September 5, 1979 Civil Case no. SCC-648 in the Court of First
Instance of Pangasinan, Branch X, San Carlos City against Geruncio Lacuesta for annulment of the contract entered into
between the Municipality and Lacuesta under Ordinance No. 8 hereinbefore mentioned, injunction and damages with
prayer for the issuance of a writ of preliminary injunction. After the hearing of the incident for the issuance of the writ of
preliminary injunction, Judge Saroca issued an order dated November 15, 1979 granted the writ as prayed for and ordered
the defendant Lacuesta, his agents, lawyers, representatives, laborers and other person or persons under his employ to
refrain and desist from interfering with and molesting the plaintiffs in the use of and in the exercise of plaintiffs'
usufructury rights until further orders from the court. On November 16, 1979, the day Judge Saroca retired from the
service, he issued another order to the sheriff to cause defendant Lacuesta to refrain from and desist from enforcing and
implementing Resolution No. 35 enacting Ordinance No. 8, series of 1974 and the contract of management and
administration, restraining them further from interfering with and molesting the plaintiffs in the use of and in the exercise
of the latters' usufructuary rights until further orders from the court.
On November 23, 1979, Lacuesta elevated to the Supreme Court the November 15 and 16 orders of Judge Saroca in a
petition for certiorari with prayer for preliminary injunction docketed as G.R. No. 51984. In Our resolution of January 14,
1980, the petition for certiorari was denied for lack of merit. His motion for reconsideration was also denied in Our
resolution of February 18, 1980.
With the retirement of Judge Saroca, the case was transferred to Branch III, Court of First Instance of Pangasinan,
Dagupan City, presided over by Judge Felicidad Carandang-Villalon, the case now docketed and numbered as D-5118.
Lacuesta then filed a Motion to Dissolve the Injunction and to Order Plaintiffs to Vacate and Turn All the Fisheries to
Defendants (the injunction previously issued by Judge Saroca dated November 15, 1979). The Motion was granted by
Judge Carandang-Villalon on the ground that 6 4 after the plaintiffs have recognized and confirmed the validity of the
resolution and the contract, and after the defendant had started to perform his duties and obligations under the contract, the
legal and factual ground which led the court to issue the writ has ceased to exist, and consequently, the dissolution of the
writ of preliminary mandatory injunction dated November 15, 1979 appears warranted by prevailing circumstances."
Plaintiff Municipality moved for reconsideration which was denied in the court's order of March 9, 1981 which also
ordered the issuance of the writ of execution after the approval of defendant Lacuesta's bond of P200,000.00.
The plaintiff Municipality thereafter assailed the above orders of Judge Carandang-Villalon dated November 8, 1981 and
March 9, 1981 in the former's petition for certiorari with prayer for writ of preliminary injunction, the petition filed in the
Court of Appeals and docketed as CA-G.R. 12586, dated June 16, 1981.
In the decision of the Court of Appeals, Seventh Division, promulgated September 29, 1981, the court held that "being
bereft of merit, as shown above, the instant petition is hereby denied due course and outrightly dismissed. Accordingly,
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the temporary restraining order heretofore issued is hereby lifted and the urgent motion to lift restraining order filed on
August 19, 1981 and on August 27, 1981 are hereby left unconsidered for having been rendered moot and academic by
the resolution." The motion for reconsideration of the decision was denied by resolution of the appellate court on
November 11, 1981.
Meanwhile, when the Court of First Instance of Pangasinan, Branch III, Judge Carandang-Villalon presiding, received
copy of the decision in SP-12586 promulgated September 29, 1981, the court issued an order on October 5, 1981 for the
ex-prosecution of its previous order to dissolve the preliminary injunction and place Lacuesta in possession of the
contested fisheries and accordingly, a writ of execution was issued on October 7, 1981.
Another petition for certiorari was filed by the spouses Lydia Terrado and Martin Rosario and Domingo Fernandez
docketed as CA-G.R. No. SP-13175, assailing the issuance of the order and writ dated October 5 and 7, 1981 respectively
for allegedly violating due process as they were issued before the lapse of the 15-day reglementary period. In this petition,
SP-3175, the court required respondent Judge and Lacuesta to comment, the same time issuing a temporary restraining
order against the assailed order and writ of October 5 and 7, 1981 of the respondent court.
On November 7, 1981, the appellate court (through the Seventh Division and ponente who handled both SP-12586 and
SP-13175), rendered its resolution in SP-13175 dismissing the petition for lack of merit and setting aside the order of
October 14, 1981 to include the lifting of the restraining order of even date. The appellate court ruled that:
Our decision in said CA-G.R. No. SP-12586 held in effect that the impugned orders (like the order of
January 8, 1981), were properly issued by the respondent court. Hence, those interlocutory orders, the
effectivity of which were suspended by the certiorari proceedings in CA-G.R. No. SP-12586, presumed to
be immediately executory upon the lifting of the restraining order as done in the decision of September
29, 1981. This must be so, notwithstanding the filing on October 21, 1981 of an "Urgent Ex-Parte Motion
For Extension" to file motion for reconsideration of said decision because an injunction, once dissolved,
cannot be revived except by a new exercise of judicial power, and no appeal by a dissatisfied party can of
itself revive it. (Watcon vs. Enriquez, 1 Phil. 480; Sitia Teco vs. Venture, 9 Phil. 497; II Martin, Rules of
Court, 1969 Ed., p. 84).
Thus, when respondent court issued its herein impugned order of October 5, 1981 and the Writ of
Execution pursuant thereto on October 7, 1981, it was merely putting into effect the immediately
operative interlocutory order dissolving the injunction. There was therefore, no abuse of discretion.
When the resolution in SP-13175 was received in the lower court, Judge Villalon issued on November 6, 1981 an "Alias
Writ of Execution and Possession" which reiterated its writ of October 7, 1981. The alias writ was received by the
Municipality, through counsel, on November 12, 1981.
On November 16, 1981, the Municipality of Bayambang, represented by its Mayor, filed another certiorari petition to
annul the alias writ of November 6, 1981, in CA-G.R. No. 13353 against Judge Carandang-Villalon and Geruncio
Lacuesta, the petition being signed by Atty. Oliver O. Lozano.
Since CA-G.R. No. SP-12586 and CA-G.R. No. SP-13353 involve the same subject matter, the Special Sixth Division of
the Court of Appeals to which CA-G.R. No. SP-13353 was assigned or raffled, resolved in its Resolution of November
27, 1981 to consolidate the case with CA-G.R. No. SP-12586 then pending with the Seventh Division of the Court of
Appeals as to the plaintiff Municipality's motion for reconsideration.
The two certiorari petitions, CA-G.R. No. 12586 and CA G.R. No. SP-13353, now consolidated in the Seventh Division,
were resolved in the Resolution dated December 4, 1981, thus: "WHEREFORE, the foregoing considered, the petition in
13353 is hereby dismissed for being a scrap of paper, the temporary restraining order heretofore issued is hereby lifted,
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and the scheduled hearing on December 10, 1981 hereby discontinued. The motion for reconsideration in SP-12586 is
hereby denied for lack of merit.
Since the Court of Appeals, Seventh Division, dismissed the petition in CA-G.R. No. SP-13353 as a mere scrap of paper
because Atty. Oliver O. Lozano was not authorized to represent the petitioner Municipality, Atty. Lozano submitted the
required authority in his Motion for Reconsideration of the resolution dismissing the petition, further praying that the
resolution of the Sixth Division giving due course to the petition as well as the temporary restraining order issued therein
be reinstated or restored.
Acting on the motion of the Municipality entitled "Ex-Parte Reiteration of Motion for Restoration of Temporary
Restraining Order" filed on December 22, 1981 and the "Urgent Ex-Parte Motion to Stop Arrest of Petitioner's Laborers"
filed on December 23, 198 1, the court in its Resolution of December 24, 1981 set the hearing of the first motion on
January 15, 1982 and as to the second motion, the court deemed "it wise and proper in the spirit of love and compassion
this Christmas time, to order that no arrests be ordered by the respondent court against persons involved in 'those fisheries
in areas covered by existing lease contracts executed by plaintiff Municipality in favor of entities and/or persons before
November 15, 1979' until after the results of the November 15 hearing are received. ... In effect, therefore, we are
ordering, as it is hereby ordered that a partial temporary restraining order be issued only as involved the areas with
existing lease contract entered into by the Municipality prior to November 15, 1979.
After the hearing on January 15, 1982 as alluded to above, the court promulgated its Resolution dated January 28, 1982,
holding that the pleadings signed by Atty. Oliver O. Lozano are deemed valid for purposes of considering the incidents
therein and that the impugned alias writ of execution issued by respondent court on November 6, 1981 is hereby declared
void only insofar as it has deleted the exception involving "those fisheries and areas covered by existing lease contract
executed by the plaintiff Municipality in favor of entities and/or persons before November 15, 1979. Further, the
respondent court was directed to conduct a factual determination of (a) who are the persons or what are the entities
involved, and (b) the clearly specified areas covered by their contracts, and that prior to the holding of such factual
determination however, the respondent court was ordered to settle the nature of those "lease contracts" i.e., whether
ordinary lease contract over a fishery area or contract of lease of services. Finally, the Court of Appeals ordered that "in
case the respondent court finds, after putting to rest the nature of those lease contracts referred to in the original order of
dissolution and after making the factual determination herein ordered, that such contracts no longer exist, then the Partial
Temporary Restraining Order above mentioned shall be deemed ineffective for having then become moot and academic
The Motion for Contempt of Court filed by Lacuesta on January 13, 1982 was also denied by the court.
Pursuant to the resolution of the Court of Appeals dated January 28, 1982 and in compliance therewith in conducting a
factual determination of who are the persons or what are the entities involved and the clearly specified areas covered by
their contracts, Judge Villalon, after conducting hearings, submitted to the appellate court in her Ist Indorsement dated
April 30, 1982, stating that "it is definite that there are admittedly no areas covered by any existing lease contract executed
by the plaintiff Municipality in favor of entities and/or persons before November 15, 1979 within the contemplation of the
Order dated January 8, 1981 which order has ordered the dissolution of the writ of preliminary mandatory injunction dated
November 15, 1979 issued by then retired Hon. Judge Augusto Saroca for reasons set forth in the Order.
Acting upon the above report of Judge Villalon, the Court of Appeals promulgated its Resolution dated July 7, 1982,
resolving that "in view of the above, the partial temporary restraining order has become ineffective for having then
become moot and academic. WHEREFORE, the motion filed by private respondent is hereby granted (Motion Ex-Parte
for Total Lifting of Partial Restraining Order). The Partial Temporary Restraining Order issued on December 24, 1981 is
hereby lifted and set aside.
Two other petitions for certiorari were also filed with the Court of Appeals assailing the October 8, 1982 Order of Judge
Villalon which ordered the issuance of a writ of execution and implementation of the Order of January 8, 1981, the first
being CA-G.R. No. 15033 entitled "Spouses Lydia Terrado and Martin Rosario, et al. vs. Hon. Felicidad CarandangVillalon, et al.," filed October 18, 1982 and the second, CA-G.R. No. 13175, "Spouses Lydia Terrado, et al. vs. Hon.
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Felicidad Carandang-Villalon, et al." dated October 9, 1981. CA-G.R. No. 15033 was dismissed on March 22, 1983,
while CA-G.R. G.R. No. 1317 5 on November 5, 1981.
The five (5) cases relating to the same subject matter, which are CA-G.R. No. 15033-SP, CA-G.R. 14501-SP, CA-G.R.
13353- SP CA-G.R. No. 13175-SP and CA-G.R. No. 12586-SP, were then consolidated in the decision of the Court of
Appeals promulgated March 22,1983.
The dismissal of the petition in CA-G.R. No. 13175 and the issuance of the alias writ of execution and possession issued
by respondent Judge Villalon in Civil Case No. D-5118 is now elevated to Us in G.R. No. 58794.
Likewise, the decision of the appellate court dismissing the petition in CA-G.R. No. 15033-SP and the Order issued by the
trial court dated January 8, 1981 have been raised to Us in G.R. No. 64489. Both petitions at bar, G.R. No. 58794 and
G.R. No. 64489, have been consolidated per Our Resolution of August 24, 1983.
The records of the petition before Us in G.R. No. 64489 disclose that upon written request of Judge Felicidad CarandangVillalon that she be relieved from taking further cognizance of Civil Case No. SCC-648 (D-5118) entitled "Geruncio
Lacuesta, et al. vs. The Municipality of Bayambang, the Supreme Court in its Resolution en banc dated June 7, 1983
granted the request of the Judge and directed the Clerk of Court of the Regional Trial Court of Dagupan to transfer the
records of the case to the Clerk of the Regional Trial Court of San Carlos City for raffling among the two branches
thereat. Accordingly, Judge Carandang-Villalon issued an Order dated June 17, 1983 directing the Stenographer who took
the proceedings 30 days to make complete transcript of the same and the Officer-in-Charge of the court to prepare the
voluminous exhibits and thereafter effect the transmittal of the full records of the case. Notwithstanding her relief, the
same Judge issued a further order dated September 2, 1983 commanding the Sheriff and the Commanding Officer of the
153rd PC Company to restore defendant Lacuesta and his men to possession of all the fisheries and areas covered by his
contract pursuant to the Order of the court dated October 8, 1982. This Order was implemented according to the Sheriff's
Return dated September 20, 1983.
Through the maze and muddle of this protracted legal controversy, it is plain and clear that the complaints and petitions
including all legal incidents and motions filed in the trial court, the appellate court and before this Tribunal are traceable.
in origin to the enactment and implementation of Municipal Ordinance No. 8, series of 1974, of the Municipality of
Bayambang, Pangasinan, establishing the Bayambang Fishery & Hunting Park and Municipal Watershed coveting the socalled Mangabul Fisheries. As stated in Section of the Ordinance, the purposes of the Park are: 1. To attract tourists to
Bayambang and thus increase the income of the municipality and create new employment and new sources of income for
the people; 2. To restore and conserve the natural environment of the area by means of reforestation of the forest or
timberland reserved, thru engineering works, and other means within the Ipd-92 area; 3. To restore or improve, conserve
and develop the fisheries, zones, and exploit the fish resources of all the fisheries therein; 4. To supply agro-industrial
enterprises that may be established in Bayambang with raw materials from the area; and 5. To provide sports and
recreation facilities and wholesome sports and recreational activities for the people.
Further, under the Ordinance, the Municipality designated, appointed and constituted private respondent Lacuesta as
Manager-Administrator for a period of twenty-five (25) years, renewable for another twenty-five (25) years upon mutual
agreement (Section 4). Among the powers, duties and obligations of the Manager-Administrator are: 1. To reforest with
woods or economic value all the timberland portions indicated in Plan Ipd-92 and those that need to be reforested for
ecological purposes; 2. To stock the forest with wildlife or economic value, protect the forest products and wildlife and
regulate their multiplication in accordance with existing laws; 3. To deepen the fisheries, swamps and tributary streams by
dredging, employing modern scientific and technological methods to restore or improve and develop the fisheries to
increase the fees yield; 4. To conduct and regulate sports fishing and hunting in the park and collect fees therefrom; 5. To
use or dispose of the fisheries portion in accordance with the general law on municipal waters; 6. To establish in a suitable
site within the park a fishing and hunting camp to be called "Camp Imelda." In Section 7 of the Ordinance, the ManagerAdministrator shall pay to the municipal government the sum equivalent to ten (10%) percent of the annual gross income
derived from an fees charged for fishing and hunting in the park and entry into Camp Imelda, from the sale of forest
products, wild games and fish from the area, but not less than P200,000.00.
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In accordance with the Ordinance, a Contract of Management and Administration was executed by the Municipality,
represented by its Municipal Mayor as the Usufructuary and Atty. Geruncio Lacuesta as the Manager-Administrator,
setting forth therein the terms and conditions laid down in the Ordinance as well as the mode and manner of the payment
of the sum of P200,000.00 annually due to the Municipality including the posting of a surety bond and other details of the
management and administration of the fisheries by the Manager-Administrator, which contract was executed on January
28, 1975 at Bayambang, Pangasinan.
Thus, the validity or legality of the Municipal Ordinance in question is the crucial and vital issue that must be resolved
once and for all to put an end to this raging litigation that has become the tug-of-war between the Municipality and
Lacuesta, together with other interested parties, over the vast and rich fishing grounds. In resolving said issue and
ultimately the very root of the conflict, the following undisputed facts are controlling and decisive: 1. That Municipal
Ordinance No. 8 has been disapproved by the Secretary of Agriculture and Natural Resources; and 2. That private
respondent has since died as shown in the Return of the Postmaster of Bayambang as noted in Our Resolution of July 2,
1984.
1. Ordinance No. 8, having been submitted to the Provincial Board of Pangasinan and approved by it by virtue of
Resolution No. 171 dated October 11, 1974, the same was submitted to the Secretary of Agriculture & Natural Resources
as required by Section 4 of Act No. 4003, The Fisheries Act, as amended by Commonwealth Act No. 471 passed June 16,
1939, and further amended by RA No. 659 approved June 16, 1951, thus:
Sec. 4. Instructions, orders, rules and regulations. The Secretary of Agriculture and Commerce shall from
time to time issue instructions, orders, rules and regulations consistent with this Act, as may be necessary
and proper to carry into effect the provisions thereof and for the conduct of proceedings arising under
such provisions; and all licenses, permits, leases and contracts issued, granted or made herein shall be
subject to the same.
All ordinances, rules or regulations pertaining to fishing or fisheries promulgated or enacted by provincial
boards, municipal boards or councils, or municipal district councils shall be submitted to the Secretary of
Agriculture and Commerce for approval and shag have full force and effect unless notice in writing of
their disapproval is communicated by the secretary to the board or council concerned within thirty days
after submission of the ordinance, rule, or regulation.
From the evidence on record, it appears that a Master Plan for the Bayambang Fishing and Hunting Park and Municipal
Watershed (Mangabul Fisheries Reservation) of Atty. Geruncio Lacuesta, Manager-Administrator of the said park, was
submitted to the Bureau of Fisheries and Aquatic Resources. In the Indorsement of the Director of Fisheries & Aquatic
Resources to the Secretary, Department of Natural Resources, the Comments, among others, state: "2. Records of this
bureau show that Resolution No. 171, s. 174 of the Provincial Board of Pangasinan, embodying Resolution No. 35, s.
1974, enacting Ordinance No. 8, s. 1974 of the Municipal Council of Bayambang, Pangasinan and Resolution No. 24, s.
1975 of the same council requesting reconsideration and rectification of the 5th Indorsement of that department dated
April 4, 1975, were returned DISAPPROVED and denied, respectively, by the Secretary of Natural Resources to the
Municipal Council of Bayambang, Pangasinan .
Upon the recommendation of the Director of Fisheries and Aquatic Resources that "In the light, therefore, of the
foregoing, the Master Plan for the Bayambang Fishing and Hunting Park and Municipal Watershed (Mangabul Fisheries
Reservation), insofar as fishing and fisheries thereat are concerned should not be given due course and should be
DISAPPROVED in the absence of adequate provisions thereon to the effect that the grant of the exclusive fishery
privileges within its municipal waters shag be granted by the municipal council (now sangguniang bayan) to the highest
bidder conformable with a fishery ordinance duly approved by the Secretary of Natural Resources, pursuant to Sections 5,
67 and 69 of Act No. 4003, as amended (now sections 4, 29 and 30 of Presidential Decree No. 704)," the Secretary of the
Department of Natural Resources disapproved the Master Plan.

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The legal basis for the disapproval of the Ordinance No. 8 and the Master Plan mentioned above is clear and explicit in
Sections 4, 67 and 69 of Act No. 4003 as amended by PD 704, Revising and Consolidating All Laws and Decrees
Affecting Fishing and Fisheries. These Sections provide:
Sec. 4. Jurisdiction of the Bureau. The Bureau shall have jurisdiction and responsibility in the
management, conservation, development, protection, utilization and disposition of an fishery and aquatic
resources of the country except municipal waters which shall be under the municipal or city government
concerned: Provided, That fish pens and seaweed culture in municipal centers shall be under the
jurisdiction of the Bureau: Provided, further, That all municipal or city ordinances and resolutions
affecting fishing and fisheries and any disposition thereunder shall be submitted to the Secretary for
appropriate action and shall have full force and effect only upon his approval. The Bureau shall also have
the authority to regulate and supervise the production, capture and gathering of fish and fishery/aquatic
products.
The Bureau shall prepare and implement, upon approval of the Fishery Industry Development Council, a
Fishery Industry Development Program.
Section 29. Grant of Fishery Privileges. A municipal or city council, conformably with an ordinance
duly approved by the Secretary pursuant to section 4 hereof, may: (a) grant to the highest qualified bidder
the exclusive privilege of construction and operating fish corrals, oyster culture beds, or of gathering
"bangus" fry, or the fry of other species in municipal waters for a period not exceeding five (5) years: ...
Section 30. Municipal concessions and leases concerning fisheries. lease or concession granted by a
municipal or city council under authority of an ordinance approved pursuant to section 4 hereof,
concerning fishing or fisheries in streams, lakes, rivers, in land and/or municipal waters, shall be valid and
enforceable unless the Secretary, upon recommendation of the Director, approves the same.
Indeed, the Ordinance is clearly against the provisions of the law for it granted exclusive fishery privileges to the private
respondent without benefit of public bidding. Under the Fisheries Act, the Municipality may not delegate to a private
individual as Manager-Administrator to "use or dispose of the fisheries portion in accordance with the general law on
municipal waters" nor to charge foes for fishing and hunting in the park, much less sell forest products, wild games and
fish from the area.
Neither can the Municipality grant the exclusive privilege of fishing for a period more than five (5) years, whereas in the
instant case, the period granted the Manager-Administrator was for twenty-five (25) years, renewable for another twentyfive years.
Moreover, under the specific provision of Act No. 4041, there is the proviso that the timber and other forest products
therein shall be placed under the administration and control of the forest service so that insofar as the ordinance relates to
the timber and other forest products and the reforestation of the timberland portions indicated in Plan Ipd-92 including the
powers, duties and responsibilities of the Manager-Administrator affecting the forestry portions are violative of Act No.
4041.
It is of no moment that at the pre-trial hearing of Civil Case No. SCC-648 (which was transferred to Branch 111, CFI
Dagupan and docketed as D-5118) the parties had admitted the legality of Ordinance No. 8. The issue as to the legality of
Ordinance No. 8 is not a question of fact that the parties may stipulate and agree at the pre-trial hearing of the case which
is for annulment of the contract under Ordinance No. 8. Such is a question of law for if the Ordinance is illegal and
contrary to law, the contract executed in pursuance thereto is consequently illegal. Acts executed against the provisions of
mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity. (Art. 5, New Civil Code).

141

From Our jurisprudence, We cite a number of cases ruling that a public bidding is essential to the validity of the grant of
exclusive privilege of fishery to a private party, thus:
The law (Sec. 2323 of the Revised Administrative Code) requires that when the exclusive privilege of
fishery or the right to conduct a fish-b reeding ground is granted to a private party, the same shall be let to
the highest bidder in the same manner as is being done in exploiting a ferry, a market or a slaughter house
belonging to the municipality (See Municipality of San Luis vs. Venture, et all 56 Phil. 329). The
requirement of competitive bidding is for the purpose of inviting competition and to guard against
favoritism, fraud and corruption in letting of fishery privileges (See 3 McQuillin, Municipal Corporations,
2nd Ed., p. 1170; Harles Gaslight Co. vs. New York, 83 N.Y. 309; and 2 Dillon, Municipal Corporations,
p. 1219) (San Diego vs. The Municipality of Naujan Province of Mindoro, 107 Phil. 118).
It may thus be restated that the law that governs the award of fishery privileges in municipal waters is the
provisions of Section 67 and 69 of Act No. 4003, as amended by Commonwealth Acts Nos. 115 and 471.
The provisions of Sections 2321, 2323 and 2319 of the Revised Administrative Code of 1917 have
thereby been modified by Act 4003, as amended. Under the applicable law the Municipal Council may
lease fishery privileges for a period not exceeding five years to the highest bidder in a public bidding
held, where the call for bid had specified the period for the lease. (San Buenaventura vs. Municipality of
San Jose, Camarines Sur, et al, 121 Phil. 101, 114).
The Municipal Council cannot extend the period of lease once it had been fixed on the basis of the period
provided in the call for bids. In the lease of fishery privileges for a period not exceeding five years the
previous approval of the provincial Board is not necessary. If the lease is for a period of more than five
years, but not exceeding ten years, the previous approval of the Provincial Board is necessary. If the lease
is for a period exceeding ten years, but not more than twenty years, the prior approval of the Secretary of
Agriculture and Natural Resources is necessary. In all cases the lease must be based on a competitive
public bidding. (San Buenaventura vs. Municipality of San Jose, Camarines Sur, et all supra p. 115).
While the respondent appellate court in CA-G.R. No. 12586-SP made the pronouncement that:
Besides, Sec. 4, Act No. 4003 (which was then the law in force before being superseded by PD 704 on
May 16, 1975) provides that an ordinance affecting fishing and fisheries "shall have full force and effect
unless notice in writing of (its) disapproval is communicated by the Secretary to the Board of council
concerned, within thirty days after submission of the ordinance." The ordinance was submitted for
approval on January 2, 1975 and the disapproval came only 102 days after such submission, on April 14,
1975. Paragraph (a) of the pretrial stipulation (Annex "6" of Respondent's Comment) states that "the said
ordinance was submitted to the then Secretary of Natural Resources who disapproved the ordinance,
insofar as fishing and fisheries are concerned after 30 days from submission."
We cannot sustain the above holding in view of Our holding in the case of Nepomuceno, et al. vs. Ocampo, et
al.,supra, wherein We held that the only purpose in the enactment of Republic Act 659 which required the Secretary of
Agriculture and Natural Resources to approve municipal ordinances pertaining to fishing or fisheries within 30 days after
submission of the ordinance, rule or regulation is simply to expedite prompt action by the Department Chief concerned.
Since Ordinance No. 8 granted fishery privileges exclusively to the private respondent without benefit of public bidding
and for a period exceeding five (5) years, the said ordinance and the contract of management executed in accordance
therewith were null and void ab initio, such that the failure of the Secretary of Agriculture & Natural Resources to
disapprove the same within 30 days from its submission does not render validity to the illegal legislation of the municipal
council nor to the contract executed under the same.
From the foregoing conclusion that the ordinance is illegal and void, per force the contract of management and
administration between the Municipality and Lacuesta is likewise null and void. It also follows that the complaint filed by
Lacuesta for prohibition in Civil Case No. 516 to enjoin the Municipal Council of Bayambang from leasing the Mangabul
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Fisheries upon public bidding as authorized in its Resolution' No. 31, series of 1977 is without legal basis and merit for
Lacuesta has no right or interest under the void ordinance and contract. The suit must be dismissed and We hereby order
its immediate dismissal.
2. We have noted earlier the death of Lacuesta in Our Resolution of July 2, 1984. His death is an irreversible fact that
throws an entirely new bearing on the legal controversy at hand. For essentially, the contract of management and
administration between the Municipality and Lacuesta is one of agency whereby a person binds himself to render some
service or to do something in representation or on behalf of another, with the consent or authority of the latter. (Article
1868, New Civil Code). Here in the case at bar, Lacuesta bound himself as Manager-Administrator of the Bayambang
Fishing & Hunting Park and Municipal Watershed to render service or perform duties and responsibilities in
representation or on behalf of the Municipality of Bayambang, with the consent or authority of the latter pursuant to
Ordinance No. 8. Under Article 1919, New Civil Code, agency is extinguished by the death of the agent. His rights and
obligations arising from the contract are not transmittable to his heirs. (Art. 1311 , New Civil Code).
3. Petitioners in both cases before Us, G.R. No. 58794 and G.R. No. 64489, anchor their claims to certain portions of the
Mangabul Fisheries which they allege to have won in public bidding under the authority of Resolution No. 31, series of
1977 of the Municipal Council of Bayambang which leased the fisheries for a four-year period. The period has already
lapsed, hence their fishing privilege is no longer effective as of June 30, 1981. To restore and place petitioners in
possession of the fisheries would be an extension of their four-year period lease which is not authorized under the
ordinance cited above.
Nonetheless, the assailed order of Judge Villalon dated September 3, 1983 restoring possession of the fisheries to
Lacuesta and his men which was issued after her relief from the case upon her own request is clearly irregular and without
authority. There should be and there ought to be full obedience and compliance by a subordinate court of the orders and
resolutions of this Court. There cannot be any iota of discipline much less efficiency in the administration of justice if the
lower echelons in the judicial hierarchy can freely act as they wish inspire of their relief. This should be a stem warning to
all judges and personnel in all the courts.
We brush aside the procedural aspects raised in the petitions before Us and in the interest of public welfare and speedy
administration of justice, avoiding further multiplicity of suits, We consider the intrinsic merits of the controversy which
as We pointed out previously, rest on the validity of the Municipal Ordinance in question. Thus, in sum and substance,
We hereby pronounce the nullity of Ordinance No. 8, series of 1974 of the Municipal Council of Bayambang, Pangasinan
and the contract of management and supervision executed between the Municipality of Bayambang and Geruncio
Lacuesta as Manager-Administrator of the Bayambang Fishery & Hunting Park and Municipal Watershed.
Since Ordinance No. 8 and the contract of management and supervision are both null and void, the Alias Writ of
Execution and Possession dated November 6, 1981 and the Order of October 8, 1982 for the issuance of writ of execution
and possession to place and restore possession of the Mangabul Fisheries, of portions thereof or fisheries therein to
Geruncio Lacuesta, his agents, men and/or representatives under the said contract and by virtue of the ordinance are,
including the writ also issued on October 8, 1982, without legal force and effect.
WHEREFORE, IN VIEW OF ALL THE FOREGOING, the Alias Writ of Execution and Possession issued November 6,
1981 and assailed in G.R. No. 58794, as well as the Order and Writ dated October 8, 1982 raised in G.R. No. 64489, are
hereby NULLIFIED and SET ASIDE. No costs.

143

G.R. No. L-11437

January 16, 1917

BENITO LEGARDA Y TUASON, plaintiff-appellant,

vs.
MARIANO B. ZARATE, defendant-appellant.
TORRES, J.:
This appeal by bill of exceptions was raised by counsel for the plaintiff and counsel for the defendant, from the judgment
of October 15, 1915, in which the court held that the defendant lessee, Mariano B. Zarate, is liable only for the payment of
the rents at the rate of 5 per cent per annum of the assessed valuation of the leased properties, which is equivalent to
P583.32 for the period from January, 1914, to May, 1915, inclusive and sentenced the defendant to pay this sum to the
administrator of the estate of the plaintiff, Benito Legarda y Tuason, deceased, without special finding as to costs.
On June 4, 1915, counsel for Benito Legarda y Tuason filed a written complaint in the Court of First Instance of this city
against Mariano B. Zarate, alleging as a cause of action that on April 23, 1910, the plaintiff's attorney in fact leased to the
women Kami Yunioka, Turu Kaneko, and Lamasta Kima lots Nos. 9, 25, and 23, respectively (Exhibits A, B, and C
attached to the complaint), of Parcel F of the lands belonging to the plaintiff and which formed a part of the Nagtajan
Hacienda; that each of the said lots contained an area of 600 square meters; that the annual rental of the property that was
the subject matter of each contract, was 10 per cent of the assessed valuation thereof; that subsequently, to wit, on
September 5, 1910, the said lessees, with the plaintiff's consent and approval, conveyed to the defendant, Mariano B.
Zarate their respective rights derived from the said contracts of lease, and all their interests in the buildings erected on the
said lots; that since that date the defendant had been paying the rents due, within the periods stipulated, always on the
basis of 10 per cent of the assessed valuation of the property, with exception of the rents corresponding to the whole of the
year 1914 and to the months from January to May, 1915, which he had refused to pay. Therefore the plaintiff's counsel
prayed the court to enter judgment by sentencing the defendant to pay to the plaintiff to rents in arrears amounting to
P1,166.65, in addition to those that might be owing by him subsequently and up to the time decision be rendered, on the
basis of 10 per cent per annum of the present assessed valuation of the property, and to pay the costs of the suit.
On June 29, 1915, counsel for the defendant filed his written answer to the above mentioned complaint; he denied the
essential parts thereof and added that on the date of the transfer of the said contracts of lease to the defendant, on
September 5, 1910, no building of any kind stood on the land in question. In special defense he alleged that prior to and at
the time of the execution of the contracts Exhibits A. B, and C, by and between the plaintiff and the original lessees, it had
been decided and stipulated that the 10 per cent of the assessed valuation which these latter should pay as annual rental
should be based on an assessment not in excess of one peso per square meter; that at the time the leases were transferred
to the defendant the land was used solely for raising rice-grass, and that it was agreed between the contracting parties that
the defendant should spend labor and money in the improvement of the said land; that the defendant filled in this land and
erected buildings thereon, but that he did this only after it had been clearly agreed between himself and the plaintiff that
the rental of the said properties should be based on their assessed valuation which should not exceed one pesos per square
meter, for, were it not for this agreement, the defendant would not have accepted such a contract; that in 1911, even after
the opening of a street through the lands in question, these properties were assessed only at one peso per square meter,
which valuation was raised to P2 in 1914, when the plaintiff, without notifying the defendant, protested against the said
increased valuation and appealed before the board of tax revision, which saw fit to fix the valuation of the said properties
at P4 per square meter, which facts became known to the defendant for the first time when the plaintiff tried to collect
from him the annual rental on the basis of 10 per cent of P4 per square meter, which the defendant refused to pay; that, by
reason of the protest made by the lessees and the owners of properties comprised within the said lands, the tax valuation
corresponding to the year 1915 was reduced to P3 per square meter; that, notwithstanding the plaintiff's claim that he was
entitled to collect from the defendant 10 per cent of the assessed valuation of P4 per square meter, in 1913 and 1914 the
plaintiff accepted rents for similar lands leased by other persons, under contracts identical to that made with the defendant,
at the rate of 10 per cent of the assessed valuation of P1 per square meter; and, finally, that the defendant is willing at any
time to pay to the plaintiff the rents for the said lands at the rate of 10 per cent of the assessed valuation of P1 per square
meter, as was stipulated between the parties, but that the plaintiff, notwithstanding the several tenders of payment made by
144

the defendant, had refused and still refused to accept the same. Therefore said counsel prayed the court to absolve the
defendant from the complaint, with the costs against the plaintiff.
After the hearing of the case and the introduction of evidence by both parties, the court rendered the decision
aforementioned, to which both the plaintiff and the defendant excepted and in writing moved for a reopening of the
proceedings and a new trial. These motions were overruled, exception was taken by the appellants, and, upon presentation
of a single bill of exceptions, in accordance with a stipulation made between both parties, the same was approved and
forwarded to the clerk of this court.
The point at issue in this suits is in regard to the amount of the rents that the defendant, Mariano B. Zarate, should be
obliged to pay to the administrators of the estate that belonged to the owner of the three parcels of land occupied by the
defendant's buildings on Plaza Gardenia, of the district of Sampaloc, Manila.
For the proper determination of this suit, it is necessary to declare what construction must be given to paragraph 3 of the
contracts of lease A, B, and C, of the date of April 23, 1910, all of the same tenor, by virtue of which three Japanese
women leased for a term of 25 years, extendible for an equal length of time at the will of the parties, the lots of land
described in the complaint. This paragraph 3 of the contract reads as follows:
The price of the lease shall be ten per cent (10%) per annum, net, of the assessed valuation of the property
specified in this contract. These rentals shall be payable monthly, in advance and within the first ten (10) days of
each month, at the domicile of the lessor or in any other place he may designate, and such payments shall be made
in Philippine currency.
The contract was executed by Dr. Benito Valdez, who, on the said date, was the attorney in fact and general administrator
of the entire estate of the deceased Benito Legarda y Tuason (Exhibit A), but the person who negotiated directly with the
prospective lessees of the lands was a man named Ramon Gavito, a subagent or administrator of the said lands. On the
date of the contracts, the assessed valuation of the leased lands was six centavos and a half per square meter (record, p.
54) and this valuation continued in force until 1911, when it was raised to P1 per square meter (record, p. 55). A few
months subsequent to the execution of the said contracts, to wit, on September 5, 1910, the original lessees, with the
consent of the attorney in fact, Valdez ceded and transferred their interests in the said parcels of land to the defendant
Mariano B. Zarate, who constructed houses thereon, and, by reason thereof and because of the opening of streets in that
locality, the assessed valuation of the Legarda lots was increased from year to year until in 1914 it was P4 per square
meter (record, p. 58), and as the rental price of the properties had thus considerably increased, the defendant refused to
pay the rents on the basis of the new assessment rate.
In effect, the defendant lessee refused to pay the rents corresponding to the year 1914 and the following years, if the rate
on which they were to be computed should be greater than P1 for each square meter. The defendant alleged that at the
time he accepted the transfer of the contracts by the Japanese women, the administrator of thehacienda, Ramon Gavito,
and Tomas Arguelles, who took part in the transaction, assured him that the amount of 10 per cent of the "assessed
valuation" of the said properties, which he was to pay as rent, would be computed on a valuation not in excess of P1 for
each square meter.
However, the plaintiff contends that paragraph 3 of the contracts under discussion clearly enough signifies the intention of
the parties that the lessee should pay as an annual rent 10 per cent of the valuation for which the said properties be
assessed, whether such valuation be increased or decreased, and that no limitations whatever were set on the valuation and
the amount that should be paid as rental.
Such was the testimony of Dr. Benito Valdez, who executed the said contracts. This witness stated that "the expression 10
per cent referred to the assessed valuation of the land in any period of time;" that he was the general administrator of the
state of the deceased Legarda and was vested with the exclusive right to make contracts in regard to that estate, wherefore
Ramon Gavito was not authorized to enter into any contract with regard thereto, as he was a mere agent of the witness and
only executed the orders the latter gave him, Valdez further testified that the construction of the defendant's houses on the
145

Nagtajan Hacienda was detrimental to the interests of the Legarda estate in that locality, inasmuch as, by reason of the few
improvements on a small part of the hacienda, the whole of the latter was obliged to bear an increase in tax, which would
not have been the case had it not been for the houses that stood there; and that the said hacienda was then assessed at
more than P300,000 (Record, pp. 56-57) and produced in rentals no more than about P12,000 per annum.
Laureano Benavides, a clerk in the service of the administrator of the Legarda estate, testified that the defendant Zarate
paid the rents pertaining to the months from April to December, 1910, on the basis of 6 1/2 centavos per square meter;
that he paid those pertaining to the years 1911, 1912, and 1913 on the basis of P1 per square meter, for this was the
assessed valuation of the property at that time; and that when, in 1914 and 1915, the assessment rate was raised to P4 and
P3, respectively, per square meter, the defendant failed to pay the said rents.
Tomas Arguelles, who, in representation of the member of the municipal board, McDonald, had taken a hand in the laying
out of the new barrio of Gardenia and in the transfers of the contracts of lease from the Japanese women to the defendant,
testified that the meaning of the said paragraph 3 in the contracts aforementioned did not seem clear to him, for if the 10
per cent mentioned in this paragraph referred to the assessed valuation of the land at any period, the amount required as
rent was excessive; that, consequently, he consulted Ramon Gavito, who stated to him that the land "is assessed at one
peso per square meter," and hence that the rent to be paid would be only P6 or P7 per annum a price which appeared
reasonable to witness but the latter did not understand that the rate of the lease price was to be modified in accordance
with the increase or decrease in the assessed valuation of the land, and added that when it was raised to P2 per square
meter, in 1914, Gavito filed a protest with the board of tax revision, requesting a reduction, and that this board, by
resolution of March 17th of the same year, 1914, deciding the protest, raised the valuation of said lands to P4 per square
meter, and that the defendant was not informed of these steps nor of the increase until the board had unfavorably decided
the protest, about the month of March, 1914.
The defendant testified that he had availed himself of the services of Arguelles in the transactions carried on with the
administrator of the estate, for the transfer of the contracts held by the Japanese women and that he had gleaned therefrom
that the defendant would be obliged to pay a rent of only 10 centavos for each square meter of land occupied by him
(record, p. 70), although the assessed valuation should be greater than P1 per square meter (record, pp. 72-73). The
defendant added that he was ever willing to pay to the plaintiff the amount of the rentals in arrears, provided that the rate
of payment did not exceed 10 centavos for each square meter of land occupied by him.
S. C. Choy, a Chinaman, another owner of houses in the same district where those that belong to defendant are situated,
and who also had obtained by transfer the lease rights of a Japanese woman in a certain lot of land pertaining to the
Nagtajan Hacienda, testified at the trial that he had dealth exclusively with Ramon Gavito, who was in charge of the
said hacienda, and that from the conversations he had had with the said Gavito before accepting the transfer he, the
witness, was convinced that he would have to pay rent only at the rate of 10 per cent on an assessed valuation of P1 and
that if the cost of the lease had exceeded this amount, he would not have accepted the transfer of the contract.
In rebuttal Mauro Prieto, another of the administrator of the estate of the deceased Benito Legarda, testifying with respect
to the allegations made in the defendant's answer, in regard to the payment of the rent on the 10 per cent basis, stated that
it was true, as aforesaid, that the administration of the estate had received from the lessees S. C. Choy and Go Chioco
payments of rentals pertaining to the year 1914 at the rate of 10 per cent on an assessed valuation of one peso, but that this
was done through an oversight, and that afterwards a claim, was made on these lessees for payment of the difference
(record, p. 81).
The record also discloses that on December 28, 1905, Ramon S. Gavito was appointed administrator of the Nagtajan
Hacienda, by the late Benito Legarda, according to the notarial instrument Exhibit 8 (record, p. 87), with right to lease
parcels of land pertaining to that hacienda, for such rentals, and on such terms and conditions as he might deem proper,
but with a proviso that all the contracts of lease executed by him should produce no effect whatever until they had been
approved by the signature of the lessor Legarda. That the said Gavito continued to act in such capacity and with that
power appears to be proven by the fact that the receipts for rentals paid for the lands pertaining to the Nagtajan Hacienda
were signed by Ramon Gavito, as may be seen by the receipts 1, 2, 3, 5, 6, and 7 (record, pp. 23-32) in which Gavito
146

styles himself "administrator," and the most recent of them bears the date of May 7, 1914, as corroborated by Valdez
(record, p. 53). However this power and authority granted to Gavito in the document of December 28, 1905, should be
deemed to be revoked by reason of the full and unlimited power conferred by the said Benito Legarda upon his son Benito
Legarda y de la Paz and his sons-in-law Mauro Prieto y Gorricho and Benito Valdez, by means of the notarial document
of December 20, 1907, which was amplified by another such instrument of November 12, 1909 (record, pp. 99-107).
Similar contracts, copied into the bill of exceptions as Exhibits A, B, and C (as assigned and transferred, without any
modification, by the lessees, the Japanese women Kami Yunioka, Turu Kaneko, and Lamasta Kima, to Mariano B. Zarate,
who substituted these lessees, with the knowledge and consent of Dr. Benito Valdez in his capacity of attorney in fact for
Benito Legarda y Tuason) were not challenged by the defendant, and remain in full force and effect; consequently
paragraph 3 of the said contracts, which specifies the rental for each of the three lots 9, 23, and 25 of parcel F of the
Nagtajan Hacienda, which are now occupied by the substituted lessee Mariano B. Zarate, produces its due effects and
natural consequences originating from the stipulated agreements; and as the words and terms employed in the said
paragraph 3 of the said contracts of lease, are clear and positive, their phraseology cannot be charged wit being
unintelligible, ambiguous or doubtful, nor as precluding a true and right understanding of the true meaning intended to be
conveyed by the said paragraph 3.
It was understood by both contracting parties, as recognized by the trial court in the judgment appealed from, that the
rents of the lands occupied by the lessee would have to be paid in the future, not on the basis of the assessed valuation of
the property on the date of the contract, but on the basis of such valuation as might be fixed by the Government in
accordance with appraisements made from time to time during the course of the 25 years stipulated as the term of the
lease. This fact is corroborated by the further fact that on the date of the contract the property was appraised at 6
centavos per square meter, and when this valuation was raised to P1 per square meter the defendant Zarate,
notwithstanding that no stipulation was made in regard to the said basis of 10 per cent of P1, did not protest against the
payment of the taxes pertaining to the years 1911, 1912 and 1913, on the basis of 10 per cent on a valuation of P1 per
square meter. This acquiescence on the defendant's part shows that he was informed and knew that the rental of the land
occupied by him was 10 per cent of the assessed valuation of the property as fixed by the Government for the payment of
the land tax.
The defendant lessee was not ignorant of the fact that the assessment rate was raised proportionally as the property
acquired greater value, and he must have taken these circumstances into consideration when he substituted himself for the
three Japanese lessees in the contracts of lease of the three lots now occupied by him, for, as it appears to have been
stipulated in paragraph 3 of the three said contracts of lease, the rental was to be 10 per cent, payable annually, of the
assessed valuation of the property, that is, of the valuation which each year might be given to the leased property on its
appraisement for the purpose of taxation, and it can not be understood that the 10 per cent of the assessed valuation of the
land on the date of the contract, April 23, 1910, was fixed as the rate of the lease price, inasmuch as this was not so
stipulated by and between the contracting parties.
The words used in the said paragraph 3 demonstrate that the intention of the parties was that the rental of the leased lands
should be 10 per cent per annum of the assessed valuation of the property, and as this valuation might be increased or
decreased during the 25 years of the life of the contract, it is evident that the stipulation made was that the rental should be
10 per cent of such valuation as on assessment might be given to the leased property. Furthermore, it does not appear to
have been stipulated that this 10 per cent per annum was to be a fixed amount in the contract, nor that the rental was not to
be affected by the natural fluctuations in the appraisement of the property, according to the rate of assessment. Therefore,
it is undeniable that the defendant, in accepting the contracts executed by and between the plaintiff and the said three
Japanese women, and in assuming the liabilities contracted therein by these latter, bound himself to pay 10 per cent per
annum of the assessed valuation of the leased lands in accordance with the assessment rate in force each year.
Article 1281 of Civil Code prescribes that, "If the terms of a contract are clear and leave no doubt as to the intentions of
the contracting parties, the literal sense of its stipulation shall be observed."

147

The phraseology employed in paragraph 3 of the said contracts is explicit and positive; it reveals precisely and clearly the
respective, and, at the same time, unanimous intention of the contracting parties to the effect that the rental of each one of
the leased portions of land should be 10 per cent of the assessed valuation of the property, and that if during the course of
the stipulated twenty-five years the valuation of the land should be raised the said 10 per cent should be computed on the
basis of the valuation fixed on assessment. No other construction outside of the proper and genuine meaning of the words
used in the said paragraph 3 of the three contracts aforementioned may be understood.
Besides, it can not be deduced from the said paragraph 3 that the words therein employed do not convey the intention of
the contracting parties, inasmuch as it does not appear in this paragraph, or in the others contained in the said contracts,
that any agreement whatever was made that the 10 per cent per annum was to be calculated on any fixed amount other
than the fixed assessed valuation of the property; if its valuation, as determined by its assessment, had decreased, the price
of the lease would also have decreased, and the defendant has acquired no right to refuse to pay the rent which the
plaintiff is entitled to collect from him pursuant to the terms of the contract, simply because the assessed valuation of the
leased property was increased.
Article 1278 of the Civil Code says: "Contracts shall be binding, whatever may be the form in which they may have been
entered into, provided that the essential conditions required for their validity exist."
The three contracts aforementioned contain the three requisites prescribed by article 1261 of the Civil Code, and if the
defendant lessee bound himself to pay 10 per cent per annum of the assessed valuation of the lands occupied by him, and
if this valuation has been increased, he can find no valid reason in support of his contention that he should pay only 10 per
cent per annum on an assessed valuation of P1 per square meter, which was not the assessed valuation per square meter of
the leased property in 1914 and 1915. The defendant lessee is obliged, pursuant to the contract, to pay 10 per cent per
annum of the assessed valuation of the properties according to the respective appraisements made by the Government in
each of those two years, or according to such appraisement as may be made in the future, during the course of the
stipulated contract.
The validity and fulfillment of contracts can not be left to the will of one of the contracting parties. (Art. 1256,
Civ. Code.)
Section 285 of the Code of Civil Procedure prescribes, "When the terms of an agreement have been reduced to writing by
the parties, it is to be considered as containing all those terms, and therefore there can be, between the parties and their
representatives or successors in interest, no evidence of the terms of agreement other than the contents of the writing,
except in the following cases."
None of the cases mentioned in the section just cited are applicable to the contracts, which have not been assailed as false,
either criminally or civilly.
For the foregoing reasons the judgment appealed from should be reversed and the defendant, Mariano B. Zarate, should
be, as he is hereby, sentenced to pay to the plaintiff the sum of P1,166.65, as rentals owing, and to pay those he may owe
in the future on the basis of 10 per cent per annum of the assessed valuation of the land occupied by him. No special
finding is made in respect to the costs of both instances. So ordered.

148

G.R. No. L-8190

May 28, 1958

GONZALO GARCIA, plaintiff-appellant,

vs.
CONSOLACION MANZANO, defendant-appellee.
REYES, J.B.L., J.:
This is an action filed by husband Gonzalo Garcia against his wife Consolacion Manzano for the judicial declaration of
the separation of their conjugal partnership property (Civil Case No. 23099, Court of First Instance of Manila).
Plaintiff Gonzalo Garcia alleged in his complaint that he and defendant are husband and wife but they have been living
separately from each other since 1948, all attempts at reconciliation between them having failed; that plaintiff, a duly
licensed doctor of veterinary science, used to be employed in the slaughter-house of the City of Manila, while defendant,
with plaintiff's knowledge and consent, engaged in the business of slaughtering large cattle and selling the fresh meat in
the city; that as a result of their joint efforts, plaintiff and defendant acquired and accumulated real and personal
properties; that upon the separation of the spouses, the defendant assumed the complete management and administration
of the conjugal partnership property, has been enjoying said property as well as its accessions and fruits to the exclusion
and prejudice of plaintiff, and has even fictitiously transferred or alienated a majority of said property in favor of third
persons; that since defendant assumed the management and administration of the conjugal partnership property, she has
neglected to file any income tax returns; at defendant has failed and refused to turn over and deliver to plaintiff his rightful
share and participation in the conjugal partnership property and its fruits. Wherefore, plaintiff prayed that judgment be
rendered ordering defendant to render a complete accounting of the conjugal partnership property and its fruits, that
judicial pronouncement be made ordering the separation of the conjugal partnership property of the spouses, and that the
rightful share therein of each of them be adjudicated pursuant to law.
Upon receipt copy of the complaint and summons, defendant filed a motion to dismiss the complaint on the ground of
failure to state a cause of action because "it does not allege any of the grounds recognized by Article 191 of the new Civil
Code for decreeing a judicial separation of properties". Plaintiff vigorously opposed the motion to dismiss, claiming that
he is entitled to some relief, legal or equitable, under the allegations of his complaint, and that Article 191 of the new Civil
Code may also be availed of by the husband where the administration of the conjugal partnership property has been
forcibly taken from him by his wife and she abuses the management thereof. Acting on the motion to dismiss, the lower
court held that plaintiff's complaint is not included under the provisions of Articles 190 and 191 of the new Civil Code
providing for judicial separation of the conjugal partnership property, and that the husband being the legal administrator
of the partnership, he "continuo consuficientes remedios legales para asegurar y reafirmar su autoridad en cuanto al
manejo de log bienes gan anciales dentro de la sociedad conyugal," and ordered the dismissal of the complaint without
prejudice. Plaintiff moved for reconsideration, which was denied. Hence, his present appeal.
We agree with the court below that the complaint does not establish a case for separation of property. Consistent with its
policy of discouraging a regime of separation and not in harmony with the unity of the family and the mutual affection
and help expected of the spouses, the Civil Codes (both old and new) require that separation of property shall not prevail
unless expressly stipulated in marriage settlements before the union is solemnized or by formal judicial decree during the
existence of the marriage (Article 190, new Civil Code; Article 1432, old Code); and in the latter case, it may only be
ordered by the court for causes specified in Article 191 of the new Civil Code:
ART. 191. The husband or the wife way ask for the separation of property, and it shall be decreed when the
spouse of the petitioner; has been sentenced to a penalty which carries with it civil interdiction, or has been
declared absent, or when legal separation has been granted.
In case of abuse of powers of administration of the conjugal partnership property of the husband, or in case of
abandonment by the husband, separation of property may also be ordered by the court according to the provisions
of articles 167 and 173, No. 3.
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In all these cases, it is sufficient to present the final judgment which has been entered against the guilty or absent
spouse.
The husband and the wife may agree upon the dissolution of the conjugal partnership during the marriage, subject
to judicial approval. All the creditors of the husband and of the wife, as well as of the conjugal partnership, shall
be notified of any petition for judicial approval of the voluntary dissolution of the conjugal partnership, so that
any such creditors may appear at the hearing to safeguard his interests. Upon approval of the petition for
dissolution of the conjugal partnership, the court shall take such measures as may protect the creditors and other
third persons.
After dissolution of the conjugal partnership, the provisions of Arts 214 and 215 shall apply. The provisions of
this Code concerning the effect of partition stated in Arts. 498 to 501 shall be applicable.
This enumeration must be regarded as limitative, in view of the Code's restrictive policy. The appellant recognizes that his
case does not come within the purview of the first paragraph of the Article quoted; but vigorously contends that the
provisions of the second paragraph, like those of Articles 167 and 178, should be interpreted as applicable, mutatis
matandis, to the husband, even if the letter of the statute refers to the wife exclusively.
ART. 167. In case of abuse of powers of administration of the conjugal partnership property by the husband, the
courts, on petition of the wife, may provide for a receivership, or administration by the wife, or separation of
property.
ART. 178. The separation in fact between husband and wife without judicial approval, shall not affect the
conjugal partnership, except that:
(1) In the spouse who leaves the conjugal home or refuses to live therein without just cause, shall not have a right
to be supported;
(2) When the consent of one spouse to any transaction of the other is required by law, judicial authorization shall
be necessary;
(3) If the husband has abandoned the wife without just cause for at least one year, she may petition the court for a
receivership or administration by her of the conjugal partnership property, or separation of property.
In support of his thesis, appellant argues that in case of mismanagement and maladministration by the wife, the husband
should be entitled to the same relief as the wife, otherwise there would be a void in the law. This contention ignores the
philosophy underlying the provisions in question. The wife is granted a remedy against the mismanagement or
maladministration of the husband because by express provision of law, it is the husband who has the administration of the
conjugal partnership.
ART. 165. The husband is the administrator of the conjugal partnership.
ART. 172. The wife cannot bind the conjugal partnership without the husband's consent, except in cases provided
by law.
In the system established by the Code the wife does not administer the conjugal partnership unless with the consent of the
husband, or by decree of court and under its supervision (Arts. 168, 196) "with such limitations as they (the courts) may
deem advisable" (Art. 197 in relation to Article 196). Legally, therefore, the wife can not mismanage the conjugal
partnership property or affairs, unless the husband or the courts tolerate it. In the event of such maladministration by the
wife (and disregarding the case of judicial authorization to have the wife manage the partnership, since such a case is not
involved), the remedy of the husband does not lie in a judicial separation of property but in revoking the power granted to
150

the wife and resume the administration of the community property and the conduct of the affairs of the conjugal
partnership. He may enforce his right of possession and control of the conjugal property against his wife (Perkins vs.
Perkins, 57 Phil., 205) and seek such ancillary remedies as may be required by the circumstances, even to the extent of
annulling or rescinding any unauthorized alienations or incumbrances, upon proper action filed for that purpose. For this
reason, the articles above quoted contemplate exclusively the remedies available to the wife (who is not the legal
administrator of the partnership) against the abuses of her husband because normally only the latter can commit such
abuses.
Appellant avers that even if separation of property is not available, the allegations of his complaint entitle him to
accounting and other relief. Unfortunately, the complaint not only expressly pleads the nature of the action as one for
separation of property, but its allegations clearly proceed on the theory that the plaintiff is entitled to such separation.
Thus, the averments regarding fictitious or fraudulent transfers are incompatible with an action between wife and husband
alone, for it is elementary that the legality of sigh transfers can not be passed upon without giving the transferees an
opportunity to be heard. .
Everything considered, we believe that the action of the court a quo in dismissing the action in view of the impropriety of
the principal remedy sought, but without prejudice to proper proceedings, would better suit the interests of equity and
justice, facilitating the clarification and simplification of the issues involved.
Wherefore, the judgment appealed from is affirmed, with costs against appellant. So ordered.

151

G.R. No. L-14248

April 28, 1960

NEW MANILA LUMBER COMPANY, INC., plaintiff-appellant,

vs.
REPUBLIC OF THE PHILIPPINES, defendant-appellee.
GUTIERREZ DAVID, J.:
Appeal from an order of dismissal of the Court of First Instance of Manila.
On May 8, 1958, the plaintiff lumber company filed in the court below a complaint against the defendant Republic of the
Philippines for the recovery of a sum of money. The complaint alleges, among other things, that defendant, thru the
Director of Schools, entered into a contract with one Alfonso Mendoza to build two school houses; that plaintiff furnished
the lumber materials in the construction of the said buildings; that prior to the payment by defendant of any amount due
the contractor, the latter executed powers of attorney in favor of the plaintiff "constituting it as his sole, true and lawful
attorney-in-fact with specific and exclusive authority to collect and receive from the defendant any and all amounts due or
may be due to said contractor from the defendant in connection with the construction of the aforesaid school buildings, as
may be necessary to pay materials supplied by the plaintiff"; and that originals of the powers of attorney were received by
defendant (thru the Director of Public Schools) who promised to pay plaintiff, but that it, nevertheless, paid the contractor
several amounts on different occasions without first making payment to plaintiff. The complaint, therefore, prays that
defendant be ordered to pay plaintiff the sum of P18,327.15, the unpaid balance of the cost of lumber supplied and used in
the construction of the school buildings, with interest at the legal rate from the date same was due, plus attorney's fees and
costs.
Served with a copy of the complaint, the defendant Republic of the Philippines, through the Solicitor General, moved to
dismiss the same on the grounds (1) that it does not allege a sufficient cause of action, (2) that plaintiff has no right to
institute the action under Act No. 3688, and (3) that the court is without jurisdiction to entertain the same against the
defendant.
The motion was opposed by plaintiff, but after hearing, the court below holding that "there is no juridical tie between
plaintiff-supplier and defendant-owner sustained the motion to dismiss on the first ground, and on June 23, 1958 issued
an order dismissing plaintiff's complaint. Its motion for reconsideration having been denied, plaintiff took the present
appeal.
The appeal is without merit.
Briefly stated, plaintiff's complaint seeks to enforce against the Republic of the Philippines a money claim for the payment
of materials it furnished for the construction of two public school buildings undertaken by contractor Alfonso Mendoza,
on the basis of powers of attorney executed by the latter authorizing said plaintiff to collect and receive from defendant
Republic any amount due or may be due to said contractor as contract price for the payment of the materials so supplied.
Section one of Public Act No. 3688, entitled "An Act for the protection of persons furnishing material and labor for the
construction of public works", reads in part as follows:
SECTION 1. Any person, partnership or corporation entering into a formal contract with the Government of the
Philippine Islands for the construction of any public building, or the prosecution and completion of any public
work, or for repairs upon any public building or public work, shall be required, before commencing such work, to
execute the usual penal bond, with good and sufficient sureties, with the additional obligation that such contractor
or his or its sub-contractors shall promptly make payments to all persons supplying him or them with labor and
materials in the prosecution of the work provided for in such contract; and any person, company or corporation
who has furnished labor or materials in the construction or repair of any public building or public work, and
152

payment for which has not been made, shall have the right to intervene and be made a party to any action
instituted by the Government of the Philippine Islands on the bond of the contractor, and to have their rights and
claims adjudicated in such action and judgment rendered thereon, subject, however, to the priority of the claim
and judgment of the Government of the Philippine Islands. If the full amount of the liability of the surety on said
bond is insufficient to pay the full amount of said claims and demands, then, after paying the full amount due the
Government, the remainder shall be distributed pro rata among said intervenors. If no suit should be brought by
the Government of the Philippine Islands within six months from the completion and final settlement of said
contract, or if the Government expressly waives its right to institute action on the penal bond, then the person or
persons supplying the contractor with labor and materials shall, upon application therefor, and furnishing affidavit
to the department under the direction of which said work has been prosecuted, that labor or materials for the
prosecution of such work have been supplied by him or them, and payment for which has not been made, be
furnished with a certified copy of said contract and bond, upon which he or they shall have a right of action, and
shall be, and are hereby, authorized to bring suit in the name of the Government of the Philippine Islands in the
Court of First Instance in the district in which said contract was to be performed and executed, and not elsewhere,
for his or their use and benefit, against said contractor and his sureties, and to prosecute the same to final
judgment and execution, . . . .
In the case at bar, it is not disputed that defendant Republic has already instituted a suit against the contractor for the
forfeiture of the latter's bond posted to secure the faithful performance of stipulations in the construction contract with
regards to one of the two school buildings (Civil Case No. 26815, Court of First Instance of Manila). The contractor has a
similar bond with respect to the other school building. Pursuant to Act 3688, plaintiff's legal remedy is, not to bring suit
against the Government, there being no privity of contract between them, but to intervene in the civil case abovementioned as an unpaid supplier of materials to the contractor, or file an action in the name of the Republic against said
contractor on the latter's other bond.
Plaintiff argues that an implied contract between it and the defendant Republic arose, when the latter, thru the Director of
Public Schools, on being furnished copies of the powers of attorney executed by the contractor, promised to make
payment to plaintiff for the materials supplied for the construction of the school buildings. It will be observed, however,
that defendant was not a party to the execution of the powers of attorney. Besides, the Director of Public Schools had no
authority to bind defendant on the payment. While he was the official who entered into contract with the contractor for the
construction of the school buildings, payment of the contract price was not within his exclusive control but subject to
approval under existing laws not only by the Department Head (Sec. 568, Rev. Adm, Code), but also by the Auditor
General.
At any rate, under the facts alleged in the complaint, the powers of attorney in question made plaintiff the contractor's
agent in the collection of whatever amounts may be due the contractor from the defendant. And since it is also alleged
that, after the execution of the powers of attorney, the contractor (principal) demanded and collected from defendant the
money the collection of which he entrusted to plaintiff, the agency apparently has already been revoked. (Articles 1920
and 1924, new Civil Code.)
The point is made by plaintiff that the powers of attorney executed by the contractor in its favor are irrevocable and are
coupled with interest. But even supposing that they are, still their alleged irrevocability cannot affect defendant who is not
a party thereto. They are obligatory only on the principal who executed the agency.
Plaintiff also cites Article 1729 of the new Civil Code, which provides that
Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor have an
action against the owner up to the amount owing from the latter to the contractor at the time the claim is made. . . .
This article, however, as expressly provided in its last paragraph, "is subject to the provisions of special law." The special
law governing in the present case, as already seen, is Act No. 3688.
153

There is another reason for upholding the order of dismissal complained of. Plaintiff's action being a claim for sum of
money arising from an alleged implied contract between it and the Republic of the Philippines, the same should have been
lodged with the Auditor General. The state cannot be sued without its consent.
In view of the foregoing, the order of dismissal appealed from is affirmed, with costs against plaintiff-appellant.

154

G.R. No. L-41182-3 April 16, 1988

DR. CARLOS L. SEVILLA and LINA O. SEVILLA, petitioners-appellants,
vs.
THE COURT OF APPEALS, TOURIST WORLD SERVICE, INC., ELISEO S.CANILAO, and SEGUNDINA
NOGUERA, respondents-appellees.
SARMIENTO , J.:
The petitioners invoke the provisions on human relations of the Civil Code in this appeal by certiorari. The facts are
beyond dispute:
xxx xxx xxx
On the strength of a contract (Exhibit A for the appellant Exhibit 2 for the appellees) entered into on Oct.
19, 1960 by and between Mrs. Segundina Noguera, party of the first part; the Tourist World Service, Inc.,
represented by Mr. Eliseo Canilao as party of the second part, and hereinafter referred to as appellants, the
Tourist World Service, Inc. leased the premises belonging to the party of the first part at Mabini St.,
Manila for the former-s use as a branch office. In the said contract the party of the third part held herself
solidarily liable with the party of the part for the prompt payment of the monthly rental agreed on. When
the branch office was opened, the same was run by the herein appellant Una 0. Sevilla payable to Tourist
World Service Inc. by any airline for any fare brought in on the efforts of Mrs. Lina Sevilla, 4% was to go
to Lina Sevilla and 3% was to be withheld by the Tourist World Service, Inc.
On or about November 24, 1961 (Exhibit 16) the Tourist World Service, Inc. appears to have been
informed that Lina Sevilla was connected with a rival firm, the Philippine Travel Bureau, and, since the
branch office was anyhow losing, the Tourist World Service considered closing down its office. This was
firmed up by two resolutions of the board of directors of Tourist World Service, Inc. dated Dec. 2, 1961
(Exhibits 12 and 13), the first abolishing the office of the manager and vice-president of the Tourist
World Service, Inc., Ermita Branch, and the second,authorizing the corporate secretary to receive the
properties of the Tourist World Service then located at the said branch office. It further appears that on
Jan. 3, 1962, the contract with the appellees for the use of the Branch Office premises was terminated and
while the effectivity thereof was Jan. 31, 1962, the appellees no longer used it. As a matter of fact
appellants used it since Nov. 1961. Because of this, and to comply with the mandate of the Tourist World
Service, the corporate secretary Gabino Canilao went over to the branch office, and, finding the premises
locked, and, being unable to contact Lina Sevilla, he padlocked the premises on June 4, 1962 to protect
the interests of the Tourist World Service. When neither the appellant Lina Sevilla nor any of her
employees could enter the locked premises, a complaint wall filed by the herein appellants against the
appellees with a prayer for the issuance of mandatory preliminary injunction. Both appellees answered
with counterclaims. For apparent lack of interest of the parties therein, the trial court ordered the dismissal
of the case without prejudice.
The appellee Segundina Noguera sought reconsideration of the order dismissing her counterclaim which
the court a quo, in an order dated June 8, 1963, granted permitting her to present evidence in support of
her counterclaim.
On June 17,1963, appellant Lina Sevilla refiled her case against the herein appellees and after the issues
were joined, the reinstated counterclaim of Segundina Noguera and the new complaint of appellant Lina
Sevilla were jointly heard following which the court a quo ordered both cases dismiss for lack of merit,
on the basis of which was elevated the instant appeal on the following assignment of errors:

155

I. THE LOWER COURT ERRED EVEN IN APPRECIATING THE NATURE OF PLAINTIFFAPPELLANT MRS. LINA O. SEVILLA'S COMPLAINT.
II. THE LOWER COURT ERRED IN HOLDING THAT APPELLANT MRS. LINA 0. SEVILA'S
ARRANGEMENT (WITH APPELLEE TOURIST WORLD SERVICE, INC.) WAS ONE MERELY OF
EMPLOYER-EMPLOYEE RELATION AND IN FAILING TO HOLD THAT THE SAID
ARRANGEMENT WAS ONE OF JOINT BUSINESS VENTURE.
III. THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLANT MRS. LINA O.
SEVILLA IS ESTOPPED FROM DENYING THAT SHE WAS A MERE EMPLOYEE OF
DEFENDANT-APPELLEE TOURIST WORLD SERVICE, INC. EVEN AS AGAINST THE LATTER.
IV. THE LOWER COURT ERRED IN NOT HOLDING THAT APPELLEES HAD NO RIGHT TO
EVICT APPELLANT MRS. LINA O. SEVILLA FROM THE A. MABINI OFFICE BY TAKING THE
LAW INTO THEIR OWN HANDS.
V. THE LOWER COURT ERRED IN NOT CONSIDERING AT .ALL APPELLEE NOGUERA'S
RESPONSIBILITY FOR APPELLANT LINA O. SEVILLA'S FORCIBLE DISPOSSESSION OF THE
A. MABINI PREMISES.
VI. THE LOWER COURT ERRED IN FINDING THAT APPELLANT APPELLANT MRS. LINA O.
SEVILLA SIGNED MERELY AS GUARANTOR FOR RENTALS.
On the foregoing facts and in the light of the errors asigned the issues to be resolved are:
1. Whether the appellee Tourist World Service unilaterally disco the telephone line at the branch office on
Ermita;
2. Whether or not the padlocking of the office by the Tourist World Service was actionable or not; and
3. Whether or not the lessee to the office premises belonging to the appellee Noguera was appellees TWS
or TWS and the appellant.
In this appeal, appealant Lina Sevilla claims that a joint bussiness venture was entered into by and
between her and appellee TWS with offices at the Ermita branch office and that she was not an employee
of the TWS to the end that her relationship with TWS was one of a joint business venture appellant made
declarations showing:
1. Appellant Mrs. Lina 0. Sevilla, a prominent figure and wife of an eminent eye, ear and
nose specialist as well as a imediately columnist had been in the travel business prior to
the establishment of the joint business venture with appellee Tourist World Service, Inc.
and appellee Eliseo Canilao, her compadre, she being the godmother of one of his
children, with her own clientele, coming mostly from her own social circle (pp. 3-6 tsn.
February 16,1965).
2. Appellant Mrs. Sevilla was signatory to a lease agreement dated 19 October 1960
(Exh. 'A') covering the premises at A. Mabini St., she expressly warranting and holding
[sic] herself 'solidarily' liable with appellee Tourist World Service, Inc. for the prompt
payment of the monthly rentals thereof to other appellee Mrs. Noguera (pp. 14-15, tsn.
Jan. 18,1964).
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3. Appellant Mrs. Sevilla did not receive any salary from appellee Tourist World Service,
Inc., which had its own, separate office located at the Trade & Commerce Building; nor
was she an employee thereof, having no participation in nor connection with said
business at the Trade & Commerce Building (pp. 16-18 tsn Id.).
4. Appellant Mrs. Sevilla earned commissions for her own passengers, her own bookings
her own business (and not for any of the business of appellee Tourist World Service, Inc.)
obtained from the airline companies. She shared the 7% commissions given by the airline
companies giving appellee Tourist World Service, Lic. 3% thereof aid retaining 4% for
herself (pp. 18 tsn. Id.)
5. Appellant Mrs. Sevilla likewise shared in the expenses of maintaining the A. Mabini
St. office, paying for the salary of an office secretary, Miss Obieta, and other sundry
expenses, aside from desicion the office furniture and supplying some of fice furnishings
(pp. 15,18 tsn. April 6,1965), appellee Tourist World Service, Inc. shouldering the rental
and other expenses in consideration for the 3% split in the co procured by appellant Mrs.
Sevilla (p. 35 tsn Feb. 16,1965).
6. It was the understanding between them that appellant Mrs. Sevilla would be given the
title of branch manager for appearance's sake only (p. 31 tsn. Id.), appellee Eliseo Canilao
admit that it was just a title for dignity (p. 36 tsn. June 18, 1965- testimony of appellee
Eliseo Canilao pp. 38-39 tsn April 61965-testimony of corporate secretary Gabino
Canilao (pp- 2-5, Appellants' Reply Brief)
Upon the other hand, appellee TWS contend that the appellant was an employee of the appellee Tourist
World Service, Inc. and as such was designated manager. 1
xxx xxx xxx
The trial court 2 held for the private respondent on the premise that the private respondent, Tourist World Service, Inc.,
being the true lessee, it was within its prerogative to terminate the lease and padlock the premises. 3 It likewise found the
petitioner, Lina Sevilla, to be a mere employee of said Tourist World Service, Inc. and as such, she was bound by the acts
of her employer. 4 The respondent Court of Appeal 5 rendered an affirmance.
The petitioners now claim that the respondent Court, in sustaining the lower court, erred. Specifically, they state:
I
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS DISCRETION IN
HOLDING THAT "THE PADLOCKING OF THE PREMISES BY TOURIST WORLD SERVICE INC. WITHOUT
THE KNOWLEDGE AND CONSENT OF THE APPELLANT LINA SEVILLA ... WITHOUT NOTIFYING MRS.
LINA O. SEVILLA OR ANY OF HER EMPLOYEES AND WITHOUT INFORMING COUNSEL FOR THE
APPELLANT (SEVILIA), WHO IMMEDIATELY BEFORE THE PADLOCKING INCIDENT, WAS IN
CONFERENCE WITH THE CORPORATE SECRETARY OF TOURIST WORLD SERVICE (ADMITTEDLY THE
PERSON WHO PADLOCKED THE SAID OFFICE), IN THEIR ATTEMP AMICABLY SETTLE THE
CONTROVERSY BETWEEN THE APPELLANT (SEVILLA) AND THE TOURIST WORLD SERVICE ... (DID NOT)
ENTITLE THE LATTER TO THE RELIEF OF DAMAGES" (ANNEX "A" PP. 7,8 AND ANNEX "B" P. 2) DECISION
AGAINST DUE PROCESS WHICH ADHERES TO THE RULE OF LAW.
II
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THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS DISCRETION IN
DENYING APPELLANT SEVILLA RELIEF BECAUSE SHE HAD "OFFERED TO WITHDRAW HER COMP
PROVIDED THAT ALL CLAIMS AND COUNTERCLAIMS LODGED BY BOTH APPELLEES WERE
WITHDRAWN." (ANNEX "A" P. 8)
III
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS DISCRETION IN
DENYING-IN FACT NOT PASSING AND RESOLVING-APPELLANT SEVILLAS CAUSE OF ACTION FOUNDED
ON ARTICLES 19, 20 AND 21 OF THE CIVIL CODE ON RELATIONS.
IV
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS DISCRETION IN
DENYING APPEAL APPELLANT SEVILLA RELIEF YET NOT RESOLVING HER CLAIM THAT SHE WAS IN
JOINT VENTURE WITH TOURIST WORLD SERVICE INC. OR AT LEAST ITS AGENT COUPLED WITH AN
INTEREST WHICH COULD NOT BE TERMINATED OR REVOKED UNILATERALLY BY TOURIST WORLD
SERVICE INC. 6
As a preliminary inquiry, the Court is asked to declare the true nature of the relation between Lina Sevilla and Tourist
World Service, Inc. The respondent Court of see fit to rule on the question, the crucial issue, in its opinion being "whether
or not the padlocking of the premises by the Tourist World Service, Inc. without the knowledge and consent of the
appellant Lina Sevilla entitled the latter to the relief of damages prayed for and whether or not the evidence for the said
appellant supports the contention that the appellee Tourist World Service, Inc. unilaterally and without the consent of the
appellant disconnected the telephone lines of the Ermita branch office of the appellee Tourist World Service, Inc. 7 Tourist
World Service, Inc., insists, on the other hand, that Lina SEVILLA was a mere employee, being "branch manager" of its
Ermita "branch" office and that inferentially, she had no say on the lease executed with the private respondent, Segundina
Noguera. The petitioners contend, however, that relation between the between parties was one of joint venture, but
concede that "whatever might have been the true relationship between Sevilla and Tourist World Service," the Rule of
Law enjoined Tourist World Service and Canilao from taking the law into their own hands, 8 in reference to the
padlocking now questioned.
The Court finds the resolution of the issue material, for if, as the private respondent, Tourist World Service, Inc.,
maintains, that the relation between the parties was in the character of employer and employee, the courts would have
been without jurisdiction to try the case, labor disputes being the exclusive domain of the Court of Industrial Relations,
later, the Bureau Of Labor Relations, pursuant to statutes then in force. 9
In this jurisdiction, there has been no uniform test to determine the evidence of an employer-employee relation. In general,
we have relied on the so-called right of control test, "where the person for whom the services are performed reserves a
right to control not only the end to be achieved but also the means to be used in reaching such end." 10 Subsequently,
however, we have considered, in addition to the standard of right-of control, the existing economic conditions prevailing
between the parties, like the inclusion of the employee in the payrolls, in determining the existence of an employeremployee relationship. 11
The records will show that the petitioner, Lina Sevilla, was not subject to control by the private respondent Tourist World
Service, Inc., either as to the result of the enterprise or as to the means used in connection therewith. In the first place,
under the contract of lease covering the Tourist Worlds Ermita office, she had bound herself insolidum as and for rental
payments, an arrangement that would be like claims of a master-servant relationship. True the respondent Court would
later minimize her participation in the lease as one of mere guaranty, 12 that does not make her an employee of Tourist
World, since in any case, a true employee cannot be made to part with his own money in pursuance of his employer's
business, or otherwise, assume any liability thereof. In that event, the parties must be bound by some other relation, but
certainly not employment.
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In the second place, and as found by the Appellate Court, '[w]hen the branch office was opened, the same was run by the
herein appellant Lina O. Sevilla payable to Tourist World Service, Inc. by any airline for any fare brought in on the effort
of Mrs. Lina Sevilla. 13 Under these circumstances, it cannot be said that Sevilla was under the control of Tourist World
Service, Inc. "as to the means used." Sevilla in pursuing the business, obviously relied on her own gifts and capabilities.
It is further admitted that Sevilla was not in the company's payroll. For her efforts, she retained 4% in commissions from
airline bookings, the remaining 3% going to Tourist World. Unlike an employee then, who earns a fixed salary usually,
she earned compensation in fluctuating amounts depending on her booking successes.
The fact that Sevilla had been designated 'branch manager" does not make her, ergo, Tourist World's employee. As we
said, employment is determined by the right-of-control test and certain economic parameters. But titles are weak
indicators.
In rejecting Tourist World Service, Inc.'s arguments however, we are not, as a consequence, accepting Lina Sevilla's own,
that is, that the parties had embarked on a joint venture or otherwise, a partnership. And apparently, Sevilla herself did not
recognize the existence of such a relation. In her letter of November 28, 1961, she expressly 'concedes your [Tourist
World Service, Inc.'s] right to stop the operation of your branch office 14 in effect, accepting Tourist World Service, Inc.'s
control over the manner in which the business was run. A joint venture, including a partnership, presupposes generally a
of standing between the joint co-venturers or partners, in which each party has an equal proprietary interest in the capital
or property contributed 15 and where each party exercises equal rights in the conduct of the business. 16 furthermore, the
parties did not hold themselves out as partners, and the building itself was embellished with the electric sign "Tourist
World Service, Inc. 17in lieu of a distinct partnership name.
It is the Court's considered opinion, that when the petitioner, Lina Sevilla, agreed to (wo)man the private respondent,
Tourist World Service, Inc.'s Ermita office, she must have done so pursuant to a contract of agency. It is the essence of
this contract that the agent renders services "in representation or on behalf of another. 18 In the case at bar, Sevilla solicited
airline fares, but she did so for and on behalf of her principal, Tourist World Service, Inc. As compensation, she received
4% of the proceeds in the concept of commissions. And as we said, Sevilla herself based on her letter of November 28,
1961, pre-assumed her principal's authority as owner of the business undertaking. We are convinced, considering the
circumstances and from the respondent Court's recital of facts, that the ties had contemplated a principal agent
relationship, rather than a joint managament or a partnership..
But unlike simple grants of a power of attorney, the agency that we hereby declare to be compatible with the intent of the
parties, cannot be revoked at will. The reason is that it is one coupled with an interest, the agency having been created for
mutual interest, of the agent and the principal. 19 It appears that Lina Sevilla is a bona fidetravel agent herself, and as such,
she had acquired an interest in the business entrusted to her. Moreover, she had assumed a personal obligation for the
operation thereof, holding herself solidarily liable for the payment of rentals. She continued the business, using her own
name, after Tourist World had stopped further operations. Her interest, obviously, is not to the commissions she earned as
a result of her business transactions, but one that extends to the very subject matter of the power of management delegated
to her. It is an agency that, as we said, cannot be revoked at the pleasure of the principal. Accordingly, the revocation
complained of should entitle the petitioner, Lina Sevilla, to damages.
As we have stated, the respondent Court avoided this issue, confining itself to the telephone disconnection and padlocking
incidents. Anent the disconnection issue, it is the holding of the Court of Appeals that there is 'no evidence showing that
the Tourist World Service, Inc. disconnected the telephone lines at the branch office. 20Yet, what cannot be denied is the
fact that Tourist World Service, Inc. did not take pains to have them reconnected. Assuming, therefore, that it had no hand
in the disconnection now complained of, it had clearly condoned it, and as owner of the telephone lines, it must shoulder
responsibility therefor.
The Court of Appeals must likewise be held to be in error with respect to the padlocking incident. For the fact that Tourist
World Service, Inc. was the lessee named in the lease con-tract did not accord it any authority to terminate that contract
without notice to its actual occupant, and to padlock the premises in such fashion. As this Court has ruled, the petitioner,
159

Lina Sevilla, had acquired a personal stake in the business itself, and necessarily, in the equipment pertaining thereto.
Furthermore, Sevilla was not a stranger to that contract having been explicitly named therein as a third party in charge of
rental payments (solidarily with Tourist World, Inc.). She could not be ousted from possession as summarily as one would
eject an interloper.
The Court is satisfied that from the chronicle of events, there was indeed some malevolent design to put the petitioner,
Lina Sevilla, in a bad light following disclosures that she had worked for a rival firm. To be sure, the respondent court
speaks of alleged business losses to justify the closure '21 but there is no clear showing that Tourist World Ermita Branch
had in fact sustained such reverses, let alone, the fact that Sevilla had moonlit for another company. What the evidence
discloses, on the other hand, is that following such an information (that Sevilla was working for another company),
Tourist World's board of directors adopted two resolutions abolishing the office of 'manager" and authorizing the
corporate secretary, the respondent Eliseo Canilao, to effect the takeover of its branch office properties. On January 3,
1962, the private respondents ended the lease over the branch office premises, incidentally, without notice to her.
It was only on June 4, 1962, and after office hours significantly, that the Ermita office was padlocked, personally by the
respondent Canilao, on the pretext that it was necessary to Protect the interests of the Tourist World Service. " 22 It is
strange indeed that Tourist World Service, Inc. did not find such a need when it cancelled the lease five months earlier.
While Tourist World Service, Inc. would not pretend that it sought to locate Sevilla to inform her of the closure, but
surely, it was aware that after office hours, she could not have been anywhere near the premises. Capping these series of
"offensives," it cut the office's telephone lines, paralyzing completely its business operations, and in the process, depriving
Sevilla articipation therein.
This conduct on the part of Tourist World Service, Inc. betrays a sinister effort to punish Sevillsa it had perceived to be
disloyalty on her part. It is offensive, in any event, to elementary norms of justice and fair play.
We rule therefore, that for its unwarranted revocation of the contract of agency, the private respondent, Tourist World
Service, Inc., should be sentenced to pay damages. Under the Civil Code, moral damages may be awarded for "breaches
of contract where the defendant acted ... in bad faith. 23
We likewise condemn Tourist World Service, Inc. to pay further damages for the moral injury done to Lina Sevilla from
its brazen conduct subsequent to the cancellation of the power of attorney granted to her on the authority of Article 21 of
the Civil Code, in relation to Article 2219 (10) thereof
ART. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage. 24
ART. 2219. Moral damages 25 may be recovered in the following and analogous cases:
xxx xxx xxx
(10) Acts and actions refered into article 21, 26, 27, 28, 29, 30, 32, 34, and 35.
The respondent, Eliseo Canilao, as a joint tortfeasor is likewise hereby ordered to respond for the same damages in a
solidary capacity.
Insofar, however, as the private respondent, Segundina Noguera is concerned, no evidence has been shown that she had
connived with Tourist World Service, Inc. in the disconnection and padlocking incidents. She cannot therefore be held
liable as a cotortfeasor.
The Court considers the sums of P25,000.00 as and for moral damages,24 P10,000.00 as exemplary damages,25 and
P5,000.00 as nominal 26 and/or temperate 27 damages, to be just, fair, and reasonable under the circumstances.
160

WHEREFORE, the Decision promulgated on January 23, 1975 as well as the Resolution issued on July 31, 1975, by the
respondent Court of Appeals is hereby REVERSED and SET ASIDE. The private respondent, Tourist World Service,
Inc., and Eliseo Canilao, are ORDERED jointly and severally to indemnify the petitioner, Lina Sevilla, the sum of
25,00.00 as and for moral damages, the sum of P10,000.00, as and for exemplary damages, and the sum of P5,000.00, as
and for nominal and/or temperate damages.

161

G.R. No. L-6626

October 6, 1911

JOSE DE LA PEA Y DE RAMON, administrator of the estate of the deceased Jose de la Pea y Gomiz; F.
GARFIELD WAIT, ET AL., interveners-appellants,
vs.
FEDERICO HIDALGO, defendant-appellant.
TORRES, J.:
This decision concerns the appeals entered under respective bills of exception by counsel for Jose de la Pea y de Ramon,
the administrator of the estate of the deceased Jose de la Pea y Gomiz, from the order of the 18th of the same month,
directing that the amount deposited as bond, by counsel for the intervening attorneys, Chicote & Miranda, Frederick G.
Waite, and C. W. O'Brien, from the said order of October 18, in so far as it declares that the counterclaim by the said
Hidalgo against de la Pea was presented in his capacity as administrator of the aforementioned estate and that the
intervener's lien could not avail to prevent the set-off decreed in the said first order appealed from.
After a regular trial in the Court of First Instance of this city of the case of Jose de la Pea y de Ramon, as administrator of
the estate of his deceased father, Jose de la Pea y Gomiz, vs. Federico Hidalgo, for the payment of a sum of money, the
record of the proceedings was forwarded to this court on appeal. By the decision rendered Hidalgo to pay to Jose de la
Pea y de Ramon, as administrator, the sum of P6,774.50 with legal interest from May 23, 1906, and, likewise, sentenced
the said Jose de la Pea y de Ramon to pay to Federico Hidalgo, as a counterclaim, the sum of P9,000, with legal interest
thereon from May 21, 1907, the date of the counterclaim; and affirmed the judgment appealed from in so far as it was in
agreement with the said decision, and reversed it in so far as it was not in accordance therewith. That decision became
final.
The record of proceedings having been remanded for execution to the Court of First Instance whence it originated, the
judge, by order of October 14, 1910, decreed that both amounts for which the defendant Hidalgo and the administrator
Pea were mutually liable in concurrent sums, should off-set each other, and that, consequently, the plaintiff, Pea y de
Ramon, in conformity with the final decision of this court, was liable for the payment of the difference between such
amounts, or P2,274.93, together with the interests at 6 per cent from the said date.
At this stage of the proceedings for the execution of the judgment that had become final, the attorneys for the said
plaintiff, Messrs. Chicote & Miranda, Frederick Garfield Waite, and C. W. O'Brien represented by C. A. DeWitt, asked
that they be permitted to intervene in the proceedings, as they held a lien upon the amount awarded in the said decision of
this court, rendered in favor of the plaintiff and against the defendant, and alleged that the lien which they held was upon
the judgment entered in favor of the plaintiff in his capacity as administrator, against the defendant; that the defendant was
entitled to the judgment awarded him by virtue of his counterclaim, yet, in consideration of the fact that their lien affected
the judgment of the lower court, which was in no wise reversed, the said lien was valid with respect to any judgment that
the plaintiff had obtained against the defendant, notwithstanding such counterclaim. In spite of the defendant's opposition,
the court, ruling on this incidental question raised, issued the aforecited order of October 18, 1910.
Counsel for the administrator Pea did not file a brief calculated to prove the soundness of his appeal from the order of
October 14, 1910, whereby there was declared a set-off between the amounts for which the plaintiff and the defendant
were liable, up to the sum where the liability of the one equaled that of the other, then latter to pay to the former the
difference, together with the interest. This order is pursuant to the law and in perfect harmony with the decision rendered
in the case by this court, and, though it was not duly impugned, its legality and correctness will be considered in this
decision in demonstrating that of the other order of the 18th of the same month, appealed from by the intervening
attorneys and by the counsel for Federico Hidalgo.
With respect to the said order of the 18th of October, the second of those appealed from in this incidental issue, it must be
borne in mind, for the proper determination of the pending appeals, that the main action, from which the said incidental
issue proceeded, was prosecuted in the Court of First Instance of this city by Jose de la Pea y de Ramon, in his capacity
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as judicial administrator of the estate of his deceased father, Jose de la Pea y Gomiz, against Federico Hidalgo, for the
payment of various sums which the later was owing, with interest, to the estate; and that the defendant, in answering the
complaint with the costs against the plaintiff and that the latter be sentenced to the payment of P9,000 which the testator,
Jose de la Pea y Gomiz, owed to Hidalgo. So that if the complaint in the main action was filed by the administrator of the
estate of the deceased Pea y Gomiz, the counterclaim presented in the same suit by the defendant, Federico Hidalgo, in
answering the complaint of the administrator, during his lifetime, owed the said defendant.
The defendant may, pursuant to section 95 of the Code of Procedure in Civil Actions, set forth by answer as many
defenses and counterclaims as he may have, whatever their nature. Section 96 of the same code provides that a
counterclaim, to be available as a defense in an answer, must be one in favor of all the substantial defendants and against
all the substantial plaintiffs in the action.
A counterclaim is termed a mutual petition, because both parties sue each other mutually in the same action, each of them
assuming the double role of plaintiff and defendant, before the trial judge, and the two suits are brought under a single
proceedings where both actions are tried at the same time and finally determined in one and the same judgment.
The different amounts sought to be recovered by Jose de la Pea y de Ramon, as the administrator of the estate of the
deceased Jose de la Pea y Gomiz, from the defendant, Federico Hidalgo, constitute various separate obligations
contracted by the later, according to the complaint, in favor of the deceased, testator, Pea y Gomiz; and the amount of the
counterclaim was likewise a debt which the said testator at his death left unpaid and owing the defendant Hidalgo;
therefore, Jose de la Pea y de Ramon, as administrator, and Federico Hidalgo are the substantial plaintiffs and
defendants, reciprocally, in the aforementioned main action.
It is evident, by a simple perusal of the finding of facts an of the grounds of law of the final decision rendered in that
action, that the same was instituted by Jose de la Pea y de Ramon, not by himself and in his own representation, but in
his capacity as administrator of the estate of his deceased father, Jose de la Pea y Gomiz, demanding payment of certain
amounts which, according to his third mended complaint, the defendant Federico Hidalgo owed the latter; and it is none
the less evident that the counterclaim presented by the defendant Federico Hidalgo had for its sole object the collection of
a certain sum which was owing to him by the deceased testator, Jose de la Pea y Gomiz, and that the plaintiff, Jose de la
Pea y de Ramon, per se and personally, had nothing to do with this debt of the estate, which concerned him only as such
administrator. This is shown by the record and clearly appears in the said decision which disposed of the plaintiffadministrator's complaint and the defendant-debtor's counterclaim. that decision, from the beginning to the end, evidence
without contradiction or proofs to the contrary, all that has been hereinbefore stated; it shows who were the contending
parties, the nature of the questions raised by complaint and counterclaim and the respective purposes sought by the one
and the other; it is therefore unreasonable to affirm that the counterclaim was made against Pea y de Ramon personally,
apart from his position as administrator.
If in any place or in any line of said decision mention was made of the name of the plaintiff Pea y de Ramon without the
title of his office as administrator of the estate, it probably was because the complaint was filed and the action was
brought by him in his capacity of administrator, and the counterclaim, also, was directed him as such administrator; and if
in any paragraph the said title of his office was omitted in designating him, such omission can not serve as a ground for
concluding that the counterclaim allowed and the sentence imposed in the said decision were against Jose de la Pea y de
Ramon as a private individual and not as the administrator of the aforementioned estate; and the sentence contained in the
decision referred to can in no wise be understood to have been made against Jose de la Pea y de Ramon personally, but
in his capacity of administrator of the estate, which alone was liable for the debt owing to the defendant; if mention was
therein made of the plaintiff by name, it is because he was the representative of the debtor estate.
The intervening attorneys allege that, in the aforesaid suit between the administrator Pea y de Ramon and Hidalgo, two
judgments were rendered, one against the defendant Hidalgo and the other against the administrator Pea y de Ramon.
This averment is incorrect, because, as has been seen and is obvious to all who intervened in the said suit, there was but
one judgment appealed from and but one decision rendered in second instance by this court, which in part modified the
prior judgment in first instance. A complaint and a counterclaim having been entered in the said suit, it logically follows
163

that the decision should contain a finding relative to the demand contained in the complaint and another finding
concerning the counterclaim. This separation of findings in one decision does not denote distinct judgments, but different
disposals of the several questions raised in the suit and comprised within a single decision, which alone terminated the
double litigation. Reason and justice will not support the claim that the sentence therein contained, directing Jose de la
Pea y de Ramon to pay to the defendant Hidalgo the sum of P9,000 and interest by virtue of the counterclaim, was
pronounced against the plaintiff in his personal capacity and not as administrator of the estate, inasmuch as Pea y de
Ramon did not initiate or prosecute his suit, in the said main action on his own account, but in his capacity as
administrator; and the debt demanded in the counterclaim was one owing by the estate, which he represented in that
action, and by his father, the testator Pea y Gomiz, as the judge of First Instance, in directing in his order of October 14,
1910, in fulfillment and execution of the decision of this court, so recognized such debt and declared in an unmistakable
manner that Hidalgo was entitled, as a result of the set-off between the two amounts specified in the decision of the
Supreme Court and which the administrator Pea y de Ramon and the defendant Hidalgo were mutually owing to each
other, to collect the sum of P2,274.93 with interest thereon at the rate of 6 per cent per annum, this amount being the
difference between the two debts set off against each other and which is owing to the defendant from the estate.
In the aforementioned decision of this court, by which the complaint and the counterclaim presented by the parties to the
said suit were disposed of, the amount which the defendant Hidalgo should pay to the administrator of the estate of the
deceased Pea y Gomiz and the sum which the said administrator, designated by his name of Jose de la Pea y de Ramon,
should, by virtue of the counterclaim, pay to the defendant, Federico Hidalgo, alone were specified; the resultant
difference, after the set-off should have been made, was not stated, as it was considered that this merely arithmetical
operation would necessarily be performed in the course of the execution proceedings by the judge of the Court of First
Instance charged with carrying out the final decision rendered in the case. This, in fact, he did do in his order of October
14, by directing that the plaintiff should pay the said sum, that it, the difference which was found to exist, after making the
set-off between the respective amounts the litigating parties were sentenced to pay. The failure to state in the said decision
that both debts were set off against each other up to a concurrent sum, can not avail as a ground for alleging that the
attorneys of the administrator Pea y de Ramon have acquired a lien on the amount which Hidalgo should pay to the
administrator Pea y de Ramon in preference to the creditor of the amount that is the subject of the counterclaim.
It is to be observed that, although counsel for the plaintiff Pea excepted to the order of October 14, 1910, by which the
judge of the Court of First Instance, following the final decisions of this court, declared a set-off between the amounts that
were owing reciprocally by both parties and directed the said plaintiff to pay to the defendant the difference of P2,274.93
with interest at the rate of 6 per cent per annum, he did not present any bill of exceptions nor any brief with the required
assignment of errors, doubtless because he was convinced that the appeal which we would have to maintained was
directed against a final decision of this court.
It is lawful and proper to allow the set-off between the two amounts specified in the said decision, in accordance with the
provisions of articles 1195, 1196, and 1202 of the Civil Code, because the credit of P6,774.50, together with the legal
interest thereon, to the payment of which the defendant Hidalgo was sentenced, belongs to the estate of the deceased Pea
y Gomiz, represented by the plaintiff, Pea y de Ramon, and the P9,000, with interest, which, in turn, the plaintiffadministrator was sentenced to pay to the said defendant, was a debt of the testator which it is now incumbent upon his
estate to repay to his creditor; therefore, as the trial judge very well says in the order of October 18, appealed from, the
lien of the intervening attorneys can not serve to prevent the set-off, for the reason that interveners rendered their services
to Jose de la Pea y de Ramon as administrator of the said estate, and the credit by which the debt owing to this estate by
the defendant Hidalgo appears to be set-off consists of a debt of the estate in favor of its debtor, Hidalgo.
If it just be that the estate of the deceased Pea y Gomiz should collect the amount owing it by Hidalgo, as determined by
final decision, it is equally just that Hidalgo should have the same right to collect the sum which the said estate owes him,
according to the same decision; therefore, in order to comply with such decision, determining the two liabilities directly
opposed to each other, it consequently and logically follows that a set-off of both credits, up to a concurrent amount, must
be affected; and if the lien or the right to collect professional fees on the part of the attorneys were superior to the right of
the creditor of the estate, the result would be that the executory decision would not be complied with; there would then be
no set-off and the defendant would be compelled to pay to the said administrator his debt to the estate, through the
164

aforementioned lien of the intervening attorneys, but could not collect, nor apply to the payment of the credit owing him
by the same estate, the amount of his debt to the latter; this would be illegal and opposed to the most rudimentary
principles of justice and, furthermore, would be an absurdity and contrary to common sense.
Section 37 of the Code of Procedure in Civil Actions prescribes, among other provisions, that a lawyer shall have a lien
upon all judgments and decrees for the payment of money, and executions issued in pursuance of such judgments and
decrees which he has secured in a litigation of his client, from and after, but not before, the time when he shall have
caused to be entered upon the records of the court, . . . and shall have the same right and power over such judgments,
decrees and execution to enforce his lien as his client had or may have, to the extent that may be necessary for the
payment of his just fees and disbursements.
If it be taken into account that, while the administrator Pea y de Ramon is entitled to collect from Hidalgo the P6,774.50
which the later is owing to the estate left by the said Pea's father, this estate must, in turn, pay to the said Hidalgo P9,000;
and that, on comparing these two amounts with each other, in proceeding with the execution of the final judgment, it
would be necessarily be disclosed by the operation that the said estate or its administrator, far from collecting any sum or
whatever from its or his credit, would have to pay Hidalgo the difference resulting from the set-off between the one
amount and the other, up to a concurrent sum, it will be understood at once that the attorneys for the representative of that
estate can not collect any part whatever of the amount awarded in the executory decision, because tat sum was intended to
cover a large part of the debt of the testator and the later's testate succession will still have to pay the difference.
The lien or right to collect fees for professional service, which the appellant attorneys possess to the sum awarded in the
final decision, is equal to the right of their client, to that of the administrator Pea y de Ramon, recognized in the said
decision, pursuant to the provisions of the aforecited section 37 of the Code of Civil Procedure. The preference claimed by
these interveners over the creditors right, by virtue of the later's counterclaim, does not appear to be established by this
section; and if the estate of the deceased Pea is obliged to pay to Hidalgo P9,000, it is not entitled to collect from the
latter the said P6,774.50 by way of a set-off, unless it shall previously have satisfied the whole amount of its debt, which it
has done; therefore the attorneys of the representative of the said estate are not entitled to collect their fees out of the said
amount recognized by decision to being to their client, but subject to a set-off by virtue of a counterclaim, as their rights
are no better than those of the creditor Hidalgo.
The judgment appealed from having been reversed with respect to that portion thereof relative to the liability asked by the
administrator of the estate to be laid against Federico Hidalgo, the sole judgment to be executed is that contained in the
decision rendered in second instance and in this decision, as has been shown; and the result, in short, has been in no wise
favorable to the plaintiff because, instead of being able to collect the amount of his credit owing by Hidalgo to the estate,
he still finds himself obliged to pay the defendant the difference resulting from the set-off to which the counterclaim,
made by the latter for a greater sum, gave rise; and therefore, the right claimed by the appellant attorneys to collect their
fees out of the amount awarded to the said administrator, is in all respects unsustainable, inasmuch as, in consequence of
the counterclaim, there was a set-off against that amount and the plaintiff has nothing to collect, but, on the contrary, is
still liable for the difference which was found to exist after the reciprocal debts of both parties had been set off against
each other.
The right of attorneys for the administrator Pea y de Ramon, to collect fees for professional service, under section 37 of
the Code of Civil Procedure, is restricted to the personal founds of their client, to amounts awarded to the latter by final
decision, but does not comprise sums of money which, according to the same decision, must be applied to be made in
such decision by virtue of a prior counterclaim.1awphil.net
We know of no legal provision which grants to the attorneys for the losing party in a suit, or who has not obtained a
judgment authorizing him to collect money from the adverse party, the privilege of collecting their professional fees with
preference over, and better right then, the said adverse party, the legitimate creditor of the said attorneys' client.
The suit was prosecuted for the collection of amounts which both parties reciprocally were owing each other, and a
decision was rendered deciding the complaint and the counterclaim and determining the sums which the litigating parties
165

must mutually pay; therefore, the final judgment must be executed, as provided by the trial judge, pursuant to its terms,
and no impediment to such execution can be had in the improper contention made by the appellant attorneys, who can
invoke no law or just reason which authorizes them to collect their professional fees out of the bond given by Hidalgo,
once the same was not deposited as security for the payment of the said fees.
For the foregoing reasons, whereby the errors attributed by the appellant attorneys to the trial judge have been duly
refuted, it is our opinion and we hold that we should and hereby do affirm the order of October 14, 1910, and also the
order of the 18th of the same month, with the exception of the final provision of this last order, of October 18, which we
reversed and direct tat return be made to Federico Hidalgo of the sum of P8,500 retained by the clerk of the court below as
a result of the motion of intervention herein concerned. No spe

166

G.R. No. 31057

September 7, 1929

ADRIANO ARBES, ET AL., plaintiffs-appellees,

vs.
VICENTE POLISTICO, ET AL., defendants-appellants.
VILLAMOR, J.:
This is an action to bring about liquidation of the funds and property of the association called "Turnuhan Polistico & Co."
The plaintiffs were members or shareholders, and the defendants were designated as president-treasurer, directors and
secretary of said association.
It is well to remember that this case is now brought before the consideration of this court for the second time. The first one
was when the same plaintiffs appeared from the order of the court below sustaining the defendant's demurrer, and
requiring the former to amend their complaint within a period, so as to include all the members of "Turnuhan Polistico &
Co.," either as plaintiffs or as a defendants. This court held then that in an action against the officers of a voluntary
association to wind up its affairs and enforce an accounting for money and property in their possessions, it is not
necessary that all members of the association be made parties to the action. (Borlasa vs. Polistico, 47 Phil., 345.) The case
having been remanded to the court of origin, both parties amend, respectively, their complaint and their answer, and by
agreement of the parties, the court appointed Amadeo R. Quintos, of the Insular Auditor's Office, commissioner to
examine all the books, documents, and accounts of "Turnuhan Polistico & Co.," and to receive whatever evidence the
parties might desire to present.
The commissioner rendered his report, which is attached to the record, with the following resume:
Income:
Member's shares............................

97,263.70

Credits paid................................

6,196.55

Interest received...........................

4,569.45

Miscellaneous...............................

1,891.00
P109,620.70

Expenses:
Premiums to members.......................

68,146.25

Loans on real-estate.......................

9,827.00

Loans on promissory notes..............

4,258.55

Salaries....................................

1,095.00

Miscellaneous...............................

1,686.10
85,012.90

Cash on hand........................................

24,607.80

167

The defendants objected to the commissioner's report, but the trial court, having examined the reasons for the objection,
found the same sufficiently explained in the report and the evidence, and accepting it, rendered judgment, holding that the
association "Turnuhan Polistico & Co." is unlawful, and sentencing the defendants jointly and severally to return the
amount of P24,607.80, as well as the documents showing the uncollected credits of the association, to the plaintiffs in this
case, and to the rest of the members of the said association represented by said plaintiffs, with costs against the
defendants.
The defendants assigned several errors as grounds for their appeal, but we believe they can all be reduced to two points, to
wit: (1) That not all persons having an interest in this association are included as plaintiffs or defendants; (2) that the
objection to the commissioner's report should have been admitted by the court below.
As to the first point, the decision on the case of Borlasa vs. Polistico, supra, must be followed.
With regard to the second point, despite the praiseworthy efforts of the attorney of the defendants, we are of opinion that,
the trial court having examined all the evidence touching the grounds for the objection and having found that they had
been explained away in the commissioner's report, the conclusion reached by the court below, accepting and adopting the
findings of fact contained in said report, and especially those referring to the disposition of the association's money,
should not be disturbed.
In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil., 516), it was held that the findings of facts made by a referee
appointed under the provisions of section 135 of the Code of Civil Procedure stand upon the same basis, when approved
by the Court, as findings made by the judge himself. And in Kriedt vs. E. C. McCullogh & Co.(37 Phil., 474), the court
held: "Under section 140 of the Code of Civil Procedure it is made the duty of the court to render judgment in accordance
with the report of the referee unless the court shall unless for cause shown set aside the report or recommit it to the
referee. This provision places upon the litigant parties of the duty of discovering and exhibiting to the court any error that
may be contained therein." The appellants stated the grounds for their objection. The trial examined the evidence and the
commissioner's report, and accepted the findings of fact made in the report. We find no convincing arguments on the
appellant's brief to justify a reversal of the trial court's conclusion admitting the commissioner's findings.
There is no question that "Turnuhan Polistico & Co." is an unlawful partnership (U.S. vs. Baguio, 39 Phil., 962), but the
appellants allege that because it is so, some charitable institution to whom the partnership funds may be ordered to be
turned over, should be included, as a party defendant. The appellants refer to article 1666 of the Civil Code, which
provides:
A partnership must have a lawful object, and must be established for the common benefit of the partners.
When the dissolution of an unlawful partnership is decreed, the profits shall be given to charitable institutions of
the domicile of the partnership, or, in default of such, to those of the province.
Appellant's contention on this point is untenable. According to said article, no charitable institution is a necessary party in
the present case of determination of the rights of the parties. The action which may arise from said article, in the case of
unlawful partnership, is that for the recovery of the amounts paid by the member from those in charge of the
administration of said partnership, and it is not necessary for the said parties to base their action to the existence of the
partnership, but on the fact that of having contributed some money to the partnership capital. And hence, the charitable
institution of the domicile of the partnership, and in the default thereof, those of the province are not necessary parties in
this case. The article cited above permits no action for the purpose of obtaining the earnings made by the unlawful
partnership, during its existence as result of the business in which it was engaged, because for the purpose, as Manresa
remarks, the partner will have to base his action upon the partnership contract, which is to annul and without legal
existence by reason of its unlawful object; and it is self evident that what does not exist cannot be a cause of action.
Hence, paragraph 2 of the same article provides that when the dissolution of the unlawful partnership is decreed, the
profits cannot inure to the benefit of the partners, but must be given to some charitable institution.
168

We deem in pertinent to quote Manresa's commentaries on article 1666 at length, as a clear explanation of the scope and
spirit of the provision of the Civil Code which we are concerned. Commenting on said article Manresa, among other
things says:
When the subscriptions of the members have been paid to the management of the partnership, and employed by
the latter in transactions consistent with the purposes of the partnership may the former demand the return of the
reimbursement thereof from the manager or administrator withholding them?
Apropos of this, it is asserted: If the partnership has no valid existence, if it is considered juridically non-existent,
the contract entered into can have no legal effect; and in that case, how can it give rise to an action in favor of the
partners to judicially demand from the manager or the administrator of the partnership capital, each one's
contribution?
The authors discuss this point at great length, but Ricci decides the matter quite clearly, dispelling all doubts
thereon. He holds that the partner who limits himself to demanding only the amount contributed by him need not
resort to the partnership contract on which to base his action. And he adds in explanation that the partner makes
his contribution, which passes to the managing partner for the purpose of carrying on the business or industry
which is the object of the partnership; or in other words, to breathe the breath of life into a partnership contract
with an objection forbidden by law. And as said contrast does not exist in the eyes of the law, the purpose from
which the contribution was made has not come into existence, and the administrator of the partnership holding
said contribution retains what belongs to others, without any consideration; for which reason he is not bound to
return it and he who has paid in his share is entitled to recover it.
But this is not the case with regard to profits earned in the course of the partnership, because they do not
constitute or represent the partner's contribution but are the result of the industry, business or speculation which is
the object of the partnership, and therefor, in order to demand the proportional part of the said profits, the partner
would have to base his action on the contract which is null and void, since this partition or distribution of the
profits is one of the juridical effects thereof. Wherefore considering this contract asnon-existent, by reason of its
illicit object, it cannot give rise to the necessary action, which must be the basis of the judicial complaint.
Furthermore, it would be immoral and unjust for the law to permit a profit from an industry prohibited by it.
Hence the distinction made in the second paragraph of this article of this Code, providing that the profits obtained
by unlawful means shall not enrich the partners, but shall upon the dissolution of the partnership, be given to the
charitable institutions of the domicile of the partnership, or, in default of such, to those of the province.
This is a new rule, unprecedented by our law, introduced to supply an obvious deficiency of the former law,
which did not describe the purpose to which those profits denied the partners were to be applied, nor state what to
be done with them.
The profits are so applied, and not the contributions, because this would be an excessive and unjust sanction for,
as we have seen, there is no reason, in such a case, for depriving the partner of the portion of the capital that he
contributed, the circumstances of the two cases being entirely different.
Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts contributed are to
be returned by the partners, because it only deals with the disposition of the profits; but the fact that said
contributions are not included in the disposal prescribed profits, shows that in consequences of said exclusion, the
general law must be followed, and hence the partners should reimburse the amount of their respective
contributions. Any other solution is immoral, and the law will not consent to the latter remaining in the possession
of the manager or administrator who has refused to return them, by denying to the partners the action to demand
them. (Manresa, Commentaries on the Spanish Civil Code, vol. XI, pp. 262-264)

169

.
G.R. No. L-35469

March 17, 1932

E. S. LYONS, plaintiff-appellant,
vs.
C. W. ROSENSTOCK, Executor of the Estate of Henry W. Elser, deceased, defendant-appellee.
STREET, J.:
This action was institute in the Court of First Instance of the City of Manila, by E. S. Lyons against C. W. Rosenstock, as
executor of the estate of H. W. Elser, deceased, consequent upon the taking of an appeal by the executor from the
allowance of the claim sued upon by the committee on claims in said estate. The purpose of the action is to recover four
hundred forty-six and two thirds shares of the stock of J. K. Pickering & Co., Ltd., together with the sum of about
P125,000, representing the dividends which accrued on said stock prior to October 21, 1926, with lawful interest. Upon
hearing the cause the trial court absolved the defendant executor from the complaint, and the plaintiff appealed.
Prior to his death on June 18, 1923, Henry W. Elser had been a resident of the City of Manila where he was engaged
during the years with which we are here concerned in buying, selling, and administering real estate. In several ventures
which he had made in buying and selling property of this kind the plaintiff, E. S. Lyons, had joined with him, the profits
being shared by the two in equal parts. In April, 1919, Lyons, whose regular vocation was that of a missionary, or
missionary agent, of the Methodist Episcopal Church, went on leave to the United States and was gone for nearly a year
and a half, returning on September 21, 1920. On the eve of his departure Elser made a written statements showing that
Lyons was, at that time, half owner with Elser of three particular pieces of real property. Concurrently with this act Lyons
execute in favor of Elser a general power of attorney empowering him to manage and dispose of said properties at will
and to represent Lyons fully and amply, to the mutual advantage of both. During the absence of Lyons two of the pieces
of property above referred to were sold by Elser, leaving in his hands a single piece of property located at 616-618 Carried
Street, in the City of Manila, containing about 282 square meters of land, with the improvements thereon.
In the spring of 1920 the attention of Elser was drawn to a piece of land, containing about 1,500,000 square meters, near
the City of Manila, and he discerned therein a fine opportunity for the promotion and development of a suburban
improvement. This property, which will be herein referred to as the San Juan Estate, was offered by its owners for
P570,000. To afford a little time for maturing his plans, Elser purchased an option on this property for P5,000, and when
this option was about to expire without his having been able to raise the necessary funds, he paid P15,000 more for an
extension of the option, with the understanding in both cases that, in case the option should be exercised, the amounts thus
paid should be credited as part of the first payment. The amounts paid for this option and its extension were supplied by
Elser entirely from his own funds. In the end he was able from his own means, and with the assistance which he obtained
from others, to acquire said estate. The amount required for the first payment was P150,000, and as Elser had available
only about P120,000, including the P20,000 advanced upon the option, it was necessary to raise the remainder by
obtaining a loan for P50,000. This amount was finally obtained from a Chinese merchant of the city named Uy Siuliong.
This loan was secured through Uy Cho Yee, a son of the lender; and in order to get the money it was necessary for Elser
not only to give a personal note signed by himself and his two associates in the projected enterprise, but also by the
Fidelity & Surety Company. The money thus raised was delivered to Elser by Uy Siuliong on June 24, 1920. With this
money and what he already had in bank Elser purchased the San Juan Estate on or about June 28, 1920. For the purpose of
the further development of the property a limited partnership had, about this time, been organized by Elser and three
associates, under the name of J. K. Pickering & Company; and when the transfer of the property was effected the deed
was made directly to this company. As Elser was the principal capitalist in the enterprise he received by far the greater
number of the shares issued, his portion amount in the beginning to 3,290 shares.
While these negotiations were coming to a head, Elser contemplated and hoped that Lyons might be induced to come in
with him and supply part of the means necessary to carry the enterprise through. In this connection it appears that on May
20, 1920, Elser wrote Lyons a letter, informing him that he had made an offer for a big subdivision and that, if it should be
170

acquired and Lyons would come in, the two would be well fixed. (Exhibit M-5.) On June 3, 1920, eight days before the
first option expired, Elser cabled Lyons that he had bought the San Juan Estate and thought it advisable for Lyons to
resign (Exhibit M-13), meaning that he should resign his position with the mission board in New York. On the same date
he wrote Lyons a letter explaining some details of the purchase, and added "have advised in my cable that you resign and I
hope you can do so immediately and will come and join me on the lines we have so often spoken about. . . . There is
plenty of business for us all now and I believe we have started something that will keep us going for some time." In one or
more communications prior to this, Elser had sought to impress Lyons with the idea that he should raise all the money he
could for the purpose of giving the necessary assistance in future deals in real estate.
The enthusiasm of Elser did not communicate itself in any marked degree to Lyons, and found him averse from joining in
the purchase of the San Juan Estate. In fact upon this visit of Lyons to the United States a grave doubt had arisen as to
whether he would ever return to Manila, and it was only in the summer of 1920 that the board of missions of his church
prevailed upon him to return to Manila and resume his position as managing treasurer and one of its trustees. Accordingly,
on June 21, 1920, Lyons wrote a letter from New York thanking Elser for his offer to take Lyons into his new project and
adding that from the standpoint of making money, he had passed up a good thing.
One source of embarrassment which had operated on Lyson to bring him to the resolution to stay out of this venture, was
that the board of mission was averse to his engaging in business activities other than those in which the church was
concerned; and some of Lyons' missionary associates had apparently been criticizing his independent commercial
activities. This fact was dwelt upon in the letter above-mentioned. Upon receipt of this letter Elser was of course informed
that it would be out of the question to expect assistance from Lyons in carrying out the San Juan project. No further efforts
to this end were therefore made by Elser.
When Elser was concluding the transaction for the purchase of the San Juan Estate, his book showed that he was indebted
to Lyons to the extent of, possibly, P11,669.72, which had accrued to Lyons from profits and earnings derived from other
properties; and when the J. K. Pickering & Company was organized and stock issued, Elser indorsed to Lyons 200 of the
shares allocated to himself, as he then believed that Lyons would be one of his associates in the deal. It will be noted that
the par value of these 200 shares was more than P8,000 in excess of the amount which Elser in fact owed to Lyons; and
when the latter returned to the Philippine Islands, he accepted these shares and sold them for his own benefit. It seems to
be supposed in the appellant's brief that the transfer of these shares to Lyons by Elser supplies some sort of basis for the
present action, or at least strengthens the considerations involved in a feature of the case to be presently explained. This
view is manifestly untenable, since the ratification of the transaction by Lyons and the appropriation by him of the shares
which were issued to him leaves no ground whatever for treating the transaction as a source of further equitable rights in
Lyons. We should perhaps add that after Lyons' return to the Philippine Islands he acted for a time as one of the members
of the board of directors of the J. K. Pickering & Company, his qualification for this office being derived precisely from
the ownership of these shares.
We now turn to the incident which supplies the main basis of this action. It will be remembered that, when Elser obtained
the loan of P50,000 to complete the amount needed for the first payment on the San Juan Estate, the lender, Uy Siuliong,
insisted that he should procure the signature of the Fidelity & Surety Co. on the note to be given for said loan. But before
signing the note with Elser and his associates, the Fidelity & Surety Co. insisted upon having security for the liability thus
assumed by it. To meet this requirements Elser mortgaged to the Fidelity & Surety Co. the equity of redemption in the
property owned by himself and Lyons on Carriedo Street. This mortgage was executed on June 30, 1920, at which time
Elser expected that Lyons would come in on the purchase of the San Juan Estate. But when he learned from the letter from
Lyons of July 21, 1920, that the latter had determined not to come into this deal, Elser began to cast around for means to
relieve the Carriedo property of the encumbrance which he had placed upon it. For this purpose, on September 9, 1920, he
addressed a letter to the Fidelity & Surety Co., asking it to permit him to substitute a property owned by himself at 644 M.
H. del Pilar Street, Manila, and 1,000 shares of the J. K. Pickering & Company, in lieu of the Carriedo property, as
security. The Fidelity & Surety Co. agreed to the proposition; and on September 15, 1920, Elser executed in favor of the
Fidelity & Surety Co. a new mortgage on the M. H. del Pillar property and delivered the same, with 1,000 shares of J. K.
Pickering & Company, to said company. The latter thereupon in turn executed a cancellation of the mortgage on the
Carriedo property and delivered it to Elser. But notwithstanding the fact that these documents were executed and
171

delivered, the new mortgage and the release of the old were never registered; and on September 25, 1920, thereafter, Elser
returned the cancellation of the mortgage on the Carriedo property and took back from the Fidelity & Surety Co. the new
mortgage on the M. H. del Pilar property, together with the 1,000 shares of the J. K. Pickering & Company which he had
delivered to it.
The explanation of this change of purpose is undoubtedly to be found in the fact that Lyons had arrived in Manila on
September 21, 1920, and shortly thereafter, in the course of a conversation with Elser told him to let the Carriedo
mortgage remain on the property ("Let the Carriedo mortgage ride"). Mrs. Elser testified to the conversation in which
Lyons used the words above quoted, and as that conversation supplies the most reasonable explanation of Elser's recession
from his purpose of relieving the Carriedo property, the trial court was, in our opinion, well justified in accepting as a
proven fact the consent of Lyons for the mortgage to remain on the Carriedo property. This concession was not only
reasonable under the circumstances, in view of the abundant solvency of Elser, but in view of the further fact that Elser
had given to Lyons 200 shares of the stock of the J. K. Pickering & Co., having a value of nearly P8,000 in excess of the
indebtedness which Elser had owed to Lyons upon statement of account. The trial court found in effect that the excess
value of these shares over Elser's actual indebtedness was conceded by Elser to Lyons in consideration of the assistance
that had been derived from the mortgage placed upon Lyon's interest in the Carriedo property. Whether the agreement was
reached exactly upon this precise line of thought is of little moment, but the relations of the parties had been such that it
was to be expected that Elser would be generous; and he could scarcely have failed to take account of the use he had made
of the joint property of the two.
As the development of the San Juan Estate was a success from the start, Elser paid the note of P50,000 to Uy Siuliong on
January 18, 1921, although it was not due until more than five months later. It will thus be seen that the mortgaging of the
Carriedo property never resulted in damage to Lyons to the extent of a single cent; and although the court refused to allow
the defendant to prove the Elser was solvent at this time in an amount much greater than the entire encumbrance placed
upon the property, it is evident that the risk imposed upon Lyons was negligible. It is also plain that no money actually
deriving from this mortgage was ever applied to the purchase of the San Juan Estate. What really happened was the Elser
merely subjected the property to a contingent liability, and no actual liability ever resulted therefrom. The financing of the
purchase of the San Juan Estate, apart from the modest financial participation of his three associates in the San Juan deal,
was the work of Elser accomplished entirely upon his own account.
The case for the plaintiff supposes that, when Elser placed a mortgage for P50,000 upon the equity of redemption in the
Carriedo property, Lyons, as half owner of said property, became, as it were, involuntarily the owner of an undivided
interest in the property acquired partly by that money; and it is insisted for him that, in consideration of this fact, he is
entitled to the four hundred forty-six and two-thirds shares of J. K. Pickering & Company, with the earnings thereon, as
claimed in his complaint.
Lyons tells us that he did not know until after Elser's death that the money obtained from Uy Siuliong in the manner
already explained had been used to held finance the purchase of the San Juan Estate. He seems to have supposed that the
Carried property had been mortgaged to aid in putting through another deal, namely, the purchase of a property referred to
in the correspondence as the "Ronquillo property"; and in this connection a letter of Elser of the latter part of May, 1920,
can be quoted in which he uses this language:
As stated in cablegram I have arranged for P50,000 loan on Carriedo property. Will use part of the money for
Ronquillo buy (P60,000) if the owner comes through.
Other correspondence shows that Elser had apparently been trying to buy the Ronquillo property, and Lyons leads us to
infer that he thought that the money obtained by mortgaging the Carriedo property had been used in the purchase of this
property. It doubtedless appeared so to him in the retrospect, but certain consideration show that he was inattentive to the
contents of the quotation from the letter above given. He had already been informed that, although Elser was angling for
the Ronquillo property, its price had gone up, thus introducing a doubt as to whether he could get it; and the quotation
above given shows that the intended use of the money obtained by mortgaging the Carriedo property was that only part of
the P50,000 thus obtained would be used in this way, if the deal went through. Naturally, upon the arrival of Lyons in
172

September, 1920, one of his first inquiries would have been, if he did not know before, what was the status of the
proposed trade for the Ronquillo property.
Elser's widow and one of his clerks testified that about June 15, 1920, Elser cabled Lyons something to this effect;: "I
have mortgaged the property on Carriedo Street, secured by my personal note. You are amply protected. I wish you to join
me in the San Juan Subdivision. Borrow all money you can." Lyons says that no such cablegram was received by him, and
we consider this point of fact of little moment, since the proof shows that Lyons knew that the Carriedo mortgage had
been executed, and after his arrival in Manila he consented for the mortgage to remain on the property until it was paid
off, as shortly occurred. It may well be that Lyons did not at first clearly understand all the ramifications of the situation,
but he knew enough, we think, to apprise him of the material factors in the situation, and we concur in the conclusion of
the trial court that Elser did not act in bad faith and was guilty of no fraud.
In the purely legal aspect of the case, the position of the appellant is, in our opinion, untenable. If Elser had used any
money actually belonging to Lyons in this deal, he would under article 1724 of the Civil Code and article 264 of the Code
of Commerce, be obligated to pay interest upon the money so applied to his own use. Under the law prevailing in this
jurisdiction a trust does not ordinarily attach with respect to property acquired by a person who uses money belonging to
another (Martinez vs. Martinez, 1 Phil., 647; Enriquez vs. Olaguer, 25 Phil., 641.). Of course, if an actual relation of
partnership had existed in the money used, the case might be difference; and much emphasis is laid in the appellant's brief
upon the relation of partnership which, it is claimed, existed. But there was clearly no general relation of partnership,
under article 1678 of the Civil Code. It is clear that Elser, in buying the San Juan Estate, was not acting for any
partnership composed of himself and Lyons, and the law cannot be distorted into a proposition which would make Lyons
a participant in this deal contrary to his express determination.
It seems to be supposed that the doctrines of equity worked out in the jurisprudence of England and the United States with
reference to trust supply a basis for this action. The doctrines referred to operate, however, only where money belonging
to one person is used by another for the acquisition of property which should belong to both; and it takes but little
discernment to see that the situation here involved is not one for the application of that doctrine, for no money belonging
to Lyons or any partnership composed of Elser and Lyons was in fact used by Elser in the purchase of the San Juan Estate.
Of course, if any damage had been caused to Lyons by the placing of the mortgage upon the equity of redemption in the
Carriedo property, Elser's estate would be liable for such damage. But it is evident that Lyons was not prejudice by that
act.
The appellee insist that the trial court committed error in admitting the testimony of Lyons upon matters that passed
between him and Elser while the latter was still alive. While the admission of this testimony was of questionable
propriety, any error made by the trial court on this point was error without injury, and the determination of the question is
not necessary to this decision. We therefore pass the point without further discussion.
The judgment appealed from will be affirmed, and it is so ordered, with costs against the appellant.

173

G.R. No. 126881

October 3, 2000

HEIRS OF TAN ENG KEE, petitioners,

vs.
COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President TAN ENG
LAY,respondents.
DE LEON, JR., J.:
In this petition for review on certiorari, petitioners pray for the reversal of the Decision1 dated March 13, 1996 of the
former Fifth Division2 of the Court of Appeals in CA-G.R. CV No. 47937, the dispositive portion of which states:
THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the complaint dismissed.
The facts are:
Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law spouse of the decedent,
joined by their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio, collectively known as herein petitioners
HEIRS OF TAN ENG KEE, filed suit against the decedent's brother TAN ENG LAY on February 19, 1990. The
complaint,3 docketed as Civil Case No. 1983-R in the Regional Trial Court of Baguio City was for accounting, liquidation
and winding up of the alleged partnership formed after World War II between Tan Eng Kee and Tan Eng Lay. On March
18, 1991, the petitioners filed an amended complaint4 impleading private respondent herein BENGUET LUMBER
COMPANY, as represented by Tan Eng Lay. The amended complaint was admitted by the trial court in its Order dated
May 3, 1991.5
The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan Eng Lay, pooling their
resources and industry together, entered into a partnership engaged in the business of selling lumber and hardware and
construction supplies. They named their enterprise "Benguet Lumber" which they jointly managed until Tan Eng Kee's
death. Petitioners herein averred that the business prospered due to the hard work and thrift of the alleged partners.
However, they claimed that in 1981, Tan Eng Lay and his children caused the conversion of the partnership "Benguet
Lumber" into a corporation called "Benguet Lumber Company." The incorporation was purportedly a ruse to deprive Tan
Eng Kee and his heirs of their rightful participation in the profits of the business. Petitioners prayed for accounting of the
partnership assets, and the dissolution, winding up and liquidation thereof, and the equal division of the net assets of
Benguet Lumber.
After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment6 on April 12, 1995, to wit:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
a) Declaring that Benguet Lumber is a joint venture which is akin to a particular partnership;
b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or partners in a business
venture and/or particular partnership called Benguet Lumber and as such should share in the profits and/or losses
of the business venture or particular partnership;
c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet Lumber Co. Inc. and as
such the heirs or legal representatives of the deceased Tan Eng Kee have a legal right to share in said assets;
d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as partner in a particular
partnership have descended to the plaintiffs who are his legal heirs.
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e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of Benguet Lumber
Company Inc. to render an accounting of all the assets of Benguet Lumber Company, Inc. so the plaintiffs know
their proper share in the business;
f) Ordering the appointment of a receiver to preserve and/or administer the assets of Benguet Lumber Company,
Inc. until such time that said corporation is finally liquidated are directed to submit the name of any person they
want to be appointed as receiver failing in which this Court will appoint the Branch Clerk of Court or another one
who is qualified to act as such.
g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in filing the instant case.
h) Dismissing the counter-claim of the defendant for lack of merit.
SO ORDERED.
Private respondent sought relief before the Court of Appeals which, on March 13, 1996, rendered the assailed decision
reversing the judgment of the trial court. Petitioners' motion for reconsideration7 was denied by the Court of Appeals in a
Resolution8 dated October 11, 1996.
Hence, the present petition.
As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and Wilborn Tan for the
use of allegedly falsified documents in a judicial proceeding. Petitioners complained that Exhibits "4" to "4-U" offered by
the defendants before the trial court, consisting of payrolls indicating that Tan Eng Kee was a mere employee of Benguet
Lumber, were fake, based on the discrepancy in the signatures of Tan Eng Kee. They also filed Criminal Cases Nos.
78857-78870 against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan, for alleged
falsification of commercial documents by a private individual. On March 20, 1999, the Municipal Trial Court of Baguio
City, Branch 1, wherein the charges were filed, rendered judgment9 dismissing the cases for insufficiency of evidence.
In their assignment of errors, petitioners claim that:
I
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP
BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS
NO FIRM ACCOUNT; (B) THERE WAS NO FIRM LETTERHEADS SUBMITTED AS EVIDENCE; (C)
THERE WAS NO CERTIFICATE OF PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO
PROFITS AND LOSSES; AND (E) THERE WAS NO TIME FIXED FOR THE DURATION OF THE
PARTNERSHIP (PAGE 13, DECISION).
II
THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING
TESTIMONY OF RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A SOLE
PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY AN EMPLOYEE THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING FACTS
WHICH WERE DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT SUPPORT THE
175

EXISTENCE OF A PARTNERSHIP JUST BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP

DULY RECORDED BEFORE THE SECURITIES AND EXCHANGE COMMISSION:
a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE
BENGUET LUMBER COMPOUND;
b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE EMPLOYEES
OF BENGUET LUMBER;
c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE EMPLOYEES
THEREIN;
d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING THE PRICES OF
STOCKS TO BE SOLD TO THE PUBLIC; AND
e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS TO THE
SUPPLIERS (PAGE 18, DECISION).
IV
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP
JUST BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO TAN AND VERONICA CHOI,
TOGETHER WITH THEIR WITNESS BEATRIZ TANDOC, ADMITTED THAT THEY DO NOT KNOW
WHEN THE ESTABLISHMENT KNOWN IN BAGUIO CITY AS BENGUET LUMBER WAS STARTED AS
A PARTNERSHIP (PAGE 16-17, DECISION).
V
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP
BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE THE PRESENT
CAPITAL OR ASSETS OF BENGUET LUMBER IS DEFINITELY MORE THAN P3,000.00 AND AS SUCH
THE EXECUTION OF A PUBLIC INSTRUMENT CREATING A PARTNERSHIP SHOULD HAVE BEEN
MADE AND NO SUCH PUBLIC INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17,
DECISION).
As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not be disturbed on
appeal if such are supported by the evidence.10 Our jurisdiction, it must be emphasized, does not include review of factual
issues. Thus:
Filing of petition with Supreme Court. A party desiring to appeal by certiorari from a judgment or final order
or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever
authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The petition shall
raise only questions of law which must be distinctly set forth.11 [emphasis supplied]
Admitted exceptions have been recognized, though, and when present, may compel us to analyze the evidentiary basis on
which the lower court rendered judgment. Review of factual issues is therefore warranted:
(1) when the factual findings of the Court of Appeals and the trial court are contradictory;
(2) when the findings are grounded entirely on speculation, surmises, or conjectures;
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(3) when the inference made by the Court of Appeals from its findings of fact is manifestly mistaken, absurd, or
impossible;
(4) when there is grave abuse of discretion in the appreciation of facts;
(5) when the appellate court, in making its findings, goes beyond the issues of the case, and such findings are
contrary to the admissions of both appellant and appellee;
(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;
(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered, will justify a
different conclusion;
(8) when the findings of fact are themselves conflicting;
(9) when the findings of fact are conclusions without citation of the specific evidence on which they are based;
and
(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence but such findings
are contradicted by the evidence on record.12
In reversing the trial court, the Court of Appeals ruled, to wit:
We note that the Court a quo over extended the issue because while the plaintiffs mentioned only the existence of
a partnership, the Court in turn went beyond that by justifying the existence of a joint venture.
When mention is made of a joint venture, it would presuppose parity of standing between the parties, equal
proprietary interest and the exercise by the parties equally of the conduct of the business, thus:
xxx

xxx

xxx

We have the admission that the father of the plaintiffs was not a partner of the Benguet Lumber before the war.
The appellees however argued that (Rollo, p. 104; Brief, p. 6) this is because during the war, the entire stocks of
the pre-war Benguet Lumber were confiscated if not burned by the Japanese. After the war, because of the
absence of capital to start a lumber and hardware business, Lay and Kee pooled the proceeds of their individual
businesses earned from buying and selling military supplies, so that the common fund would be enough to form a
partnership, both in the lumber and hardware business. That Lay and Kee actually established the Benguet
Lumber in Baguio City, was even testified to by witnesses. Because of the pooling of resources, the post-war
Benguet Lumber was eventually established. That the father of the plaintiffs and Lay were partners, is obvious
from the fact that: (1) they conducted the affairs of the business during Kee's lifetime, jointly, (2) they were the
ones giving orders to the employees, (3) they were the ones preparing orders from the suppliers, (4) their families
stayed together at the Benguet Lumber compound, and (5) all their children were employed in the business in
different capacities.
xxx

xxx

xxx

It is obvious that there was no partnership whatsoever. Except for a firm name, there was no firm account, no firm
letterheads submitted as evidence, no certificate of partnership, no agreement as to profits and losses, and no time
fixed for the duration of the partnership. There was even no attempt to submit an accounting corresponding to the
period after the war until Kee's death in 1984. It had no business book, no written account nor any memorandum
for that matter and no license mentioning the existence of a partnership [citation omitted].
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Also, the exhibits support the establishment of only a proprietorship. The certification dated March 4, 1971,
Exhibit "2", mentioned co-defendant Lay as the only registered owner of the Benguet Lumber and Hardware. His
application for registration, effective 1954, in fact mentioned that his business started in 1945 until 1985
(thereafter, the incorporation). The deceased, Kee, on the other hand, was merely an employee of the Benguet
Lumber Company, on the basis of his SSS coverage effective 1958, Exhibit "3". In the Payrolls, Exhibits "4" to
"4-U", inclusive, for the years 1982 to 1983, Kee was similarly listed only as an employee; precisely, he was on
the payroll listing. In the Termination Notice, Exhibit "5", Lay was mentioned also as the proprietor.
xxx

xxx

xxx

We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in any form, but when
an immovable is constituted, the execution of a public instrument becomes necessary. This is equally true if the
capitalization exceeds P3,000.00, in which case a public instrument is also necessary, and which is to be recorded
with the Securities and Exchange Commission. In this case at bar, we can easily assume that the business
establishment, which from the language of the appellees, prospered (pars. 5 & 9, Complaint), definitely exceeded
P3,000.00, in addition to the accumulation of real properties and to the fact that it is now a compound. The
execution of a public instrument, on the other hand, was never established by the appellees.
And then in 1981, the business was incorporated and the incorporators were only Lay and the members of his
family. There is no proof either that the capital assets of the partnership, assuming them to be in existence, were
maliciously assigned or transferred by Lay, supposedly to the corporation and since then have been treated as a
part of the latter's capital assets, contrary to the allegations in pars. 6, 7 and 8 of the complaint.
These are not evidences supporting the existence of a partnership:
1) That Kee was living in a bunk house just across the lumber store, and then in a room in the bunk house in
Trinidad, but within the compound of the lumber establishment, as testified to by Tandoc; 2) that both Lay and
Kee were seated on a table and were "commanding people" as testified to by the son, Elpidio Tan; 3) that both
were supervising the laborers, as testified to by Victoria Choi; and 4) that Dionisio Peralta was supposedly being
told by Kee that the proceeds of the 80 pieces of the G.I. sheets were added to the business.
Partnership presupposes the following elements [citation omitted]: 1) a contract, either oral or written. However,
if it involves real property or where the capital is P3,000.00 or more, the execution of a contract is necessary; 2)
the capacity of the parties to execute the contract; 3) money property or industry contribution; 4) community of
funds and interest, mentioning equality of the partners or one having a proportionate share in the benefits; and 5)
intention to divide the profits, being the true test of the partnership. The intention to join in the business venture
for the purpose of obtaining profits thereafter to be divided, must be established. We cannot see these elements
from the testimonial evidence of the appellees.
As can be seen, the appellate court disputed and differed from the trial court which had adjudged that TAN ENG KEE and
TAN ENG LAY had allegedly entered into a joint venture. In this connection, we have held that whether a partnership
exists is a factual matter; consequently, since the appeal is brought to us under Rule 45, we cannot entertain inquiries
relative to the correctness of the assessment of the evidence by the court a quo.13 Inasmuch as the Court of Appeals and
the trial court had reached conflicting conclusions, perforce we must examine the record to determine if the reversal was
justified.
The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet Lumber. A contract of
partnership is defined by law as one where:
. . . two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention
of dividing the profits among themselves.
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Two or more persons may also form a partnership for the exercise of a profession.14
Thus, in order to constitute a partnership, it must be established that (1) two or more persons bound themselves to
contribute money, property, or industry to a common fund, and (2) they intend to divide the profits among
themselves.15 The agreement need not be formally reduced into writing, since statute allows the oral constitution
of a partnership, save in two instances: (1) when immovable property or real rights are contributed,16 and (2) when
the partnership has a capital of three thousand pesos or more.17 In both cases, a public instrument is required.18 An
inventory to be signed by the parties and attached to the public instrument is also indispensable to the validity of
the partnership whenever immovable property is contributed to the partnership.19
The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture, which it said is akin to a
particular partnership.20 A particular partnership is distinguished from a joint adventure, to wit:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal partnership, with no
firm name and no legal personality. In a joint account, the participating merchants can transact business under
their own name, and can be individually liable therefor.
(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the business
of pursuing to a successful termination may continue for a number of years; a partnership generally relates to a
continuing business of various transactions of a certain kind.21
A joint venture "presupposes generally a parity of standing between the joint co-ventures or partners, in which each party
has an equal proprietary interest in the capital or property contributed, and where each party exercises equal rights in the
conduct of the business."22 Nonetheless, in Aurbach, et. al. v. Sanitary Wares Manufacturing Corporation, et. al.,23 we
expressed the view that a joint venture may be likened to a particular partnership, thus:
The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been
generally understood to mean an organization formed for some temporary purpose. (Gates v. Megargel, 266 Fed.
811 [1920]) It is hardly distinguishable from the partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a mutual right of control. (Blackner v. McDermott, 176
F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P.2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288
P.2d. 12 289 P.2d. 242 [1955]). The main distinction cited by most opinions in common law jurisdiction is that
the partnership contemplates a general business with some degree of continuity, while the joint venture is formed
for the execution of a single transaction, and is thus of a temporary nature. (Tufts v. Mann. 116 Cal. App. 170, 2
P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]).
This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be
particular or universal, and a particular partnership may have for its object a specific undertaking. (Art. 1783,
Civil Code). It would seem therefore that under Philippine law, a joint venture is a form of partnership and should
thus be governed by the law of partnerships. The Supreme Court has however recognized a distinction between
these two business forms, and has held that although a corporation cannot enter into a partnership contract, it may
however engage in a joint venture with others. (At p. 12, Tuazon v. Bolaos, 95 Phil. 906 [1954]) (Campos and
Lopez-Campos Comments, Notes and Selected Cases, Corporation Code 1981).
Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of partnership but there
is none. The alleged partnership, though, was never formally organized. In addition, petitioners point out that the New
Civil Code was not yet in effect when the partnership was allegedly formed sometime in 1945, although the contrary may
well be argued that nothing prevented the parties from complying with the provisions of the New Civil Code when it took
effect on August 30, 1950. But all that is in the past. The net effect, however, is that we are asked to determine whether a
partnership existed based purely on circumstantial evidence. A review of the record persuades us that the Court of
Appeals correctly reversed the decision of the trial court. The evidence presented by petitioners falls short of the quantum
of proof required to establish a partnership.
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Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could have expounded on
the precise nature of the business relationship between them. In the absence of evidence, we cannot accept as an
established fact that Tan Eng Kee allegedly contributed his resources to a common fund for the purpose of establishing a
partnership. The testimonies to that effect of petitioners' witnesses is directly controverted by Tan Eng Lay. It should be
noted that it is not with the number of witnesses wherein preponderance lies;24 the quality of their testimonies is to be
considered. None of petitioners' witnesses could suitably account for the beginnings of Benguet Lumber Company, except
perhaps for Dionisio Peralta whose deceased wife was related to Matilde Abubo.25 He stated that when he met Tan Eng
Kee after the liberation, the latter asked the former to accompany him to get 80 pieces of G.I. sheets supposedly owned by
both brothers.26Tan Eng Lay, however, denied knowledge of this meeting or of the conversation between Peralta and his
brother.27 Tan Eng Lay consistently testified that he had his business and his brother had his, that it was only later on that
his said brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or co-possession (specifically here,
of the G.I. sheets) is not an indicium of the existence of a partnership.28
Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in existence, Tan Eng
Kee never asked for an accounting. The essence of a partnership is that the partners share in the profits and losses.29 Each
has the right to demand an accounting as long as the partnership exists.30 We have allowed a scenario wherein "[i]f
excellent relations exist among the partners at the start of the business and all the partners are more interested in seeing the
firm grow rather than get immediate returns, a deferment of sharing in the profits is perfectly plausible."31 But in the
situation in the case at bar, the deferment, if any, had gone on too long to be plausible. A person is presumed to take
ordinary care of his concerns.32 As we explained in another case:
In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second place, she did not furnish
any help or intervention in the management of the theatre. In the third place, it does not appear that she has even
demanded from defendant any accounting of the expenses and earnings of the business. Were she really a partner,
her first concern should have been to find out how the business was progressing, whether the expenses were
legitimate, whether the earnings were correct, etc. She was absolutely silent with respect to any of the acts that a
partner should have done; all that she did was to receive her share of P3,000.00 a month, which cannot be
interpreted in any manner than a payment for the use of the premises which she had leased from the owners.
Clearly, plaintiff had always acted in accordance with the original letter of defendant of June 17, 1945 (Exh. "A"),
which shows that both parties considered this offer as the real contract between them.33 [emphasis supplied]
A demand for periodic accounting is evidence of a partnership.34 During his lifetime, Tan Eng Kee appeared never to have
made any such demand for accounting from his brother, Tang Eng Lay.
This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of payrolls purporting to show that
Tan Eng Kee was an ordinary employee of Benguet Lumber, as it was then called. The authenticity of these documents
was questioned by petitioners, to the extent that they filed criminal charges against Tan Eng Lay and his wife and
children. As aforesaid, the criminal cases were dismissed for insufficiency of evidence. Exhibits "4" to "4-U" in fact
shows that Tan Eng Kee received sums as wages of an employee. In connection therewith, Article 1769 of the Civil Code
provides:
In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third
persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or copossessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property which the returns are derived;
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(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a partner in
the business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by installment or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a business or other property by installments or
otherwise.
In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an employee, not a partner. Even
if the payrolls as evidence were discarded, petitioners would still be back to square one, so to speak, since they did not
present and offer evidence that would show that Tan Eng Kee received amounts of money allegedly representing his share
in the profits of the enterprise. Petitioners failed to show how much their father, Tan Eng Kee, received, if any, as his
share in the profits of Benguet Lumber Company for any particular period. Hence, they failed to prove that Tan Eng Kee
and Tan Eng Lay intended to divide the profits of the business between themselves, which is one of the essential features
of a partnership.
Nevertheless, petitioners would still want us to infer or believe the alleged existence of a partnership from this set of
circumstances: that Tan Eng Lay and Tan Eng Kee were commanding the employees; that both were supervising the
employees; that both were the ones who determined the price at which the stocks were to be sold; and that both placed
orders to the suppliers of the Benguet Lumber Company. They also point out that the families of the brothers Tan Eng
Kee and Tan Eng Lay lived at the Benguet Lumber Company compound, a privilege not extended to its ordinary
employees.
However, private respondent counters that:
Petitioners seem to have missed the point in asserting that the above enumerated powers and privileges granted in
favor of Tan Eng Kee, were indicative of his being a partner in Benguet Lumber for the following reasons:
(i) even a mere supervisor in a company, factory or store gives orders and directions to his subordinates. So long,
therefore, that an employee's position is higher in rank, it is not unusual that he orders around those lower in rank.
(ii) even a messenger or other trusted employee, over whom confidence is reposed by the owner, can order
materials from suppliers for and in behalf of Benguet Lumber. Furthermore, even a partner does not necessarily
have to perform this particular task. It is, thus, not an indication that Tan Eng Kee was a partner.
(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this privilege was not
accorded to other employees, the undisputed fact remains that Tan Eng Kee is the brother of Tan Eng Lay.
Naturally, close personal relations existed between them. Whatever privileges Tan Eng Lay gave his brother, and
which were not given the other employees, only proves the kindness and generosity of Tan Eng Lay towards a
blood relative.
(iv) and even if it is assumed that Tan Eng Kee was quarreling with Tan Eng Lay in connection with the pricing
of stocks, this does not adequately prove the existence of a partnership relation between them. Even highly
confidential employees and the owners of a company sometimes argue with respect to certain matters which, in
no way indicates that they are partners as to each other.35
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In the instant case, we find private respondent's arguments to be well-taken. Where circumstances taken singly may be
inadequate to prove the intent to form a partnership, nevertheless, the collective effect of these circumstances may be such
as to support a finding of the existence of the parties' intent.36 Yet, in the case at bench, even the aforesaid circumstances
when taken together are not persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was involved in
the operations of Benguet Lumber, but in what capacity is unclear. We cannot discount the likelihood that as a member of
the family, he occupied a niche above the rank-and-file employees. He would have enjoyed liberties otherwise unavailable
were he not kin, such as his residence in the Benguet Lumber Company compound. He would have moral, if not actual,
superiority over his fellow employees, thereby entitling him to exercise powers of supervision. It may even be that among
his duties is to place orders with suppliers. Again, the circumstances proffered by petitioners do not provide a logical
nexus to the conclusion desired; these are not inconsistent with the powers and duties of a manager, even in a business
organized and run as informally as Benguet Lumber Company.
There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of. Hence, the
petition must fail.
WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is
herebyAFFIRMED in toto. No pronouncement as to costs.

182

G.R. No. 44119

March 30, 1937

SHARRUF & CO., known also as SHARRUF & ESKENAZI, SALOMON SHARRUF and ELIAS
ESKENAZI,plaintiffs-appellees,
vs.
BALOISE FIRE INSURANCE CO., SUN INSURANCE OFFICE, LTD., and SPRINGFIELD INSURANCE CO.,
represented by KUENZLE & STREIFF, INC., defendants-appellants.
VILLA-REAL, J.:
This is an appeal taken by the defendant companies Baloise Fire Insurance Co., Sun Insurance Office Ltd., and
Springfield Insurance Co., represented by Kuenzle & Streiff, Inc., from the judgment of the Court of First instance of
Manila, the dispositive part of which reads as follows:
Wherefore, judgment is rendered ordering the defendant insurance companies to pay to the plantiffs Salomon
Sharruf and Elias Eskenazi the total amount of P40,000 plus interest thereon at 8 per cent per annum from the date
of the filing of the complaint, with the costs of the trial. The defendants shall pay this judgment jointly in
proportion to the respective policies issued by them. The plaintiffs Salomon Sharruf and Elias Eskenazi shall
recover the judgment share and share alike, deducting from the portion of the plaintiff Elias Eskenazi the sum of
P3,000 which belongs and shall turned over to the intervenor E. Awad & Co., Inc. It is so ordered.
In support of their appeal the appellants assign the following alleged errors as committed by the court a quo in its decision
in question, to wit:
1. the lower court erred in holding, that Salomon Sharruf and Elias Eskenazi had personality to sue, either as a
partnership or individually, and therefore, an insurable interest.
2. The lower court erred in holding, that the fire that broke out in the premises at Nos. 299-301 Muelle de la
Industria of this city, occupied by the alleged plaintiffs, was not of incendiary origin.
3. The lower court erred in holding, that the "idea of using petroleum in the fire in question, surged after the fire
for the purpose of making it appear as a part of the evidence."
4. The lower court erred in holding, that the claim of loss filed by the alleged plaintiffs was not fraudulent, but
merely inaccurate, due to the peculiar circumstances of the case, such as the loss of invoices and sales-slips.
5. The lower court erred in sentencing the defendants to pay jointly to the alleged plaintiffs the sum of P40,000,
with interest thereon at the rate of 8 per cent year and costs.
6. The lower court erred in overruling defendants' motion for new trial and in failing to dismiss the case
altogether, with costs against the alleged plaintiffs.
The preponderance of the evidence shows the existence of the following facts:.
In the months of June and July 1933, the plaintiffs Salomon Sharruf and Elias Eskenazi were doing business under the
firm name of Sharruf & Co. As they had applied to the defendant companies for insurance of the merchandise they had in
stock, the latter sent their representative P. E. Schiess to examine and asses it. On July 25, 1933, the defendant insurance
companies issued insurance policies Exhibits D, E, and F in the total amount of P25,000 in the name of Sharruf & Co.
issued an additional policy (Exhibit G) in the sum of P15,000 in favor of said firm Sharruf & Co., raising the total amount
of the insurance on said merchandise to P40,000. On August 26, 1933, the plaintiffs executed a contract of partnership
between themselves (Exhibit A) wherein they substituted the name of Sharruf & Co. with the Sharruf & Eskenazi, stating
183

that Elias Eskenazi contributed to the partnership, as his capital, goods valued at P26,299.94 listed in an inventory Exhibit
B. It was likewise stated in said contract that Salomon Sharruf brought to said partnership, as his capital, goods valued at
P24,205.10, appearing in the inventories Exhibit C and C-1. The total value of the merchandise contributed by both
partners amounted to P50,505.04. Part of said merchandise, most of which were textiles, was sold for P8,000, leaving
goods worth P43,000. In all there were from 60 to 70 bolts of silk. All the goods, most of which were aluminum kitchen
utensils, various porcelain and glass wares, and other articles of stucco, were contained in about 39 or 40 cases. The last
time the plaintiffs were in the building was on September 19, 1933, at 4 o'clock in the afternoon. Up to the month of
September 1933, about 30 or 40 cases of merchandise belonging to the plaintiffs were in Robles' garage at No. 1012
Mabini Street.
At about 12.41 o'clock on the morning of September 22, 1933, the fire alarm bell rang in the different fire stations of the
city. The firemen of the San Nicolas Fire Station, headed by Captain Charles A. Baker, were the first to arrive at the scene
of the fire, followed by Captain Thomas F. McIntyre of the Santa Cruz Fire Station, who arrived at 12.44 o'clock. Having
found the door at No. 301, Muelle de la Industria Street, where the building was in flames, locked, the firemen pumped
water on the upper part of the building and later broke open the door through which they an entered the premises. They
then saw an inflamed liquid flowing towards the sidewalk, the flames thereon blazing more intensely every time water fell
on them. The liquid apparently came from under the staircase of said floor. They likewise noted that the entire space
occupied by the staircase was in flames except the adjoining room. After the fire had been extinguished, an earthen pot
(Exhibit 15) containing ashes and the residue of a certain substance, all of which smelled of petroleum, was found by
detective Manalo near the railing of the stairway of the second floor. At about 8.30 o'clock that same morning, detective
Irada found nother earthen pot (Exhibit 16), one-fourth full of water smelled of petroleum, under the staircase of the first
floor; straw and excelsior, that also smelled of petroleum, around said pot, a red rag (Exhibit 18) in front of the toilet, and
a towel which also smelled of petroleum can, Exhibit 21. On the following day, September 23, 1933, photographs were
taken of the condition of the different parts of the building and of the goods found therein. Said photographs are: Exhibit
1, showing the interior of the first floor partially burned, with the staircase, the doorway, the wooden partition wall and
pieces of wood scattered on the floor supposed to be from the door that was demolished; Exhibit 2, showing about 8 or 9
scorched cases, some closed and others open; Exhibit 3, showing the space or hall of the upper floor partially damaged by
the fire at the place occupied by the staircase, with chairs piled up and unburnt, pieces of wood and debris apparently from
the cement partition wall beside the staircase and the attic; Exhibit 4, showing the same space taken from another angle,
with the partition wall of cement and stone and some broken railings of the stairways; Exhibit 5, showing a room with
partially burnt partition wall, with a wardrobe and a table in the background, another table in the center, a showcase near
the wall with porcelain and iron articles on top thereof and fallen and burnt window shutters on the floor; Exhibit 6,
showing an open unburnt showcase containing necklaces with limitation stones and other jewelry; Exhibit 7, showing
piled up chairs and boxes and the burned and destroyed upper part of the partition wall and attic; Exhibit 8, presenting a
showcase with a burnt top, containing kitchen utensils, tableware, dinner pails and other articles; Exhibit 9, presenting a
half-open trunk with protruding ends of cloth, other pieces of cloth scattered on the floor, a step of the staircase and a
bench; Exhibit 10, showing the partially destroyed attic and wires wound around the beams; Exhibit 11, presenting
another view of the same attic from another angle. On the 27th of said month and year, the following photographs were
taken: Exhibit 12, presenting a close-up of the beams and electric wiring on September 25, 1933, was of the opinion that
the wires wound around the beam and a nail might have caused the fire, but he could not assure whether any of the wires
was burned due to an electrical discharge the passed through it, or whether or not the fire started from the lighting system.
In the burned building the plaintiffs kept petroleum used for cleaning the floor.
The first question to be decided in the present appeal, which is raised in the first assignment of alleged error, is whether or
not Salomon Sharruf and Elias Eskenazi had juridical personality to bring this action, either individually or collectively,
and whether or not they had insurable interest.
As already seen, Salomon Sharruf and Elias Eskenazi were doing business under the firm name of Sharruf & Co. in whose
name the insurance policies were issued, Elias Eskenazi having paid the corresponding premiums.
In the case of Lim Cuan Sy vs. Northern Assurance Co. (55 Phil., 248), this court said:
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A policy insuring merchandise against fire is not invalidated by the fact that the name of the insured in the policy
is incorrectly written "Lim Cuan Sy" instead of "Lim Cuan Sy & Co.", the latter being the proper legal
designation of the firm, where it appears that the designation "Lim Cuan Sy" was commonly used as the name of
the firm in its business dealings and that the error in the designation of the insured in the policy was not due to
any fraudulent intent on the part of the latter and did not mislead the insurer as to the extent of the liability
assumed.
In the present case, while it is true that at the beginning the plaintiffs had been doing business in said name of "Sharruf &
Co.", insuring their business in said name, and upon executing the contract of partnership (exhibit A) on August 26, 1933,
they changed the title thereof to "Sharruf & Eskenazi," the membership of the partnership in question remained
unchanged, the same and only members of the former, Salomon Sharruf and Elias Eskenazi, being the ones composing the
latter, and it does not appear that in changing the title of the partnership they had the intention of defrauding the herein
defendant insurance companies. Therefore, under the above-cited doctrine the responsibility of said defendants to the
plaintiffs by virtue of the respective insurance policies has not been altered. If this is true, the plaintiffs have juridical
personality to bring this action.
The second question to be decided is that raised in the second assignment of alleged error, which consists in whether or
not the fire which broke out in the building at Nos. 299-301 Muelle de la Industria, occupied by the plaintiffs, is of
incentiary origin.
In maintaining the affirmative, the appellants call attention to the earthen pots Exhibits 15 and 16, the first found by
detective Manalo beside the railing of the stairways of the upper floor and the second found by detective Irada on the first
floor, both containing liquid, ashes and other residues which smelled of petroleum; a red rag (Exhibit 18) found by
detective Irada in front of the toilet; the partially burnt box (Exhibit 20); and the old can (Exhibit 21) containing garbage.
The fact that the liquid found by the detectives in the earthen jars smelled of petroleum, does not constitute conclusive
evidence that they had been used as containers for petroleum to burn the house. Said smell could have very well come the
strips of China wood of which boxes from abroad are made, the resin of which smells of petroleum, or from the rags
found therein which might have been used to clean the floor by saturating them with petroleum. There being petroleum
for cleaning the floor in the building, it is not strange that when the house caught fire the petroleum also caught fire, the
flames floating on the water coming out from under the door from the pumps. There is neither direct nor strong
circumstantial evidence that the plaintiffs personally or through their agents placed petroleum in the building in order to
burn it, because it was locked on the outside and nobody was staying therein. As it cannot be assumed that the petroleum
might have burned by itself, it is probable that the fire might have originated from the electric wiring, although electrical
engineer Mora stated that he could not assure whether any of the wires was burned due to an electric discharge passing
through it, or whether or not the fire was caused by the lighting system.
Upon consideration of all the evidence and circumstances surrounding the fire, this court finds no evidence sufficient to
warrant a finding that the plaintiffs are responsible for the fire.
With respect to the question whether or not the claim of loss filed by the plaintiffs is fraudulent, it is alleged by them that
the total value of the textiles contained in cases deposited inside the building when the partnership Sharruf & Eskenazi
was formed was P12,000; that of the fancy jewelry with imitation stones from P15,000 to P17,000, and that of the kitchen
utensils and tableware made of aluminum, bronze and glass P10,676 (Exhibits B, C, and C-1). If, as said plaintiffs claim,
they had already sold articles, mostly textiles, valued at P8,000, a small quantity of cloth must have been left at the time
the fire occured. In their claim, however, the textiles allegedly consumed by fire and damaged by water are assessed by
them at P12,000. The claim of P12,000 is certainly not attributable to a mere mistake in estimate and counting because if
they had textiles worth only P12,000 before the fire and they sold goods, mostly textiles, worth P8,000, surely textiles in
the same amount of P12,000 could not have been burned and damaged after the fire. Of the kitchen utensils and tableware
made of aluminum, bronze and glass, of which, according to the evidence for the plaintiffs, they had a stock valued at
P10,676 (Exhibit B), there were found after the fire articles worth only P1,248.80 (Exhibit K). Therefore, utensils valued
at P9,427.20 were lacking. A considerable amount of kitchen utensils made of noninflammable and fire-proof material
could not, by the very nature of things have been totally consumed by the fire. At most, said articles would have been
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damaged, as the rest, and would have left traces of their existence. The same may be said of the fancy jewels with
imitation stones, and others of which the fancy jewels with imitation stones, and others of which the plaintiffs claim to
have had a stock worth from P15,000 to P17,000 at the time of the fire, of which only a few valued at P3,471.16, were left
after the fire (Exhibit K). According to said plaintiffs, all the articles, for the alleged loss of which indemnity is sought,
were contained in about 40 showcases and wardrobes. According to the testimony of the fire station chiefs, corrobarated
by the photographs of record, the flames caused more damage in the upper part of the rooms than in the lower part
thereof; since, of the ten or eleven cases found inside the building after the fire, only a few were partially burned and
others scorched judging from their appearance, the goods were damaged more by water than by fire. According to the
inventory made by White & Page, adjusters of the insurance companies, in the presence of the plaintiffs themselves and
according to data supplied by the latter, the total value thereof, aside, from the articles not included in the inventories
Exhibits B, C, and C-1, assessed at P744.50, amounts to only P8,077.35. If the plaintiffs' claim that at time of the fire
there were about 40 cases inside the burnt building were true, a ten or eleven of them were found after the fire, traces of
the thirty or twenty-nine cases allegedly burnt would be found, since experience has shown that during the burning of a
building all the cases deposited therein are not so reduced to ashes that the least vestige thereof cannot be found. In the
case of Go Lu vs. Yorkshire Insurance Co. (43 Phil., 633), this court laid down the following doctrine:
This court will legally presume that in an ordinary fire fifty bales or boxes of bolt goods of cloth cannot be wholly
consumed or totally destroyed, and that in the very nature of things some trace or evidence will be left remaining
of their loss or destruction.
The plaintiffs, upon whom devolve the legal obligation to prove the existence, at the time of the fire, of the articles and
merchandise for the destruction of which they claim indemnity from the defendant companies, have not complied with
their duty because they have failed to prove by a preponderance of evidence that when the fire took place there where in
the burnt building articles and merchandise in the total amount of the insurance policies or that the textiles and other
damaged and undamaged goods found in the building after the fire were worth P40,000. On the contrary, their own
witness, Robles, testified that up to the month of September, 1933, there were about 39 or 40 cases belonging to the
plaintiffs in his garage on Mabini Street, indicating thereby that the cases of merchandise examined by the agent of the
insurance companies on July 25 and August 15, 1933, and for which the insurance policies were issued, were taken from
the burned building where they were found. So great is the difference between the amount of articles insured, which the
plaintiffs claim to have been in the building before the fire, and the amount thereof shown by the vestige of the fire to
have been therein, that the most liberal human judgment can not attribute such difference to a mere innocent error in
estimate or counting but to a deliberate intent to demand of the insurance companies payment of an indemnity for goods
not existing at the time of the fire, thereby constituting the so-called "fraudulent claim" which, by express agreement
between the insurers and the insured, is a ground for exemption of the insurers from civil liability.
Therefore, as the herein plaintiffs-appellees have acted in bad faith in presenting a fraudulent claim, they are not entitled
to the indemnity claimed by them by virtue of the insurance policies issued by the defendant-appellant companies in their
favor.
For the foregoing considerations, this court is of the opinion and so holds: (1) that when the partners of a general
partnership doing business under the firm name of "Sharruf & Co." obtain insurance policies issued to said firm and the
latter is afterwards changed to "Sharruf & Eskenazi", which are the names of the same and only partners of said firm
"Sharruf & Co.", continuing the same business, the new firm acquires the rights of the former under the same policies; (2)
that when the evidence relative to the cause of a fire and the author thereof is so vague and doubtful, the insured cannot be
attributed incendiary intervention therein for the mere fact that he had the keys to the unoccupied building in his
possession; (3) that a person who presents a claim for damages caused by fire to articles and goods not existing at the time
of the fire does so fradulently and his claim is fraudulent, and (4) that when immediately after a fire that broke out inside a
completely locked building, lasting scarcely 27 minutes, only about ten or eleven partly burned and scorched cases, some
containing textiles and wrapping paper and others, statutes of saints, have been found without any trace of the destruction
of other cases by said fire, it can neither logically nor reasonably be inferred that 40 of said cases were inside the building
when the fire broke out.
186

G.R. No. L-14617

February 18, 1920

R. Y. HANLON, plaintiff-appellee,
vs.
JOHN W. HAUSSERMANN and A. W. BEAM, defendants-appellants.
GEORGE C. SELLNER, intervener.
STREET, J.:
This action was originally instituted by R. Y. Hanlon to compel the defendants, John W. Haussermann and A. W. Beam,
to account for a share of the profits gained by them in rehabilitating the plant of the Benguet Consolidated Mining
Company and in particular to compel them to surrender to the plaintiff 50,000 shares of the stock of said company, with
dividends paid thereon. A few days after the action was begun G. C. Sellner was permitted to intervene in like interest
with Hanlon and to the same extent. Thereafter the case was conducted in all respects as if Hanlon and Sellner had been
co-plaintiffs from the beginning. At the hearing judgment was rendered requiring the defendants to surrender to Hanlon
and Sellner respectively 24,000 shares each of the stock of said company, and to pay the dividends declared and paid on
said stock for the years 1916 and 1917. From this judgment the defendants appealed.
The controlling features of this controversy are disclosed in documentary evidence, and the other facts necessary to a
proper understanding of the case are stated in the narrative part of the opinion of the trial judge. As both parties to the
appeal agree that his statement of facts is substantially correct, we adopt his findings of fact as the basis of our own
statement, with such transposition, omissions, and additions as seen desirable for the easier comprehension of the case.
The Benguet Consolidated Mining Company is a corporation which was organized in 1903 with an authorized capital
stock of one million dollars, of the par value of one dollar per share, of which stock 499,000 shares had been issued prior
to November 1913, and 501,000 shares then remained in the treasury as unissued stock. The par value of the shares was
changed to one peso per share after the organization of the corporation.
In the year 1909 the milling plant of said company, situated near Baguio in the subprovince of Benguet, Philippine Islands
upon a partially developed quartz mine, was badly damaged and partly destroyed by high water, and in 1911 it was
completely destroyed by like causes. The company was thereafter without working capital, and without credit, and
therefore unable to rebuild the plant.
In October and November 1913, and for a long time prior thereto, the defendant John W. Haussermann and A. W. Beam
were shareholders in said mining company and members of its board of directors, and were at said time vice-president and
secretary-treasurer, respectively, of said company.
In October, 1913, the plaintiff R. Y. Hanlon, an experienced mining engineer, upon the solicitation of the defendant
Beam, presented to the board of directors of the Benguet Consolidated Mining Company a proposition for the
rehabilitation of the company, and asked an option for thirty days within which to thoroughly examine the property; which
proposition, with certain amendments, was finally accepted by said company; and thereafter, on November 6, 1913,
within the option period, the terms of that proposition and acceptance were incorporated in a written contract between the
plaintiff and the company, in which the said company acted by and through the defendant John W. Haussermann as vicepresident and the defendant A. W. Beam as secretary. In this contract it appears that for and in consideration of the
issuance and delivery to said Hanlon or to his order of the 501,000 shares of the unissued capital stock of said mining
company, the said Hanlon undertook, promised, and agreed to do or cause to be done sufficient development work on the
mining properties of said company to enable the company to mine and take out not less than sixty tons of ore per day, and
to give an extraction of not less than 85 per cent of the gold content of the ore; and the terms and conditions upon which
said undertaking was based may be briefly stated as follows: (1) said Hanlon was to pay into the treasury of the mining
company the sum of P75,000 in cash within six months from that date; (2) upon the payment of said P75,000 in cash there
was to be issued and delivered to said Hanlon or to his order 250,000 shares of said unissued stock; (3) prescribing the
purposes for which said P75,000 should be disbursed by said mining company upon the order of said Hanlon; (4)
187

providing for raising an additional sum of P75,000 by obtaining a loan in the name of said mining company upon the
security of its properties and assets, such additional indebtedness to be paid and discharged within eighteen months from
date of said agreement; (5) providing for the payment of the then indebtedness of said mining company amounting to
P13,105.08; (6) providing for the distribution of the net earnings after the payment of the indebtedness mentioned in
paragraphs 4 and 5; (7) providing that, for the purpose of securing and guaranteeing the faithful performance of each and
every undertaking in said agreement mentioned to be fulfilled by said Hanlon, 250,000 of said 501,000 shares should
remain on deposit with said mining company, to be released, surrendered and delivered to said Hanlon or to his order, as
follows: "151,000 shares to be released, surrendered and delivered to the said party of the first part, or his order, when said
milling plant shall have been duly completed and the operation thereof commenced; the balance of said shares to wit:
100,000, shall remain on deposit with the party of the second part until the above mentioned loan to be secured by the
assets of the company shall have been fully paid and discharged, in which event said shares shall be released, surrendered
and delivered to the party of the first part, or his order;" (8) providing that in the event the earnings of the company should
be insufficient to pay all indebtedness within the time provided in paragraphs 4 and 6, the balance remaining due thereon
was to be paid by said Hanlon, and if he neglected to pay off and discharge the balance due, then the said mining company
was to have the right and authority to sell and dispose of the 100,000 shares of stock remaining in its possession at public
or private sale at the prevailing market price, or as many of said shares as might be necessary to fully liquidate and
discharge the balance of said indebtedness remaining unpaid; (9) providing for taking out insurance by said mining
company for the protection of said Hanlon, to cover the full value of said plant during its erection and after the completion
thereof for a period of not less than eighteen months after the same shall have been placed in operation.
As was at the time well known to all parties concerned herein the plaintiff Hanlon was personally without the financial
resources necessary to enable him to contribute P75,000 towards the project indicated in the contract Exhibit B, above set
forth; and in order to overcome this obstacle he was compelled to seek the assistance of others. Haussermann and Beam,
being cognizant of this necessity, agreed to find P25,000 of the necessary capital, and for the remainder the plaintiff relied
upon G. C. Sellner, a business man of the city of Manila, who, upon being approached, agreed to advance P50,000. A
verbal understanding with reference to his matter had been attained by the four parties to this litigation before the contract
Exhibit B between Hanlon and the mining company had been formally executed, and this agreement was in fact reduced
to writing and signed on November 5, 1913, one day prior to the execution of the contract between Hanlon and the mining
company.
In this contract of November 5, 1913, (Exhibit A), the four parties, to wit: Hanlon, Sellner, Haussermann, and Beam,
agreed to collaborate in the flotation of the project outlined in the contract Exhibit B, and defined the manner in which the
necessary capital of P75,000 was to be raised. As this contract is absolutely vital in the present litigation its provisions are
set out in full:
Whereas, R. Y. Hanlon has submitted a proposition to the Benguet Consolidated Mining Co., a copy of which is
hereto attached for reference; and
Whereas, the Board of Directors of the Benguet Consolidated Mining Co., has accepted such proposition as
amended; and
Whereas, said parties have agreed to cooperate and assist the said Hanlon in the flotation of said proposition;
Now, therefore, this agreement made by and between the undersigned as follows:
I.
It is mutually agreed by and between the parties hereto that each shall do all in his power to float said proposition
and make the same a success.
II.
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It is mutually agreed that said proposition shall be floated in the following manner, to wit:
(a) That 301,000 shares of the Benguet Consolidated Mining Company shall be set aside and offered for sale for
the purpose of raising the sum of P75,000 required to be paid to the Benguet Consolidated Mining Company in
accordance with said proposition.
(b) That of said sum of P75,000, the said George Seller agrees and undertakes to secure and obtain subscriptions
for the sum of P50,000.
(c) That John W. Haussermann and A. W. Beam undertake and agree to secure and obtain subscriptions for the
sum of P25,000.
(d) The said Sellner, Haussermann and Beam hereby guarantee that the subscriptions to be obtained by them as
hereinabove stated shall be fully paid within six (6) months from the date of the acceptance on the part of the said
Hanlon of the option granted by said company; it being understood and agreed that if for any cause the said
Sellner shall fail to obtain subscriptions and payment thereof to the amount of P50,000 within the time herein
specified, then and in that event the obligation of said Haussermann and Beam shall be discharged; and, on the
other hand, if for any cause said Haussermann and Beam shall fail to obtain subscriptions for the P25,000 and
payment thereof within the time herein mentioned, then and in that event, the said Sellner shall be released from
his obligation.
It is mutually understood and agreed that each of the parties mentioned in this paragraph shall from time to time
advise the other parties as to the number of subscriptions obtained and the amount of payments thereon.
III.
That out of the remaining 200,000 shares of the Benguet Consolidated Mining Co., to be issued under said
proposition each of said parties hereto, that is to say: George Sellner, John W. Haussermann, A. W. Beam and R.
Y. Hanlon shall be entitled to receive one-fourth thereof, or 50,000 shares, as compensation for the services
rendered in the flotation of this proposition.
IV.
They necessary funds to cover preliminary expenses, such as expenses to examining the properties of the Benguet
Consolidated Mining Co., freight charges and other charges on ore samples, costs of testing same, etc., shall be
supplied by Messrs. Sellner, Haussermann and Beam, which said sum shall be reimbursed to said parties out of
the P75,000 fund raised by the sale of the P301,000 shares of stock hereinabove in Paragraph II, Subsection A,
hereof, mentioned.
V.
Cash for the loan of P5,000 to be made to the Benguet Consolidated Mining Co., as provided in the proposition of
the said Hanlon, shall be furnished by Messrs. Sellner, Haussermann and Beam, in equal proportions as needed by
the company.
In witness whereof, the respective parties hereto have hereunto set their hands at Manila, P. I., this 5th day of
November, 1913.
(Sgd.) R. Y. HANLON,
(Sgd.)GEORGE C. SELLER,
189

(Sgd.)JOHN W. HAUSSERMANN,
(Sgd.)A. W. BEAM.
During the period which intervened between the making of the preliminary verbal agreement and the final
execution of this contract, the plaintiff, Hanlon, at the expenses of the joint adventure went from Manila to the
Benguet Consolidated mining properties, near Baguio, accompanied by the defendant Beam at the expense of said
mining company, and said Hanlon made a preliminary investigation and examination of the properties, selected
and surveyed a suitable mill site and took out about half a ton of ore samples which it had been agreed were to be
forwarded to the United States for tests for use by him in the selection of the machinery best suited for the
treatment of such ore; and said Hanlon reported to his coadventurers that it was a very feasible scheme, and that
there was enough ore in sight to well repay the investment of P125,000, which was the sum estimated by said
Hanlon to be necessary to equip the property.
Soon after the contract Exhibits B and A were made the plaintiff Hanlon departed for the United States, in
contemplation of which event he executed a special power of attorney, on November 10, 1913, constituting and
appointing Beam his special agent and attorney in fact, for and in his name, to do and perform the following acts:
To vote at the meetings of any company or companies, and otherwise to act as my proxy or
representative, in respect of any shares of stock now held, or which may hereafter be acquired by me
therein, and for that purpose to sign and execute any proxy or other instrument in my name and on my
behalf;
To secure subscriptions in my name for the shares of the Benguet Consolidated Mining Co., to be issued
to me under and by virtue of an agreement entered into with said company on November 6, 1013, and to
enter into the necessary agreements for the same of said shares.
To demand, sue for, and receive all debts, moneys, securities for money, goods, chattels or other personal
property to which I am now or may hereafter become entitled, or which are now or may become due,
owing or payable to me from any person or persons whomsoever, and in my name to give effectual
receipts and discharges for the same.
Prior to that time, on May 27, 1913, the plaintiff Hanlon had given one A. Gnandt of the city of Manila a power of
attorney with general and comprehensive powers, and "with full power of substitution and revocation;" and
thereafter on March 14, 1914, said Gnandt, owing to his intended departure from the Philippine Islands, executed
a power of attorney in favor of said A. W. Beam, with the same general powers which had been conferred upon
him, and Beam became Hanlon's sole agent in the Philippine Islands. Said original power of attorney had no
special relation to the substitute specifically authorized the attorney in fact:
To make, sign, execute and deliver any and all contracts, agreements, receipts and documents of any
nature and kind whatsoever.
After the enumeration of other general and specific powers, Beam was finally authorized:
To do any and all things necessary or proper for the due performance and execution of the foregoing
powers.
By reference to the contract of November 5, 1913, (Exhibit A), it will be seen that 301,000 shares of the stock of
the Benguet Consolidated Mining Company were to be used to raise the P75,000 which Hanlon was bound to
supply to the mining company; and the contract contemplated that these shares should be disposed of at 25
centavos per share. As Sellner had agreed to raise P50,000, it resulted that 200,000 shares had to be allocated to
him; while Haussermann and Beam had at their disposal 100,000 shares, with which to raise P25,000. Sellner,
190

Haussermann, and Beam furthermore guaranteed that the subscriptions to be obtained by them should be fully
paid within six months from the date of the acceptance by Hanlon of the contract with the mining company, that
is, from November 6, 1913.
In prosecution of the common purpose, Haussermann and Beam proceeded, after the departure of Hanlon, to
procure subscriptions upon the stock at their disposal, part being subscribed by themselves severally and part sold
upon subscription to outsiders; and during the next two or three months the block of shares allotted to them was
subscribed. As a consequence of this they were thereafter prepared to pay in, or to cause to be paid in, the entire
amount which they were obligated to raise. Doubts, however, presently arose as to the ability of Sellner to obtain
subscriptions or produce the P75,000, which he obligated to bring in; and as early as in February of 1914, Beam
cabled to Hanlon in America "Sellner unable to pay. Have you any instructions?" Upon receipt of this cablegram,
Hanlon cabled Sellner to use every effort to raise the money and also cable Beam to obtain the money elsewhere
if Sellner could not supply it. Furthermore, in order to be prepared against the contingency of Sellner's ultimate
inability to respond, Hanlon attempted to enlist the interest of capitalists in San Francisco but in this was
unsuccessful. It will be observed that, although by the exact letter of the contract, Sellner was obligated to obtain
subscriptions for the sum of P50,000, he nevertheless desired to keep the entire 200,000 shares assigned to him
exclusively for himself, and proceeding on the assumption that he had in effect underwritten a subscription for the
whole block of shares, he made no effort to obtain subscriptions from anybody else for any part of these shares.
Meanwhile Haussermann and Beam were in touch with Sellner, urging him to action but without avail, Sellner
being in fact wholly unable to fulfill his undertaking. In this condition of affairs the period of six months specified
in the contracts of November 5 and 6 for the raising of the sum of P75,000 passed.
Thereafter Haussermann and Beam assumed that they were absolved from the obligations of their contract of
November 5, 1913, with Hanlon and Sellner, and that the mining company was no longer bound by its contract of
November 6, 1913, with Hanlon. They therefore proceeded, as parties interest in the rehabilitation of the mining
company, to make other arrangements for financing the project. They found it possible to effectuate this through
the offices of Sendres of the Bank of the Philippine Islands, and in order to do so, a new contract was made
between the mining company and Beam, with Haussermann as silent partner of the latter, whereby a bonus of
96,000 shares was conceded to the promoter instead of the 100,000 shares which would have accrued to
Haussermann and Beam if the Hanlon project had gone through. As a result of this, the profits of each were
reduced by the amount of 2,000 shares below what they might have realized under the Hanlon contract of
November 5. Another feature of the new project was that some of those who had subscribed to the stock of the
mining company through Beam under the Hanlon project were retained as stockholders in the new scheme of
flotation. Some, however, dropped out, with the result that Haussermann and Beam were compelled to increase
their subscriptions materially.
As preliminary to the new scheme of financing the corporation, the board of directors of the mining company,
composed of Haussermann Beam, and Sendres, saw fit at a special meeting on June 19, 1914, to adopt a
resolution declaring the contract of November 6, 1913, between Hanlon and the company to be cancelled by
reason of the failure of Hanlon to pay in the sum of P75,000 in cash on or before May 6, 1914.
Immediately after the adoption of this resolution, the new plan for financing the mining company was unfolded by
Mr. Beam to the Board in a letter, addressed by him to the Directors. In its parts relating to financial arrangements
said letter is as follows:
MANILA, P. I., June 17, 1914.
To the DIRECTORS OF THE BENGUET CONSOLIDATED MINING
CO.,
Manila, P. I.
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GENTLEMEN:
The undersigned hereby applies for an option for 30 days over 501,000 shares of unissued stock of your corporation. . . .
I have canvassed the local field for capital and am reasonably assured that the required capital will be available as follows:
405,000 shares have been subscribed for at 20 and 25 cents per share, making up a total of P86,000, which sums is
payable to the company in four equal monthly installments commencing July 15, 1914. . . . . Arrangements have been
made whereby the Bank of Philippine Islands will grant the company an overdraft to the extent of P50,000, thus affording
P136,000. . . .
The balance of the 501,000 shares of unissued stock, or 96,000 shares, are to be issued to my order when the total sum of
86,000 subscribed as above stated shall have been paid to the company. The said shares are to be placed in the hands of
the Bank of the Philippine Islands in escrow to be held by the said bank and delivered to my order as soon as the overdraft
hereinbefore mentioned shall be fully paid and liquidated.
It is further understood that the bank shall have full power and authority to vote said shares until such time as said
overdraft is repaid to the company.
For the payment of the overdraft guaranteed by the Bank of the Philippine Islands, it is understood that the total net
earning of the company shall be used, and the term "net earnings" shall be understood to mean the gross value of gold
recovered less actual operation expense.
Trusting that the foregoing may meet with your approval and acceptance, I am
Yours very truly,
(Sgd.) A. W. BEAM.
Upon motion of Senders, the proposition of Beam was accepted; Sendres and Haussermann voting in favor of the same.
At the same special meeting it was moved and seconded and unanimously carried that a meeting of the shareholders of the
company be called for the purpose of passing upon the action of the directors in accepting the proposition made by Beam.
At this special meeting of the shareholders, held at 4:30 p. m., June 29, 1914, there were 310,405 shares of the 499,000
shares of issued stock represented at the meeting. The stockholders personally present were A. W. Beam, E. Sendres, and
O. M. Shuman; and various other shareholders were represented by Beam as proxy, and the Bank of the Philippine Islands
was represented by Sendres as proxy. It appears from the minutes of said special meeting that Beam's proposition, which
had been accepted by the board of directors, as above stated, was submitted to the meeting and after being read was
ordered to be attached to the minutes. After due discussion by the shareholders present, Shuman moved that the action of
the board of directors accepting Beam's proposition be approved, and this motion was duly seconded and unanimously
carried.
The Beam project was carried out, and the mining company was brought to a dividend-paying basis, paying a quarterly
dividend of five per cent; and at the time of the trial of this case the shares of stock in the market had risen from twenty
centavos to P1.50 or higher. The defendants about 1916 received 48,000 shares each as their profits. It is stated in the
appellants' brief, without denial from the appellee, that said shares have appreciated subsequently to the trial below to the
value of P2 each. The trial court held that the plaintiffs, as coadventurers with the defendants in the project for the
rehabilitation of the mining company, are each entitled to recover the one-fourth part of the 96,000 shares obtained from
the mining company by the defendants, or 24,000 shares, with dividends paid, and to be paid beginning with the year
1916. It is thus apparent that the value of the interest awarded to each of the plaintiffs is considerably in excess of $25,000
(U. S. currency).
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So far as Beam's material scheme for the improvement of the mining property is concerned it followed the same lines and
embodied the same ideas as had been entertained while the Hanlon project was in course of promotion; and it is contended
for the plaintiffs that there was an unfair appropriation by Beam of the labors and ideas of Hanlon. This is denied by the
defendants, whose testimony tends to minimize the extent of Hanlon's contribution to the project in labor and ideas. We
believe it unnecessary to enter into the merits of this contention, as in our opinion the solution of the case must be
determined by other considerations.
An examination of the rights of the parties to this litigation must begin with the interpretation of the contract of November
5, 1913. Some discussion is indulged in the briefs of counsel upon the question whether that contract constitutes a
partnership among the four signatories or a mere enterprise upon joint account (cuenta en participacion) under the Code
of Commerce. This question seems to us of academy rather than practical importance; for whatever be the character of the
relation thus created, each party was undoubtedly bound to use good faith towards the other, so long as the relation
subsisted.
In paragraph I of said contract each party obligates himself to do all in his power to "float" the Hanlon proposition, i. e., as
indicated in the contract of November 6, between Hanlon and the mining company. This means of course that each was to
do what he could to make that project for the rehabilitation of the mining company a success. The word flotation,
however, points more particularly to the effort to raise money, since, as all man know, it takes capital to make any
enterprise of this kind go. In paragraph II of the same contract the manner in which the flotation is to be effected is
described, namely, that Sellner is to obtain subscriptions for P50,000 and Haussermann and Beam for P25,000. This
involved, as we have already stated, the allocation of 200,000 shares to Sellner and 100,000 to Hanlon and Beam.
Now the two paragraphs of the contract to which reference has been made must be construed together, and it is entirely
clear that the general language used in the first paragraph is limited by that used in the second paragraph. In other words,
though in the first paragraph the parties agree to help float the project, they are tied up, in regard to the manner of
effecting the flotation, to the method agreed upon in the second. We can by no means lend our assent to the proposition
that the first paragraph created an obligation, independent of the provisions of paragraph II, which continued to subsist
after the method of flotation described in paragraph II became impossible of fulfillment. It is a rudimentary canon of
interpretation that all parts of a writing are to be construed together (6 R. C. L., p. 837) and that the particular controls the
general. (Art. 1283, Civ. Code; 13 C. J., p. 537.)
It seems too plain for argument that so long as that contract was in force, Sellner did not have any right to inter-meddle
with the 100,000 shares allotted to Haussermann and Beam. Neither could the latter dispose of the 200,000 shares allotted
to Sellner. Indeed, Sellner, by reserving to himself all of these 200,000 shares and sitting tightly, as he did, on this block
of stock, made it impossible for Haussermann, Beam, or anybody else, to raise money by selling those shares within the
period fixed as the limit of his guaranty. There was absolutely, as everybody knew, no other means to raise money except
by the sale of stock; and when Hanlon cabled to Beam in February to obtain the money elsewhere if Sellner could not
supply it, he was directing the impossible, unless Sellner should release the block of shares assigned to him, which he
never did. As a matter of fact it appears that this quantity of the stock of the mining company could not then have been
sold at 25 cents per share in the Manila market to anybody; and in the end in order to get Sendres and the Bank of the
Philippine Islands to take part in the Beam project 260,000 shares had to go at 20 centavos per share.
By referring to subsection (d) to paragraph II of the contract of November 5, 1913, it will be seen that the promises with
reference to the obtaining of subscriptions are mutual concurrent conditions; and it is expressly declared in the contract
that upon the default of either party the obligation of the other shall be discharged. From this it is clear that upon the
happening of the condition which occurred in this case, i.e., the default of Sellner to pay to the mining company on or
before May 6, 1914, the sum of money which he had undertaken to find, Haussermann and Beam were discharged.
This is a typical case of a resolutory condition under the civil law. The contract expressly provides that upon the
happening of a future and uncertain negative event, the obligation created by the agreement shall cease to exist.

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In conditional obligations the acquisition of rights as well as the extinction of those already acquired shall depend
upon the event constituting the condition. (Civ. Code, art. 1114.)
If the condition consists in the happening of an event within a fixed period the obligation shall be extinguished
from the time the period elapses or when it becomes certain that the event will not take place. (Civ. code, art.
1117.)
The right of Hanlon to require any further aid or assistance from these defendants after May 6, 1914, was expressly
subordinated to a resolutory condition, and the contract itself declares in precise language that the effect of the nonfulfillment of the condition shall be precisely the same as that which the statute attaches to it the extinction of the
obligation.
In the argument of the plaintiffs at this point a distinction is drawn between the discharge from the guaranty to raise
money at the stated time and the discharge from the contract as an entirety; and it is insisted that while the defendants
were discharged from liability to Sellner on their guaranty to have the money forthcoming on May 6, they were not
discharged from their liability on the contract, considered in its broader features, and especially were not discharged with
reference to their obligation to Hanlon. This argument proceeds on the erroneous assumption that the defendants were
bound to discover some other method of flotation after the plan prescribed in the contract had become impossible of
fulfillment and to proceeds therewith for the benefit of all four of the parties. Furthermore, this conception of the case is
apparently over-refined and not in harmony with the common-sense view of the situation as it must have presented itself
to the contracting parties at the time. The obtaining of capital was fundamentally necessary before the project could be
proceeded with; and it was obvious enough that, if the parties should fail to raise the money, the whole scheme must
collapse like a stock of cards. The provisions relative to the getting in of capital are the principal features of the contract,
other matters being of subordinate importance. In our opinion the contracting parties must have understood and intended
that Haussermann and Beam would be discharged from the contract in its entirety by the failure of Sellner to comply with
his obligation. This is the plainest, simplest, and most obvious meaning of which the words used are capable and we
believe it to be their correct interpretation. We are not to suppose that either of the signatories intended for those words to
operate as a trap for the others; and such would certainly be the effect of the provision in question if the words are to be
understood as referring to a discharge from the guaranty merely, leaving the contract intact in other respects.
It is insisted in behalf of the plaintiffs that Haussermann and Beam, as well as Sellner, defaulted in the performance of the
contract of November 5, 1913, and that not having performed their obligation to obtain subscriptions for the sum of
P25,000 and to cause payment to be made into the company's treasury on or before May 6, 1914, they cannot take
advantage of the similar default of Sellner. This suggestion is irrelevant to the fundamental issue. The question here is not
whether Haussermann and Beam have a right of action for damaged against Sellner. If they were suing him, it would be
pertinent to say that they could not maintain the action because they themselves had not caused the money to be paid in
which they had agreed to raise. The question here is different, namely, whether Haussermann and Beam have been
discharged from the contract of November 5, 1913, by the default of Sellner; and this question must, under the contract,
be answered by reference to the acts of Sellner. Upon this point it is irrelevant to say that the discharged was mutual as
between the two parties and not merely one-sided.
The interpretation which we have placed upon the contract of November 5, 1913, exerts a decisive influence upon this
litigation, and makes a reversal of the appealed judgment inevitable. There are, however, certain subordinate features of
the case which, as disposed in the appellee's brief, appear to justify the conclusion of the trial judge; and we deem it
desirable to say something with reference to the questions thus presented.
It will be noted that there is no resolutory provision in the contract of November 6, 1913, between Hanlon and the mining
company, declaring that said contract would be discharged or abrogated upon the failure of Hanlon to supply, within the
period specified, the money which he had obligated himself to raise. In other words, time is not expressly made of the
essence of this contract. From this it is argued for the plaintiffs that this contract remained in force after May 6, 1914,
notwithstanding the failure of Hanlon to supply the funds which he had agreed to find, and indeed it is insisted upon the
authority of Ocejo, Perez & Co. vs. International Banking Corporation (37 Phil. Rep., 631), that the mining company
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could not be relieved from that contract without obtaining a judicial rescission in an action specially brought for that
purpose. The reply to this is two-fold.
In the first place the present action is not based upon the contract between Hanlon and the mining company; and it is clear
that if Hanlon had sued the mining company, as for example, in an action seeking to recover damages for breach of its
contract with him, he would have been confronted by the insuperable obstacle that he had never supplied, nor offered to
supply, one penny of the P75,000, which he had obligated himself to bind, and which was absolutely necessary to the
rehabilitation of the company. The benefits of a contract are not for him who has failed to comply with its obligations. It
may be admitted that the resolution of the Board of Directors of the mining company, on June 19, 1914, declaring the
contract of November 6, 1913, with Hanlon to be cancelled, considered alone, was without legal effect, since one party to
a contract cannot absolve himself from its obligations without the consent of the other.
With reference to the second point, namely, that a judicial rescission was necessary to absolve the mining company from
its obligations to Hanlon under the contract of December 6, 1913, we will say that we consider the doctrine of Ocejo,
Perez & Co., vs. International Banking Corporation (37 Phil. Rep., 631), to be inapplicable. The contract there in
question was one relating to a sale of goods, and it had been fully performed on the part of the vendor by delivery. This
court held that delivery had the effect of passing title, and that while the failure of the purchaser to pay the price gave the
seller a right to sue for a rescission of the contract, the failure of the buyer to pay the purchase price did not ipso
facto produce a reversion of title to the vendor, or authorize him, upon his election to rescind, to treat the goods as his own
property and retake them by writ of replevin. In the present case the contract between Hanlon and the mining company
was executory as to both parties, and the obligation of the company to deliver the shares could not arise until Hanlon
should pay or tender payment of the money. The situation is similar to that which arises every day in business transactions
in which the purchaser of goods upon an executory contract fails to take delivery and pay the purchase price. The vendor
in such case is entitled to resell the goods. If he is obliged to sell for less than the contract price, he holds the buyer for the
difference; if he sells for as much as or more than the contract price, the breach of the contract by the original buyer
is damnum absque injuria. But it has never been held that there is any need of an action of rescission to authorize the
vendor, who is still in possession, to dispose of the property where the buyer fails to pay the price and take delivery. Of
course no judicial proceeding could be necessary to rescind a contract which, like that of November 5, 1913, contains a
resolutory provision by virtue of which the obligation is already extinguished.
Much reliance is placed by counsel for the plaintiffs upon certain American decisions holding that partners, agents, joint
adventurers, and other persons occupying similar fiduciary relations to one another, must not be allowed to obtain any
undue advantage of their associates or to retain any profit which others do not share. We have no criticism to make against
this salutary doctrine when properly applied and would be slow to assume that our civil law requires any less degree of
good faith between parties so circumstanced than is required by the courts of equity in other countries. For instance, we
feel quite sure that this Court would have no difficulty in subscribing to the doctrine which is stated in Lind vs.
Webber (36 Nev., 623; 50 L. R. A. [N. S.], 1046}, with reference to joint adventurers as follows:
We further find that the law is well established that the relation between joint adventurers is fiduciary in its
character and the utmost good faith is required of the trustee, to whom the deal or property may be instrusted, and
such trustee will be held strictly to account to his co-adventurers, and that he will not be permitted, by reason of
the possession of the property or profits whichever the case may be to enjoy an unfair advantage, or have any
greater rights in the property or profits as trustee, than his co-adventurers are entitled to. The mere fact that he is
intrusted with the rights of his co-adventurers imposes upon him the sacred duty of guarding their rights equally
with his own, and he is required to account strictly to his co-adventurers, and, if he is recreant to his trust, any
rights they may be denied are recoverable.
In Flagg vs. Mann (9 Fed. Cas., 202; Fed. Case No. 4847), it appeared that Flagg and Mann had an agreement to purchase
a tract of land on joint account. The court held that where parties are interested together by mutual agreement, and a
purchase is made agreeably thereto, neither party can excuse the other from what was intended to be for the common
benefit; and any private benefit, touching the common right, which is secured by either party must be shared by both.
Justice Story, acting as Circuit Justice, said that the doctrine in question was "a wholesome and equitable principle, which
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by declaring the sole purchase to be for the joint benefit, takes away the temptation to commit a dishonest act, founded in
the desire of obtaining a selfish gain to the injury of a co-contractor, and thus adds strength to wavering virtue, by making
good faith an essential ingredient in the validity of the purchase. There is not, therefore, any novelty in the doctrine of Mr.
Chancellor Kent, notwithstanding the suggestion at the bar to the contrary; and it stands approved equally by ancient and
modern authority, by the positive rule of the Roman Law, the general recognition of continental Europe, and the actual
jurisprudence of England and America."
We deem it unnecessary to proceed to an elaborate analysis of the array of cases cited by the appellee as containing
applications of the doctrine above stated. Suffice it to say that, upon examination, such of these decisions as have
reference to joint adventures will be found to deal with the situation where the associates are not only joint adventurers
but are joint adventurers merely. In the present case Haussermann and Beam were stockholders and officials in the mining
company from a time long anterior to the beginning of their relations with Hanlon. They were not merely co-adventurers
with Hanlon, but in addition were in a fiduciary relation with the mining company and its other shareholders, to whom
they owned duties as well as to Hanlon. It does not appear that the defendants acquired any special knowledge of the mine
or of the feasibility of its reconstruction by reason of their relation with Hanlon which they did not already have; and they
probably were in no better situation as regards the facts relating to the mine after the failure of the Hanlon contract than
they were before. The fact of their having been formerly associated with Hanlon certainly did not preclude them from
making use of the information which they possessed as stockholders and officers of the mining company long before they
came into contact with him.
After the termination of an agency, partnership, or joint adventure, each of the parties is free to act in his own interest,
provided he has done nothing during the continuance of the relation to lay a foundation for an undue advantage to himself.
To act as agent for another does not necessarily imply the creation of a permanent disability in the agent to act for himself
in regard to the same subject-matter; and certainly no case has been called to our attention in which the equitable doctrine
above referred to has been so applied as to prevent an owner of property from doing what he pleased with his own after
such a contract as that of November 5, 1913, between the parties to this lawsuit had lapsed.
In the present case so far as we can see, the defendants acted in good faith for the accomplishment of the common purpose
and to the full extent of their obligation during the continuance of their contract; and if Sellner had not defaulted, or if
Hanlon had been able to produce the necessary capital from some other source, during the time set for raising the money,
the original project would undoubtedly have proceeded to its consummation. Certainly, no act of the defendants can be
pointed to which prevented or retarded its realization; and we are of the opinion that, under the circumstances, nothing
more could be required of the defendants than a full and honest compliance with their contract. As this had been discharge
through the fault of another they can not be held liable upon it. Certainly, we cannot accede to the proposition that the
defendants by making the contracts in question had discapacitated themselves and their company for an indefinite period
from seeking other means of financing the company's necessities, save only upon the penalty of surrendering a share of
their ultimate gain to the two adventurers who are plaintiffs in this action.
The power of attorney which Hanlon left with Beam upon departing for America was executed chiefly to enable
Haussermann and Beam to comply with their obligation to raise P25,000 by the sale of shares. This feature of the power
of attorney was manifestly subordinate to the purpose of the joint agreement of November 5, 1913. Certainly, under that
power, Beam could not have disposed of any of the stock allotted to Sellner; neither was he bound, or even authorized,
after the joint agreement was at an end, to use the power for Hanlon's benefit, even supposing contrary to the proven
fact that purchasers to the necessary extent could have been found for the shares at 25 centavos per share.
As we have already stated, some of the individuals who originally subscribed to the Hanlon project were carried as
stockholders into the new project engineered by Beam, being credited with any payments previously made by them. In
other words, the mining company honored these subscriptions, although the Hanlon project on which they were based had
fallen through. This circumstance cannot in our opinion alter the fundamental features of the case. Taken all together these
subscriptions were for only a part of the P25,000 which the defendants had undertaken to raise and were by no means
sufficient to finance the Hanlon project without the assistance which Sellner had agreed to give. Of course if Beam, acting
as attorney in fact of Hanlon, had obtained a sufficient number of subscriptions to finance the Hanlon project, and
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concealing this fact, had subsequently utilized the same subscriptions to finance his own scheme, the case would be
different. But the revealed facts do not bear out this imputation.
It should be noted in this connection that the mining company had approved the subscriptions obtained by Haussermann
and Beam and had, prior to May 6, 1914, accepted part payment of the amount due upon some of them. It is not at all
clear that, under these circumstances, the company could have repudiated these subscriptions, even if its officers had
desired to do so; and if the mining company was bound either legally ormorally to recognize them, if cannot be imputed
to the defendants as an act of bad faith that such subscriptions were so recognized.
The trial court held that Haussermann, by reason of his interest in the Beam project, was disqualified to act as a director of
the mining company upon the resolution accepting that project; and it was accordingly declared that said resolution was
without legal effect. We are of the opinion that the circumstance referred to could at the most have had no further effect
than to render the contract with Beam voidable and not void; and the irregularity involved in Haussermann's participation
in that resolution was doubtless cured by the later ratification of the contract at a meeting of the stockholders. However
this may be, the plaintiffs are not in a position to question the validity of the contract of the mining company with Beam
since the purpose of the action is to secure a share in the gains acquired under that contract.
In the course of the preceding discussion we have already noted the fact that no resolutory provision contemplating the
possible failure of Hanlon to supply the necessary capital within the period of six months is found in the contract of
November 6, 1913, between Hanlon and the mining company. In other words, time was not expressly made of the essence
of that contract. It should not be too hastily inferred from this that the mining company continued to be bound by that
contract after Hanlon dad defaulted in procuring the money which he had obligated himself to supply. Whether that
contract continued to be binding after the date stated is a question which does not clearly appear to be necessary to the
decision of this case, but the attorneys for Hanlon earnestly insist that said contract did in fact continue to be binding upon
the mining company after May 6, 1914; and upon this assumption taken in connection with the power held by Beam as
attorney in fact of Hanlon, It is argued that the right of action of Hanlon is complete, as against Beam and Haussermann,
even without reference to the profit-sharing agreement of November 5. We consider this contention to be unsound; and
the correctness of our position on this point can, we think, be clearly demonstrated by considering for a moment the
question whether time was in fact of the essence of the contract of November 6, 1913, in other words, Was the mining
company discharged by the default of Hanlon in the performance of that agreement?
Whether a party to a contract is impliedly discharged by the failure of the other to comply with a certain stipulation on or
before the time set for performance, must be determined with reference to the intention of the parties as deduced from the
contract itself in relation with the circumstances under which the contract was made.
Upon referring to the contract now in question i. e., the contract of November 6, 1913 it will be seen that the leading
stipulation following immediately after the general paragraph at the beginning of the contract, is that which relates to the
raising of capital by Hanlon. It reads as follows:
1. Said party of the first part agrees to pay into the treasury of the party of the second part the sum of Seventy-five
Thousand Pesos ( P75,000) in cash within six (6) months from the date of this agreement.
Clearly, all the possibilities and potentialities of the situation with respect to the rehabilitation of the Benguet mining
property, depended upon the fulfillment of that stipulation; and in fact nearly all the other subsequent provisions of the
contract are concerned in one way or another with the acts and things that were contemplated to be done with that money
after it should be paid into the company's treasury. Only in the event of such payment were shares to be issued to Hanlon,
and it was stipulated that the money so to be paid in should be disbursed to pay the expenses of the very improvements
which Hanlon had agreed to make. There can then be no doubt that compliance on the part of Hanlon with this stipulation
was viewed by the parties as the pivotal fact in the whole scheme.
Again, it will be recalled that this contract (Exhibit B) between Hanlon and the mining company was not in fact executed
until the day following that on which the profit-sharing agreement (Exhibit A) was executed by the four parties to this
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lawsuit. In other words, Haussermann and Beam, as officials of the mining company, refrained from executing the
company's contract until Hanlon had obligated himself by the profit-sharing agreement. Indeed, these two contracts should
really be considered as constituting a single transaction; and it is obvious enough that the prime motive which induced
Haussermann and Beam to place their signature upon the contract of November 6 was that they already had the profitsharing agreement securely in their hands. Therefore, when the contract of November 6, between Hanlon and the mining
company was signed, all the parties who participated therein acted with full knowledge of the provisions contained in the
profit-sharing agreement; and in particular the minds of all must have riveted upon the provisions of paragraph II of the
profit-sharing agreement, wherein is described the manner in which the project to which the parties were then affixing
their signatures should be financially realized ("floated"). In subsection (d) of the same paragraph II, as will be
remembered, are found the words which declare that Haussermann and Beam would be discharged if Sellner should fail to
pay into the company's treasury on or before the expiration of the prescribed period the money which he had agreed to
raise. Under these conditions it is apparent enough that the parties to the later contract treated time as of the essence of the
agreement and intended that the failure of Hanlon to supply the necessary capital within the time stated should put an end
to the whole project. In view of the fact that an express resolutory provision had been inserted in the profit-sharing
agreement, it must have seemed superfluous to insert such express clause in the later contract. Any extension of time,
therefore, that the mining company might have made after May 6, 1914, with respect to the date of performance by
Hanlon would have been purely a matter of grace, and not demandable by Hanlon as of absolute right. It is needless to say
in this connection that the default of Sellner was the default of Hanlon.
An examination of the decisions of the American and English courts reveals a great mass of material devoted to the
discussion of the question whether in a given case time is of the essence of a contract. As presented in those courts, the
question commonly arises where a contracting party, who has himself failed to comply with some agreement, tenders
performance after the stipulated time has passed, and upon the refusal of the other party to accept the delayed performance
the delinquent party resorts to the court of equity to compel the other party to proceed. The equitable doctrine there
recognized as applicable in such situation is that if the contracting parties have treated time as of the essence of the
contract, the delinquency will not be excused and specific performance will not be granted; but on the other hand, if it
appears that time has not been made of the essence of the contract, equity will relieve from the delinquency and specific
performance may be granted, due compensation being made for the damage caused by the delay. In such cases the courts
take account of the difference between that which is matter of substance and that which is matter of mere form.
To illustrate: the rule has been firmly established from an early date in courts of equity that in agreements for the sale of
land, time is not ordinarily of the essence of the contract; that is to say, acts which one of the parties has stipulated to
perform on a given date may be performed at a later date. Delay in the payment of the purchase money, for instance, does
not necessarily result in the forfeiture of the rights of the purchaser under the contract, since mere delay in the payment of
money may be compensated by the allowance of interest. (36 Cyc., 707-708.) In discussing this subject, Pomeroy says:
"Time may be essential. It is so whenever the intention of the parties is clear that the performance of its terms shall be
accomplished exactly at the stipulated day. The intention must then govern. A delay cannot be excused. A performance at
the time is essential; any default will defeat the right to specific enforcement." (4 Pomeroy Eq. Jur., 3rd ed., sec. 1408.)
Again, says the same writer: "It is well settled that where the parties have so stipulated as to make the time of payment of
the essence of the contract, within the view of equity as well as of the law, a court of equity cannot relieve a vendee who
has made default. With respect to this rule there is no doubt; the only difficulty is in determining when time has thus been
made essential. It is also equally certain that when the contract is made to depend upon a condition precedent in other
words, when no right shall vest until certain acts have been done, as, for example, until the vendee has paid certain sums
at certain specified times then, also a court of equity will not relieve the vendee against the forfeiture incurred by a
breach of such condition precedent." (1 Pomeroy Eq. Jur., 3rd ed., sec. 455.)
As has been determined in innumerable cases it is not necessary, in order to make time of the essence of a contract, that
the contract should expressly so declare. Words of this import need not to be used. It is sufficient that the intention to this
effect should appear; and there are certain situations wherein it is held, from the nature of the agreement itself, that time is
of the essence of the contract.

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Time may be of the essence, without express stipulation to that effect, by implication from the nature of the
contract itself, or of the subject-matter, or of the circumstances under which the contract is made. (36 Cyc., 709.)
In agreements which are executed in the form of options, time is always held to be of the essence of the contract; and it is
well recognized that in such contracts acceptance of the option and payment of the purchase price constitute conditions
precedent to specific enforcement. The same is true generally of all unilateral contracts. (36 Cyc., 711.) In mercantile
contracts for the manufacture and sale of goods time is also held to be of the essence of the agreement. (13 C. J., 688.)
Likewise, where the subject-matter of a contract is of speculative or fluctuating value it is held that the parties must have
intended time to be of the essence (13 C. J., 668.) Most conspicuous among all the situations where time is presumed to be
of the essence of a contract from the mere nature of the subject-matter is that where the contract relates to mining
property. As has been well said by the Supreme Court of the United States, such property requires, and of all properties
perhaps the most requires, the persons interested in it to be vigilant and active in asserting their rights.
(Waterman vs. Banks, 144 U. S., 394; 36 L. ed., 479, 483.) Hence it is uniformly held that time is of the essence of the
contract for the sale of an option on mining property, or a contract for the sale thereof, even though there is no express
stipulation to that effect. (27 Cyc., 675). The same idea is clearly applicable to a contract like that now under
consideration which provides for the rehabilitation of a mining plant with funds to be supplied by the contractor within a
limited period.
Under the doctrine above expounded it is evident that Hanlon would be entitled to no relief against the mining company in
an action of specific performance, even if he had been prepared and had offered, after May 6, 1914, to advance the
requisite money and proceed with the performance of the contract. Much less can he be considered entitled to relief where
he has remained in default throughout and has at no time offered to comply with the obligations incumbent upon himself.
Our conclusion, upon a careful examination of the whole case, is that the action cannot be maintained. The judgment is
accordingly reversed and the defendants are absolved from the complaint. No express pronouncement will be made as to
costs of either instance.

199

G.R. No. L-25007

March 2, 1926

PACIFIC COMMERCIAL COMPANY, plaintiff-appellee,

vs.
ABOITIZ & MARTINEZ, ET AL., defendants.
JOSE MARTINEZ, defendant-appellant.
OSTRAND, J.:
In April, 1919 Arnaldo F. de Silva, Guillermo Aboitiz, Vidal Aboitiz and Jose Martinez formed a "regular, collective,
merchantile partnership" with a capital of P40,000 of which each of the partners Aboitiz and De Silva furnished one-third.
The partner Jose Martinez was an industrial partner and furnished no capital; it was provided in the partnership article that
he was to receive 30 per cent of the profits and that his responsibility for losses should not exceed the amount of the
profits received by him.
On April 27, 1922, the partnership, through its duly authorized representative, Guillermo Aboitiz, executed a promissory
note in favor of the plaintiff the Pacific Commercial Company for the sum of P23,168.71, with interest at 12 per cent per
annum until fully paid as additional sum of 10 per cent as attorney's fees and costs of collection in the event it became
necessary to resort to judicial proceedings. As security for the payment of the note, the partnership executed a chattel
mortgage in favor of the plaintiff on certain personal property therein described.
For failure of the partnership to pay the debt the chattel mortgage was foreclosed the mortgages property sold and the
proceeds of the sale, P2,000 was paid over to the plaintiff on December 28, 1923. No further payment on the note appears
to have been made and January 4, 1924, the present action was brought for the recovery of the unpaid balance with
interest. Upon trial the court below rendered judgment in favor of the plaintiff and against the partnership for the sum of
P27,951.68 and for the payment of interest on the capital of P21,168.71 at the rate of 10 per cent per annum from the 31st
October, 1924, until paid, together with 10 per cent on the amount due for fees for collection in accordance with the terms
of the aforesaid note. The judgment further provided that execution should first issue against the property of the
partnership should first issue against the insolvency of the partnership, it might issue against the property of the partners
De Silva and Aboitiz and in the event of their insolvency, then against the property of the industrial partner Jose Martinez.
From this judgment Martinez appealed to this court and here maintains that under article 141 of the Code of Commerce
he, as a mere industrial partner, cannot be held responsible for the partnership's debt.
The case is practically identical with that of the Compania Maritima vs. Munoz (9 Phil., 326), in which this court held the
industrial partners secondarily liable for the debts of the partnership but on the strength of the vigorous dissenting opinion
of Chief Justice Arellano in that case, that appellant argues that the decision therein was erroneous and should now be
overruled. With all due respect for the legal acumen of the first Chief Justice of this Court, we are still of the opinion that
the case was correctly decided. Article 127 of the Code of Commerce reads as follows:
All the members of the general copartnership, be they or be they not managing partners of the same are liable
personally and in solidum with all their property for the results of the transaction made in the name and for the
account of the partnership, under the signature of the later, and by a person authorized to make use thereof.
The language of this article is clear and specific that all the members of a general copartnership are liable with all their
property for the results of the duly authorized transactions made in the name and for the account of the partnership. On the
other hand, article 141, upon which the appellants relies and which provides that "losses shall be computed in the same
proportion among the capitalist partners without including the industrial partners, unless by special agreement the latter
have been constituted as participants therein," is susceptible of two different interpretations of which that given it in the
Compania Maritima case, supra, i. e., that it relates merely to the distribution of losses among the partners themselves in
the settlement of the partnership affairs and has no reference to partnership obligations to third parties, appears to us to be
the more logical.
200

There is a marked distinction between a liability and a loss and the inability of a partnership to pay a debt to a third party
at a particular time does not necessarily mean that the partnership business as a whole, has been operated at a loss. The
partnership may have outstanding credits which for the moment may have be unavailable for the payment of debts, but
which eventually may be realized upon and yield profits more than sufficient to cover all losses. Bearing this in mind it
will be found that there in reality is no conflict between the two articles quoted; one speaks of liabilities, the other of
losses.
The judgment appealed from is affirmed with the costs against the appellant. So ordered.

201

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
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
partner, they are all liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into on
behalf of an unincorporated association or ostensible corporation may lie in a person who may not have directly transacted
on its behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the Court of
Appeals in CA-GR CV
41477, 1 which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby affirmed. 2
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA, reads as
follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September 20,
1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as
hereinafter made by reason of the special and unique facts and circumstances and the proceedings that
transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the
Agreement plus P68,000.00 representing the unpaid price of the floats not covered by
said Agreement;
b. 12% interest per annum counted from date of plaintiff's invoices and computed on
their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80
dated February 9, 1990;
ii. Accrued interest for 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;
202

c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing P500.00 per
appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets
counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of
auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the unpaid price
of nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total
amount 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 respondents 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.
203

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. 21
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 . . . . Oviously, the ultimate
undertaking of the defendants was to divide the profits among themselves which is what a partnership
essentially is . . . . 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
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In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT
THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A
PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN
QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING,
THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM
AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF
PETITIONER LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats from respondent, the Court must
resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts the CA
finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that the CA based its finding on
the Compromise Agreement alone. Furthermore, he disclaims any direct participation in the purchase of the nets, alleging
that the negotiations were conducted by Chua and Yao only, and that he has not even met the representatives of the
respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract of
Lease " dated February 1, 1990, showed that he had merely leased to the two the main asset of the purported partnership
the fishing boat F/B Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the
gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly showed that there
existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides:
Art. 1767 By the contract of partnership, two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join
him, while Antonio Chua was already Yao's partner;
(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to acquire two fishing
boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;

205

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance the
venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale over these
two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan extended by Jesus
Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry docking and other
expenses for the boats would be shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the partnership in
the amount of P1 million secured by a check, because of which, Yao and Chua entrusted the ownership
papers of two other boats, Chua's FB Lady Anne Mel and Yao's FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from
Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported
business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by Antonio
Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents; (b)
reformation of contracts; (c) declaration of ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed between the partieslitigants 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
petitioner's brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the
proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the
repair of which were financed with borrowed money, fell under the term "common fund" under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties
agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows
that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets and the
floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their business. It
would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition of the
aforesaid equipment, without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the fishing
business. They purchased the boats, which constituted the main assets of the partnership, and they agreed that the
proceeds from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only questions of law. Thus, the
foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that the present
action is embraced by one of the exceptions to the rule. 16 In assailing the factual findings of the two lower courts,
petitioner effectively goes beyond the bounds of a petition for review under Rule 45.
Compromise Agreement
Not the Sole Basis of Partnership
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Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership was the Compromise
Agreement. He also claims that the settlement was entered into only to end the dispute among them, but not to adjudicate
their preexisting rights and obligations. His arguments are baseless. The Agreement was but an embodiment of the
relationship extant among the parties prior to its execution.
A proper adjudication of claimants' rights mandates that courts must review and thoroughly appraise all relevant facts.
Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In implying that
the lower courts have decided on the basis of one piece of document alone, petitioner fails to appreciate that the CA and
the RTC delved into the history of the document and explored all the possible consequential combinations in harmony
with law, logic and fairness. Verily, the two lower courts' factual findings mentioned above nullified petitioner's argument
that the existence of a partnership was based only on the Compromise Agreement.
Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua and Yao, not a partner in
the fishing venture. His argument allegedly finds support in the Contract of Lease and the registration papers showing that
he was the owner of the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his own boats to
pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. No lessor would do
what petitioner did. Indeed, his consent to the sale proved that there was a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which debts were
undertaken in order to finance the acquisition and the upgrading of the vessels which would be used in their fishing
business. The sale of the boats, as well as the division among the three of the balance remaining after the payment of their
loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an asset of the
partnership. It is not uncommon to register the properties acquired from a loan in the name of the person the lender trusts,
who in this case is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd for petitioner to sell his property to pay a debt he did not incur,
if the relationship among the three of them was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and
not to him. Again, we disagree.
Sec. 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.

207

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from denying its
corporate existence. "The reason behind this doctrine is obvious an unincorporated association has no personality and
would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law; it
cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a
person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all
the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered
into or for other acts performed as such agent. 17
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first instance, an
unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack of
personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received advantages
and benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation
and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the transaction made by the ostensible corporation, despite
knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it sold. The
only question here is whether petitioner should be held jointly 18 liable with Chua and Yao. Petitioner contests such
liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Since his name
does not appear on any of the contracts and since he never directly transacted with the respondent corporation, ergo, he
cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier been
proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the Writ has effectively
stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation. Although it was
never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three as contracting
parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a corporation and those
benefited by it, knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the benefits
of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of
said association and is covered by the scope of the doctrine of corporation by estoppel. We reiterate the ruling of the Court
in Alonso v. Villamor: 19
A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art
of movement and position, entraps and destroys the other. It is, rather, a contest in which each contending
party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and
indecisive all imperfections of form and technicalities of procedure, asks that justice be done upon the
merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality, when it deserts its
proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in technicalities.
Third Issue:

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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.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., pls. see concurring opinion.
Separate Opinions
VITUG, J., concurring opinion;
I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice 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 would wish to elucidate a bit, albeit briefly, the liability of partners in a general partnership.
When a person by his act or deed represents himself as a partner in an existing partnership or with one or more persons
not actual partners, he is deemed an agent of such persons consenting to such representation and in the same manner, if he
were a partner, with respect to persons who rely upon the representation. 1 The association formed by Chua, Yao and Lim,
should be, as it has been deemed, a de facto partnership with all the consequent obligations for the purpose of enforcing
the rights of third persons. The liability of general partners (in a general partnership as so opposed to a limited
partnership) is laid down in Article 1816 2 which posits that all partners shall be liable pro rata beyond the partnership
assets for all the contracts which may have been entered into in its name, under its 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 partners can be held solidarily liable with the partnership specifically in these instances (1) where, by any wrongful
act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his
co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent as the partner so acting or omitting to act; (2) where one partner 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 business receives money or property of a third person and the money or property so
received is misapplied by any partner while it is in the custody of the partnership 3 consistently with the rules on the
nature of civil liability in delicts and quasi-delicts.

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G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO),
CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.
GUTIERREZ, JR., J.:
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 plaintiffs
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.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim 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.
It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses aside
from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is further required to pay cross
party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half, the amount of
Pl84,878.74 with interest from the filing of the cross-complaints until the amount is fully paid; plus moral
and exemplary damages in the amount of P184,878.84 with interest from the filing of the crosscomplaints until the amount is fully paid; plus moral and exemplary damages in the amount of
P50,000.00 for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another
P20,000.00 to Constancio B. Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco,
the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's fees and the amount
of P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as
attorney's fees and costs.
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 Cervanteses were attached and that they were required
to file a counterbond in order to dissolve the attachment, is not an act of bad faith. When a man tries to
protect his rights, he should not be saddled with 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 discretion.
No damage is decided against Malayan Insurance 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
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damages in performing an act which is clearly within its power and which is the reason for its being, then
nobody would engage in the insurance business. No further claim or counter-claim for or against anybody
is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)
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 installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in
Manila on June 7,1965 while the other aircraft, arrived in Manila on July 18,1965.
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 Company, Inc. (Bormaheco), Francisco and Modesto Cervantes
(Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were supposed to be their contributions to a new corporation proposed by Lim
to expand his airline business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of
Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The
indemnity agreements stipulated that the indemnitors principally agree and bind themselves jointly and severally to
indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties,
charges and expenses of whatever kind and nature which Pioneer may incur in consequence of having become surety
upon the 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 pay or cause to be paid or become liable to pay on them of whatever
kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel
mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein that Lim transfer and
convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register of Deeds
of the City of Manila and with the Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil
Aeronautics Law (Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid
a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of Davao City.
The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment
against Lim and respondents, the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were not
privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to litigation
and for recovery of the sums of money they advanced to Lim for the purchase of the 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.

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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:
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 petitioner questions the following findings of the appellate court:
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, plaintiffs 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. Germans, 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).

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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.
The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:
xxx xxx xxx
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:
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 attorneyin- 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 name of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be
prosecuted in the name of the real party in interest.' This provision is mandatory. The real
party in interest is the party who would be benefitted or injured by the judgment or is the
party entitled to the avails of the suit.
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-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil.
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Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968, 23
SCRA 706, 710-714.
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).
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).
The rules of practice in actions on original insurance policies are in general applicable to actions or
contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7
Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
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 the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the wrongdoer or the person who has
violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss,
the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031
[1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals(154 SCRA
650 [1987]):
Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in
said article that the insurer is deemed subrogated to the 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 deficiency. Evidently, under this legal provision, the real party in interest with regard to the
portion of the indemnity paid is the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as against the
respondents for the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no cause
of action against the respondents.
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,
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however, cite any grounds except its allegation that respondent "Maglanas 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:
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 following is averred under oath by Pioneer in the original complaint:
The various conflicting claims over the mortgaged properties have impaired and rendered
insufficient the security under the chattel mortgage and there is thus no other sufficient
security for the claim sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there is no other security for the claim
sought to be enforced by this action, which necessarily means that the indemnity agreement had ceased to
have any force and effect at the time this action was instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and spare
parts, no longer has any further action against the defendants as indemnitors to recover any unpaid
balance of the price. The indemnity agreement was ipso jure extinguished 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 payments to the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.
Independently of the preceding proposition Pioneer's election of the remedy of foreclosure precludes any
further action to recover any unpaid balance of the price.
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.
Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure and
the instant suit. Such being the case, as provided by the aforementioned provisions, Pioneer shall have no
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 Corp. No. L- 24772, May 27,1968, 23 SCRA 791,
795-6.
The operation of the foregoing provision cannot be escaped from through the contention that Pioneer is
not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of JDA as vendor,
having subrogated it in such rights. Nor may the application of the provision be validly opposed on the
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ground that these defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et al. v.
Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates discharged
these defendants from any liability as alleged indemnitors. The change of the maturity dates of the
obligations of Lim, or SAL extinguish the original obligations thru novations thus discharging the
indemnitors.
The principal hereof shall be paid in eight equal successive three months interval
installments, the first of which shall be due and payable 25 August 1965, the remainder
of which ... shall be due and payable on the 26th day x x x of each succeeding three
months and the last of which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and JDA,
modifying the maturity dates of the obligations, as follows:
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 remainder
of which ... shall be due and payable on the 4th day ... of each succeeding months and the
last of which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates different
from that fixed in the aforesaid memorandum; the due date of the first installment appears as October 15,
1965, and those of the rest of the installments, the 15th of each succeeding three months, that of the last
installment being July 15, 1967.
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 thereby also
extinguished. Applicable by analogy are the rulings of the Supreme Court in the case of Kabankalan
Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil.
532, 538.
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
time referred to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom
et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed 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 JDA. By virtue of an express stipulation in the surety bond, the failure of JDA to present its
claim to Pioneer within ten days from default of Lim or SAL on every installment, released Pioneer from
liability from the claim.
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Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his
co-debtors if such payment is made after the obligation has prescribed or became illegal.
These defendants are entitled to recover damages and 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 instant action is clearly unfounded insofar as plaintiff drags these defendants and
defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors whose agreement was to do business
through the corporate vehicle but who failed to incorporate the entity in which they had chosen to invest?
How are the losses to be treated in situations where their contributions to the intended 'corporation' were
invested not through the corporate form? This Petition presents these fundamental questions which we
believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
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:
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 interest from the filing of the cross-complaints
until the amount is fully paid. Defendant 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 Pl51,000.00 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 P
184,878.74.
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 the 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,
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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). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during the pretrial
despite notification. In his answer, the petitioner denied having received any amount from respondents Bormaheco, the
Cervanteses and Maglana. 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 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.
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:
... 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. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third party
complaint:
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
218

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
P 178,997.14 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.

219

G.R. No. L-4776

March 18, 1909

MANUEL ORMACHEA TIN-CONGCO, deceased, represented by the Chinaman Tiu Tusay, judicial
administrator of his estate, plaintiff-appellee,
vs.
SANTIAGO TRILLANA, defendant-appellant.
TORRES, J.:
On the 15th of January, 1904, Manuel Ormachea Tin-Congco, a Chinaman, presented an amended complaint against
Santiago Trillana, alleging that the plaintiff Ormachea and Luis Vizmanos Ong Queco were engaged in business in the
pueblos of Hagonoy, Malolos, and other places in the Province of Bulacan, and that in the course thereof the defendant
purchased from them merchandise to the value of 4,000 pesos, local currency; that two years prior to that date, a little
more or less, the partnership was dissolved and the business was divided up between the partners, all accounts and debts
of the defendant were alloted to the plaintiff, and became the individual property of Ormachea Tin-Congco; the
indebtedness is proven by the documents signed by the defendant or his agents in favor of Ormachea or of Vizmanos Ong
Queco or their agent named Lawa in charge of the business, The documents of indebtedness are inserted in the complaint
and duly numbered. They aggregate 135 documents, some of which are written in Tagalog with corresponding
translations; that the legal interest on the said 4,000 pesos is 1,500 pesos which makes the total debt amount to 5,500
pesos, and the same has not been paid by the defendant. Therefore, the plaintiff prays that judgment be entered ordering
the defendant, Santiago Trillana, to pay the said 5,500 pesos with costs.
The defendant filed a written answer on November 15, 1904, setting forth: That he admitted the first statement of the
complaint, but had no knowledge as to the second as it appears therein; that he did not admit the same, nor the other
allegations in the complaint in the sense in which they are set out; that as a special defense, the defendant alleges that he
had already settled his accounts and obligations contracted in the business to which the complaint refers, by means of
periodical payments in tuba or the liquor of the nipa palm, and that if any accounts are still pending, the same should,
owing to their character and the manner in which they were constituted, be paid in kind and not in money as the plaintiff
claims in his complaint, and should be paid at the time and under the circumstances which, as is customary in Hagonoy,
such class of obligations are settled; he therefore asked the court below to enter judgment absolving the defendant of the
complaint, with the costs against the plaintiff.
After hearing the evidence presented by the parties, the trial judge, on February 27, 1907, rendered judgment ordering the
defendant, Santiago Trillana, to pay to the Chinaman Florentino Tiu Tusay, the judicial administrator of the estate of the
deceased plaintiff, Ormachea Tin-Congco, the sum of P2,832.22, in tuba, under the same conditions stipulated between
the debtor and the copartnership for the working of the distillery of Luis Vizmanos and the late Chinaman Manuel
Ormachea, with costs.
The representative of the defendant excepted to the above judgment, and announced his intention to appeal by means of a
bill of exceptions; and by a writing dated March 22, 1907, he prayed the lower court to revoke or amend its former
decision of the 27th of February, and to order a new trial as the evidence adduced at the hearing was not sufficient to
justify said decision, because the vale No. 88 is subscribed by another person who is not the defendant, and for said reason
its value can not be demanded from him; that vales numbered 31, 87, 91, 93, 94, 96, and 97 are in the same condition; that
the vales Nos. 5, 6, 7, 32, 33, 35, 40, 41, 44, 48, 54, 63, 104, 105, 127, 132, and 133 offered by the plaintiff in evidence
and signed by the defendant, clearly express on whose account they were issued, and for said reason the obligations
contained in said vales are not those of the defendant, Santiago Trillana, and can not stand as evidence against him; that
the vales Nos. 109, 112, 113, 115, 116, 118, 12, and 15 by themselves do not prove, nor can they prove that the amount of
money which they represent should form part of the defendant's debt, because it does not appear that there was ever a
lawful transfer, cession or indorsement made between the person in whose favor they are made out and the so-called
creditor, nor between said person and the successor of the said entity, that is to say, the representative of the plaintiff;
that vale No. 113 is made out as a mere recommendation of the defendant, and for account of a third person; that vale No.
1 does not state the year, and No. 135 bears no date at all, therefore, they do not constitute sufficient proof to justify the
220

condemnatory judgment with respect to the amount which they represent because the time when said respective
obligations were contracted is not determined; that the vales which are date previously to vale No. 98 are invalidated by
the note of general liquidation between the creditor Manuel Ormachea, and the debtor Santiago Trillana written on the
back of the said vale No. 98 in Chinese characters and explained by the witness Jose R. Lopez Lawa, and, notwithstanding
said liquidation, the said vales are reputed as unpaid; and finally, that if the debt is payable in tuba, unless it is shown and
it does not so appear that the defendant refused to pay it in that manner or has failed to comply with his obligations, there
is no reason to compel him to pay, therefore he should not be ordered to do so, much less to pay the costs.
At the hearing, the trial judge, on the 7th of May, 1907, overruled the motion to modify his former decision as far as it
referred to the amount of the indebtedness found against the defendant and the said judgment was modified by adding the
provision that the defendant should make payment in tuba which he should deliver at the plaintiff's distillery in the town
of Hagonoy within the term of six months, but that, if said term should expire without such payment, whatever might be
the cause, he should be obliged to pay his debt in cash.
The defendant requested a decision in his motion for a new trial in which he contended that the evidence was not
sufficient to justify the judgment of February 27, and on the 12th of November the court below held that, by its order of
May 7, last, the motion for a new trial was denied, and said denial was reproduced as explanation of the ruling of May 7.
The defendant excepted to the foregoing decision and presented the corresponding amended bill of exceptions; when
approving the bill of exceptions, the court below ordered the suspension of the execution providing that the defendant
furnish bond in the sum of P4,000.
As Manuel Ormachea Tin-Congco claimed from Santiago Trillana the payment of the sum which, as capital and interest
thereon, he owed the former for amounts in cash and in goods which he took from the creditor and his partner, Luis
Vizmanos Ong Queco, as shown by the 135 vales which are attached to the complaint and which were admitted as
authentic by the defendant, with the exception of eight of them signed by the other persons, aggregating P173, the court
below, in view of the evidence, found that the debt which could be claimed from the defendant, after deducting the said
P173, amounted only to P2,832.22 4/8.
The record shows that the amounts advanced to the debtor, Santiago Trillana, and to the others by means of the said vales,
and most of which were addressed to Lopez Lawa, and some to other persons, were delivered by the said Lopez Lawa
who, from the years 1894 or by 1895 to 1901, was the manager of the distillery situated in the barrio of San Sebastian,
municipality of Hagonoy, Bulacan, and owned in partnership by Ormachea and Vizmanos, but the money furnished by the
manager to Trillana and to the others on account of the tuba or liquor of the nipa palm which the defendant had engaged
to supply to said distillery belonged to the two owners of the same, not to the manager, Jose Lopez Lawa.
It has also been fully proven that, when in June or July, 1901, the aforesaid Ormachea Tin-Congco and Vizmanos Ong
Queco withdrew from the business, Lawa ceased to act as manager of the distillery, and then, among other things that
belonged to the two partners, they divided between them the credits that they held against third persons, those that stood
against Santiago Trillana as evidenced by the said 135 vales, having gone to Manuel Ormachea Tin-Congco. This is
affirmed by Luis Vizmanos Ong Queco, Syo Bunchad, by Jose R. Lopez Lawa himself, and, as stipulated between the
parties, by Tiu Langco, a Chinaman who was at the time employed as mixer in said distillery. It should be noted that,
while this litigation was pending, the plaintiff, Manuel Ormachea, died, and Florentino Tiu Tusay was appointed
administrator of his estate; letters of administration in favor of the latter were issued on the 9th of October, 1905. (Folio
56.)
As has been seen, the defendant stated that he had already paid his accounts and obligations contracted in favor of the said
Ormachea and Vizmanos by means of periodical deliveries of tuba or liquor of the nipa palm, and alleged that, if any
amount was still pending payment, it should be paid not in money but in tuba, at such time and under such circumstances
as are customary in the town of Hagonoy. In evidence of this, while testifying under oath, he introduced the following
document marked "A" which appears at folio 248:

221

I, Jose R. Lopez (Lawa), a Christian Chinese, do hereby declare that D. Santiago Trillana has no outstanding debt
whatever with the distillery situated in the barrio of San Sebastian in this town, which in past times was under my
management. What I have stated is the truth. Hagonoy, November 19, 1903. Jose R. Lopez.
The debtor explained how and in what manner he obtained the foregoing document from Lawa, and stated: That in
November, 1903, he received a letter from Mr. McGirr, the plaintiff's attorney, requesting him to settle his account with
Lawa, for which reason he called on the latter and asked him whether he still owed him anything on account of the
distillery in San Sebastian; Lawa replied that he no longer owed anything; thereupon the requested Lawa to issue the said
document, and under Lawa's direction the debtor wrote out the document, and the former, upon being informed of its
contents, signed it; for said reason the witness believed that he no longer owed anything.
However, Lopez Lawa affirms that he gave the said document marked as Exhibit A" to the debtor, Santiago Trillana,
because the latter was indebted to him but to Manuel Ormachea, to whom the credits standing against Trillana were
transferred when Ormachea withdrew from the above-mentioned partnership with Vizmanos Ong Queco. When drawing
up the preinserted document, it was not his intention to annul and set aside the valeswhich represented the indebtedness of
the defendant, Trillana.
If the business jointly carried on by Ormachea and Vizmanos was dissolved, and its transactions ceased in 1901 Jose
Lopez Lawa, who managed the distillery on behalf of the owners of the same, also ceased to act as such manager in said
year, and for said reason the document Exhibit A, which he issued to the debtor on the 19th of November, 1903, two years
after ceasing to be manager, can not serve to relieve the debtor from paying what he owed by virtue of the documents
or vales that he had issued in order to obtain money from the owners of the said distillery; that is to say, as agreed upon by
them, the right to recover the debts of the defendant still belonged to Ormachea when the business was dissolved, as Lawa
was not authorized by Ormachea to deliver to the debtor an acquittance releasing him from the obligations that he had
contracted, to the prejudice of the real creditor, the only person entitled to condone a debt in the event of waiving the right
to recover the same.
If the document marked "A" had been issued by Jose Lopez Lawa while still at the head of the business of the distillery, as
representative of the owners thereof, the aforesaid Ormachea and Vizmanos, prior to their withdrawal from business,
perhaps it might have served as a foundation for the debtor to allege that his obligations evidenced by said vales had been
settled, although, if such was the case, the said vales should have been returned to him by Lawa, or by the owners of the
distillery; but, as the document was made out and issued two years afterwards, without a previous payment of the amounts
secured on the said vales, when the business no longer existed, when the owners had entirely withdrawn from it, and when
Lawa, who then acted as manager of the distillery, had no express authority to issue such a document, with the further
circumstance of its being written in Spanish, a language with which the Chinaman who signed it was probably not well
acquainted and the fact that it was written by the defendant, Santiago Trillana himself; it is not proper nor lawful to admit
the said document as possessing a force and effect that would fully exempt the defendant from the payment of his
obligation, and with greater reason if it is considered that it has not been shown that Lawa was authorized to liquidate
accounts, or issue an acquittance releasing the debtor from the payment of his debt. (Arts. 1714 and 1719, Civil Code.)
Article 1162 of said code reads:
Payment must be made to the person in whose favor an obligation is constituted, or to another authorized to
receive it in his name.
After the close of the business of the distillery owned by Ormachea and Vizmanos, and after Lawa had ceased for two
years to act in the administration and management thereof, he was not authorized to sign the document marked "A," made
out by the debtor, by which the credit of Ormachea should be considered as settled, and the obligation contracted by
Santiago Trillana, as shown by the vales which appear in the record, extinguished.
Since the vales existed, and were in the possession of the creditor, it was because the amounts they called for had not
presumed to have been fulfilled when the proofs of its existence have been returned to the debtor. (Sec. 334, par. 8, Code
222

of Civil Procedure.) Seeing that the amounts stated in the vales acknowledged by the debtor were advanced to him in part
payment of the price of certain quantities of tuba or liquor of the nipa palm which he had contracted to deliver at the
distillery, and as long as he is able to comply with these stipulations within a reasonable time, the defendant can not be
compelled to pay his debt in cash. The amounts stated in the valeswere advanced under the condition that the same would
be paid or satisfied with the value of the tuba received by the distillery; therefore, the decision of the court below, which
moreover appears to have been acquiesced in by the appellee for the reason that it was undoubtedly so stipulated, is in
accordance with the law. (Art. 1278, Civil Code.)
In view of the forgoing, and accepting the conclusions contained in the judgment of February 27, 1907, appealed from, it
is our opinion that the same should be affirmed, and we hereby affirm it, with the addition made in the order of May 7 of
the same year, with the costs against the appellant. So ordered.

223

G.R. No. L-20735

August 14, 1965

GLICERIA C. LIWANAG, Special Administratrix of the Estate of PIO D. LIWANAG, petitioner,

vs.
HON. COURT OF APPEALS, HON. JESUS DE VEYRA, as Judge of the Court of First Instance of Manila, and
MANUEL AGREGADO, respondents.
CONCEPCION, J.:
Appeal by certiorari from a decision of the Court of Appeals.
Petitioner Gliceria C. Liwanag is the special administratrix of the estate of Pio D. Liwanag, the settlement of which is the
subject of Special Proceeding No. 46599 of the Court of First Instance of Manila. On January 9, 1962 respondent Manuel
Agregado commenced against her as such special administratrix, Civil Case No. 50897 of the same court, for the
foreclosure of a real estate mortgage constituted in his favor by said Pio D. Liwanag during his lifetime. On July 18, 1962,
here petitioner moved to dismiss Agregado's complaint, upon the ground that as special administratrix she cannot be sued
by a creditor of the deceased. In an order dated August 1, 1962, respondent, Hon. Jesus de Veyra, as Judge of said court,
denied the motion, whereupon petitioner filed case CA-G.R. No. 31168-R of the Court of Appeals against respondent
Judge and Agregado, to annul said order by writ ofcertiorari and enjoin said Judge from entertaining said Case No.
50897. Upon petitioner's motion, the Court of Appeals issued a writ of preliminary injunction directing respondent Judge
to refrain from proceeding with the trial of that case, until further orders. However, subsequently, or on December 3,
1962, the Court of Appeals rendered a decision denying the writ prayed for and dissolving said writ of preliminary
injunction, with costs against the petitioner. Hence this appeal taken by petitioner upon the theory that, pursuant to Section
2, Rule 81 of the (old) Rules of Court, "a special administrator shall not be liable to pay any debts of the deceased," and
that, accordingly, Agregado has no cause of action against her as a special administratrix.
In as much, however, as the alleged absence of a cause of action does not affect respondent's jurisdiction to hear Case No.
50897, it follows that the denial of petitioner's motion to the same, even if it were erroneous, is reviewable, not by writ
of certiorari, but by appeal, after the rendition of judgment on the merits. Moreover, the theory that a mortgagee cannot
bring an action for foreclosure against the special administrator of the estate of a deceased person has already been
rejected by this Court. In Liwanag vs. Hon. Luis B. Reyes, G.R. No. L-19159 (September 29, 1964), involving the same
petitioner herein, the same estate of the deceased Pio D. Liwanag, a similar action for foreclosure, although of another
mortgage and an identical motion to dismiss and issue, we expressed ourselves as follows:
The defendant Gliceria Liwanag filed a motion to dismiss the complaint for foreclosure, on the theory that she
may not be sued as special administratrix.
xxx

xxx

xxx

Section 7 of Rule 86 of the New Rules of Court provides that a creditor holding a claim against the deceased,
secured by a mortgage or other collateral security, may pursue any of these remedies: (1) abandon his security and
prosecute his claim and share in the general distribution of the assets of the estate; (2) foreclose his mortgage or
realize upon his security by an action in court, making the executor or administrator a party defendant, and if there
is a deficiency after the sale of the mortgaged property, he may prove the same in the testate or intestate
proceedings; and (3) rely exclusively upon his mortgage and foreclose it any time within the ordinary period of
limitations, and if he relies exclusively upon the mortgage, he shall not...share in the distribution of the assets.
Obviously, the herein respondent has chosen the second remedy, having filed his action for foreclosure against the
administratrix of the property.

224

Now the question arises as to whether the petitioner herein can be sued as special administratrix. The Rules of
Court do not expressly prohibit making the special administratrix a defendant in a suit against the estate.
Otherwise, creditors would find the adverse effects of the statute of limitations running against them in cases
where the appointment of a regular administrator is delayed. So that if We are not to deny the present action on
this technical ground alone, and the appointment of a regular administrator will be delayed, the very purpose for
which the mortgage was constituted will be defeated.
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the petitioner. It is so ordered.

225

G.R. No. 110782 September 25, 1998

IRMA IDOS, petitioner,
vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.
QUISUMBING, J.:
Before this Court is the petition for review of the Decision of respondent Court of Appeals 1 dismissing petitioner's appeal
in CA-G.R. CR No. 11960; and affirming her conviction as well as the sentence imposed on her by the Regional Trial
Court of Malolos, Bulacan, in Criminal Case No. 1395-M-88 2 as follows:
WHEREFORE . . . the (c)ourt finds the accused Irma Idos guilty beyond reasonable doubt and is hereby
sentenced to suffer the penalty of imprisonment of six (6) months and to pay a fine of P135,000.00 and to
pay private complainant Eddie Alarilla the amount of the check in question of P135,000.00 at 12%
interest from the time of the filing of the (i)nformation (August 10, 1988) until said amount has been fully
paid.
Elevated from the Third Division 3 of this Court, the case was accepted for resolution en banc on the initial impression
that here, a constitutional question might be involved. 4 It was opined that petitioner's sentence, particularly six months'
imprisonment, might be in violation of the constitutional guarantee against imprisonment for non-payment of a debt. 5
A careful consideration of the issues presented in the petition as well as the comments thereon and the findings of fact by
the courts below in the light of applicable laws and precedents convinces us, however, that the constitutional dimension
need not be reached in order to resolve those issues adequately. For, as herein discussed, the merits of the petition could
be determined without delving into aspects of the cited constitutional guarantee vis-a-vis provisions of the Bouncing
Checks Law (Batas Pambansa Blg. 22). There being no necessity therefor, we lay aside discussions of the constitutional
challenge to said law in deciding this petition.
The petitioner herein, Irma L. Idos, is a businesswoman engaged in leather tanning. Her accuser for violation of B.P. 22 is
her erstwhile supplier and business partner, the complainant below, Eddie Alarilla.
As narrated by the Court of Appeals, the background of this case is as follows:
The complainant Eddie Alarilla supplied chemicals and rawhide to the accused-appellant Irma L. Idos for
use in the latter's business of manufacturing leather. In 1985, he joined the accused-appellant's business
and formed with her a partnership under the style "Tagumpay Manufacturing," with offices in Bulacan
and Cebu City.
However, the partnership was short lived. In January, 1986 the parties agreed to terminate their
partnership. Upon liquidation of the business the partnership had as of May 1986 receivables and stocks
worth P1,800,000.00. The complainant's share of the assets was P900,000.00 to pay for which the
accused-appellant issued the following postdated checks, all drawn against Metrobank Branch in
Mandaue, Cebu:
CHECK NO. DATE AMOUNT
1) 103110295 8-15-86 P135,828.87
2) 103110294 P135,828.87
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3) 103115490 9-30-86 P135,828.87

4) 103115491 10-30-86 P126,656.01
The complainant was able to encash the first, second, and fourth checks, but the third check (Exh. A)
which is the subject of this case, was dishonored on October 14, 1986 for insufficiency of funds. The
complainant demanded payment from the accused-appellant but the latter failed to pay. Accordingly, on
December 18, 1986, through counsel, he made a formal demand for payment. (Exh. B) In a letter dated
January 2, 1987, the accused-appellant denied liability. She claimed that the check had been given upon
demand of complainant in May 1986 only as "assurance" of his share in the assets of the partnership and
that it was not supposed to be deposited until the stocks had been sold.
Complainant then filed his complaint in the Office of the Provincial Fiscal of Bulacan which on August
22, 1988 filed an information for violation of BP Blg. 22 against accused-appellant.
Complainant danied that the checks issued to him by accused-appellant were subject to the disposition of
the stocks and the collection of receivables of the business. But the accused-appellant insisted that the
complainant had known that the checks were to be funded from the proceeds of the sale of the stocks and
the collection of receivables. She claimed that the complainant himself asked for the checks because he
did not want to continue in the tannery business and had no use for a share of the stocks. (TSN, p. 7, April
14, 1991; id., pp. 8-9, Nov. 13, 1989; id., pp. 12, 16, 20, Feb. 14, 1990; id, p. 14, June 4, 1990).
On February 15, 1992, the trial court rendered judgment finding the accused-appellant guilty of the crime
charged. The accused-appellant's motion for annulment of the decision and for reconsideration was
denied by the trial court in its order dated April 12, 1991. 6
Herein respondent court thereafter affirmed on appeal the decision of the trial court. Petitioner timely moved for a
reconsideration, but this was subsequently denied by respondent court in its Resolution 7 dated June 11, 1993. Petitioner
has now appealed to us by way of a petition for certiorari under Rule 45 of the Rules of Court.
During the pendency of this petition, this Court by a resolutions 8 dated August 30, 1993, took note of the compromise
agreement executed between the parties, regarding the civil aspect of the case, as manifested by petitioner in a Motion to
Render Judgment based on Compromise Agreement 9 filed on August 5, 1993. After submission of the Comment 10 by the
Solicitor General, and the Reply 11 by petitioner, this case was deemed submitted for decision.
Contending that the Court of Appeals erred in its affirmance of the trial court's decision, petitioner cites the following
reasons to justify the review of her case:
1. The Honorable Court of Appeals has decided against the innocence of the accused
based on mere probabilities which, on the contrary, should have warranted her acquittal
on reasonable doubt. Even then, the conclusion of the trial court is contrary to the
evidence on record, including private complainant's judicial admission that there was no
consideration for the check.
2 The Honorable Court of Appeals has confused and merged into one the legal concepts
of dissolution, liquidation and termination of a partnership and on the basis of such
misconception of the law, disregarded the fact of absence of consideration of the check
and convicted the accused.
3 While this appeal was pending, the parties submitted for the approval of the Honorable
Court a compromise agreement on the civil liability. The accused humbly submits that
227

this supervening event, which by its terms puts to rest any doubt the Court of Appeals
had entertained against the defense of lack of consideration, should have a legal effect
favorable to the accused, considering that the dishonored check constitutes a private
transaction between partners which does not involve the public interest, and considering
further that the offense is not one involving moral turpitude.
4 The Honorable Court of Appeals failed to appreciate the fact that the accused had
warned private complainant that the check was not sufficiently funded, which should
have exonerated the accused pursuant to the ruling in the recent case of Magno vs. Court
of Appeals, 210 SCRA 471, which calls for a more flexible and less rigid application of
the Bouncing Checks law. 12
For a thorough consideration of the merits of petitioner's appeal, we find pertinent and decisive the following issues:
1. Whether respondent court erred in holding that the subject check was issued by petitioner to apply on account or for
value, that is, as part of the consideration of a "buy-out" of said complainant's interest in the partnership, and not merely
as a commitment on petitioner's part to return the investment share of complainant, along with any profit pertaining to said
share, in the partnership.
2. Whether the respondent court erred in concluding that petitioner issued the subject check knowing at the time of issue
that she did not have sufficient funds in or credit with the drawee bank and without communicating this fact of
insufficiency of funds to the complainant.
Both inquiries boil down into one ultimate issue: Did the respondent court err in affirming the trial court's judgment that
she violated Batas Pambansa Blg. 22?
Considering that penal statutes are strictly construed against the state and liberally in favor of the accused, it bears
stressing that for an act to be punishable under the B.P. 22, it "must come clearly within both the spirit and the letter of the
statue. 13 Otherwise, the act has to be declared outside the law's ambit and a plea of innocence by the accused must be
sustained.
The relevant provisions of B.P. 22 state that:
Sec. 1. Checks without sufficient funds. Any person who makes or draws and issues any check to
apply on account or for value, knowing at the time of issue that he does not have sufficient funds in or
credit with the drawee bank for the payment of such check in full upon its presentment, which check is
subsequently dishonored by the drawee bank for insufficiency of funds or credit or would have been
dishonored for the same reason had not the drawer, without any valid reason, ordered the bank to stop
payment, shall be punished by imprisonment of not less than thirty days but not more than one (1) year or
by a fine of not less than but not more than double the amount of the check which fine shall in no case
exceed Two hundred thousand pesos, or both such fine and imprisonment at the discretion of the court.
The same penalty shall be imposed upon any person who having sufficient funds in or credit with the
drawee bank when he makes or draws and issues a check, shall fail to keep sufficient funds or to maintain
a credit or to cover the full amount of the check if presented within a period of ninety (90) days from the
date appearing thereon, for which reason it is dishonored by the drawee bank.
Where the check is drawn by a corporation, company or entity, the person or persons who actually signed
the check in behalf of such drawer shall be liable under this Act.

228

Sec. 2. Evidence of knowledge of insufficient funds. The making, drawing and issuance of a check
payment of which is refused by the drawee because of insufficient funds in or credit with such bank,
when presented within ninety (90) days from the date of the check, shall be prima facie evidence of
knowledge of such insufficiency of funds or credit unless such maker or drawer pays the holder thereof
the amount due thereon or makes arrangements for payment in full by the drawee of such check within
five (5) banking days after receiving notice that such check has not been paid by the drawee. (Emphasis
supplied)
As decided by this Court, the elements of the offense penalized under B.P. 22, are as follows: "(1) the making, drawing
and issuance of any check to apply to account or for value; (2) the knowledge of the maker, drawer or issuer that at the
time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full
upon its presentment; and (3) subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or
dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment. 14
In the present case, with regard to the first issue, evidence on record would show that the subject check was to be funded
from receivables to be collected and goods to be sold by the partnership, and only when such collection and sale were
realized. 15 Thus, there is sufficient basis for the assertion that the petitioner issued the subject check (Metrobank Check
No. 103115490 dated October 30, 1986, in the amount of P135,828.87) to evidence only complainant's share or interest in
the partnership, or at best, to show her commitment that when receivables are collected and goods are sold, she would
give to private complainant the net amount due him representing his interest in the partnership. It did not involve a debt of
or any account due and payable by the petitioner.
Two facts stand out. Firstly, three of four checks were properly encashed by complainant; only one (the third) was not.
But eventually even this one was redeemed by petitioner. Secondly, even private complainant admitted that there was no
consideration whatsoever for the issuance of the check, whose funding was dependent on future sales of goods and
receipts of payment of account receivables.
Now, it could not be denied that though the parties petitioner and complainant had agreed to dissolve the
partnership, such ageement did not automatically put an end to the partnership, since they still had to sell the goods on
hand and collect the receivables from debtors. In short, they were still in the process of "winding up" the affairs of the
partnership, when the check in question was issued.
Under the Civil Code, the three final stages of a partnership are (1) dissolution; (2) winding-up; and (3) termination. These
stages are distinguished, to wit:
(1) Dissolution Defined
Dissolution is the change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on of the business (Art.
1828). It is that point of time the time the partners cease to carry on the
business tonether. (Citation omitted).
(2) Winding Up Defined
Winding up is the process of settling business affairs of dissolution.
(NOTE: Examples of winding up: the paying of previous obligations; the
collecting of assets previously demandable; even new business if needed
to wind up, as the contracting with a demolition company for the
demolition of the garage used in a "used car" partnership.)
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(3) Termination Defined

Termination is the point in time after all the partnership affairs have been wound up. 16 [Citation omitted] (Emphasis
supplied).
These final stages in the life of a partnership are recognized under the Civil Code that explicitly declares that upon
dissolution, the partnership is not terminated, to wit:
Art 1828. The dissolution of a partnership is the change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.
Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed. (Emphasis supplied.)
The best evidence of the existence of the partnership, which was not yet terminated (though in the winding up stage), were
the unsold goods and uncollected receivables, which were presented to the trial court. Since the partnership has not been
terminated, the petitioner and private complainant remained as co-partners. The check was thus issued by the petitioner to
complainant, as would a partner to another, and not as payment from a debtor to a creditor.
The more tenable view, one in favor of the accused, is that the check was issued merely to evidence the complainant's
share in the partnership property, or to assure the latter that he would receive in time his due share therein. The alternative
view that the check was in consideration of a "buy out" is but a theory, favorable to the complainant, but lacking support
in the record; and must necessarily be discarded.
For there is nothing on record which even slightly suggest that petitioner ever became interested in acquiring, much less
keeping, the shares of the complainant. What is very clear therefrom is that the petitioner exerted her best efforts to sell
the remaining goods and to collect the receivables of the partnership, in order to come up with the amount necessary to
satisfy the value of complainant's interest in the partnership at the dissolution thereof. To go by accepted custom of the
trade, we are more inclined to the view that the subject check was issued merely to evidence complainant's interest in the
partnership. Thus, we are persuaded that the check was not intended to apply on account or for value; rather it should be
deemed as having been drawn without consideration at the time of issue.
Absent the first element of the offense penalized under B.P. 22, which is "the making, drawing and issuance of any check
to apply on account or for value", petitioner's issuance of the subject check was not an act contemplated in nor made
punishable by said statute.
As to the second issue, the Solicitor General contends that under the Bouncing Checks Law, the elements of deceit and
damage are not essential or required to constitute a violation thereof. In his view, the only essential element is the
knowledge on the part of the maker or drawer of the check of the insufficiency of his/her funds at the time of the issuance
of said check.
The Bouncing Checks Law makes the mere act of issuing a bad or worthless check a special offense punishable by law.
"Malice or intent in issuing the worthless check is immaterial, the offense being malum
prohibitum," 17 so goes the argument for the public respondents.
But of course this could not be an absolute proposition without descending to absurdity. For if a check were issued by a
kidnap victim to a kidnapper for ransom, it would be absurd to hold the drawer liable under B.P. 22, if the check is
dishonored and unpaid. That would go against public policy and common sense.
Public respondents further contend that "since petitioner issued the check in favor of complainant. Alarilla and when
notified that it was returned for insufficiency of funds, failed to make good the check, then petitioner is liable for violation
230

of B.P. 22. 18 Again, this matter could not be all that simple. For while "the maker's knowledge of the insufficiency of
funds is legally presumed from the dishonor of his checks for insufficiency of funds, 19 this presumption is rebuttable.
In the instant case, there is only a prima facie presumption which did not preclude the presentation of contrary
evidence. 20 In fact, such contrary evidence on two points could be gleaned from the record concerning (1) lack of actual
knowledge of insufficiency of funds; and (2) lack of adequate notice of dishonor.
Noteworthy for the defense, knowledge of insufficiency of funds or credit in the drawee bank for the payment of a check
upon its presentment is an essential element of the offense. 21 It must be proved, particularly where the prima
facie presumption of the existence of this element has been rebutted. The prima facie presumption arising from the fact of
drawing, issuing or making a check, the payment of which was subsequently refused for insufficiency of funds is,
moreover, not sufficient proof of guilt by the issuer.
In the case of Nieva v. Court of Appeals, 22 it was held that the subsequent dishonor of the subject check issued by accused
merely engendered the prima facie presumption that she knew of the insufficiency of funds, but did not render the accused
automatically guilty under B.P. 22. 23
The prosecution has a duty to prove all the elements of the crime, including the acts that give rise to
the prima facie presumption; petitioner, on the other hand, has a right to rebut the prima
faciepresumption. Therefore, if such knowledge of insufficiency of funds is proven to be actually absent
or non-existent, the accused should not be held liable for the offense defined under the first paragraph of
Section 1 of B.P. 22. Although the offense charged is a malum prohibitum, the prosecution is not thereby
excused from its responsibility of proving beyond reasonable doubt all the elements of the offense, one of
which is knowledge of the insufficiency of funds.
Sec. 1 of B.P. 22 specifically requires that the person in making, drawing or issuing the check, be shown that he knows at
the time of issue, that he does not have sufficient funds in or credit with the drawee bank for the payment of such check in
full upon its presentment.
In the case at bar, as earlier discussed, petitioner issued the check merely to evidence the proportionate share of
complainant in the partnership assets upon its dissolution. Payment of that share in the partnership was conditioned on the
subsequent realization of profits from the unsold goods and collection of the receivables of the firm. This condition must
be satisfied or complied with before the complainant can actually "encash" the check. The reason for the condition is that
petitioner has no independent means to satisfy or discharge the complainant's share, other than by the future sale and
collection of the partnership assets. Thus, prior to the selling of the goods and collecting of the receivables, the
complainant could not, as of yet, demand his proportionate share in the business. This situation would hold true until after
the winding up, and subsequent termination of the partnership. For only then, when the goods were already sold and
receivables paid that cash money could be availed of by the erstwhile partners.
Complainant did not present any evidence that petitioner signed and issued four checks actually knowing that funds
therefor would be insufficient at the time complainant would present them to the drawee bank. For it was uncertain at the
time of issuance of the checks whether the unsold goods would have been sold, or whether the receivables would have
been collected by the time the checks would be encashed. As it turned out, three were fully funded when presented to the
bank; the remaining one was settled only later on.
Since petitioner issued these four checks without actual knowledge of the insufficiency of funds, she could not be held
liable under B.P. 22 when one was not honored right away. For it is basic doctrine that penal statutes such as B.P. 22
"must be construed with such strictness as to carefully safeguard the rights of the defendant . . ." 24The element of
knowledge of insufficiency of funds has to be proved by the prosecution; absent said proof, petitioner could not be held
criminally liable under that law. Moreover, the presumption of prima facie knowledge of such insufficiency in this case
was actually rebutted by petitioner's evidence.
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Further, we find that the prosecution also failed to prove adequate notice of dishonor of the subject check on petitioner's
part, thus precluding any finding of prima facie evidence of knowledge of insufficiency of funds. There is no proof that
notice of dishonor was actually sent by the complainant or by the drawee bank to the petitioner. On this point, the record
is bereft of evidence to the contrary.
But in fact, while the subject check initially bounced, it was later made good by petitioner. In addition, the terms of the
parties' compromise agreement, entered into during the pendency of this case, effectively invalidates the allegation of
failure to pay or to make arrangement for the payment of the check in full. Verily, said compromise agreement constitutes
an arrangement for the payment in full of the subject check.
The absence of notice of dishonor is crucial in the present case. As held by this Court in prior cases:
Because no notice of dishonor was actually sent to and received by the petitioner, the prima
faciepresumption that she knew about the insufficiency of funds cannot apply. Section 2 of B.P. 22
clearly provides that this presumption arises not from the mere fact of drawing, making and issuing a bum
check; there must also be a showing that, within five banking days from receipt of the notice of dishonor,
such maker or drawer failed to pay the holder of the check the amount due thereon or to make
arrangement for its payment in full by the drawee of such check. 25 [Emphasis supplied.]
The absence of a notice of dishonor necessarily deprives an accused an opportunity to preclude a criminal
prosecution. Accordingly, procedural due process clearly enjoins that a notice of dishonor be actually
served on petitioner. Petitioner has a right to demand and the basic postulates of fairness require
that the notice of dishonor be actually sent to and received by her to afford her the opportunity to avert
prosecution under
B.P. 26
Further, what militates strongly against public respondents' stand is the fact that petitioner repeatedly notified the
complainant of the insufficiency of funds. Instructive is the following pronouncement of this Court in Magno v. Court of
Appeals:
Furthermore, the element of "knowing at the time of issue that he does not have sufficient funds in or
credit with the drawee bank for the payment of such check in full upon its presentment, which check is
subsequently dishonored by the drawee bank for insufficiency of funds or credit or would have been
dishonored for the same reason . . ." is inversely applied in this case. From the very beginning. petitioner
never hid the fact that he did not have the funds with which to put up the warranty deposit and as a matter
of fact, he openly intimated this to the vital conduit of the transaction, Joey Gomez, to whom petitioner
was introduced by Mrs. Teng. It would have been different if this predicament was not communicated to
all the parties he dealt with regarding the lease agreement the financing or which was covered by L.S.
Finance Management. " 27
In the instant case, petitioner intimated to private complainant the possibility that funds might be insufficient to cover the
subject check, due to the fact that the partnership's goods were yet to be sold and receivables yet to be collected.
As Magno had well observed:
For all intents and purposes, the law was devised to safeguard the interest of the banking system and the
legitimate public checking account user. It did not intend to shelter or favor nor encourage users of the
system to enrich themselves through manipulations and circumvention of the noble purpose and objective
of the law. Least should it be used also as a means of jeopardizing honest-to-goodness transactions with
some color of "get-rich" scheme to the prejudice of well-meaning businessmen who are the pillars of
society.
232

xxx xxx xxx

Thus, it behooves upon a court of law that in applying the punishment imposed upon the accused, the
objective of retribution of a wronged society, should be directed against the "actual and potential
wrongdoers". In the instant case, there is no doubt that petitioner's four (4) checks were used to
collateralize an accommodation, and not to cover the receipt of an actual "account or credit for value" as
this was absent, and therefore petitioner should not be punished for mere issuance of the checks in
question. Following the aforecited theory, in petitioner's stead the "potential wrongdoer," whose operation
could be a menace to society, should not be glorified by convicting the petitioner. 28
Under the circumstances obtaining in this case, we find the petitioner to have issued the check in good faith, with every
intention of abiding by her commitment to return, as soon as able, the investments of complainant in the partnership.
Evidently, petitioner issued the check with benign considerations in mind, and not for the purpose of committing fraud,
deceit, or violating public policy.
To recapitulate, we find the petition impressed with merit. Petitioner may not be held liable for violation of B.P. 22 for the
following reasons: (1) the subject check was not made, drawn and issued by petitioner in exchange for value received as
to qualify it as a check on account or for value; (2) there is no sufficient basis to conclude that petitioner, at the time of
issue of the check, had actual knowledge of the insufficiency of funds; and (3) there was no notice of dishonor of said
check actually served on petitioner, thereby depriving her of the opportunity to pay or make arrangements for the payment
of the check, to avoid criminal prosecution.
Having resolved the foregoing principal issues, and finding the petition meritorious, we no longer need to pass upon the
validity and legality or necessity of the purported compromise agreement on civil liability between the petitioner and the
complainant.
WHEREFORE, the instant petition is hereby GRANTED AND THE PETITIONER ACQUITTED. The Decision of the
respondent Court of Appeals in CA-G.R. CR No. 11960 is hereby REVERSED and the Decision of Regional Trial Court
in Criminal Case No. 1395-M-88 is hereby SET ASIDE.

233

G.R. No. 142293

February 27, 2003

VICENTE SY, TRINIDAD PAULINO, 6BS TRUCKING CORPORATION, and SBT1 TRUCKING
CORPORATION,petitioners,
vs.
HON. COURT OF APPEALS and JAIME SAHOT, respondents.
QUISUMBING, J.:
This petition for review seeks the reversal of the decision2 of the Court of Appeals dated February 29, 2000, in CA-G.R.
SP No. 52671, affirming with modification the decision3 of the National Labor Relations Commission promulgated on
June 20, 1996 in NLRC NCR CA No. 010526-96. Petitioners also pray for the reinstatement of the decision4 of the Labor
Arbiter in NLRC NCR Case No. 00-09-06717-94.
Culled from the records are the following facts of this case:
Sometime in 1958, private respondent Jaime Sahot5 started working as a truck helper for petitioners family-owned
trucking business named Vicente Sy Trucking. In 1965, he became a truck driver of the same family business, renamed T.
Paulino Trucking Service, later 6Bs Trucking Corporation in 1985, and thereafter known as SBT Trucking Corporation
since 1994. Throughout all these changes in names and for 36 years, private respondent continuously served the trucking
business of petitioners.
In April 1994, Sahot was already 59 years old. He had been incurring absences as he was suffering from various ailments.
Particularly causing him pain was his left thigh, which greatly affected the performance of his task as a driver. He
inquired about his medical and retirement benefits with the Social Security System (SSS) on April 25, 1994, but
discovered that his premium payments had not been remitted by his employer.
Sahot had filed a week-long leave sometime in May 1994. On May 27th, he was medically examined and treated for EOR,
presleyopia, hypertensive retinopathy G II (Annexes "G-5" and "G-3", pp. 48, 104, respectively),6 HPM, UTI,
Osteoarthritis (Annex "G-4", p. 105),7 and heart enlargement (Annex G, p. 107).8 On said grounds, Belen Paulino of the
SBT Trucking Service management told him to file a formal request for extension of his leave. At the end of his weeklong absence, Sahot applied for extension of his leave for the whole month of June, 1994. It was at this time when
petitioners allegedly threatened to terminate his employment should he refuse to go back to work.
At this point, Sahot found himself in a dilemma. He was facing dismissal if he refused to work, But he could not retire on
pension because petitioners never paid his correct SSS premiums. The fact remained he could no longer work as his left
thigh hurt abominably. Petitioners ended his dilemma. They carried out their threat and dismissed him from work,
effective June 30, 1994. He ended up sick, jobless and penniless.
On September 13, 1994, Sahot filed with the NLRC NCR Arbitration Branch, a complaint for illegal dismissal, docketed
as NLRC NCR Case No. 00-09-06717-94. He prayed for the recovery of separation pay and attorneys fees against Vicente
Sy and Trinidad Paulino-Sy, Belen Paulino, Vicente Sy Trucking, T. Paulino Trucking Service, 6Bs Trucking and SBT
Trucking, herein petitioners.
For their part, petitioners admitted they had a trucking business in the 1950s but denied employing helpers and drivers.
They contend that private respondent was not illegally dismissed as a driver because he was in fact petitioners industrial
partner. They add that it was not until the year 1994, when SBT Trucking Corporation was established, and only then did
respondent Sahot become an employee of the company, with a monthly salary that reached P4,160.00 at the time of his
separation.

234

Petitioners further claimed that sometime prior to June 1, 1994, Sahot went on leave and was not able to report for work
for almost seven days. On June 1, 1994, Sahot asked permission to extend his leave of absence until June 30, 1994. It
appeared that from the expiration of his leave, private respondent never reported back to work nor did he file an extension
of his leave. Instead, he filed the complaint for illegal dismissal against the trucking company and its owners.
Petitioners add that due to Sahots refusal to work after the expiration of his authorized leave of absence, he should be
deemed to have voluntarily resigned from his work. They contended that Sahot had all the time to extend his leave or at
least inform petitioners of his health condition. Lastly, they cited NLRC Case No. RE-4997-76, entitled "Manuelito
Jimenez et al. vs. T. Paulino Trucking Service," as a defense in view of the alleged similarity in the factual milieu and
issues of said case to that of Sahots, hence they are in pari material and Sahots complaint ought also to be dismissed.
The NLRC NCR Arbitration Branch, through Labor Arbiter Ariel Cadiente Santos, ruled that there was no illegal
dismissal in Sahots case. Private respondent had failed to report to work. Moreover, said the Labor Arbiter, petitioners
and private respondent were industrial partners before January 1994. The Labor Arbiter concluded by ordering petitioners
to pay "financial assistance" of P15,000 to Sahot for having served the company as a regular employee since January 1994
only.
On appeal, the National Labor Relations Commission modified the judgment of the Labor Arbiter. It declared that private
respondent was an employee, not an industrial partner, since the start. Private respondent Sahot did not abandon his job
but his employment was terminated on account of his illness, pursuant to Article 2849 of the Labor Code. Accordingly, the
NLRC ordered petitioners to pay private respondent separation pay in the amount of P60,320.00, at the rate of P2,080.00
per year for 29 years of service.
Petitioners assailed the decision of the NLRC before the Court of Appeals. In its decision dated February 29, 2000, the
appellate court affirmed with modification the judgment of the NLRC. It held that private respondent was indeed an
employee of petitioners since 1958. It also increased the amount of separation pay awarded to private respondent to
P74,880, computed at the rate of P2,080 per year for 36 years of service from 1958 to 1994. It decreed:
WHEREFORE, the assailed decision is hereby AFFIRMED with MODIFICATION. SB Trucking Corporation is hereby
directed to pay complainant Jaime Sahot the sum of SEVENTY-FOUR THOUSAND EIGHT HUNDRED EIGHTY
(P74,880.00) PESOS as and for his separation pay.10
Hence, the instant petition anchored on the following contentions:
I
RESPONDENT COURT OF APPEALS IN PROMULGATING THE QUESTION[ED] DECISION AFFIRMING WITH
MODIFICATION THE DECISION OF NATIONAL LABOR RELATIONS COMMISSION DECIDED NOT IN
ACCORD WITH LAW AND PUT AT NAUGHT ARTICLE 402 OF THE CIVIL CODE.11
II
RESPONDENT COURT OF APPEALS VIOLATED SUPREME COURT RULING THAT THE NATIONAL LABOR
RELATIONS COMMISSION IS BOUND BY THE FACTUAL FINDINGS OF THE LABOR ARBITER AS THE
LATTER WAS IN A BETTER POSITION TO OBSERVE THE DEMEANOR AND DEPORTMENT OF THE
WITNESSES IN THE CASE OF ASSOCIATION OF INDEPENDENT UNIONS IN THE PHILIPPINES VERSUS
NATIONAL CAPITAL REGION (305 SCRA 233).12
III
PRIVATE RESPONDENT WAS NOT DISMISS[ED] BY RESPONDENT SBT TRUCKING CORPORATION.13
235

Three issues are to be resolved: (1) Whether or not an employer-employee relationship existed between petitioners and
respondent Sahot; (2) Whether or not there was valid dismissal; and (3) Whether or not respondent Sahot is entitled to
separation pay.
Crucial to the resolution of this case is the determination of the first issue. Before a case for illegal dismissal can prosper,
an employer-employee relationship must first be established.14
Petitioners invoke the decision of the Labor Arbiter Ariel Cadiente Santos which found that respondent Sahot was not an
employee but was in fact, petitioners industrial partner.15 It is contended that it was the Labor Arbiter who heard the case
and had the opportunity to observe the demeanor and deportment of the parties. The same conclusion, aver petitioners, is
supported by substantial evidence.16 Moreover, it is argued that the findings of fact of the Labor Arbiter was wrongly
overturned by the NLRC when the latter made the following pronouncement:
We agree with complainant that there was error committed by the Labor Arbiter when he concluded that complainant was
an industrial partner prior to 1994. A computation of the age of complainant shows that he was only twenty-three (23)
years when he started working with respondent as truck helper. How can we entertain in our mind that a twenty-three (23)
year old man, working as a truck helper, be considered an industrial partner. Hence we rule that complainant was only an
employee, not a partner of respondents from the time complainant started working for respondent.17
Because the Court of Appeals also found that an employer-employee relationship existed, petitioners aver that the
appellate courts decision gives an "imprimatur" to the "illegal" finding and conclusion of the NLRC.
Private respondent, for his part, denies that he was ever an industrial partner of petitioners. There was no written
agreement, no proof that he received a share in petitioners profits, nor was there anything to show he had any
participation with respect to the running of the business.18
The elements to determine the existence of an employment relationship are: (a) the selection and engagement of the
employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employers power to control the employees
conduct. The most important element is the employers control of the employees conduct, not only as to the result of the
work to be done, but also as to the means and methods to accomplish it.19
As found by the appellate court, petitioners owned and operated a trucking business since the 1950s and by their own
allegations, they determined private respondents wages and rest day.20 Records of the case show that private respondent
actually engaged in work as an employee. During the entire course of his employment he did not have the freedom to
determine where he would go, what he would do, and how he would do it. He merely followed instructions of petitioners
and was content to do so, as long as he was paid his wages. Indeed, said the CA, private respondent had worked as a truck
helper and driver of petitioners not for his own pleasure but under the latters control.
Article 176721 of the Civil Code states that in a contract of partnership two or more persons bind themselves to contribute
money, property or industry to a common fund, with the intention of dividing the profits among themselves.22 Not one of
these circumstances is present in this case. No written agreement exists to prove the partnership between the parties.
Private respondent did not contribute money, property or industry for the purpose of engaging in the supposed business.
There is no proof that he was receiving a share in the profits as a matter of course, during the period when the trucking
business was under operation. Neither is there any proof that he had actively participated in the management,
administration and adoption of policies of the business. Thus, the NLRC and the CA did not err in reversing the finding of
the Labor Arbiter that private respondent was an industrial partner from 1958 to 1994.
On this point, we affirm the findings of the appellate court and the NLRC. Private respondent Jaime Sahot was not an
industrial partner but an employee of petitioners from 1958 to 1994. The existence of an employer-employee relationship
is ultimately a question of fact23 and the findings thereon by the NLRC, as affirmed by the Court of Appeals, deserve not
236

only respect but finality when supported by substantial evidence. Substantial evidence is such amount of relevant evidence
which a reasonable mind might accept as adequate to justify a conclusion.24
Time and again this Court has said that "if doubt exists between the evidence presented by the employer and the
employee, the scales of justice must be tilted in favor of the latter."25 Here, we entertain no doubt. Private respondent since
the beginning was an employee of, not an industrial partner in, the trucking business.
Coming now to the second issue, was private respondent validly dismissed by petitioners?
Petitioners contend that it was private respondent who refused to go back to work. The decision of the Labor Arbiter
pointed out that during the conciliation proceedings, petitioners requested respondent Sahot to report back for work.
However, in the same proceedings, Sahot stated that he was no longer fit to continue working, and instead he demanded
separation pay. Petitioners then retorted that if Sahot did not like to work as a driver anymore, then he could be given a
job that was less strenuous, such as working as a checker. However, Sahot declined that suggestion. Based on the
foregoing recitals, petitioners assert that it is clear that Sahot was not dismissed but it was of his own volition that he did
not report for work anymore.
In his decision, the Labor Arbiter concluded that:
While it may be true that respondents insisted that complainant continue working with respondents despite his alleged
illness, there is no direct evidence that will prove that complainants illness prevents or incapacitates him from performing
the function of a driver. The fact remains that complainant suddenly stopped working due to boredom or otherwise when
he refused to work as a checker which certainly is a much less strenuous job than a driver.26
But dealing the Labor Arbiter a reversal on this score the NLRC, concurred in by the Court of Appeals, held that:
While it was very obvious that complainant did not have any intention to report back to work due to his illness which
incapacitated him to perform his job, such intention cannot be construed to be an abandonment. Instead, the same should
have been considered as one of those falling under the just causes of terminating an employment. The insistence of
respondent in making complainant work did not change the scenario.
It is worthy to note that respondent is engaged in the trucking business where physical strength is of utmost requirement
(sic). Complainant started working with respondent as truck helper at age twenty-three (23), then as truck driver since
1965. Complainant was already fifty-nine (59) when the complaint was filed and suffering from various illness triggered
by his work and age.
x x x27
In termination cases, the burden is upon the employer to show by substantial evidence that the termination was for lawful
cause and validly made.28 Article 277(b) of the Labor Code puts the burden of proving that the dismissal of an employee
was for a valid or authorized cause on the employer, without distinction whether the employer admits or does not admit
the dismissal.29 For an employees dismissal to be valid, (a) the dismissal must be for a valid cause and (b) the employee
must be afforded due process.30
Article 284 of the Labor Code authorizes an employer to terminate an employee on the ground of disease, viz:
Art. 284. Disease as a ground for termination- An employer may terminate the services of an employee who has been
found to be suffering from any disease and whose continued employment is prohibited by law or prejudicial to his health
as well as the health of his co-employees: xxx

237

However, in order to validly terminate employment on this ground, Book VI, Rule I, Section 8 of the Omnibus
Implementing Rules of the Labor Code requires:
Sec. 8. Disease as a ground for dismissal- Where the employee suffers from a disease and his continued employment is
prohibited by law or prejudicial to his health or to the health of his co-employees, the employer shall not terminate his
employment unless there is a certification by competent public health authority that the disease is of such nature or at such
a stage that it cannot be cured within a period of six (6) months even with proper medical treatment. If the disease or
ailment can be cured within the period, the employer shall not terminate the employee but shall ask the employee to take a
leave. The employer shall reinstate such employee to his former position immediately upon the restoration of his normal
health. (Italics supplied).
As this Court stated in Triple Eight integrated Services, Inc. vs. NLRC,31 the requirement for a medical certificate under
Article 284 of the Labor Code cannot be dispensed with; otherwise, it would sanction the unilateral and arbitrary
determination by the employer of the gravity or extent of the employees illness and thus defeat the public policy in the
protection of labor.
In the case at bar, the employer clearly did not comply with the medical certificate requirement before Sahots dismissal
was effected. In the same case of Sevillana vs. I.T. (International) Corp., we ruled:
Since the burden of proving the validity of the dismissal of the employee rests on the employer, the latter should likewise
bear the burden of showing that the requisites for a valid dismissal due to a disease have been complied with. In the
absence of the required certification by a competent public health authority, this Court has ruled against the validity of the
employees dismissal. It is therefore incumbent upon the private respondents to prove by the quantum of evidence
required by law that petitioner was not dismissed, or if dismissed, that the dismissal was not illegal; otherwise, the
dismissal would be unjustified. This Court will not sanction a dismissal premised on mere conjectures and suspicions, the
evidence must be substantial and not arbitrary and must be founded on clearly established facts sufficient to warrant his
separation from work.32
In addition, we must likewise determine if the procedural aspect of due process had been complied with by the employer.
From the records, it clearly appears that procedural due process was not observed in the separation of private respondent
by the management of the trucking company. The employer is required to furnish an employee with two written notices
before the latter is dismissed: (1) the notice to apprise the employee of the particular acts or omissions for which his
dismissal is sought, which is the equivalent of a charge; and (2) the notice informing the employee of his dismissal, to be
issued after the employee has been given reasonable opportunity to answer and to be heard on his defense.33 These, the
petitioners failed to do, even only for record purposes. What management did was to threaten the employee with
dismissal, then actually implement the threat when the occasion presented itself because of private respondents painful
left thigh.
All told, both the substantive and procedural aspects of due process were violated. Clearly, therefore, Sahots dismissal is
tainted with invalidity.
On the last issue, as held by the Court of Appeals, respondent Jaime Sahot is entitled to separation pay. The law is clear
on the matter. An employee who is terminated because of disease is entitled to "separation pay equivalent to at least one
month salary or to one-half month salary for every year of service, whichever is greater xxx."34Following the formula set
in Art. 284 of the Labor Code, his separation pay was computed by the appellate court at P2,080 times 36 years (1958 to
1994) or P74,880. We agree with the computation, after noting that his last monthly salary was P4,160.00 so that one-half
thereof is P2,080.00. Finding no reversible error nor grave abuse of discretion on the part of appellate court, we are
constrained to sustain its decision. To avoid further delay in the payment due the separated worker, whose claim was filed
way back in 1994, this decision is immediately executory. Otherwise, six percent (6%) interest per annum should be
charged thereon, for any delay, pursuant to provisions of the Civil Code.
238

G.R. No. 127405

September 20, 2001

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,

vs.
COURT OF APPEALS and NENITA A. ANAY, respondent.
YNARES-SANTIAGO, J.:
The inherent powers of a Court to amend and control its processes and orders so as to make them conformable to law and
justice includes the right to reverse itself, especially when in its honest opinion it has committed an error or mistake in
judgment, and that to adhere to its decision will cause injustice to a party litigant.1
On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed a Motion for Reconsideration of our
Decision dated October 4, 2000. They maintain that there was no partnership between petitioner Belo, on the one hand,
and respondent Nenita A. Anay, on the other hand; and that the latter being merely an employee of petitioner Tocao.
After a careful review of the evidence presented, we are convinced that, indeed, petitioner Belo acted merely as guarantor
of Geminesse Enterprise. This was categorically affirmed by respondent's own witness, Elizabeth Bantilan, during her
cross-examination. Furthermore, Bantilan testified that it was Peter Lo who was the company's financier. Thus:
Q - You mentioned a while ago the name William Belo. Now, what is the role of William Belo with
Geminesse Enterprise?
A

- William Belo is the friend of Marjorie Tocao and he was the guarantor of the company.

- What do you mean by guarantor?

A - He guarantees the stocks that she owes somebody who is Peter Lo and he acts as guarantor for us. We can
borrow money from him.
Q

- You mentioned a certain Peter Lo. Who is this Peter Lo?

- Peter Lo is based in Singapore.

- What is the role of Peter Lo in the Geminesse Enterprise?

- He is the one fixing our orders that open the L/C.

- You mean Peter Lo is the financier?

- Yes, he is the financier.

- And the defendant William Belo is merely the guarantor of Geminesse Enterprise, am I correct?

- Yes, sir2

The foregoing was neither refuted nor contradicted by respondent's evidence. It should be recalled that the business
relationship created between petitioner Tocao and respondent Anay was an informal partnership, which was not even
recorded with the Securities and Exchange Commission. As such, it was understandable that Belo, who was after all
petitioner Tocao's good friend and confidante, would occasionally participate in the affairs of the business, although never
239

in a formal or official capacity.3 Again, respondent's witness, Elizabeth Bantilan, confirmed that petitioner Belo's presence
in Geminesse Enterprise's meetings was merely as guarantor of the company and to help petitioner Tocao.4
Furthermore, no evidence was presented to show that petitioner Belo participated in the profits of the business enterprise.
Respondent herself professed lack of knowledge that petitioner Belo received any share in the net income of the
partnership.5 On the other hand, petitioner Tocao declared that petitioner Belo was not entitled to any share in the profits
of Geminesse Enterprise.6 With no participation in the profits, petitioner Belo cannot be deemed a partner since the
essence of a partnership is that the partners share in the profits and losses.7
Consequently, inasmuch as petitioner Belo was not a partner in Geminesse Enterprise, respondent had no cause of action
against him and her complaint against him should accordingly be dismissed.
As regards the award of damages, petitioners argue that respondent should be deemed in bad faith for failing to account
for stocks of Geminesse Enterprise amounting to P208,250.00 and that, accordingly, her claim for damages should be
barred to that extent. We do not agree. Given the circumstances surrounding private respondent's sudden ouster from the
partnership by petitioner Tocao, her act of withholding whatever stocks were in her possession and control was justified,
if only to serve as security for her claims against the partnership. However, while we do not agree that the same renders
private respondent in bad faith and should bar her claim for damages, we find that the said sum of P208,250.00 should be
deducted from whatever amount is finally adjudged in her favor on the basis of the formal account of the partnership
affairs to be submitted to the Regional Trial Court.
WHEREFORE, based on the foregoing, the Motion for Reconsideration of petitioners is PARTIALLY GRANTED. The
Regional Trial Court of Makati is hereby ordered to DISMISS the complaint, docketed as Civil Case No. 88-509, as
against petitioner William T. Belo only. The sum of P208,250.00 shall be deducted from whatever amount petitioner
Marjorie Tocao shall be held liable to pay respondent after the normal accounting of the partnership affairs.

240

G.R. No. L-25532

February 28, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, 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; ....
241

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; ....
242

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. 1Appellant 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.
243

G.R. No. L-13260

October 31, 1960

LINO P. BERNARDO, petitioner,

vs.
EUFERMIA PASCUAL, ET AL., and WORKMEN'S COMPENSATION COMMISSION, respondents.
GUTIERREZ DAVID, J.:
This is a petition to review on certiorari a decision of the Workmen's Compensation Commission, awarding compensation
to the widow and children of the deceased Pedro Pascual who met death as a result of an accident while felling a tree in
petitioner's lumber concession.
The record shows that on March 9, 1955, the deceased Pedro Pascual was, together with Rogelio Bacane and Martin
Quinto, in the woods at Corona, San Miguel Bulacan. Bacane and Quinto, both loggers admittedly in the employ of herein
petitioner, were cutting timber, while fifty meter away from them the deceased was felling are which he had started
hewing three days before. When Bacane and Quinto heard the sound of the falling treeand following the practice among
loggersthey shouted to Pascual to find out if he was alright. As the latter did not answer, they rushed to where he was
and there found him prostrate on the ground with blood tricking from his mouth. Shortly thereafter, he died from a
fractured skull and his companions took his body home in petitioner's truck.
On March 31, 1955, the widow of the deceased on behalf of herself and their children filed a claim for compensation with
the Workmen's Compensation Commission. Originally filed against the Bernardo Sawmill, the claim was on February 6,
1956 amended to include herein petitioner Lino P. Bernardo, the timber concessionaire and owner and operator of the
sawmill, as party respondent. In his answer, the latter denied that he was a timber concessionaire before October 13, 1955,
or that he had an employer-employee relationship with the deceased. He also objected to the claim on the ground of
prescription. The referee assigned to hear the case having denied the claim, the claimants petitioned for review. On
August 27, 1957, the reviewing commissioner reversed the referee's decision and ordered Lino P. Bernardo to pay
claimants P3,120.00 as compensation, to reimburse them P200.00 for burial expenses and to pay to the Workmen's
Compensation Fund P32.00 as fees. Reconsideration of this award having been denied, Lino P. Bernardo brought the
present petition for certiorari.
Petitioner first charged that the respondent Commissioner abused its discretion in reversing the decision of the referee and
finding that the deceased was his employee. Petitioner, however was failed to substantiate the charge. On the other,
Rogelio Bacane and Martin Quinto, whose employment with the petitioner was never denied and who were present and
were working together with deceased at the time the latter met his death, testified at the hearing of the case that the said
deceased was their co-laborer in the lumber concession of petitioner Lino P. Bernardo. Indeed, the respondent
Commission expressly found that their testimonies "clearly point to the existence of an employer-employee relation
between the respondent (herein petitioner) and the deceased." It also appear that the deceased, Bacane and Quinto used to
receive their wages from Emilio Bautista, petitioner's "Katiwala". As a matter of fact, the widow of the deceased received
from said Bautista the wages corresponding to services last rendered by her husband. Petitioner claims that Bautista was a
forest guard of the Government and was not his employee. This claim, however, loses its force when we consider the fact
that forest guards hired by lumber concessionaire, though appointed by the Department of Agriculture and Natural
Resources (under Forestry Order No. 11), are still deemed employees of the concessionaires. (See Martha Lumber
Mill vs. Lagradante, et al., 99 Phil., 434; 52 Off. Gaz. [9] 4230.)
In disclaiming employer-employee relationship with the deceased, petitioner has made the rather reckless accusation that
the said deceased was a "lumber smuggler" who had been stealing timber from the concession area. No explanation,
however, was given why the deceased at the time of his death was felling a tree in board daylight and in the presence of
petitioner's two loggers. In this connection, we might add that the finding of the respondent Commission that the deceased
was petitioner's employee at the time of his death is a finding of fact and there being no sufficient showing that the same is
unsupported by substantial evidence, the same should de deemed final and conclusive upon this Court. (Magdrigal
Shipping Co. vs. Del Rosario, et al., G.R. No. L-13130, October 31, 1959; NLU vs. Sta. Ana, 101 Phil., 297; 54 Off. Gaz.
244

[6] 1817; see also PAL vs. PAL Employees Association G.R. No. L-8197, October 31, 1958; Donato vs. Phil. Marine
Officers Association, G.R. No. L-12506, May 18, 1958; 15c and Up Employees' Association vs. Dept. and Bazaar Free
Workers' Union, G.R. No. L-9168, October 18, 1956; NLU vs. Dinglasan, 98 Phil., 649; 52 Off. Gaz. (4) 1933; Batangas
Transportation Co. vs.Rivera and WCC, supra, p. 175.).
Petitioner also argues that the claim was made out of time and therefore already barred because it was filed only on
February 6, 1956. It will be recalled that claimants fileds their original claim on March 31, 1955 against the Bernardo
Sawmill, and February 6, 1956, amended it to include petitioner Lino P. Bernardo as party respondent, it appearing that he
was the owner and operator of the sawmill. It will thus be seen that in amending the claim, claimants merely specified the
real party in interest in accordance with the rule that every action must be prosecuted in the name of such party in interest
(Section 2, Rule 3, Rules of Court). Since the amendments did not state a new cause of action but merely made more
determinate the real party respondent, it evidently relates back to the date of the original complaint or claim, which was
admittedly filed within the 3-months period from the death of the employee as fixed by section 24, of the Workmen's
Compensation Act.
With respect to petitioner's claim that he became a lumber concessionaire only on October 13, 1955, suffice it to say that
prior to the date, he was partner to several persons owning the concession in San Miguel, Bulacan, and subsequent thereto,
he acquired the interest of his partners and became the sole concessionaire. Under those circumstances he became liable to
the creditors of the partnership. (Art. 1840, new Civil Code.)
WHEREFORE, the decision of the Workmen's Compensation Commission sought to be reviewed is affirmed, with costs.

245

G.R. No. 126334

November 23, 2001

EMILIO EMNACE, petitioner,

vs.
COURT OF APPEALS, ESTATE OF VICENTE TABANAO, SHERWIN TABANAO, VICENTE WILLIAM
TABANAO, JANETTE TABANAO DEPOSOY, VICENTA MAY TABANAO VARELA, ROSELA TABANAO
and VINCENT TABANAO, respondents.
YNARES-SANTIAGO, J.:
Petitioner Emilio Emnace, Vicente Tabanao and Jacinto Divinagracia were partners in a business concern known as Ma.
Nelma Fishing Industry. Sometime in January of 1986, they decided to dissolve their partnership and executed an
agreement of partition and distribution of the partnership properties among them, consequent to Jacinto Divinagracia's
withdrawal from the partnership.1 Among the assets to be distributed were five (5) fishing boats, six (6) vehicles, two (2)
parcels of land located at Sto. Nio and Talisay, Negros Occidental, and cash deposits in the local branches of the Bank of
the Philippine Islands and Prudential Bank.
Throughout the existence of the partnership, and even after Vicente Tabanao's untimely demise in 1994, petitioner failed
to submit to Tabanao's heirs any statement of assets and liabilities of the partnership, and to render an accounting of the
partnership's finances. Petitioner also reneged on his promise to turn over to Tabanao's heirs the deceased's 1/3 share in
the total assets of the partnership, amounting to P30,000,000.00, or the sum of P10,000,000.00, despite formal demand for
payment thereof.2
Consequently, Tabanao' s heirs, respondents herein, filed against petitioner an action for accounting, payment of shares,
division of assets and damages.3 In their complaint, respondents prayed as follows:
1. Defendant be ordered to render the proper accounting of all the assets and liabilities of the partnership at bar;
and
2. After due notice and hearing defendant be ordered to pay/remit/deliver/surrender/yield to the plaintiffs the
following:
A. No less than One Third (1/3) of the assets, properties, dividends, cash, land(s), fishing vessels, trucks,
motor vehicles, and other forms and substance of treasures which belong and/or should belong, had
accrued and/or must accrue to the partnership;
B. No less than Two Hundred Thousand Pesos (P200,000.00) as moral damages;
C. Attorney's fees equivalent to Thirty Percent (30%) of the entire share/amount/award which the
Honorable Court may resolve the plaintiffs as entitled to plus P1,000.00 for every appearance in court.4
Petitioner filed a motion to dismiss the complaint on the grounds of improper venue, lack of jurisdiction over the nature of
the action or suit, and lack of capacity of the estate of Tabanao to sue.5 On August 30, 1994, the trial court denied the
motion to dismiss. It held that venue was properly laid because, while realties were involved, the action was directed
against a particular person on the basis of his personal liability; hence, the action is not only a personal action but also an
action in personam. As regards petitioner's argument of lack of jurisdiction over the action because the prescribed docket
fee was not paid considering the huge amount involved in the claim, the trial court noted that a request for accounting was
made in order that the exact value of the partnership may be ascertained and, thus, the correct docket fee may be paid.
Finally, the trial court held that the heirs of Tabanao had aright to sue in their own names, in view of the provision of
Article 777 of the Civil Code, which states that the rights to the succession are transmitted from the moment of the death
of the decedent.6
246

The following day, respondents filed an amended complaint,7 incorporating the additional prayer that petitioner be
ordered to "sell all (the partnership's) assets and thereafter pay/remit/deliver/surrender/yield to the plaintiffs" their
corresponding share in the proceeds thereof. In due time, petitioner filed a manifestation and motion to dismiss,8arguing
that the trial court did not acquire jurisdiction over the case due to the plaintiffs' failure to pay the proper docket fees.
Further, in a supplement to his motion to dismiss,9 petitioner also raised prescription as an additional ground warranting
the outright dismissal of the complaint.
On June 15, 1995, the trial court issued an Order,10 denying the motion to dismiss inasmuch as the grounds raised therein
were basically the same as the earlier motion to dismiss which has been denied. Anent the issue of prescription, the trial
court ruled that prescription begins to run only upon the dissolution of the partnership when the final accounting is done.
Hence, prescription has not set in the absence of a final accounting. Moreover, an action based on a written contract
prescribes in ten years from the time the right of action accrues.
Petitioner filed a petition for certiorari before the Court of Appeals,11 raising the following issues:
I.
Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion in taking
cognizance of a case despite the failure to pay the required docket fee;
II. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion in insisting to
try the case which involve (sic) a parcel of land situated outside of its territorial jurisdiction;
III. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion in allowing
the estate of the deceased to appear as party plaintiff, when there is no intestate case and filed by one who was
never appointed by the court as administratrix of the estates; and
IV. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion in not
dismissing the case on the ground of prescription.
On August 8, 1996, the Court of Appeals rendered the assailed decision,12 dismissing the petition for certiorari, upon a
finding that no grave abuse of discretion amounting to lack or excess of jurisdiction was committed by the trial court in
issuing the questioned orders denying petitioner's motions to dismiss.
Not satisfied, petitioner filed the instant petition for review, raising the same issues resolved by the Court of Appeals,
namely:
I.

Failure to pay the proper docket fee;

II. Parcel of land subject of the case pending before the trial court is outside the said court's territorial
jurisdiction;
III.

Lack of capacity to sue on the part of plaintiff heirs of Vicente Tabanao; and

IV.

Prescription of the plaintiff heirs' cause of action.

It can be readily seen that respondents' primary and ultimate objective in instituting the action below was to recover the
decedent's 1/3 share in the partnership' s assets. While they ask for an accounting of the partnership' s assets and finances,
what they are actually asking is for the trial court to compel petitioner to pay and turn over their share, or the equivalent
value thereof, from the proceeds of the sale of the partnership assets. They also assert that until and unless a proper
accounting is done, the exact value of the partnership' s assets, as well as their corresponding share therein, cannot be
ascertained. Consequently, they feel justified in not having paid the commensurate docket fee as required by the Rules of
Court.1wphi1.nt
247

We do not agree. The trial court does not have to employ guesswork in ascertaining the estimated value of the
partnership's assets, for respondents themselves voluntarily pegged the worth thereof at Thirty Million Pesos
(P30,000,000.00). Hence, this case is one which is really not beyond pecuniary estimation, but rather partakes of the
nature of a simple collection case where the value of the subject assets or amount demanded is pecuniarily
determinable.13 While it is true that the exact value of the partnership's total assets cannot be shown with certainty at the
time of filing, respondents can and must ascertain, through informed and practical estimation, the amount they expect to
collect from the partnership, particularly from petitioner, in order to determine the proper amount of docket and other
fees.14 It is thus imperative for respondents to pay the corresponding docket fees in order that the trial court may acquire
jurisdiction over the action.15
Nevertheless, unlike in the case of Manchester Development Corp. v. Court of Appeals,16 where there was clearly an
effort to defraud the government in avoiding to pay the correct docket fees, we see no attempt to cheat the courts on the
part of respondents. In fact, the lower courts have noted their expressed desire to remit to the court "any payable balance
or lien on whatever award which the Honorable Court may grant them in this case should there be any deficiency in the
payment of the docket fees to be computed by the Clerk of Court."17 There is evident willingness to pay, and the fact that
the docket fee paid so far is inadequate is not an indication that they are trying to avoid paying the required amount, but
may simply be due to an inability to pay at the time of filing. This consideration may have moved the trial court and the
Court of Appeals to declare that the unpaid docket fees shall be considered a lien on the judgment award.
Petitioner, however, argues that the trial court and the Court of Appeals erred in condoning the non-payment of the proper
legal fees and in allowing the same to become a lien on the monetary or property judgment that may be rendered in favor
of respondents. There is merit in petitioner's assertion. The third paragraph of Section 16, Rule 141 of the Rules of Court
states that:
The legal fees shall be a lien on the monetary or property judgment in favor of the pauper-litigant.
Respondents cannot invoke the above provision in their favor because it specifically applies to pauper-litigants. Nowhere
in the records does it appear that respondents are litigating as paupers, and as such are exempted from the payment of
court fees.18
The rule applicable to the case at bar is Section 5(a) of Rule 141 of the Rules of Court, which defines the two kinds of
claims as: (1) those which are immediately ascertainable; and (2) those which cannot be immediately ascertained as to the
exact amount. This second class of claims, where the exact amount still has to be finally determined by the courts based
on evidence presented, falls squarely under the third paragraph of said Section 5(a), which provides:
In case the value of the property or estate or the sum claimed is less or more in accordance with the appraisal of
the court, the difference of fee shall be refunded or paid as the case may be. (Underscoring ours)
In Pilipinas Shell Petroleum Corporation v. Court of Appeals,19 this Court pronounced that the above-quoted provision
"clearly contemplates an Initial payment of the filing fees corresponding to the estimated amount of the claim subject to
adjustment as to what later may be proved."20 Moreover, we reiterated therein the principle that the payment of filing fees
cannot be made contingent or dependent on the result of the case. Thus, an initial payment of the docket fees based on an
estimated amount must be paid simultaneous with the filing of the complaint. Otherwise, the court would stand to lose the
filing fees should the judgment later turn out to be adverse to any claim of the respondent heirs.
The matter of payment of docket fees is not a mere triviality. These fees are necessary to defray court expenses in the
handling of cases. Consequently, in order to avoid tremendous losses to the judiciary, and to the government as well, the
payment of docket fees cannot be made dependent on the outcome of the case, except when the claimant is a pauperlitigant.

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Applied to the instant case, respondents have a specific claim - 1/3 of the value of all the partnership assets - but they did
not allege a specific amount. They did, however, estimate the partnership's total assets to be worth Thirty Million Pesos
(P30,000,000.00), in a letter21 addressed to petitioner. Respondents cannot now say that they are unable to make an
estimate, for the said letter and the admissions therein form part of the records of this case. They cannot avoid paying the
initial docket fees by conveniently omitting the said amount in their amended complaint. This estimate can be made the
basis for the initial docket fees that respondents should pay. Even if it were later established that the amount proved was
less or more than the amount alleged or estimated, Rule 141, Section 5(a) of the Rules of Court specifically provides that
the court may refund the 'excess or exact additional fees should the initial payment be insufficient. It is clear that it is only
the difference between the amount finally awarded and the fees paid upon filing of this complaint that is subject to
adjustment and which may be subjected to alien.
In the oft-quoted case of Sun Insurance Office, Ltd. v. Hon. Maximiano Asuncion,22 this Court held that when the specific
claim "has been left for the determination by the court, the additional filing fee therefor shall constitute a lien on the
judgment and it shall be the responsibility of the Clerk of Court or his duly authorized deputy to enforce said lien and
assess and collect the additional fee." Clearly, the rules and jurisprudence contemplate the initial payment of filing and
docket fees based on the estimated claims of the plaintiff, and it is only when there is a deficiency that a lien may be
constituted on the judgment award until such additional fee is collected.
Based on the foregoing, the trial court erred in not dismissing the complaint outright despite their failure to pay the proper
docket fees. Nevertheless, as in other procedural rules, it may be liberally construed in certain cases if only to secure a just
and speedy disposition of an action. While the rule is that the payment of the docket fee in the proper amount should be
adhered to, there are certain exceptions which must be strictly construed.23
In recent rulings, this Court has relaxed the strict adherence to the Manchester doctrine, allowing the plaintiff to pay the
proper docket fees within a reasonable time before the expiration of the applicable prescriptive or reglementary period.24
In the recent case of National Steel Corp. v. Court of Appeals,25 this Court held that:
The court acquires jurisdiction over the action if the filing of the initiatory pleading is accompanied by the
payment of the requisite fees, or, if the fees are not paid at the time of the filing of the pleading, as of the time of
full payment of the fees within such reasonable time as the court may grant, unless, of course, prescription has set
in the meantime.
It does not follow, however, that the trial court should have dismissed the complaint for failure of private
respondent to pay the correct amount of docket fees. Although the payment of the proper docket fees is a
jurisdictional requirement, the trial court may allow the plaintiff in an action to pay the same within a reasonable
time before the expiration of the applicable prescriptive or reglementary period. If the plaintiff fails to comply
within this requirement, the defendant should timely raise the issue of jurisdiction or else he would be considered
in estoppel. In the latter case, the balance between the appropriate docket fees and the amount actually paid by the
plaintiff will be considered a lien or any award he may obtain in his favor. (Underscoring ours)
Accordingly, the trial court in the case at bar should determine the proper docket fee based on the estimated amount that
respondents seek to collect from petitioner, and direct them to pay the same within a reasonable time, provided the
applicable prescriptive or reglementary period has not yet expired, Failure to comply therewith, and upon motion by
petitioner, the immediate dismissal of the complaint shall issue on jurisdictional grounds.
On the matter of improper venue, we find no error on the part of the trial court and the Court of Appeals in holding that
the case below is a personal action which, under the Rules, may be commenced and tried where the defendant resides or
may be found, or where the plaintiffs reside, at the election of the latter.26

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Petitioner, however, insists that venue was improperly laid since the action is a real action involving a parcel of land that
is located outside the territorial jurisdiction of the court a quo. This contention is not well-taken. The records indubitably
show that respondents are asking that the assets of the partnership be accounted for, sold and distributed according to the
agreement of the partners. The fact that two of the assets of the partnership are parcels of land does not materially change
the nature of the action. It is an action in personam because it is an action against a person, namely, petitioner, on the basis
of his personal liability. It is not an action in rem where the action is against the thing itself instead of against the
person.27 Furthermore, there is no showing that the parcels of land involved in this case are being disputed. In fact, it is
only incidental that part of the assets of the partnership under liquidation happen to be parcels of land.
The time-tested case of Claridades v. Mercader, et al.,28 settled this issue thus:
The fact that plaintiff prays for the sale of the assets of the partnership, including the fishpond in question, did not
change the nature or character of the action, such sale being merely a necessary incident of the liquidation of the
partnership, which should precede and/or is part of its process of dissolution.
The action filed by respondents not only seeks redress against petitioner. It also seeks the enforcement of, and petitioner's
compliance with, the contract that the partners executed to formalize the partnership's dissolution, as well as to implement
the liquidation and partition of the partnership's assets. Clearly, it is a personal action that, in effect, claims a debt from
petitioner and seeks the performance of a personal duty on his part.29 In fine, respondents' complaint seeking the
liquidation and partition of the assets of the partnership with damages is a personal action which may be filed in the
proper court where any of the parties reside.30 Besides, venue has nothing to do with jurisdiction for venue touches more
upon the substance or merits of the case.31 As it is, venue in this case was properly laid and the trial court correctly ruled
so.
On the third issue, petitioner asserts that the surviving spouse of Vicente Tabanao has no legal capacity to sue since she
was never appointed as administratrix or executrix of his estate. Petitioner's objection in this regard is misplaced. The
surviving spouse does not need to be appointed as executrix or administratrix of the estate before she can file the action.
She and her children are complainants in their own right as successors of Vicente Tabanao. From the very moment of
Vicente Tabanao' s death, his rights insofar as the partnership was concerned were transmitted to his heirs, for rights to the
succession are transmitted from the moment of death of the decedent.32
Whatever claims and rights Vicente Tabanao had against the partnership and petitioner were transmitted to respondents by
operation of law, more particularly by succession, which is a mode of acquisition by virtue of which the property, rights
and obligations to the extent of the value of the inheritance of a person are transmitted.33 Moreover, respondents became
owners of their respective hereditary shares from the moment Vicente Tabanao died.34
A prior settlement of the estate, or even the appointment of Salvacion Tabanao as executrix or administratrix, is not
necessary for any of the heirs to acquire legal capacity to sue. As successors who stepped into the shoes of their decedent
upon his death, they can commence any action originally pertaining to the decedent.35 From the moment of his death, his
rights as a partner and to demand fulfillment of petitioner's obligations as outlined in their dissolution agreement were
transmitted to respondents. They, therefore, had the capacity to sue and seek the court's intervention to compel petitioner
to fulfill his obligations.
Finally, petitioner contends that the trial court should have dismissed the complaint on the ground of prescription, arguing
that respondents' action prescribed four (4) years after it accrued in 1986. The trial court and the Court of Appeals gave
scant consideration to petitioner's hollow arguments, and rightly so.
The three (3) final stages of a partnership are: (1) dissolution; (2) winding-up; and (3) termination.36 The partnership,
although dissolved, continues to exist and its legal personality is retained, at which time it completes the winding up of its
affairs, including the partitioning and distribution of the net partnership assets to the partners.37 For as long as the
partnership exists, any of the partners may demand an accounting of the partnership's business. Prescription of the said
right starts to run only upon the dissolution of the partnership when the final accounting is done.38
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Contrary to petitioner's protestations that respondents' right to inquire into the business affairs of the partnership accrued
in 1986, prescribing four (4) years thereafter, prescription had not even begun to run in the absence of a final accounting.
Article 1842 of the Civil Code provides:
The right to an account of his interest shall accrue to any partner, or his legal representative as against the winding
up partners or the surviving partners or the person or partnership continuing the business, at the date of
dissolution, in the absence of any agreement to the contrary.
Applied in relation to Articles 1807 and 1809, which also deal with the duty to account, the above-cited provision states
that the right to demand an accounting accrues at the date of dissolution in the absence of any agreement to the contrary.
When a final accounting is made, it is only then that prescription begins to run. In the case at bar, no final accounting has
been made, and that is precisely what respondents are seeking in their action before the trial court, since petitioner has
failed or refused to render an accounting of the partnership's business and assets. Hence, the said action is not barred by
prescription.
In fine, the trial court neither erred nor abused its discretion when it denied petitioner's motions to dismiss. Likewise, the
Court of Appeals did not commit reversible error in upholding the trial court's orders. Precious time has been lost just to
settle this preliminary issue, with petitioner resurrecting the very same arguments from the trial court all the way up to the
Supreme Court. The litigation of the merits and substantial issues of this controversy is now long overdue and must
proceed without further delay.
WHEREFORE, in view of all the foregoing, the instant petition is DENIED for lack of merit, and the case
isREMANDED to the Regional Trial Court of Cadiz City, Branch 60, which is ORDERED to determine the proper
docket fee based on the estimated amount that plaintiffs therein seek to collect, and direct said plaintiffs to pay the same
within a reasonable time, provided the applicable prescriptive or reglementary period has not yet expired. Thereafter, the
trial court is ORDERED to conduct the appropriate proceedings in Civil Case No. 416-C.

251

G.R. No. 70926 January 31, 1989

DAN FUE LEUNG, petitioner,
vs.
HON. INTERMEDIATE APPELLATE COURT and LEUNG YIU, respondents.
GUTIERREZ, JR., J.:
The petitioner asks for the reversal of the decision of the then Intermediate Appellate Court in AC-G.R. No. CV-00881
which affirmed the decision of the then Court of First Instance of Manila, Branch II in Civil Case No. 116725 declaring
private respondent Leung Yiu a partner of petitioner Dan Fue Leung in the business of Sun Wah Panciteria and ordering
the petitioner to pay to the private respondent his share in the annual profits of the said restaurant.
This case originated from a complaint filed by respondent Leung Yiu with the then Court of First Instance of Manila,
Branch II to recover the sum equivalent to twenty-two percent (22%) of the annual profits derived from the operation of
Sun Wah Panciteria since October, 1955 from petitioner Dan Fue Leung.
The Sun Wah Panciteria, a restaurant, located at Florentino Torres Street, Sta. Cruz, Manila, was established sometime in
October, 1955. It was registered as a single proprietorship and its licenses and permits were issued to and in favor of
petitioner Dan Fue Leung as the sole proprietor. Respondent Leung Yiu adduced evidence during the trial of the case to
show that Sun Wah Panciteria was actually a partnership and that he was one of the partners having contributed P4,000.00
to its initial establishment.
The private respondents evidence is summarized as follows:
About the time the Sun Wah Panciteria started to become operational, the private respondent gave P4,000.00 as his
contribution to the partnership. This is evidenced by a receipt identified as Exhibit "A" wherein the petitioner
acknowledged his acceptance of the P4,000.00 by affixing his signature thereto. The receipt was written in Chinese
characters so that the trial court commissioned an interpreter in the person of Ms. Florence Yap to translate its contents
into English. Florence Yap issued a certification and testified that the translation to the best of her knowledge and belief
was correct. The private respondent identified the signature on the receipt as that of the petitioner (Exhibit A-3) because it
was affixed by the latter in his (private respondents') presence. Witnesses So Sia and Antonio Ah Heng corroborated the
private respondents testimony to the effect that they were both present when the receipt (Exhibit "A") was signed by the
petitioner. So Sia further testified that he himself received from the petitioner a similar receipt (Exhibit D) evidencing
delivery of his own investment in another amount of P4,000.00 An examination was conducted by the PC Crime
Laboratory on orders of the trial court granting the private respondents motion for examination of certain documentary
exhibits. The signatures in Exhibits "A" and 'D' when compared to the signature of the petitioner appearing in the pay
envelopes of employees of the restaurant, namely Ah Heng and Maria Wong (Exhibits H, H-1 to H-24) showed that the
signatures in the two receipts were indeed the signatures of the petitioner.
Furthermore, the private respondent received from the petitioner the amount of P12,000.00 covered by the latter's
Equitable Banking Corporation Check No. 13389470-B from the profits of the operation of the restaurant for the year
1974. Witness Teodulo Diaz, Chief of the Savings Department of the China Banking Corporation testified that said check
(Exhibit B) was deposited by and duly credited to the private respondents savings account with the bank after it was
cleared by the drawee bank, the Equitable Banking Corporation. Another witness Elvira Rana of the Equitable Banking
Corporation testified that the check in question was in fact and in truth drawn by the petitioner and debited against his
own account in said bank. This fact was clearly shown and indicated in the petitioner's statement of account after the
check (Exhibit B) was duly cleared. Rana further testified that upon clearance of the check and pursuant to normal
banking procedure, said check was returned to the petitioner as the maker thereof.

252

The petitioner denied having received from the private respondent the amount of P4,000.00. He contested and impugned
the genuineness of the receipt (Exhibit D). His evidence is summarized as follows:
The petitioner did not receive any contribution at the time he started the Sun Wah Panciteria. He used his savings from his
salaries as an employee at Camp Stotsenberg in Clark Field and later as waiter at the Toho Restaurant amounting to a little
more than P2,000.00 as capital in establishing Sun Wah Panciteria. To bolster his contention that he was the sole owner of
the restaurant, the petitioner presented various government licenses and permits showing the Sun Wah Panciteria was and
still is a single proprietorship solely owned and operated by himself alone. Fue Leung also flatly denied having issued to
the private respondent the receipt (Exhibit G) and the Equitable Banking Corporation's Check No. 13389470 B in the
amount of P12,000.00 (Exhibit B).
As between the conflicting evidence of the parties, the trial court gave credence to that of the plaintiffs. Hence, the court
ruled in favor of the private respondent. The dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, ordering
the latter to deliver and pay to the former, the sum equivalent to 22% of the annual profit derived from the
operation of Sun Wah Panciteria from October, 1955, until fully paid, and attorney's fees in the amount of
P5,000.00 and cost of suit. (p. 125, Rollo)
The private respondent filed a verified motion for reconsideration in the nature of a motion for new trial and, as
supplement to the said motion, he requested that the decision rendered should include the net profit of the Sun Wah
Panciteria which was not specified in the decision, and allow private respondent to adduce evidence so that the said
decision will be comprehensively adequate and thus put an end to further litigation.
The motion was granted over the objections of the petitioner. After hearing the trial court rendered an amended decision,
the dispositive portion of which reads:
FOR ALL THE FOREGOING CONSIDERATIONS, the motion for reconsideration filed by the plaintiff,
which was granted earlier by the Court, is hereby reiterated and the decision rendered by this Court on
September 30, 1980, is hereby amended. The dispositive portion of said decision should read now as
follows:
WHEREFORE, judgment is hereby rendered, ordering the plaintiff (sic) and against the defendant,
ordering the latter to pay the former the sum equivalent to 22% of the net profit of P8,000.00 per day from
the time of judicial demand, until fully paid, plus the sum of P5,000.00 as and for attorney's fees and costs
of suit. (p. 150, Rollo)
The petitioner appealed the trial court's amended decision to the then Intermediate Appellate Court. The questioned
decision was further modified by the appellate court. The dispositive portion of the appellate court's decision reads:
WHEREFORE, the decision appealed from is modified, the dispositive portion thereof reading as
follows:
1. Ordering the defendant to pay the plaintiff by way of temperate damages 22% of the net profit of
P2,000.00 a day from judicial demand to May 15, 1971;
2. Similarly, the sum equivalent to 22% of the net profit of P8,000.00 a day from May 16, 1971 to August
30, 1975;
3. And thereafter until fully paid the sum equivalent to 22% of the net profit of P8,000.00 a day.
253

Except as modified, the decision of the court a quo is affirmed in all other respects. (p. 102, Rollo)
Later, the appellate court, in a resolution, modified its decision and affirmed the lower court's decision. The dispositive
portion of the resolution reads:
WHEREFORE, the dispositive portion of the amended judgment of the court a quo reading as follows:
WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendant, ordering the
latter to pay to the former the sum equivalent to 22% of the net profit of P8,000.00 per day from the time
of judicial demand, until fully paid, plus the sum of P5,000.00 as and for attorney's fees and costs of suit.
is hereby retained in full and affirmed in toto it being understood that the date of judicial demand is July 13, 1978. (pp.
105-106, Rollo).
In the same resolution, the motion for reconsideration filed by petitioner was denied.
Both the trial court and the appellate court found that the private respondent is a partner of the petitioner in the setting up
and operations of the panciteria. While the dispositive portions merely ordered the payment of the respondents share, there
is no question from the factual findings that the respondent invested in the business as a partner. Hence, the two courts
declared that the private petitioner is entitled to a share of the annual profits of the restaurant. The petitioner, however,
claims that this factual finding is erroneous. Thus, the petitioner argues: "The complaint avers that private respondent
extended 'financial assistance' to herein petitioner at the time of the establishment of the Sun Wah Panciteria, in return of
which private respondent allegedly will receive a share in the profits of the restaurant. The same complaint did not claim
that private respondent is a partner of the business. It was, therefore, a serious error for the lower court and the Hon.
Intermediate Appellate Court to grant a relief not called for by the complaint. It was also error for the Hon. Intermediate
Appellate Court to interpret or construe 'financial assistance' to mean the contribution of capital by a partner to a
partnership;" (p. 75, Rollo)
The pertinent portions of the complaint state:
xxx xxx xxx
2. That on or about the latter (sic) of September, 1955, defendant sought the financial assistance of
plaintiff in operating the defendant's eatery known as Sun Wah Panciteria, located in the given address of
defendant; as a return for such financial assistance. plaintiff would be entitled to twenty-two percentum
(22%) of the annual profit derived from the operation of the said panciteria;
3. That on October 1, 1955, plaintiff delivered to the defendant the sum of four thousand pesos
(P4,000.00), Philippine Currency, of which copy for the receipt of such amount, duly acknowledged by
the defendant is attached hereto as Annex "A", and form an integral part hereof; (p. 11, Rollo)
In essence, the private respondent alleged that when Sun Wah Panciteria was established, he gave P4,000.00 to the
petitioner with the understanding that he would be entitled to twenty-two percent (22%) of the annual profit derived from
the operation of the said panciteria. These allegations, which were proved, make the private respondent and the petitioner
partners in the establishment of Sun Wah Panciteria because Article 1767 of the Civil Code provides that "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".
Therefore, the lower courts did not err in construing the complaint as one wherein the private respondent asserted his
rights as partner of the petitioner in the establishment of the Sun Wah Panciteria, notwithstanding the use of the term
financial assistance therein. We agree with the appellate court's observation to the effect that "... given its ordinary
254

meaning, financial assistance is the giving out of money to another without the expectation of any returns therefrom'. It
connotes an ex gratia dole out in favor of someone driven into a state of destitution. But this circumstance under which
the P4,000.00 was given to the petitioner does not obtain in this case.' (p. 99, Rollo) The complaint explicitly stated that
"as a return for such financial assistance, plaintiff (private respondent) would be entitled to twenty-two percentum (22%)
of the annual profit derived from the operation of the said panciteria.' (p. 107, Rollo) The well-settled doctrine is that the
'"... nature of the action filed in court is determined by the facts alleged in the complaint as constituting the cause of
action." (De Tavera v. Philippine Tuberculosis Society, Inc., 113 SCRA 243; Alger Electric, Inc. v. Court of Appeals, 135
SCRA 37).
The appellate court did not err in declaring that the main issue in the instant case was whether or not the private
respondent is a partner of the petitioner in the establishment of Sun Wah Panciteria.
The petitioner also contends that the respondent court gravely erred in giving probative value to the PC Crime Laboratory
Report (Exhibit "J") on the ground that the alleged standards or specimens used by the PC Crime Laboratory in arriving at
the conclusion were never testified to by any witness nor has any witness identified the handwriting in the standards or
specimens belonging to the petitioner. The supposed standards or specimens of handwriting were marked as Exhibits "H"
"H-1" to "H-24" and admitted as evidence for the private respondent over the vigorous objection of the petitioner's
counsel.
The records show that the PC Crime Laboratory upon orders of the lower court examined the signatures in the two
receipts issued separately by the petitioner to the private respondent and So Sia (Exhibits "A" and "D") and compared the
signatures on them with the signatures of the petitioner on the various pay envelopes (Exhibits "H", "H-1" to 'H-24") of
Antonio Ah Heng and Maria Wong, employees of the restaurant. After the usual examination conducted on the questioned
documents, the PC Crime Laboratory submitted its findings (Exhibit J) attesting that the signatures appearing in both
receipts (Exhibits "A" and "D") were the signatures of the petitioner.
The records also show that when the pay envelopes (Exhibits "H", "H-1" to "H-24") were presented by the private
respondent for marking as exhibits, the petitioner did not interpose any objection. Neither did the petitioner file an
opposition to the motion of the private respondent to have these exhibits together with the two receipts examined by the
PC Crime Laboratory despite due notice to him. Likewise, no explanation has been offered for his silence nor was any
hint of objection registered for that purpose.
Under these circumstances, we find no reason why Exhibit "J" should be rejected or ignored. The records sufficiently
establish that there was a partnership.
The petitioner raises the issue of prescription. He argues: The Hon. Respondent Intermediate Appellate Court gravely
erred in not resolving the issue of prescription in favor of petitioner. The alleged receipt is dated October 1, 1955 and the
complaint was filed only on July 13, 1978 or after the lapse of twenty-two (22) years, nine (9) months and twelve (12)
days. From October 1, 1955 to July 13, 1978, no written demands were ever made by private respondent.
The petitioner's argument is based on Article 1144 of the Civil Code which provides:
Art. 1144. The following actions must be brought within ten years from the time the right of action
accrues:
(1) Upon a written contract;
(2) Upon an obligation created by law;
(3) Upon a judgment.
255

in relation to Article 1155 thereof which provides:

Art. 1155. The prescription of actions is interrupted when they are filed before the court, when there is a
written extra-judicial demand by the creditor, and when there is any written acknowledgment of the debt
by the debtor.'
The argument is not well-taken.
The private respondent is a partner of the petitioner in Sun Wah Panciteria. The requisites of a partnership which are 1)
two or more persons bind themselves to contribute money, property, or industry to a common fund; and 2) intention on
the part of the partners to divide the profits among themselves (Article 1767, Civil Code; Yulo v. Yang Chiao Cheng, 106
Phil. 110)-have been established. As stated by the respondent, a partner shares not only in profits but also in the losses of
the firm. If excellent relations exist among the partners at the start of business and all the partners are more interested in
seeing the firm grow rather than get immediate returns, a deferment of sharing in the profits is perfectly plausible. It
would be incorrect to state that if a partner does not assert his rights anytime within ten years from the start of operations,
such rights are irretrievably lost. The private respondent's cause of action is premised upon the failure of the petitioner to
give him the agreed profits in the operation of Sun Wah Panciteria. In effect the private respondent was asking for an
accounting of his interests in the partnership.
It is Article 1842 of the Civil Code in conjunction with Articles 1144 and 1155 which is applicable. Article 1842 states:
The right to an account of his interest shall accrue to any partner, or his legal representative as against the
winding up partners or the surviving partners or the person or partnership continuing the business, at the
date of dissolution, in the absence or any agreement to the contrary.
Regarding the prescriptive period within which the private respondent may demand an accounting, Articles 1806, 1807,
and 1809 show that the right to demand an accounting exists as long as the partnership exists. Prescription begins to run
only upon the dissolution of the partnership when the final accounting is done.
Finally, the petitioner assails the appellate court's monetary awards in favor of the private respondent for being excessive
and unconscionable and above the claim of private respondent as embodied in his complaint and testimonial evidence
presented by said private respondent to support his claim in the complaint.
Apart from his own testimony and allegations, the private respondent presented the cashier of Sun Wah Panciteria, a
certain Mrs. Sarah L. Licup, to testify on the income of the restaurant.
Mrs. Licup stated:
ATTY. HIPOLITO (direct examination to Mrs. Licup).
Q Mrs. Witness, you stated that among your duties was that you were in charge of the
custody of the cashier's box, of the money, being the cashier, is that correct?
A Yes, sir.
Q So that every time there is a customer who pays, you were the one who accepted the
money and you gave the change, if any, is that correct?
A Yes.

256

Q Now, after 11:30 (P.M.) which is the closing time as you said, what do you do with the
money?
A We balance it with the manager, Mr. Dan Fue Leung.
ATTY. HIPOLITO:
I see.
Q So, in other words, after your job, you huddle or confer together?
A Yes, count it all. I total it. We sum it up.
Q Now, Mrs. Witness, in an average day, more or less, will you please tell us, how much
is the gross income of the restaurant?
A For regular days, I received around P7,000.00 a day during my shift alone and during
pay days I receive more than P10,000.00. That is excluding the catering outside the place.
Q What about the catering service, will you please tell the Honorable Court how many
times a week were there catering services?
A Sometimes three times a month; sometimes two times a month or more.
xxx xxx xxx
Q Now more or less, do you know the cost of the catering service?
A Yes, because I am the one who receives the payment also of the catering.
Q How much is that?
A That ranges from two thousand to six thousand pesos, sir.
Q Per service?
A Per service, Per catering.
Q So in other words, Mrs. witness, for your shift alone in a single day from 3:30 P.M. to
11:30 P.M. in the evening the restaurant grosses an income of P7,000.00 in a regular day?
A Yes.
Q And ten thousand pesos during pay day.?
A Yes.
(TSN, pp. 53 to 59, inclusive, November 15,1978)
xxx xxx xxx
257

COURT:
Any cross?
ATTY. UY (counsel for defendant):
No cross-examination, Your Honor. (T.S.N. p. 65, November 15, 1978). (Rollo, pp. 127128)
The statements of the cashier were not rebutted. Not only did the petitioner's counsel waive the cross-examination on the
matter of income but he failed to comply with his promise to produce pertinent records. When a subpoena duces
tecum was issued to the petitioner for the production of their records of sale, his counsel voluntarily offered to bring them
to court. He asked for sufficient time prompting the court to cancel all hearings for January, 1981 and reset them to the
later part of the following month. The petitioner's counsel never produced any books, prompting the trial court to state:
Counsel for the defendant admitted that the sales of Sun Wah were registered or recorded in the daily
sales book. ledgers, journals and for this purpose, employed a bookkeeper. This inspired the Court to ask
counsel for the defendant to bring said records and counsel for the defendant promised to bring those that
were available. Seemingly, that was the reason why this case dragged for quite sometime. To bemuddle
the issue, defendant instead of presenting the books where the same, etc. were recorded, presented
witnesses who claimed to have supplied chicken, meat, shrimps, egg and other poultry products which,
however, did not show the gross sales nor does it prove that the same is the best evidence. This Court
gave warning to the defendant's counsel that if he failed to produce the books, the same will be considered
a waiver on the part of the defendant to produce the said books inimitably showing decisive records on
the income of the eatery pursuant to the Rules of Court (Sec. 5(e) Rule 131). "Evidence willfully
suppressed would be adverse if produced." (Rollo, p. 145)
The records show that the trial court went out of its way to accord due process to the petitioner.
The defendant was given all the chance to present all conceivable witnesses, after the plaintiff has rested
his case on February 25, 1981, however, after presenting several witnesses, counsel for defendant
promised that he will present the defendant as his last witness. Notably there were several postponement
asked by counsel for the defendant and the last one was on October 1, 1981 when he asked that this case
be postponed for 45 days because said defendant was then in Hongkong and he (defendant) will be back
after said period. The Court acting with great concern and understanding reset the hearing to November
17, 1981. On said date, the counsel for the defendant who again failed to present the defendant asked for
another postponement, this time to November 24, 1981 in order to give said defendant another judicial
magnanimity and substantial due process. It was however a condition in the order granting the
postponement to said date that if the defendant cannot be presented, counsel is deemed to have waived the
presentation of said witness and will submit his case for decision.
On November 24, 1981, there being a typhoon prevailing in Manila said date was declared a partial nonworking holiday, so much so, the hearing was reset to December 7 and 22, 1981. On December 7, 1981,
on motion of defendant's counsel, the same was again reset to December 22, 1981 as previously
scheduled which hearing was understood as intransferable in character. Again on December 22, 1981, the
defendant's counsel asked for postponement on the ground that the defendant was sick. the Court, after
much tolerance and judicial magnanimity, denied said motion and ordered that the case be submitted for
resolution based on the evidence on record and gave the parties 30 days from December 23, 1981, within
which to file their simultaneous memoranda. (Rollo, pp. 148-150)

258

The restaurant is located at No. 747 Florentino Torres, Sta. Cruz, Manila in front of the Republic Supermarket. It is near
the corner of Claro M. Recto Street. According to the trial court, it is in the heart of Chinatown where people who buy and
sell jewelries, businessmen, brokers, manager, bank employees, and people from all walks of life converge and patronize
Sun Wah.
There is more than substantial evidence to support the factual findings of the trial court and the appellate court. If the
respondent court awarded damages only from judicial demand in 1978 and not from the opening of the restaurant in 1955,
it is because of the petitioner's contentions that all profits were being plowed back into the expansion of the business.
There is no basis in the records to sustain the petitioners contention that the damages awarded are excessive. Even if the
Court is minded to modify the factual findings of both the trial court and the appellate court, it cannot refer to any portion
of the records for such modification. There is no basis in the records for this Court to change or set aside the factual
findings of the trial court and the appellate court. The petitioner was given every opportunity to refute or rebut the
respondent's submissions but, after promising to do so, it deliberately failed to present its books and other evidence.
The resolution of the Intermediate Appellate Court ordering the payment of the petitioner's obligation shows that the same
continues until fully paid. The question now arises as to whether or not the payment of a share of profits shall continue
into the future with no fixed ending date.
Considering the facts of this case, the Court may decree a dissolution of the partnership under Article 1831 of the Civil
Code which, in part, provides:
Art. 1831. On application by or for a partner the court shall decree a dissolution whenever:
xxx xxx xxx
(3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the
business;
(4) A partner willfully or persistently commits a breach of the partnership agreement, or otherwise so
conducts himself in matters relating to the partnership business that it is not reasonably practicable to
carry on the business in partnership with him;
xxx xxx xxx
(6) Other circumstances render a dissolution equitable.
There shall be a liquidation and winding up of partnership affairs, return of capital, and other incidents of dissolution
because the continuation of the partnership has become inequitable.
WHEREFORE, the petition for review is hereby DISMISSED for lack of merit. The decision of the respondent court is
AFFIRMED with a MODIFICATION that as indicated above, the partnership of the parties is ordered dissolved.

259

G.R. No. 164401

June 25, 2008

LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners,

vs.
THE HONORABLE COURT OF APPEALS; THE HONORABLE PRESIDING JUDGE, Regional Trial Court,
Branch 11, Sindangan, Zamboanga Del Norte; THE REGIONAL TRIAL COURT SHERIFF, Branch 11,
Sindangan, Zamboanga Del Norte; THE CLERK OF COURT OF MANILA, as Ex-Officio Sheriff; and
LAMBERTO T. CHUA, respondents.
VELASCO, JR., J.:
The Case
Before us is a petition for review under Rule 45, seeking to nullify and set aside the Decision1 and Resolution dated
November 6, 2003 and July 6, 2004, respectively, of the Court of Appeals (CA) in CA-G.R. SP No. 75688. The impugned
CA Decision and Resolution denied the petition for certiorari interposed by petitioners assailing the Resolutions 2 dated
November 6, 2002 and January 7, 2003, respectively, of the Regional Trial Court (RTC), Branch 11 in Sindangan,
Zamboanga Del Norte in Civil Case No. S-494, a suit for winding up of partnership affairs, accounting, and recovery of
shares commenced thereat by respondent Lamberto T. Chua.
The Facts
In 1977, Chua and Jacinto Sunga formed a partnership to engage in the marketing of liquefied petroleum gas. For
convenience, the business, pursued under the name, Shellite Gas Appliance Center (Shellite), was registered as a sole
proprietorship in the name of Jacinto, albeit the partnership arrangement called for equal sharing of the net profit.
After Jacintos death in 1989, his widow, petitioner Cecilia Sunga, and married daughter, petitioner Lilibeth Sunga-Chan,
continued with the business without Chuas consent. Chuas subsequent repeated demands for accounting and winding up
went unheeded, prompting him to file on June 22, 1992 a Complaint for Winding Up of a Partnership Affairs, Accounting,
Appraisal and Recovery of Shares and Damages with Writ of Preliminary Attachment, docketed as Civil Case No. S-494
of the RTC in Sindangan, Zamboanga del Norte and raffled to Branch 11 of the court.
After trial, the RTC rendered, on October 7, 1997, judgment finding for Chua, as plaintiff a quo. The RTCs decision
would subsequently be upheld by the CA in CA-G.R. CV No. 58751 and by this Court per its Decision dated August 15,
2001 in G.R. No. 143340.3 The corresponding Entry of Judgment4 would later issue declaring the October 7, 1997 RTC
decision final and executory as of December 20, 2001. The fallo of the RTCs decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as follows:
(1) DIRECTING them to render an accounting in acceptable form under accounting procedures and
standards of the properties, assets, income and profits of [Shellite] since the time of death of Jacinto
L. Sunga, from whom they continued the business operations including all businesses derived from
[Shellite]; submit an inventory, and appraisal of all these properties, assets, income, profits, etc. to the
Court and to plaintiff for approval or disapproval;
(2) ORDERING them to return and restitute to the partnership any and all properties, assets, income
and profits they misapplied and converted to their own use and advantage that legally pertain to the
plaintiff and account for the properties mentioned in pars. A and B on pages 4-5 of this petition as basis;

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(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the plaintiff in the
partnership of the listed properties, assets and good will in schedules A, B and C, on pages 4-5 of the
petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the
partnership from 1988 to May 30, 1992, when the plaintiff learned of the closure of the store the sum
of P35,000.00 per month, with legal rate of interest until fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities
pursuant to law, after delivering to the plaintiff all the interest, shares, participation and equity in the
partnership, or the value thereof in money or moneys worth, if the properties are not physically divisible;
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and hold
them liable to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorneys [fee] and P25,000.00 as
litigation expenses.
NO special pronouncements as to COSTS.
SO ORDERED.5 (Emphasis supplied.)
Via an Order6 dated January 16, 2002, the RTC granted Chuas motion for execution. Over a month later, the RTC, acting
on another motion of Chua, issued an amended writ of execution.7
It seems, however, that the amended writ of execution could not be immediately implemented, for, in an omnibus motion
of April 3, 2002, Chua, inter alia, asked the trial court to commission a certified public accountant (CPA) to undertake the
accounting work and inventory of the partnership assets if petitioners refuse to do it within the time set by the court. Chua
later moved to withdraw his motion and instead ask the admission of an accounting report prepared by CPA Cheryl A.
Gahuman. In the report under the heading, Computation of Claims,8 Chuas aggregate claim, arrived at using the
compounding-of-interest method, amounted to PhP 14,277,344.94. Subsequently, the RTC admitted and approved the
computation of claims in view of petitioners failure and refusal, despite notice, to appear and submit an accounting report
on the winding up of the partnership on the scheduled hearings on April 29 and 30, 2002.9
After another lengthy proceedings, petitioners, on September 24, 2002, submitted their own CPA-certified valuation and
accounting report. In it, petitioners limited Chuas entitlement from the winding up of partnership affairs to an aggregate
amount of PhP 3,154,736.65 only.10 Chua, on the other hand, submitted a new computation,11 this time applying simple
interest on the various items covered by his claim. Under this methodology, Chuas aggregate claim went down to PhP
8,733,644.75.
On November 6, 2002, the RTC issued a Resolution,12 rejecting the accounting report petitioners submitted, while
approving the new computation of claims Chua submitted. The fallo of the resolution reads:
WHEREFORE, premises considered, this Court resolves, as it is hereby resolved, that the Computation of Claims
submitted by the plaintiff dated October 15, 2002 amounting to P8,733,644.75 be APPROVED in all respects as
the final computation and accounting of the defendants liabilities in favor of the plaintiff in the above-captioned
case, DISAPPROVING for the purpose, in its entirety, the computation and accounting filed by the defendants.
SO RESOLVED.13
Petitioners sought reconsideration, but their motion was denied by the RTC per its Resolution of January 7, 2003.14
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In due time, petitioners went to the CA on a petition for certiorari15 under Rule 65, assailing the November 6, 2002 and
January 7, 2003 resolutions of the RTC, the recourse docketed as CA-G.R. SP No. 75688.
The Ruling of the CA
As stated at the outset, the CA, in the herein assailed Decision of November 6, 2003, denied the petition for certiorari,
thus:
WHEREFORE, the foregoing considered, the Petition is hereby DENIED for lack of merit.
SO ORDERED.16
The CA predicated its denial action on the ensuing main premises:
1. Petitioners, by not appearing on the hearing dates, i.e., April 29 and 30, 2002, scheduled to consider Chuas
computation of claims, or rendering, as required, an accounting of the winding up of the partnership, are deemed to have
waived their right to interpose any objection to the computation of claims thus submitted by Chua.
2. The 12% interest added on the amounts due is proper as the unwarranted keeping by petitioners of Chuas money
passes as an involuntary loan and forbearance of money.
3. The reiterative arguments set forth in petitioners pleadings below were part of their delaying tactics. Petitioners had
come to the appellate court at least thrice and to this Court twice. Petitioners had more than enough time to question the
award and it is now too late in the day to change what had become final and executory.
Petitioners motion for reconsideration was rejected by the appellate court through the assailed Resolution17dated July 6,
2004. Therein, the CA explained that the imposition of the 12% interest for forbearance of credit or money was proper
pursuant to paragraph 1 of the October 7, 1997 RTC decision, as the computation done by CPA Gahuman was made in
"acceptable form under accounting procedures and standards of the properties, assets, income and profits of
[Shellite]."18 Moreover, the CA ruled that the imposition of interest is not based on par. 3 of the October 7, 1997 RTC
decision as the phrase "shares and interests" mentioned therein refers not to an imposition of interest for use of money in a
loan or credit, but to a legal share or right. The appellate court also held that the imposition of interest on the partnership
assets falls under par. 2 in relation to par. 1 of the final RTC decision as the restitution mentioned therein does not simply
mean restoration but also reparation for the injury or damage committed against the rightful owner of the property.
Finally, the CA declared the partnership assets referred to in the final decision as "liquidated claim" since the claim of
Chua is ascertainable by mathematical computation; therefore, interest is recoverable as an element of damage.
The Issues
Hence, the instant petition with petitioners raising the following issues for our consideration:
I.
Whether or not the Regional Trial Court can [impose] interest on a final judgment of unliquidated claims.
II.
Whether or not the Sheriff can enforce the whole divisible obligation under judgment only against one Defendant.
III.
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Whether or not the absolute community of property of spouses Lilibeth Sunga Chan with her husband Norberto
Chan can be lawfully made to answer for the liability of Lilibeth Chan under the judgment.19
Significant Intervening Events
In the meantime, pending resolution of the instant petition for review and even before the resolution by the CA of its CAG.R. SP No. 75688, the following relevant events transpired:
1. Following the RTCs approval of Chuas computation of claims in the amount of PhP 8,733,644.75, the sheriff
of Manila levied upon petitioner Sunga-Chans property located along Linao St., Paco, Manila, covered by
Transfer Certificate of Title (TCT) No. 208782,20 over which a building leased to the Philippine National Bank
(PNB) stood. In the auction sale of the levied lot, Chua, with a tender of PhP 8 million,21emerged as the winning
bidder.
2. On January 21, 2005, Chua moved for the issuance of a final deed of sale and a writ of possession. He also
asked the RTC to order the Registry of Deeds of Manila to cancel TCT No. 208782 and to issue a new certificate.
Despite petitioners opposition on the ground of prematurity, a final deed of sale22 was issued on February 16,
2005.
3. On February 18, 2005, Chua moved for the confirmation of the sheriffs final deed of sale and for the issuance
of an order for the cancellation of TCT No. 208782. Petitioners again interposed an opposition in which they
informed the RTC that this Court had already granted due course to their petition for review on January 31, 2005;
4. On April 11, 2005, the RTC, via a Resolution, confirmed the sheriffs final deed of sale, ordered the Registry
of Deeds of Manila to cancel TCT No. 208782, and granted a writ of possession23 in favor of Chua.
5. On May 3, 2005, petitioners filed before this Court a petition for the issuance of a temporary restraining order
(TRO). On May 24, 2005, the sheriff of Manila issued a Notice to Vacate24 against petitioners, compelling
petitioners to repair to this Court anew for the resolution of their petition for a TRO.
6. On May 31, 2005, the Court issued a TRO,25 enjoining the RTC and the sheriff from enforcing the April 11,
2005 writ of possession and the May 24, 2005 Notice to Vacate. Consequently, the RTC issued an Order26 on
June 17, 2005, suspending the execution proceedings before it.
7. Owing to the clashing ownership claims over the leased Paco property, coupled with the filing of an unlawful
detainer suit before the Metropolitan Trial Court (MeTC) in Manila against PNB, the Court, upon the banks
motion, allowed, by Resolution27 dated April 26, 2006, the consignation of the monthly rentals with the MeTC
hearing the ejectment case.
The Courts Ruling
The petition is partly meritorious.
First Issue: Interest Proper in Forbearance of Credit
Petitioners, citing Article 221328 of the Civil Code, fault the trial court for imposing, in the execution of its final judgment,
interests on what they considered as unliquidated claims. Among these was the claim for goodwill upon which the RTC
attached a monetary value of PhP 250,000. Petitioners also question the imposition of 12% interest on the claimed
monthly profits of PhP 35,000, reckoned from 1988 to October 15, 1992. To petitioners, the imposable rate should only be
6% and computed from the finality of the RTCs underlying decision, i.e., from December 20, 2001.
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Third on the petitioners list of unliquidated claims is the yet-to-be established value of the one-half partnership share and
interest adjudicated to Chua, which, they submit, must first be determined with reasonable certainty in a judicial
proceeding. And in this regard, petitioners, citing Eastern Shipping Lines, Inc. v. Court of Appeals,29would ascribe error
on the RTC for adding a 12% per annum interest on the approved valuation of the one-half share of the assets, inclusive of
goodwill, due Chua.
Petitioners are partly correct.
For clarity, we reproduce the summary valuations and accounting reports on the computation of claims certified to by the
parties respective CPAs. Chua claimed the following:
A 50% share on assets (exclusive of goodwill) at fair market
value (Schedule 1)

P 1,613,550.00

B 50% share in the monetary value of goodwill (P500,000 x

50%)

250,000.00

C Legal interest on share of assets from June 1, 1992 to Oct.

15, 2002 at 12% interest per year (Schedule 2)

2,008,869.75

D Unreceived profits from 1988 to 1992 and its

corresponding interest from Jan. 1, 1988 to Oct. 15, 2002
(Schedule 3)

4,761,225.00

E Damages

50,000.00

F Attorneys fees

25,000.00

G Litigation fees

25,000.00

TOTAL AMOUNT

P 8,733,644.75

On the other hand, petitioners acknowledged the following to be due to Chua:

Total Assets Schedule 1

P2,431,956.35

50% due to Lamberto Chua

P1,215,978.16

Total Alleged Profit, Net of Payments Made,

May 1992-Sch. 2

1,613,758.49

50% share in the monetary value of goodwill

(500,000 x 50%)

250,000.00

Moral and Exemplary Damages

50,000.00

Attorneys Fee

25,000.00

Litigation Fee

25,000.00

TOTAL AMOUNT

P3,154,736.65

As may be recalled, the trial court admitted and approved Chuas computation of claims amounting to PhP 8,733,644.75,
but rejected that of petitioners, who came up with the figure of only PhP 3,154,736.65. We highlight the substantial
differences in the accounting reports on the following items, to wit: (1) the aggregate amount of the partnership assets
bearing on the 50% share of Chua thereon; (2) interests added on Chuas share of the assets; (3) amount of profits from
264

1988 through May 30, 1992, net of alleged payments made to Chua; and (4) interests added on the amount entered as
profits.
From the foregoing submitted valuation reports, there can be no dispute about the goodwill earned thru the years by
Shellite. In fact, the parties, by their own judicial admissions, agreed on the monetary value, i.e., PhP 250,000, of this
item. Clearly then, petitioners contradict themselves when they say that such amount of goodwill is without basis. Thus,
the Court is loathed to disturb the trial courts approval of the amount of PhP 250,000, representing the monetary value of
the goodwill, to be paid to Chua.
Neither is the Court inclined to interfere with the CAs conclusion as to the total amount of the partnership profit, that is,
PhP 1,855,000, generated for the period January 1988 through May 30, 1992, and the total partnership assets of PhP
3,227,100, 50% of which, or PhP 1,613,550, pertains to Chua as his share. To be sure, petitioners have not adduced
adequate evidence to belie the above CAs factual determination, confirmatory of the trial courts own. Needless to stress,
it is not the duty of the Court, not being a trier of facts, to analyze or weigh all over again the evidence or premises
supportive of such determination, absent, as here, the most compelling and cogent reasons.
This brings us to the question of the propriety of the imposition of interest and, if proper, the imposable rate of interest
applicable.
In Reformina v. Tomol, Jr.,30 the Court held that the legal interest at 12% per annum under Central Bank (CB) Circular
No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for transactions involving
payment of indemnities in the concept of damages arising from default in the performance of obligations in general and/or
for money judgment not involving a loan or forbearance of money, goods, or credit, the governing provision is Art. 2209
of the Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently provides:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.
The term "forbearance," within the context of usury law, has been described as a contractual obligation of a lender or
creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt then due
and payable.31
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as
follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money, goods, or
credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while the 6% per annum
under Art. 2209 of the Civil Code applies "when the transaction involves the payment of indemnities in the concept of
damage arising from the breach or a delay in the performance of obligations in general,"32 with the application of both
rates reckoned "from the time the complaint was filed until the [adjudged] amount is fully paid."33 In either instance, the
reckoning period for the commencement of the running of the legal interest shall be subject to the condition "that the
courts are vested with discretion, depending on the equities of each case, on the award of interest."34
Otherwise formulated, the norm to be followed in the future on the rates and application thereof is:
I. When an obligation, regardless of its source, is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as follows:
265

1. When the obligation breached consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation not constituting loans or forbearance of money is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.35
Guided by the foregoing rules, the award to Chua of the amount representing earned but unremitted profits, i.e.. PhP
35,000 monthly, from January 1988 until May 30, 1992, must earn interest at 6% per annum reckoned from October 7,
1997, the rendition date of the RTC decision, until December 20, 2001, when the said decision became final and
executory. Thereafter, the total of the monthly profits inclusive of the add on 6% interest shall earn 12% per annum
reckoned from December 20, 2001 until fully paid, as the award for that item is considered to be, by then, equivalent to a
forbearance of credit. Likewise, the PhP 250,000 award, representing the goodwill value of the business, the award of PhP
50,000 for moral and exemplary damages, PhP 25,000 attorneys fee, and PhP 25,000 litigation fee shall earn 12% per
annum from December 20, 2001 until fully paid.
Anent the impasse over the partnership assets, we are inclined to agree with petitioners assertion that Chuas share and
interest on such assets partake of an unliquidated claim which, until reasonably determined, shall not earn interest for him.
As may be noted, the legal norm for interest to accrue is "reasonably determinable," not, as Chua suggested and the CA
declared, determinable by mathematical computation.
The Court has certainly not lost sight of the fact that the October 7, 1997 RTC decision clearly directed petitioners to
render an accounting, inventory, and appraisal of the partnership assets and then to wind up the partnership affairs by
restituting and delivering to Chua his one-half share of the accounted partnership assets. The directive itself is a
recognition that the exact share and interest of Chua over the partnership cannot be determined with reasonable precision
without going through with the inventory and accounting process. In fine, a liquidated claim cannot validly be asserted
without accounting. In net effect, Chuas interest and share over the partnership asset, exclusive of the goodwill, assumed
the nature of a liquidated claim only after the trial court, through its November 6, 2002 resolution, approved the assets
inventory and accounting report on such assets.
Considering that Chuas computation of claim, as approved by the trial court, was submitted only on October 15, 2002, no
interest in his favor can be added to his share of the partnership assets. Consequently, the computation of claims of Chua
should be as follows:
(1) 50% share on assets (exclusive of goodwill)
at fair market value
(2) 50% share in the monetary value of goodwill

PhP 1,613,550.00
250,000.00
266

(PhP 500,000 x 50%)

(3) 12% interest on share of goodwill from December 20,
2001 to October 15, 2000
[PhP 250,000 x 0.12 x 299/365 days]

24,575.34

(4) Unreceived profits from 1988 to May 30, 1992

1,855,000.00

(5) 6% interest on unreceived profits from January 1, 1988 to

December 20, 200136

1,360,362.50

(6) 12% interest on unreceived profits from December

20, 2001 to October 15, 2002
[PhP 3,215,362.50 x 12% x 299/365 days]

316,074.54

(7) Moral and exemplary damages

50,000.00

(8) Attorneys fee

25,000.00

(9) Litigation fee

25,000.00

(10) 12% interest on moral and exemplary damages,

attorneys fee, and litigation fee from December 20, 2001 to
October 15, 2002
[PhP 100,000 x 12% x 299/365 days]
TOTAL AMOUNT

9,830.14
PhP 5,529,392.52

Second Issue: Petitioners Obligation Solidary

Petitioners, on the submission that their liability under the RTC decision is divisible, impugn the implementation of the
amended writ of execution, particularly the levy on execution of the absolute community property of spouses petitioner
Sunga-Chan and Norberto Chan. Joint, instead of solidary, liability for any and all claims of Chua is obviously petitioners
thesis.
Under the circumstances surrounding the case, we hold that the obligation of petitioners is solidary for several reasons.
For one, the complaint of Chua for winding up of partnership affairs, accounting, appraisal, and recovery of shares and
damages is clearly a suit to enforce a solidary or joint and several obligation on the part of petitioners. As it were, the
continuance of the business and management of Shellite by petitioners against the will of Chua gave rise to a solidary
obligation, the acts complained of not being severable in nature. Indeed, it is well-nigh impossible to draw the line
between when the liability of one petitioner ends and the liability of the other starts. In this kind of situation, the law itself
imposes solidary obligation. Art. 1207 of the Civil Code thus provides:
Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation
does not imply that each one of the former has a right to demand, or that each of the latter is bound to render,
entire compliance with the prestation. There is solidary liability only when the obligation expressly so states, or
when the law or the nature of the obligation requires solidarity. (Emphasis ours.)
Any suggestion that the obligation to undertake an inventory, render an accounting of partnership assets, and to wind up
the partnership affairs is divisible ought to be dismissed.
For the other, the duty of petitioners to remit to Chua his half interest and share of the total partnership assets proceeds
from petitioners indivisible obligation to render an accounting and inventory of such assets. The need for the imposition
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of a solidary liability becomes all the more pronounced considering the impossibility of quantifying how much of the
partnership assets or profits was misappropriated by each petitioner.
And for a third, petitioners obligation for the payment of damages and attorneys and litigation fees ought to be solidary
in nature, they having resisted in bad faith a legitimate claim and thus compelled Chua to litigate.
Third Issue: Community Property Liable
Primarily anchored as the last issue is the erroneous theory of divisibility of petitioners obligation and their joint liability
therefor. The Court needs to dwell on it lengthily.
Given the solidary liability of petitioners to satisfy the judgment award, respondent sheriff cannot really be faulted for
levying upon and then selling at public auction the property of petitioner Sunga-Chan to answer for the whole obligation
of petitioners. The fact that the levied parcel of land is a conjugal or community property, as the case may be, of spouses
Norberto and Sunga-Chan does not per se vitiate the levy and the consequent sale of the property. Verily, said property is
not among those exempted from execution under Section 13,37 Rule 39 of the Rules of Court.
And it cannot be overemphasized that the TRO issued by the Court on May 31, 2005 came after the auction sale in
question.
Parenthetically, the records show that spouses Sunga-Chan and Norberto were married on February 4, 1992, or after the
effectivity of the Family Code on August 3, 1988. Withal, their absolute community property may be held liable for the
obligations contracted by either spouse. Specifically, Art. 94 of said Code pertinently provides:
Art. 94. The absolute community of property shall be liable for:
(1) x x x x
(2) All debts and obligations contracted during the marriage by the designated administrator-spouse for the benefit
of the community, or by both spouses, or by one spouse with the consent of the other.
(3) Debts and obligations contracted by either spouse without the consent of the other to the extent that the
family may have been benefited. (Emphasis ours.)
Absent any indication otherwise, the use and appropriation by petitioner Sunga-Chan of the assets of Shellite even after
the business was discontinued on May 30, 1992 may reasonably be considered to have been used for her and her
husbands benefit.
It may be stressed at this juncture that Chuas legitimate claim against petitioners, as readjusted in this disposition,
amounts to only PhP 5,529,392.52, whereas Sunga-Chans auctioned property which Chua acquired, as the highest bidder,
fetched a price of PhP 8 million. In net effect, Chua owes petitioner Sunga-Chan the amount of PhP 2,470,607.48,
representing the excess of the purchase price over his legitimate claims.
Following the auction, the corresponding certificate of sale dated January 15, 2004 was annotated on TCT No. 208782.
On January 21, 2005, Chua moved for the issuance of a final deed of sale (1) to order the Registry of Deeds of Manila to
cancel TCT No. 208782; (2) to issue a new TCT in his name; and (3) for the RTC to issue a writ of possession in his
favor. And as earlier stated, the RTC granted Chuas motion, albeit the Court restrained the enforcement of the RTCs
package of orders via a TRO issued on May 31, 2005.

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Therefore, subject to the payment by Chua of PhP 2,470,607.48 to petitioner Sunga-Chan, we affirm the RTCs April 11,
2005 resolution, confirming the sheriffs final deed of sale of the levied property, ordering the Registry of Deeds of
Manila to cancel TCT No. 208782, and issuing a writ of possession in favor of Chua.
WHEREFORE, this petition is PARTLY GRANTED. Accordingly, the assailed decision and resolution of the CA in
CA-G.R. SP No. 75688 are hereby AFFIRMED with the following MODIFICATIONS:
(1) The Resolutions dated November 6, 2002 and January 7, 2003 of the RTC, Branch 11 in Sindangan, Zamboanga Del
Norte in Civil Case No. S-494, as effectively upheld by the CA, are AFFIRMED with the modification that the approved
claim of respondent Chua is hereby corrected and adjusted to cover only the aggregate amount of PhP 5,529,392.52;
(2) Subject to the payment by respondent Chua of PhP 2,470,607.48 to petitioner Sunga-Chan, the Resolution dated April
11, 2005 of the RTC, confirming the sheriffs final deed of sale of the levied property, ordering the Registry of Deeds of
Manila to cancel TCT No. 208782, and issuing a writ of possession in favor of respondent Chua, is AFFIRMED; and
The TRO issued by the Court on May 31, 2005 in the instant petition is LIFTED.

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G.R. No. L-23726

August 27, 1925

In re estate of the deceased Domingo Florentino.

JOSE VILLANUEVA, executor, petitioner-appellant,
vs.
ROBERTA DE LEON, opponent-appellee.
MALCOLM, J.:
The salient points of this case are these:
Domingo Florentino died at Vigan, Ilocos Sur, on January 16, 1924, leaving a considerable estate. Shortly thereafter, the
will of the late Florentino was admitted to probate and Jose Villanueva named executor. Villanueva qualified as executor
by filing the necessary bond in the amount of P20,000. He was granted the usual letters of administration.
In the meantime, one Roberta de Leon had presented a motion in which she prayed in effect that the court allow her to
intervene in the proceedings. She alleged that she and the deceased Florentino had been living together as husband and
wife since 1888; that in that year they formed a partnership to which each contributed P1,000 for the purpose of engaging
in business; and that the partnership was dissolved by the death of Florentino without there having been any liquidation.
This motion was denied by Judge Quintero as improper, inasmuch as the movant could present her claims to the
commissioners or institute an independent action to confirm her rights in the estate. In accordance with the suggestion of
the court, Roberta de Leon did in fact bring suit against Jose Villanueva, executor, in which she asked that she be declared
the owner of one-half of the property left by Domingo Florentino.
Later, Roberta de Leon filed another motion duly sworn to in which she alleged that the executor had made it appear that
the property of the deceased was worth only P50,000, whereas the same was valued at over P300,000. Specific mention
was made by her of jewelry and tobacco leaf. Accordingly, movant prayed the court to order the executor to correct the
inventory to the end that the true amount should appear in the same.
On October 31, 1924, Judge Mariano issued an order commanding the executor within three days to give reasons under
oath why the jewels referred to in one of Roberta de Leon's motions, should not be included in the inventory, and to
explain what had been done with the tobacco leaf. In the same order, the court ruled that Roberta de Leon had the right to
intervene in the settlement of the accounts. The contents of this order were objected to by counsel for the executor and
steps taken to perfect an appeal. In turn, counsel for Roberta de Leon entered opposition on the ground that the executor
had no right of appeal. The court admitted the appeal in so far as it related to the right of Roberta de Leon to intervene, but
denied the appeal in so far as it related to the order to the executor to state under oath why the jewels in question should
not be included in the inventory and also to explain what had been done with the consignments of tobacco leaf.
In this court, three errors are assigned by the executor as appellant. The second and third errors need not be discussed
since they relate to matters as to which the lower court denied appeal. Had appellant desired to contest the correctness of
the action taken by the trial judge in not certifying the bill of exceptions as to one question, he had his remedy pursuant to
section 499 of the Code of Civil Procedure. Not having taken advantage of this provision of the law, the appellate court is
powerless to interfere on questions which are not properly before it. (Code of Civil Procedure, sec. 499; Somes vs.
Crossfield and Molina [1907], 8 Phil., 283; Lituaa and Calica vs. Oliveros [1918], 38 Phil., 628.) The single question is
whether or not an alleged partner of a deceased person has such interest in the estate of the deceased as to allow her to
take part in the approval of the accounts.
It is the duly of the probate court to scrutinize carefully the accounts of executors and administrators and to correct all
errors founded in law or fact. It is the right of all the creditors and distributees of the estate to be present and, if so
disposed, to contest the account of the executor or administrator. Only a prima facie right at the time of filing the petition
is sufficient to entitle the applicant to intervene in the accounts of the executor or administrator. It is for the trial court to
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determine whether the person seeking to participate in the proceedings is a person interested within the meaning of the
law, or is merely an intruder who should be excluded from any further participation. The determination of this question
must necessarily be largely discretionary in the trial court. Any doubt as to the interest of the petitioner ought, however, to
be resolved in favor of the petitioner, and any doubt arising in the appellate court ought to be resolved in favor of the
action taken by the trial judge. Administrators and executors instead of opposing the intervention of interested parties
should welcome the participation of the same for their own protection. (See Garwood vs. Garwood [1866], 29 Cal., 514,
cited by appellant; Estate of Willey [1903], 140 Cal., 238.)
On the supposition that that part of the order of the trial court which relates to the right of Roberta de Leon, the alleged
partner of the deceased, to intervene in the testate proceedings is appealable, we entertain the view that the action taken by
the trial judge was correct. Accordingly, it results that the order is affirmed, with costs against the appellant. So ordered.

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