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11th case Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19342 May 25, 1972
LORENZO T. OA and HEIRS OF JULIA BUALES, namely:
RODOLFO B. OA, MARIANO B. OA, LUZ B. OA, VIRGINIA B.
OA and LORENZO B. OA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor
General Felicisimo R. Rosete, and Special Attorney Purificacion Ureta for
respondent.

BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA
Case No. 617, similarly entitled as above, holding that petitioners have
constituted an unregistered partnership and are, therefore, subject to the
payment of the deficiency corporate income taxes assessed against them
by respondent Commissioner of Internal Revenue for the years 1955 and
1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly
interest from December 15, 1958, subject to the provisions of Section 51
(e) (2) of the Internal Revenue Code, as amended by Section 8 of
Republic Act No. 2343 and the costs of the suit, 1 as well as the resolution
of said court denying petitioners' motion for reconsideration of said
decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her
surviving spouse, Lorenzo T. Oa and her five children. In

1948, Civil Case No. 4519 was instituted in the Court of


First Instance of Manila for the settlement of her estate.
Later, Lorenzo T. Oa the surviving spouse was appointed
administrator of the estate of said deceased (Exhibit 3, pp.
34-41, BIR rec.). On April 14, 1949, the administrator
submitted the project of partition, which was approved by
the Court on May 16, 1949 (See Exhibit K). Because three of
the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oa, were still minors when the project of
partition was approved, Lorenzo T. Oa, their father and
administrator of the estate, filed a petition in Civil Case No.
9637 of the Court of First Instance of Manila for
appointment as guardian of said minors. On November 14,
1949, the Court appointed him guardian of the persons and
property of the aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR
rec.) shows that the heirs have undivided one-half (1/2)
interest in ten parcels of land with a total assessed value of
P87,860.00, six houses with a total assessed value of
P17,590.00 and an undetermined amount to be collected
from the War Damage Commission. Later, they received
from said Commission the amount of P50,000.00, more or
less. This amount was not divided among them but was used
in the rehabilitation of properties owned by them in common
(t.s.n., p. 46). Of the ten parcels of land aforementioned, two
were acquired after the death of the decedent with money
borrowed from the Philippine Trust Company in the amount
of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).
The project of partition also shows that the estate shares
equally with Lorenzo T. Oa, the administrator thereof, in
the obligation of P94,973.00, consisting of loans contracted
by the latter with the approval of the Court (see p. 3 of
Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court
on May 16, 1949, no attempt was made to divide the
properties therein listed. Instead, the properties remained
under the management of Lorenzo T. Oa who used said

properties in business by leasing or selling them and


investing the income derived therefrom and the proceeds
from the sales thereof in real properties and securities. As a
result, petitioners' properties and investments gradually
increased from P105,450.00 in 1949 to P480,005.20 in 1956
as can be gleaned from the following year-end balances:

Y
e
a
r

Inve
stme
nt

La
nd

Bu
ildi
ng

1954

63,623.37

99,001.20

167,962.04

1955

100,786.00

120,249.78

169,262.52

1956

175,028.68

135,714.68

169,262.52

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

Ac
co
un
t

Ac
co
un
t

1949

P87,860.00

P17,590.00

1950

P24,657.65

128,566.72

96,076.26

1951

51,301.31

120,349.28

110,605.11

1952

67,927.52

87,065.28

152,674.39

1953

61,258.27

84,925.68

161,463.83

From said investments and properties petitioners derived


such incomes as profits from installment sales of subdivided
lots, profits from sales of stocks, dividends, rentals and
interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 3738). The said incomes are recorded in the books of account
kept by Lorenzo T. Oa where the corresponding shares of
the petitioners in the net income for the year are also
known. Every year, petitioners returned for income tax
purposes their shares in the net income derived from said
properties and securities and/or from transactions involving
them (Exhibit 3, supra; t.s.n., pp. 25-26). However,
petitioners did not actually receive their shares in the yearly
income. (t.s.n., pp. 25-26, 40, 98, 100). The income was
always left in the hands of Lorenzo T. Oa who, as
heretofore pointed out, invested them in real properties and
securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent
(Commissioner of Internal Revenue) decided that petitioners
formed an unregistered partnership and therefore, subject
to the corporate income tax, pursuant to Section 24, in
relation to Section 84(b), of the Tax Code. Accordingly, he
assessed against the petitioners the amounts of P8,092.00
and P13,899.00 as corporate income taxes for 1955 and
1956, respectively. (See Exhibit 5, amended by Exhibit 17,
pp. 50 and 86, BIR rec.). Petitioners protested against the

assessment and asked for reconsideration of the ruling of


respondent that they have formed an unregistered
partnership. Finding no merit in petitioners' request,
respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See
pp. 1-4, Memorandum for Respondent, June 12, 1961).

I.

The original assessment was as follows:

II.

1955

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING


THAT THE PETITIONERS WERE CO-OWNERS OF THE
PROPERTIES INHERITED AND (THE) PROFITS DERIVED
FROM TRANSACTIONS THEREFROM (sic);

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT


THE PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP;

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


Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

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

1956
Net income as per investigation ................ P69,245.23

IV.
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

ON THE ASSUMPTION THAT THE PETITIONERS


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

(See Exhibit 13, page 50, BIR records)


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

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

In other words, petitioners pose for our resolution the following


questions: (1) Under the facts found by the Court of Tax Appeals, should
petitioners be considered as co-owners of the properties inherited by
them from the deceased Julia Buales and the profits derived from
transactions involving the same, or, must they be deemed to have formed
an unregistered partnership subject to tax under Sections 24 and 84(b) of
the National Internal Revenue Code? (2) Assuming they have formed an
unregistered partnership, should this not be only in the sense that they
invested as a common fund the profits earned by the properties owned by
them in common and the loans granted to them upon the security of the
said properties, with the result that as far as their respective shares in
the inheritance are concerned, the total income thereof should be
considered as that of co-owners and not of the unregistered partnership?
And (3) assuming again that they are taxable as an unregistered
partnership, should not the various amounts already paid by them for the
same years 1955 and 1956 as individual income taxes on their respective
shares of the profits accruing from the properties they owned in common
be deducted from the deficiency corporate taxes, herein involved,
assessed against such unregistered partnership by the respondent
Commissioner?
Pondering on these questions, the first thing that has struck the Court is
that whereas petitioners' predecessor in interest died way back on March
23, 1944 and the project of partition of her estate was judicially approved
as early as May 16, 1949, and presumably petitioners have been holding
their respective shares in their inheritance since those dates admittedly
under the administration or management of the head of the family, the
widower and father Lorenzo T. Oa, the assessment in question refers to
the later years 1955 and 1956. We believe this point to be important
because, apparently, at the start, or in the years 1944 to 1954, the
respondent Commissioner of Internal Revenue did treat petitioners as coowners, not liable to corporate tax, and it was only from 1955 that he
considered them as having formed an unregistered partnership. At least,
there is nothing in the record indicating that an earlier assessment had
already been made. Such being the case, and We see no reason how it
could be otherwise, it is easily understandable why petitioners' position
that they are co-owners and not unregistered co-partners, for the
purposes of the impugned assessment, cannot be upheld. Truth to tell,
petitioners should find comfort in the fact that they were not similarly
assessed earlier by the Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the
deceased among themselves pursuant to the project of partition approved
in 1949, "the properties remained under the management of Lorenzo T.
Oa who used said properties in business by leasing or selling them and
investing the income derived therefrom and the proceed from the sales
thereof in real properties and securities," as a result of which said
properties and investments steadily increased yearly from P87,860.00 in
"land account" and P17,590.00 in "building account" in 1949 to
P175,028.68 in "investment account," P135.714.68 in "land account" and
P169,262.52 in "building account" in 1956. And all these became possible
because, admittedly, petitioners never actually received any share of the
income or profits from Lorenzo T. Oa and instead, they allowed him to
continue using said shares as part of the common fund for their ventures,
even as they paid the corresponding income taxes on the basis of their
respective shares of the profits of their common business as reported by
the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their
contention, merely limit themselves to holding the properties inherited by
them. Indeed, it is admitted that during the material years herein
involved, some of the said properties were sold at considerable profit,
and that with said profit, petitioners engaged, thru Lorenzo T. Oa, in the
purchase and sale of corporate securities. It is likewise admitted that all
the profits from these ventures were divided among petitioners
proportionately in accordance with their respective shares in the
inheritance. In these circumstances, it is Our considered view that from
the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oa as a common fund in
undertaking several transactions or in business, with the intention of
deriving profit to be shared by them proportionally, such act was
tantamonut to actually contributing such incomes to a common fund and,
in effect, they thereby formed an unregistered partnership within the
purview of the above-mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period
when the heirs can be considered as co-owners rather than unregistered
co-partners within the contemplation of our corporate tax laws
aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs,
obviously, without them becoming thereby unregistered co-partners, but
it does not necessarily follow that such status as co-owners continues

until the inheritance is actually and physically distributed among the


heirs, for it is easily conceivable that after knowing their respective
shares in the partition, they might decide to continue holding said shares
under the common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis. Withal, if
this were to be allowed, it would be the easiest thing for heirs in any
inheritance to circumvent and render meaningless Sections 24 and 84(b)
of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated,
among the reasons for holding the appellants therein to be unregistered
co-partners for tax purposes, that their common fund "was not something
they found already in existence" and that "it was not a property inherited
by them pro indiviso," but it is certainly far fetched to argue therefrom,
as petitioners are doing here, that ergo, in all instances where an
inheritance is not actually divided, there can be no unregistered copartnership. As already indicated, for tax purposes, the co-ownership of
inherited properties is automatically converted into an unregistered
partnership the moment the said common properties and/or the incomes
derived therefrom are used as a common fund with intent to produce
profits for the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either duly executed in
an extrajudicial settlement or approved by the court in the corresponding
testate or intestate proceeding. The reason for this is simple. From the
moment of such partition, the heirs are entitled already to their
respective definite shares of the estate and the incomes thereof, for each
of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If after such partition,
he allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in
proportion to his share, there can be no doubt that, even if no document
or instrument were executed for the purpose, for tax purposes, at least,
an unregistered partnership is formed. This is exactly what happened to
petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of
the Civil Code, providing that: "The sharing of gross returns does not of
itself establish a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property from which the
returns are derived," and, for that matter, on any other provision of said
code on partnerships is unavailing. In Evangelista, supra, this Court

clearly differentiated the concept of partnerships under the Civil Code


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

... provides its own concept of a partnership.


Under the term "partnership" it includes not
only a partnership as known in common law
but, as well, a syndicate, group, pool, joint
venture, or other unincorporated organization
which carries on any business, financial
operation, or venture, and which is not, within
the meaning of the Code, a trust, estate, or a
corporation. ... . (7A Merten's Law of Federal
Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate,
group, pool, joint venture or other
unincorporated organization, through or by
means of which any business, financial
operation, or venture is carried on. ... . (8
Merten's Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National
Internal Revenue Code includes these partnerships with
the exception only of duly registered general copartnerships
within the purview of the term "corporation." It is,
therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned,
and are subject to the income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs.
Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July 29, 1968,
24 SCRA 198, wherein the Court ruled against a theory of co-ownership
pursued by appellants therein.
As regards the second question raised by petitioners about the
segregation, for the purposes of the corporate taxes in question, of their
inherited properties from those acquired by them subsequently, We
consider as justified the following ratiocination of the Tax Court in
denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if
there was an unregistered partnership, the holding should
be limited to the business engaged in apart from the

properties inherited by petitioners. In other words, the


taxable income of the partnership should be limited to the
income derived from the acquisition and sale of real
properties and corporate securities and should not include
the income derived from the inherited properties. It is
admitted that the inherited properties and the income
derived therefrom were used in the business of buying and
selling other real properties and corporate securities.
Accordingly, the partnership income must include not only
the income derived from the purchase and sale of other
properties but also the income of the inherited properties.
Besides, as already observed earlier, the income derived from inherited
properties may be considered as individual income of the respective heirs
only so long as the inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares are used as
part of the common assets of the heirs to be used in making profits, it is
but proper that the income of such shares should be considered as the
part of the taxable income of an unregistered partnership. This, We hold,
is the clear intent of the law.
Likewise, the third question of petitioners appears to have been
adequately resolved by the Tax Court in the aforementioned resolution
denying petitioners' motion for reconsideration of the decision of said
court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners
alleges:
Even if we were to yield to the decision of this
Honorable Court that the herein petitioners
have formed an unregistered partnership and,
therefore, have to be taxed as such, it might be
recalled that the petitioners in their individual
income tax returns reported their shares of the
profits of the unregistered partnership. We
think it only fair and equitable that the various
amounts paid by the individual petitioners as
income tax on their respective shares of the
unregistered partnership should be deducted
from the deficiency income tax found by this

Honorable Court against the unregistered


partnership. (page 7, Memorandum for the
Petitioner in Support of Their Motion for
Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the
taxable income of the partnership must be reduced by the
amounts of income tax paid by each petitioner on his share
of partnership profits. This is not correct; rather, it should be
the other way around. The partnership profits distributable
to the partners (petitioners herein) should be reduced by the
amounts of income tax assessed against the partnership.
Consequently, each of the petitioners in his individual
capacity overpaid his income tax for the years in question,
but the income tax due from the partnership has been
correctly assessed. Since the individual income tax liabilities
of petitioners are not in issue in this proceeding, it is not
proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that
whatever excess they might have paid as individual income tax cannot be
credited as part payment of the taxes herein in question. It is argued that
to sanction the view of the Tax Court is to oblige petitioners to pay
double income tax on the same income, and, worse, considering the time
that has lapsed since they paid their individual income taxes, they may
already be barred by prescription from recovering their overpayments in
a separate action. We do not agree. As We see it, the case of petitioners
as regards the point under discussion is simply that of a taxpayer who
has paid the wrong tax, assuming that the failure to pay the corporate
taxes in question was not deliberate. Of course, such taxpayer has the
right to be reimbursed what he has erroneously paid, but the law is very
clear that the claim and action for such reimbursement are subject to the
bar of prescription. And since the period for the recovery of the excess
income taxes in the case of herein petitioners has already lapsed, it
would not seem right to virtually disregard prescription merely upon the
ground that the reason for the delay is precisely because the taxpayers
failed to make the proper return and payment of the corporate taxes
legally due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly above
suspicion in their conduct vis-a-vis their tax obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax


Appeals appealed from is affirm with costs against petitioners.
Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.
Reyes, J.B.L. and Teehankee, JJ., concur in the result.
Castro, J., took no part.
Concepcion, C.J., is on leave.

G.R. No. L-45425

12th Republic of the Philippines


SUPREME COURT
Manila

1. Jose
Gatchalian .......................................................................................
.............

P0.1
8

EN BANC

2. Gregoria
Cristobal .........................................................................................
......

.18

3. Saturnina
Silva ................................................................................................
....

.08

4. Guillermo
Tapia ...............................................................................................
....

.13

5. Jesus
Legaspi ............................................................................................
..........

.15

6. Jose
Silva ................................................................................................
.............

.07

7. Tomasa
Mercado ..........................................................................................
......

.08

8. Julio
Gatchalian .......................................................................................
............

.13

9. Emiliana
Santiago ..........................................................................................
......

.13

10. Maria C.
Legaspi ............................................................................................
...

.16

11. Francisco
Cabral .............................................................................................
..

.13

12. Gonzalo

.14

April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,


vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.
Office of the Solicitor-General Tuason for appellee.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendant Collector
of Internal Revenue the sum of P1,863.44, with legal interest thereon,
which they paid under protest by way of income tax. They appealed from
the decision rendered in the case on October 23, 1936 by the Court of
First Instance of the City of Manila, which dismissed the action with the
costs against them.
The case was submitted for decision upon the following stipulation of
facts:
Come now the parties to the above-mentioned case, through their
respective undersigned attorneys, and hereby agree to respectfully
submit to this Honorable Court the case upon the following
statement of facts:
1. That plaintiff are all residents of the municipality of Pulilan,
Bulacan, and that defendant is the Collector of Internal Revenue of
the Philippines;
2. That prior to December 15, 1934 plaintiffs, in order to enable
them to purchase one sweepstakes ticket valued at two pesos (P2),
subscribed and paid therefor the amounts as follows:

Javier ...............................................................................................
.....
13. Maria
Santiago ..........................................................................................
.........

.17

14. Buenaventura
Guzman ......................................................................................

.13

15. Mariano
Santos .............................................................................................
....

.14

Total ................................................................................................
........

2.00

3. That immediately thereafter but prior to December 15, 1934,


plaintiffs purchased, in the ordinary course of business, from one
of the duly authorized agents of the National Charity Sweepstakes
Office one ticket bearing No. 178637 for the sum of two pesos (P2)
and that the said ticket was registered in the name of Jose
Gatchalian and Company;
4. That as a result of the drawing of the sweepstakes on December
15, 1934, the above-mentioned ticket bearing No. 178637 won one
of the third prizes in the amount of P50,000 and that the
corresponding check covering the above-mentioned prize of
P50,000 was drawn by the National Charity Sweepstakes Office in
favor of Jose Gatchalian & Company against the Philippine
National Bank, which check was cashed during the latter part of
December, 1934 by Jose Gatchalian & Company;
5. That on December 29, 1934, Jose Gatchalian was required by
income tax examiner Alfredo David to file the corresponding
income tax return covering the prize won by Jose Gatchalian &
Company and that on December 29, 1934, the said return was
signed by Jose Gatchalian, a copy of which return is enclosed as
Exhibit A and made a part hereof;
6. That on January 8, 1935, the defendant made an assessment
against Jose Gatchalian & Company requesting the payment of the

sum of P1,499.94 to the deputy provincial treasurer of Pulilan,


Bulacan, giving to said Jose Gatchalian & Company until January
20, 1935 within which to pay the said amount of P1,499.94, a copy
of which letter marked Exhibit B is enclosed and made a part
hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney,
sent to defendant a reply, a copy of which marked Exhibit C is
attached and made a part hereof, requesting exemption from
payment of the income tax to which reply there were enclosed
fifteen (15) separate individual income tax returns filed separately
by each one of the plaintiffs, copies of which returns are attached
and marked Exhibit D-1 to D-15, respectively, in order of their
names listed in the caption of this case and made parts hereof; a
statement of sale signed by Jose Gatchalian showing the amount
put up by each of the plaintiffs to cover up the attached and
marked as Exhibit E and made a part hereof; and a copy of the
affidavit signed by Jose Gatchalian dated December 29, 1934 is
attached and marked Exhibit F and made part thereof;
8. That the defendant in his letter dated January 28, 1935, a copy
of which marked Exhibit G is enclosed, denied plaintiffs' request of
January 20, 1935, for exemption from the payment of tax and
reiterated his demand for the payment of the sum of P1,499.94 as
income tax and gave plaintiffs until February 10, 1935 within
which to pay the said tax;
9. That in view of the failure of the plaintiffs to pay the amount of
tax demanded by the defendant, notwithstanding subsequent
demand made by defendant upon the plaintiffs through their
attorney on March 23, 1935, a copy of which marked Exhibit H is
enclosed, defendant on May 13, 1935 issued a warrant of distraint
and levy against the property of the plaintiffs, a copy of which
warrant marked Exhibit I is enclosed and made a part hereof;
10. That to avoid embarrassment arising from the embargo of the
property of the plaintiffs, the said plaintiffs on June 15, 1935,
through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi,
paid under protest the sum of P601.51 as part of the tax and
penalties to the municipal treasurer of Pulilan, Bulacan, as
evidenced by official receipt No. 7454879 which is attached and

marked Exhibit J and made a part hereof, and requested defendant


that plaintiffs be allowed to pay under protest the balance of the
tax and penalties by monthly installments;
11. That plaintiff's request to pay the balance of the tax and
penalties was granted by defendant subject to the condition that
plaintiffs file the usual bond secured by two solvent persons to
guarantee prompt payment of each installments as it becomes due;
12. That on July 16, 1935, plaintiff filed a bond, a copy of which
marked Exhibit K is enclosed and made a part hereof, to guarantee
the payment of the balance of the alleged tax liability by monthly
installments at the rate of P118.70 a month, the first payment
under protest to be effected on or before July 31, 1935;
13. That on July 16, 1935 the said plaintiffs formally protested
against the payment of the sum of P602.51, a copy of which protest
is attached and marked Exhibit L, but that defendant in his letter
dated August 1, 1935 overruled the protest and denied the request
for refund of the plaintiffs;
14. That, in view of the failure of the plaintiffs to pay the monthly
installments in accordance with the terms and conditions of bond
filed by them, the defendant in his letter dated July 23, 1935, copy
of which is attached and marked Exhibit M, ordered the municipal
treasurer of Pulilan, Bulacan to execute within five days the
warrant of distraint and levy issued against the plaintiffs on May
13, 1935;
15. That in order to avoid annoyance and embarrassment arising
from the levy of their property, the plaintiffs on August 28, 1936,
through Jose Gatchalian, Guillermo Tapia, Maria Santiago and
Emiliano Santiago, paid under protest to the municipal treasurer of
Pulilan, Bulacan the sum of P1,260.93 representing the unpaid
balance of the income tax and penalties demanded by defendant as
evidenced by income tax receipt No. 35811 which is attached and
marked Exhibit N and made a part hereof; and that on September
3, 1936, the plaintiffs formally protested to the defendant against
the payment of said amount and requested the refund thereof,
copy of which is attached and marked Exhibit O and made part
hereof; but that on September 4, 1936, the defendant overruled

the protest and denied the refund thereof; copy of which is


attached and marked Exhibit P and made a part hereof; and
16. That plaintiffs demanded upon defendant the refund of the
total sum of one thousand eight hundred and sixty three pesos and
forty-four centavos (P1,863.44) paid under protest by them but
that defendant refused and still refuses to refund the said amount
notwithstanding the plaintiffs' demands.
17. The parties hereto reserve the right to present other and
additional evidence if necessary.
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:
I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age,
hereby certify, that on the 11th day of August, 1934, I sold parts of
my shares on ticket No. 178637 to the persons and for the amount
indicated below and the part of may share remaining is also shown
to wit:
Purchaser
1. Mariano
Santos ...........................................

Amoun
t

Address

P0.14 Pulilan, Bulacan.

2. Buenaventura
Guzman ...............................

.13

- Do -

3. Maria
Santiago ............................................

.17

- Do -

4. Gonzalo
Javier ..............................................

.14

- Do -

5. Francisco
Cabral ..........................................

.13

- Do -

6. Maria C.
Legaspi ..........................................

.16

- Do -

7. Emiliana
Santiago .........................................

.13

- Do -

8. Julio
Gatchalian ............................................

.13

- Do -

Name

Exhibi
t
No.

1. Jose
Gatchalian ...................... D-1
....................

Purch
ase
Price

Price
Won

Expenses

Net
priz
e

P4,42
5

P 480

3,94
5

2. Gregoria
Cristobal ........................ D-2
..............

.18 4,575

2,000

2,57
5

3. Saturnina
Silva ............................... D-3
..............

.08 1,875

360

1,51
5

.13 3,325

360

2,96
5

P0.18

9. Jose
Silva ......................................................

.07

- Do -

10. Tomasa
Mercado .......................................

.08

- Do -

11. Jesus
Legaspi .............................................

.15

- Do -

12. Guillermo
Tapia ...........................................

.13

- Do -

13. Saturnina
Silva ............................................

.08

- Do -

4. Guillermo
Tapia .............................. D-4
............

14. Gregoria
Cristobal .......................................

.18

- Do -

5. Jesus Legaspi by
Maria Cristobal .........

D-5

.15 3,825

720

3,10
5

15. Jose
Gatchalian ............................................

.18

- Do -

6. Jose
Silva ............................... D-6
.....................

.08 1,875

360

1,51
5

7. Tomasa
Mercado ......................... D-7
..............

.07 1,875

360

1,51
5

8. Julio Gatchalian by
Beatriz Guzman .......

D-8

.13 3,150

240

2,91
0

9. Emiliana
Santiago ......................... D-9
.............

.13 3,325

360

2,96
5

10. Maria C.
Legaspi .......................... D-10
............

.16 4,100

960

3,14
0

11. Francisco
Cabral ............................ D-11
..........

.13 3,325

360

2,96
5

2.00 Total cost of said


ticket; and that, therefore, the persons named above are entitled to
the parts of whatever prize that might be won by said ticket.
Pulilan, Bulacan, P.I.
(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is inserted in the bill of
exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS
FOR 1934 ALL DATED JANUARY 19, 1935 SUBMITTED TO THE
COLLECTOR OF INTERNAL REVENUE.

12. Gonzalo
Javier .............................. D-12
............

.14 3,325

2,96
360
5

13. Maria
Santiago ......................... D-13
.................

.17 4,350

360

3,99
0

14. Buenaventura
Guzman .......................... D-14
.

.13 3,325

360

2,96
5

15. Mariano
Santos ............................ D-15
............

.14 3,325

360

2,96
5

<="" td=""
style="fontsize: 14px; textdecoration:
50,00 none; color:
2.00
0 rgb(0, 0, 128);
font-family:
arial,
verdana;">
The legal questions raised in plaintiffs-appellants' five assigned errors
may properly be reduced to the two following: (1) Whether the plaintiffs
formed a partnership, or merely a community of property without a
personality of its own; in the first case it is admitted that the partnership
thus formed is liable for the payment of income tax, whereas if there was
merely a community of property, they are exempt from such payment;
and (2) whether they should pay the tax collectively or whether the latter
should be prorated among them and paid individually.
The Collector of Internal Revenue collected the tax under section 10 of
Act No. 2833, as last amended by section 2 of Act No. 3761, reading as
follows:
SEC. 10. (a) There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding
calendar year from all sources by every corporation, joint-stock

company, partnership, joint account (cuenta en participacion),


association or insurance company, organized in the Philippine
Islands, no matter how created or organized, but not including
duly registered general copartnership (compaias colectivas), a tax
of three per centum upon such income; and a like tax shall be
levied, assessed, collected, and paid annually upon the total net
income received in the preceding calendar year from all sources
within the Philippine Islands by every corporation, joint-stock
company, partnership, joint account (cuenta en participacion),
association, or insurance company organized, authorized, or
existing under the laws of any foreign country, including interest
on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise: Provided, however, That nothing in this
section shall be construed as permitting the taxation of the income
derived from dividends or net profits on which the normal tax has
been paid.
The gain derived or loss sustained from the sale or other
disposition by a corporation, joint-stock company, partnership,
joint account (cuenta en participacion), association, or insurance
company, or property, real, personal, or mixed, shall be ascertained
in accordance with subsections (c) and (d) of section two of Act
Numbered Two thousand eight hundred and thirty-three, as
amended by Act Numbered Twenty-nine hundred and twenty-six.
The foregoing tax rate shall apply to the net income received by
every taxable corporation, joint-stock company, partnership, joint
account (cuenta en participacion), association, or insurance
company in the calendar year nineteen hundred and twenty and in
each year thereafter.
There is no doubt that if the plaintiffs merely formed a community of
property the latter is exempt from the payment of income tax under the
law. But according to the stipulation facts the plaintiffs organized a
partnership of a civil nature because each of them put up money to buy a
sweepstakes ticket for the sole purpose of dividing equally the prize
which they may win, as they did in fact in the amount of P50,000 (article
1665, Civil Code). The partnership was not only formed, but upon the
organization thereof and the winning of the prize, Jose Gatchalian
personally appeared in the office of the Philippines Charity Sweepstakes,
in his capacity as co-partner, as such collection the prize, the office

issued the check for P50,000 in favor of Jose Gatchalian and company,
and the said partner, in the same capacity, collected the said check. All
these circumstances repel the idea that the plaintiffs organized and
formed a community of property only.
Having organized and constituted a partnership of a civil nature, the said
entity is the one bound to pay the income tax which the defendant
collected under the aforesaid section 10 (a) of Act No. 2833, as amended
by section 2 of Act No. 3761. There is no merit in plaintiff's contention
that the tax should be prorated among them and paid individually,
resulting in their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed, with the costs
of this instance to the plaintiffs appellants. So ordered.
Avancea, C.J., Villa-Real, Diaz, Laurel, Concepcion and Moran, JJ.,
concur.

13th Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-47045 November 22, 1988
NOBIO SARDANE, petitioner,
vs.
THE COURT OF APPEALS and ROMEO J. ACOJEDO, respondents.
Y.G. Villaruz & Associates for petitioner.
Pelagio R. Lachica for private respondent.

REGALADO, J.:
The extensive discussion and exhaustive disquisition in the decision 1 of
the respondent Court 2 should have written finis to this case without
further recourse to Us. The assignment of errors and arguments raised in
the respondent Court by herein private respondent, as the petitioner
therein, having been correctly and justifiedly sustained by said court
without any reversible error in its conclusions, the present petition must
fail.
The assailed decision details the facts and proceedings which spawned
the present controversy as follows:
Petitioner brought an action in the City Court of Dipolog for
collection of a sum of P5,217.25 based on promissory notes
executed by the herein private respondent Nobio Sardane in
favor of the herein petitioner. Petitioner bases his right to
collect on Exhibits B, C, D, E, F, and G executed on different
dates and signed by private respondent Nobio Sardane.

Exhibit B is a printed promissory note involving Pl,117.25


and dated May 13, 1972. Exhibit C is likewise a printed
promissory note and denotes on its face that the sum loaned
was Pl,400.00. Exhibit D is also a printed promissory note
dated May 31, 1977 involving an amount of P100.00. Exhibit
E is what is commonly known to the layman as 'vale' which
reads: 'Good for: two hundred pesos (Sgd) Nobio Sardane'.
Exhibit F is stated in the following tenor: 'Received from Mr.
Romeo Acojedo the sum Pesos: Two Thousand Two Hundred
(P2,200.00) ONLY, to be paid on or before December 25,
1975. (Sgd) Nobio Sardane.' Exhibit G and H are both vales'
involving the same amount of one hundred pesos, and dated
August 25, 1972 and September 12, 1972 respectively.
It has been established in the trial court that on many
occasions, the petitioner demanded the payment of the total
amount of P5,217.25. The failure of the private respondent
to pay the said amount prompted the petitioner to seek the
services of lawyer who made a letter (Exhibit 1) formally
demanding the return of the sum loaned. Because of the
failure of the private respondent to heed the demands
extrajudicially made by the petitioner, the latter was
constrained to bring an action for collection of sum of
money.
During the scheduled day for trial, private respondent failed
to appear and to file an answer. On motion by the petitioner,
the City Court of Dipolog issued an order dated May 18,
1976 declaring the private respondent in default and
allowed the petitioner to present his evidence ex-parte.
Based on petitioner's evidence, the City Court of Dipolog
rendered judgment by default in favor of the petitioner.
Private respondent filed a motion to lift the order of default
which was granted by the City Court in an order dated May
24, 1976, taking into consideration that the answer was filed

within two hours after the hearing of the evidence


presented ex-parte by the petitioner.

accorded in favor of said petitioner by Section 8, Rule 8 of the Rules of


Court.

After the trial on the merits, the City Court of Dipolog


rendered its decision on September 14, 1976, the dispositive
portion of which reads:

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

IN VIEW OF THE FOREGOING, judgment is hereby


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

Consequently, said trial court concluded that the promissory notes


involved were merely receipts for the contributions to said partnership
and, therefore, upheld the claim that there was ambiguity in the
promissory notes, hence parol evidence was allowable to vary or
contradict the terms of the represented loan contract.
The parol evidence rule in Rule 130 provides:

(b) Ordering the defendant to pay the plaintiff the sum of


P200.00 as attorney's fee and to pay the cost of this
proceeding. 3
Therein defendant Sardane appealed to the Court of First Instance of
Zamboanga del Norte which reversed the decision of the lower court by
dismissing the complaint and ordered the plaintiff-appellee Acojedo to
pay said defendant-appellant P500.00 each for actual damages, moral
damages, exemplary damages and attorney's fees, as well as the costs of
suit. Plaintiff-appellee then sought the review of said decision by petition
to the respondent Court.
The assignment of errors in said petition for review can be capsulized
into two decisive issues, firstly, whether the oral testimony for the therein
private respondent Sardane that a partnership existed between him and
therein petitioner Acojedo are admissible to vary the meaning of the
abovementioned promissory notes; and, secondly, whether because of the
failure of therein petitioner to cross-examine therein private respondent
on his sur-rebuttal testimony, there was a waiver of the presumption

Sec. 7. Evidence of written agreements.When the terms of


an agreement have been reduced to writing, it is to be
considered as containing all such terms, and, therefore,
there can be, between the parties and their successors in
interest, no evidence of the terms of the agreement other
than the contents of the writing except in the following
cases:
(a) Where a mistake or imperfection of the writing or its
failure to express the the true intent and agreement of the
parties, or the validity of the agreement is put in issue by
the pleadings;
(b) When there is an intrinsic ambiguity in the writing.
As correctly pointed out by the respondent Court the exceptions to the
rule do not apply in this case as there is no ambiguity in the writings in
question, thus:

In the case at bar, Exhibits B, C, and D are printed


promissory notes containing a promise to pay a sum certain
in money, payable on demand and the promise to bear the
costs of litigation in the event of the private respondent's
failure to pay the amount loaned when demanded
extrajudicially. Likewise, the vales denote that the private
respondent is obliged to return the sum loaned to him by the
petitioner. On their face, nothing appears to be vague or
ambigous, for the terms of the promissory notes clearly
show that it was incumbent upon the private respondent to
pay the amount involved in the promissory notes if and when
the petitioner demands the same. It was clearly the intent of
the parties to enter into a contract of loan for how could an
educated man like the private respondent be deceived to
sign a promissory note yet intending to make such a writing
to be mere receipts of the petitioner's supposed contribution
to the alleged partnership existing between the parties?
It has been established in the trial court that, the private
respondent has been engaged in business for quite a long
period of time--as owner of the Sardane Trucking Service,
entering into contracts with the government for the
construction of wharfs and seawall; and a member of the
City Council of Dapitan (TSN, July 20, 1976, pp. 5758).<re||an1w> It indeed puzzles us how the private
respondent could have been misled into signing a document
containing terms which he did not mean them to be. ...
xxx xxx xxx
The private respondent admitted during the crossexamination made by petitioner's counsel that he was the
one who was responsible for the printing of Exhibits B, C,
and D (TSN, July 28, 1976, p. 64). How could he purportedly
rely on such a flimsy pretext that the promissory notes were
receipts of the petitioner's contribution? 4

The Court of Appeals held, and We agree, that even if


evidence aliunde other than the promissory notes may be admitted to
alter the meaning conveyed thereby, still the evidence is insufficient to
prove that a partnership existed between the private parties hereto.
As manager of the basnig Sarcado naturally some degree of control over
the operations and maintenance thereof had to be exercised by herein
petitioner. The fact that he had received 50% of the net profits does not
conclusively establish that he was a partner of the private respondent
herein. Article 1769(4) of the Civil Code is explicit that while the receipt
by a person of a share of the profits of a business is prima facie evidence
that he is a partner in the business, no such inference shall be drawn if
such profits were received in payment as wages of an employee.
Furthermore, herein petitioner had no voice in the management of the
affairs of the basnig. Under similar facts, this Court in the early case
of Fortis vs. Gutierrez Hermanos, 5 in denying the claim of the plaintiff
therein that he was a partner in the business of the defendant, declared:
This contention cannot be sustained. It was a mere contract
of employment. The plaintiff had no voice nor vote in the
management of the affairs of the company. The fact that the
compensation received by him was to be determined with
reference to the profits made by the defendant in their
business did not in any sense make him a partner therein. ...
The same rule was reiterated in Bastida vs. Menzi & Co., Inc., et
al. 6 which involved the same factual and legal milieu.
There are other considerations noted by respondent Court which negate
herein petitioner's pretension that he was a partner and not a mere
employee indebted to the present private respondent. Thus, in an action
for damages filed by herein private respondent against the North
Zamboanga Timber Co., Inc. arising from the operations of the business,
herein petitioner did not ask to be joined as a party plaintiff. Also,
although he contends that herein private respondent is the treasurer of
the alleged partnership, yet it is the latter who is demanding an
accounting. The advertence of the Court of First Instance to the fact that

the casco bears the name of herein petitioner disregards the finding of
the respondent Court that it was just a concession since it was he who
obtained the engine used in the Sardaco from the Department of Local
Government and Community Development. Further, the use by the
parties of the pronoun "our" in referring to "our basnig, our catch", "our
deposit", or "our boseros" was merely indicative of the camaraderie and
not evidentiary of a partnership, between them.
The foregoing factual findings, which belie the further claim that the
aforesaid promissory notes do not express the true intent and agreement
of the parties, are binding on Us since there is no showing that they fall
within the exceptions to the rule limiting the scope of appellate review
herein to questions of law.
On the second issue, the pertinent rule on actionable documents in Rule
8, for ready reference, reads:
Sec. 8. How to contest genuineness of such documents.
When an action or defense is founded upon a written
instrument, copied in or attached to the corresponding
pleading as provided in the preceding section, the
genuineness and due execution of the instrument shall be
deemed admitted unless the adverse party, under oath,
specifically denies them, and sets forth what he claims to be
the facts; but this provision does not apply when the adverse
party does not appear to be a party to the instrument or
when compliance with an order for the inspection of the
original instrument is refused.
The record shows that herein petitioner did not deny under oath in his
answer the authenticity and due execution of the promissory notes which
had been duly pleaded and attached to the complaint, thereby admitting
their genuineness and due execution. Even in the trial court, he did not at
all question the fact that he signed said promissory notes and that the
same were genuine. Instead, he presented parol evidence to vary the
import of the promissory notes by alleging that they were mere receipts
of his contribution to the alleged partnership.

His arguments on this score reflect a misapprehension of the rule on


parol evidence as distinguished from the rule on actionable documents.
As the respondent Court correctly explained to herein petitioner, what he
presented in the trial Court was testimonial evidence that the promissory
notes were receipts of his supposed contributions to the alleged
partnership which testimony, in the light of Section 7, Rule 130, could not
be admitted to vary or alter the explicit meaning conveyed by said
promissory notes. On the other hand, the presumed genuineness and due
execution of said promissory notes were not affected, pursuant to the
provisions of Section 8, Rule 8, since such aspects were not at all
questioned but, on the contrary, were admitted by herein petitioner.
Petitioner's invocation of the doctrines in Yu Chuck, et al. vs. Kong Li
Po, 7 which was reiterated in Central Surety & Insurance Co. vs. C. N.
Hodges, et al. 8 does not sustain his thesis that the herein private
respondent had "waived the mantle of protection given him by Rule 8,
Sec. 8". It is true that such implied admission of genuineness and due
execution may be waived by a party but only if he acts in a manner
indicative of either an express or tacit waiver thereof. Petitioner,
however, either overlooked or ignored the fact that, as held in Yu
Chuck, and the same is true in other cases of Identical factual settings,
such a finding of waiver is proper where a case has been tried in
complete disregard of the rule and the plaintiff having pleaded a
document by copy, presents oral evidence to prove the due execution of
the document and no objections are made to the defendant's evidence in
refutation. This situation does not obtain in the present case hence said
doctrine is obviously inapplicable.
Neither did the failure of herein private respondent to cross-examine
herein petitioner on the latter's sur-rebuttal testimony constitute a
waiver of the aforesaid implied admission. As found by the respondent
Court, said sur-rebuttal testimony consisted solely of the denial of the
testimony of herein private respondent and no new or additional matter
was introduced in that sur-rebuttal testimony to exonerate herein
petitioner from his obligations under the aforesaid promissory notes.

On the foregoing premises and considerations, the respondent Court


correctly reversed and set aside the appealed decision of the Court of
First Instance of Zamboanga del Norte and affirmed in full the decision of
the City Court of Dipolog City in Civil Case No. A-1838, dated September
14, 1976.
Belatedly, in his motion for reconsideration of said decision of the
respondent Court, herein petitioner, as the private respondent therein,
raised a third unresolved issue that the petition for review therein should
have been dismissed for lack of jurisdiction since the lower Court's
decision did not affirm in full the judgment of the City Court of Dipolog,
and which he claimed was a sine qua non for such a petition under the
law then in force. He raises the same point in his present appeal and We
will waive the procedural technicalities in order to put this issue at rest.
Parenthetically, in that same motion for reconsideration he had sought
affirmative relief from the respondent Court praying that it sustain the
decision of the trial Court, thereby invoking and submitting to its
jurisdiction which he would now assail. Furthermore, the objection that
he raises is actually not one of jurisdiction but of procedure. 9
At any rate, it will be noted that petitioner anchors his said objection on
the provisions of Section 29, Republic Act 296 as amended by Republic
Act 5433 effective September 9, 1968. Subsequently, the procedure for
appeal to the Court of Appeals from decisions of the then courts of first
instance in the exercise of their appellate jurisdiction over cases
originating from the municipal courts was provided for by Republic Act
6031, amending Section 45 of the Judiciary Act effective August 4, 1969.
The requirement for affirmance in full of the inferior court's decision was
not adopted or reproduced in Republic Act 6031. Also, since Republic Act
6031 failed to provide for the procedure or mode of appeal in the cases
therein contemplated, the Court of Appeals en banc provided thereof in
its Resolution of August 12, 1971, by requiring a petition for review but
which also did not require for its availability that the judgment of the
court of first instance had affirmed in full that of the lower court. Said
mode of appeal and the procedural requirements thereof governed the

appeal taken in this case from the aforesaid Court of First Instance to the
Court of Appeals in 1977. 10 Herein petitioner's plaint on this issue is,
therefore, devoid of merit.
WHEREFORE, the judgment of the respondent Court of Appeals is
AFFIRMED, with costs against herein petitioner.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ.,
concur.

14th Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-21906

December 24, 1968

INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees,


vs.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, defendant-appellant.
Aportadera and Palabrica and Pelaez, Jalandoni and Jamir plaintiffsappellees.
Ruiz Law Offices for defendant-appellant.
CASTRO, J.:
This is an appeal from the order of May 2, 1956, the decision of May 4,
1956 and the order of May 21, 1956, all of the Court of First Instance of
Davao, in civil case 629. The basic action is for specific performance, and
damages resulting from an alleged breach of contract.
In 1940 Nicanor Casteel filed a fishpond application for a big tract of
swampy land in the then Sitio of Malalag (now the Municipality of
Malalag), Municipality of Padada, Davao. No action was taken thereon by
the authorities concerned. During the Japanese occupation, he filed
another fishpond application for the same area, but because of the
conditions then prevailing, it was not acted upon either. On December 12,
1945 he filed a third fishpond application for the same area, which, after
a survey, was found to contain 178.76 hectares. Upon investigation
conducted by a representative of the Bureau of Forestry, it was
discovered that the area applied for was still needed for firewood
production. Hence on May 13, 1946 this third application was
disapproved.
Despite the said rejection, Casteel did not lose interest. He filed a motion
for reconsideration. While this motion was pending resolution, he was
advised by the district forester of Davao City that no further action would

be taken on his motion, unless he filed a new application for the area
concerned. So he filed on May 27, 1947 his fishpond application 1717.
Meanwhile, several applications were submitted by other persons for
portions of the area covered by Casteel's application.
On May 20, 1946 Leoncio Aradillos filed his fishpond application 1202
covering 10 hectares of land found inside the area applied for by Casteel;
he was later granted fishpond permit F-289-C covering 9.3 hectares
certified as available for fishpond purposes by the Bureau of Forestry.
Victor D. Carpio filed on August 8, 1946 his fishpond application 762 over
a portion of the land applied for by Casteel. Alejandro Cacam's fishpond
application 1276, filed on December 26, 1946, was given due course on
December 9, 1947 with the issuance to him of fishpond permit F-539-C to
develop 30 hectares of land comprising a portion of the area applied for
by Casteel, upon certification of the Bureau of Forestry that the area was
likewise available for fishpond purposes. On November 17, 1948 Felipe
Deluao filed his own fishpond application for the area covered by
Casteel's application.
Because of the threat poised upon his position by the above applicants
who entered upon and spread themselves within the area, Casteel
realized the urgent necessity of expanding his occupation thereof by
constructing dikes and cultivating marketable fishes, in order to prevent
old and new squatters from usurping the land. But lacking financial
resources at that time, he sought financial aid from his uncle Felipe
Deluao who then extended loans totalling more or less P27,000 with
which to finance the needed improvements on the fishpond. Hence, a
wide productive fishpond was built.
Moreover, upon learning that portions of the area applied for by him
were already occupied by rival applicants, Casteel immediately filed the
corresponding protests. Consequently, two administrative cases ensued
involving the area in question, to wit: DANR Case 353, entitled "Fp. Ap.
No. 661 (now Fp. A. No. 1717), Nicanor Casteel, applicant-appellant
versus Fp. A. No. 763, Victorio D. Carpio, applicant-appellant"; and DANR
Case 353-B, entitled "Fp. A. No. 661 (now Fp. A. No. 1717), Nicanor
Casteel, applicant-protestant versus Fp. Permit No. 289-C, Leoncio

Aradillos, Fp. Permit No. 539-C, Alejandro Cacam, PermitteesRespondents."


However, despite the finding made in the investigation of the above
administrative cases that Casteel had already introduced improvements
on portions of the area applied for by him in the form of dikes, fishpond
gates, clearings, etc., the Director of Fisheries nevertheless rejected
Casteel's application on October 25, 1949, required him to remove all the
improvements which he had introduced on the land, and ordered that the
land be leased through public auction. Failing to secure a favorable
resolution of his motion for reconsideration of the Director's order,
Casteel appealed to the Secretary of Agriculture and Natural Resources.
In the interregnum, some more incidents occurred. To avoid repetition,
they will be taken up in our discussion of the appellant's third assignment
of error.
On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as party
of the first part, and Nicanor Casteel as party of the second part,
executed a contract denominated a "contract of service" the salient
provisions of which are as follows:
That the Party of the First Part in consideration of the mutual
covenants and agreements made herein to the Party of the Second
Part, hereby enter into a contract of service, whereby the Party of
the First Part hires and employs the Party of the Second Part on
the following terms and conditions, to wit:
That the Party of the First Part will finance as she has hereby
financed the sum of TWENTY SEVEN THOUSAND PESOS
(P27,000.00), Philippine Currency, to the Party of the Second Part
who renders only his services for the construction and
improvements of a fishpond at Barrio Malalag, Municipality of
Padada, Province of Davao, Philippines;
That the Party of the Second Part will be the Manager and sole
buyer of all the produce of the fish that will be produced from said
fishpond;

That the Party of the First Part will be the administrator of the
same she having financed the construction and improvement of
said fishpond;
That this contract was the result of a verbal agreement entered
into between the Parties sometime in the month of November,
1947, with all the above-mentioned conditions enumerated; ...
On the same date the above contract was entered into, Inocencia Deluao
executed a special power of attorney in favor of Jesus Donesa, extending
to the latter the authority "To represent me in the administration of the
fishpond at Malalag, Municipality of Padada, Province of Davao,
Philippines, which has been applied for fishpond permit by Nicanor
Casteel, but rejected by the Bureau of Fisheries, and to supervise,
demand, receive, and collect the value of the fish that is being
periodically realized from it...."
On November 29, 1949 the Director of Fisheries rejected the application
filed by Felipe Deluao on November 17, 1948. Unfazed by this rejection,
Deluao reiterated his claim over the same area in the two administrative
cases (DANR Cases 353 and 353-B) and asked for reinvestigation of the
application of Nicanor Casteel over the subject fishpond. However, by
letter dated March 15, 1950 sent to the Secretary of Commerce and
Agriculture and Natural Resources (now Secretary of Agriculture and
Natural Resources), Deluao withdrew his petition for reinvestigation.
On September 15, 1950 the Secretary of Agriculture and Natural
Resources issued a decision in DANR Case 353, the dispositive portion of
which reads as follows:
In view of all the foregoing considerations, Fp. A. No. 661 (now Fp.
A. No. 1717) of Nicanor Casteel should be, as hereby it is,
reinstated and given due course for the area indicated in the
sketch drawn at the back of the last page hereof; and Fp. A. No.
762 of Victorio D. Carpio shall remain rejected.
On the same date, the same official issued a decision in DANR Case 353B, the dispositive portion stating as follows:
WHEREFORE, Fishpond Permit No. F-289-C of Leoncio Aradillos
and Fishpond Permit No. F-539-C of Alejandro Cacam, should be,

as they are hereby cancelled and revoked; Nicanor Casteel is


required to pay the improvements introduced thereon by said
permittees in accordance with the terms and dispositions
contained elsewhere in this decision....
Sometime in January 1951 Nicanor Casteel forbade Inocencia Deluao
from further administering the fishpond, and ejected the latter's
representative (encargado), Jesus Donesa, from the premises.
Alleging violation of the contract of service (exhibit A) entered into
between Inocencia Deluao and Nicanor Casteel, Felipe Deluao and
Inocencia Deluao on April 3, 1951 filed an action in the Court of First
Instance of Davao for specific performance and damages against Nicanor
Casteel and Juan Depra (who, they alleged, instigated Casteel to violate
his contract), praying inter alia, (a) that Casteel be ordered to respect
and abide by the terms and conditions of said contract and that Inocencia
Deluao be allowed to continue administering the said fishpond and
collecting the proceeds from the sale of the fishes caught from time to
time; and (b) that the defendants be ordered to pay jointly and severally
to plaintiffs the sum of P20,000 in damages.
On April 18, 1951 the plaintiffs filed an ex parte motion for the issuance
of a preliminary injunction, praying among other things, that during the
pendency of the case and upon their filling the requisite bond as may be
fixed by the court, a preliminary injunction be issued to restrain Casteel
from doing the acts complained of, and that after trial the said injunction
be made permanent. The lower court on April 26, 1951 granted the
motion, and, two days later, it issued a preliminary mandatory injunction
addressed to Casteel, the dispositive portion of which reads as follows:
POR EL PRESENTE, queda usted ordenado que, hasta nueva
orden, usted, el demandado y todos usu abogados, agentes,
mandatarios y demas personas que obren en su ayuda, desista de
impedir a la demandante Inocencia R. Deluao que continue
administrando personalmente la pesqueria objeto de esta causa y
que la misma continue recibiendo los productos de la venta de los
pescados provenientes de dicha pesqueria, y que, asimismo, se
prohibe a dicho demandado Nicanor Casteel a desahuciar
mediante fuerza al encargado de los demandantes llamado Jesus
Donesa de la pesqueria objeto de la demanda de autos.

On May 10, 1951 Casteel filed a motion to dissolve the injunction,


alleging among others, that he was the owner, lawful applicant and
occupant of the fishpond in question. This motion, opposed by the
plaintiffs on June 15, 1951, was denied by the lower court in its order of
June 26, 1961.
The defendants on May 14, 1951 filed their answer with counterclaim,
amended on January 8, 1952, denying the material averments of the
plaintiffs' complaint. A reply to the defendants' amended answer was
filed by the plaintiffs on January 31, 1952.
The defendant Juan Depra moved on May 22, 1951 to dismiss the
complaint as to him. On June 4, 1951 the plaintiffs opposed his motion.
The defendants filed on October 3, 1951 a joint motion to dismiss on the
ground that the plaintiffs' complaint failed to state a claim upon which
relief may be granted. The motion, opposed by the plaintiffs on October
12, 1951, was denied for lack of merit by the lower court in its order of
October 22, 1951. The defendants' motion for reconsideration filed on
October 31, 1951 suffered the same fate when it was likewise denied by
the lower court in its order of November 12, 1951.
After the issues were joined, the case was set for trial. Then came a
series of postponements. The lower court (Branch I, presided by Judge
Enrique A. Fernandez) finally issued on March 21, 1956 an order in open
court, reading as follows: .
Upon petition of plaintiffs, without any objection on the part of
defendants, the hearing of this case is hereby transferred to May 2
and 3, 1956 at 8:30 o'clock in the morning.
This case was filed on April 3, 1951 and under any circumstance
this Court will not entertain any other transfer of hearing of this
case and if the parties will not be ready on that day set for hearing,
the court will take the necessary steps for the final determination
of this case. (emphasis supplied)
On April 25, 1956 the defendants' counsel received a notice of hearing
dated April 21, 1956, issued by the office of the Clerk of Court (thru the
special deputy Clerk of Court) of the Court of First Instance of Davao,
setting the hearing of the case for May 2 and 3, 1956 before Judge

Amador Gomez of Branch II. The defendants, thru counsel, on April 26,
1956 filed a motion for postponement. Acting on this motion, the lower
court (Branch II, presided by Judge Gomez) issued an order dated April
27, 1956, quoted as follows:
This is a motion for postponement of the hearing of this case set
for May 2 and 3, 1956. The motion is filed by the counsel for the
defendants and has the conformity of the counsel for the plaintiffs.
An examination of the records of this case shows that this case was
initiated as early as April 1951 and that the same has been under
advisement of the Honorable Enrique A. Fernandez, Presiding
Judge of Branch No. I, since September 24, 1953, and that various
incidents have already been considered and resolved by Judge
Fernandez on various occasions. The last order issued by Judge
Fernandez on this case was issued on March 21, 1956, wherein he
definitely states that the Court will not entertain any further
postponement of the hearing of this case.
CONSIDERING ALL THE FOREGOING, the Court believes that the
consideration and termination of any incident referring to this case
should be referred back to Branch I, so that the same may be
disposed of therein. (emphasis supplied)
A copy of the abovequoted order was served on the defendants' counsel
on May 4, 1956.
On the scheduled date of hearing, that is, on May 2, 1956, the lower
court (Branch I, with Judge Fernandez presiding), when informed about
the defendants' motion for postponement filed on April 26, 1956, issued
an order reiterating its previous order handed down in open court on
March 21, 1956 and directing the plaintiffs to introduce their evidence ex
parte, there being no appearance on the part of the defendants or their
counsel. On the basis of the plaintiffs' evidence, a decision was rendered
on May 4, 1956 the dispositive portion of which reads as follows:
EN SU VIRTUD, el Juzgado dicta de decision a favor de los
demandantes y en contra del demandado Nicanor Casteel:
(a) Declara permanente el interdicto prohibitorio expedido contra
el demandado;

(b) Ordena al demandado entregue la demandante la posesion y


administracion de la mitad () del "fishpond" en cuestion con
todas las mejoras existentes dentro de la misma;
(c) Condena al demandado a pagar a la demandante la suma de
P200.00 mensualmente en concepto de danos a contar de la fecha
de la expiracion de los 30 dias de la promulgacion de esta decision
hasta que entregue la posesion y administracion de la porcion del
"fishpond" en conflicto;
(d) Condena al demandado a pagar a la demandante la suma de
P2,000.00 valor de los pescado beneficiados, mas los intereses
legales de la fecha de la incoacion de la demanda de autos hasta el
completo pago de la obligacion principal;
(e) Condena al demandado a pagar a la demandante la suma de
P2,000.00, por gastos incurridos por aquella durante la pendencia
de esta causa;
(f) Condena al demandado a pagar a la demandante, en concepto
de honorarios, la suma de P2,000.00;
(g) Ordena el sobreseimiento de esta demanda, por insuficiencia de
pruebas, en tanto en cuanto se refiere al demandado Juan Depra;
(h) Ordena el sobreseimiento de la reconvencion de los
demandados por falta de pruebas;
(i) Con las costas contra del demandado, Casteel.
The defendant Casteel filed a petition for relief from the foregoing
decision, alleging, inter alia, lack of knowledge of the order of the court a
quo setting the case for trial. The petition, however, was denied by the
lower court in its order of May 21, 1956, the pertinent portion of which
reads as follows:
The duty of Atty. Ruiz, was not to inquire from the Clerk of Court
whether the trial of this case has been transferred or not, but to
inquire from the presiding Judge, particularly because his motion
asking the transfer of this case was not set for hearing and was not
also acted upon.

Atty. Ruiz knows the nature of the order of this Court dated March
21, 1956, which reads as follows:
Upon petition of the plaintiff without any objection on the
part of the defendants, the hearing of this case is hereby
transferred to May 2 and 3, 1956, at 8:30 o'clock in the
morning.
This case was filed on April 3, 1951, and under any
circumstance this Court will not entertain any other transfer
of the hearing of this case, and if the parties will not be
ready on the day set for hearing, the Court will take
necessary steps for the final disposition of this case.
In view of the order above-quoted, the Court will not accede to any
transfer of this case and the duty of Atty. Ruiz is no other than to
be present in the Sala of this Court and to call the attention of the
same to the existence of his motion for transfer.
Petition for relief from judgment filed by Atty. Ruiz in behalf of the
defendant, not well taken, the same is hereby denied.
Dissatisfied with the said ruling, Casteel appealed to the Court of Appeals
which certified the case to us for final determination on the ground that it
involves only questions of law.
Casteel raises the following issues:
(1) Whether the lower court committed gross abuse of discretion
when it ordered reception of the appellees' evidence in the
absence of the appellant at the trial on May 2, 1956, thus depriving
the appellant of his day in court and of his property without due
process of law;
(2) Whether the lower court committed grave abuse of discretion
when it denied the verified petition for relief from judgment filed
by the appellant on May 11, 1956 in accordance with Rule 38,
Rules of Court; and

(3) Whether the lower court erred in ordering the issuance ex


parte of a writ of preliminary injunction against defendantappellant, and in not dismissing appellees' complaint.
1. The first and second issues must be resolved against the appellant.
The record indisputably shows that in the order given in open court on
March 21, 1956, the lower court set the case for hearing on May 2 and 3,
1956 at 8:30 o'clock in the morning and empathically stated that, since
the case had been pending since April 3, 1951, it would not entertain any
further motion for transfer of the scheduled hearing.
An order given in open court is presumed received by the parties on the
very date and time of promulgation,1 and amounts to a legal notification
for all legal purposes.2 The order of March 21, 1956, given in open court,
was a valid notice to the parties, and the notice of hearing dated April 21,
1956 or one month thereafter, was a superfluity. Moreover, as between
the order of March 21, 1956, duly promulgated by the lower court, thru
Judge Fernandez, and the notice of hearing signed by a "special deputy
clerk of court" setting the hearing in another branch of the same court,
the former's order was the one legally binding. This is because the
incidents of postponements and adjournments are controlled by the court
and not by the clerk of court, pursuant to section 4, Rule 31 (now sec. 3,
Rule 22) of the Rules of Court.
Much less had the clerk of court the authority to interfere with the order
of the court or to transfer the cage from one sala to another without
authority or order from the court where the case originated and was
being tried. He had neither the duty nor prerogative to re-assign the trial
of the case to a different branch of the same court. His duty as such clerk
of court, in so far as the incident in question was concerned, was simply
to prepare the trial calendar. And this duty devolved upon the clerk of
court and not upon the "special deputy clerk of court" who purportedly
signed the notice of hearing.
It is of no moment that the motion for postponement had the conformity
of the appellees' counsel. The postponement of hearings does not depend
upon agreement of the parties, but upon the court's discretion. 3
The record further discloses that Casteel was represented by a total of 12
lawyers, none of whom had ever withdrawn as counsel. Notice to Atty.

Ruiz of the order dated March 21, 1956 intransferably setting the case
for hearing for May 2 and 3, 1956, was sufficient notice to all the
appellant's eleven other counsel of record. This is a well-settled rule in
our jurisdiction.4
It was the duty of Atty. Ruiz, or of the other lawyers of record, not
excluding the appellant himself, to appear before Judge Fernandez on the
scheduled dates of hearing Parties and their lawyers have no right to
presume that their motions for postponement will be granted. 5 For
indeed, the appellant and his 12 lawyers cannot pretend ignorance of the
recorded fact that since September 24, 1953 until the trial held on May
2, 1956, the case was under the advisement of Judge Fernandez who
presided over Branch I. There was, therefore, no necessity to "re-assign"
the same to Branch II because Judge Fernandez had exclusive control of
said case, unless he was legally inhibited to try the case and he was
not.
There is truth in the appellant's contention that it is the duty of the clerk
of court not of the Court to prepare the trial calendar. But the
assignment or reassignment of cases already pending in one sala to
another sala, and the setting of the date of trial after the trial calendar
has been prepared, fall within the exclusive control of the presiding
judge.
The appellant does not deny the appellees' claim that on May 2 and 3,
1956, the office of the clerk of court of the Court of First Instance of
Davao was located directly below Branch I. If the appellant and his
counsel had exercised due diligence, there was no impediment to their
going upstairs to the second storey of the Court of First Instance building
in Davao on May 2, 1956 and checking if the case was scheduled for
hearing in the said sala. The appellant after all admits that on May 2,
1956 his counsel went to the office of the clerk of court.
The appellant's statement that parties as a matter of right are entitled to
notice of trial, is correct. But he was properly accorded this right. He was
notified in open court on March 21, 1956 that the case was definitely and
intransferably set for hearing on May 2 and 3, 1956 before Branch I. He
cannot argue that, pursuant to the doctrine in Siochi vs. Tirona,6 his
counsel was entitled to a timely notice of the denial of his motion for
postponement. In the cited case the motion for postponement was the
first one filed by the defendant; in the case at bar, there had already been

a series of postponements. Unlike the case at bar, the Siochi case was not
intransferably set for hearing. Finally, whereas the cited case did not
spend for a long time, the case at bar was only finally and intransferably
set for hearing on March 21, 1956 after almost five years had elapsed
from the filing of the complaint on April 3, 1951.
The pretension of the appellant and his 12 counsel of record that they
lacked ample time to prepare for trial is unacceptable because between
March 21, 1956 and May 2, 1956, they had one month and ten days to do
so. In effect, the appellant had waived his right to appear at the trial and
therefore he cannot be heard to complain that he has been deprived of
his property without due process of law.7 Verily, the constitutional
requirements of due process have been fulfilled in this case: the lower
court is a competent court; it lawfully acquired jurisdiction over the
person of the defendant (appellant) and the subject matter of the action;
the defendant (appellant) was given an opportunity to be heard; and
judgment was rendered upon lawful hearing.8
2. Finally, the appellant contends that the lower court incurred an error
in ordering the issuance ex parte of a writ of preliminary injunction
against him, and in not dismissing the appellee's complaint. We find this
contention meritorious.
Apparently, the court a quo relied on exhibit A the so-called "contract
of service" and the appellees' contention that it created a contract of
co-ownership and partnership between Inocencia Deluao and the
appellant over the fishpond in question.
Too well-settled to require any citation of authority is the rule that
everyone is conclusively presumed to know the law. It must be assumed,
conformably to such rule, that the parties entered into the so-called
"contract of service" cognizant of the mandatory and prohibitory laws
governing the filing of applications for fishpond permits. And since they
were aware of the said laws, it must likewise be assumed in fairness to
the parties that they did not intend to violate them. This view must
perforce negate the appellees' allegation that exhibit A created a
contract of co-ownership between the parties over the disputed fishpond.
Were we to admit the establishment of a co-ownership violative of the
prohibitory laws which will hereafter be discussed, we shall be compelled
to declare altogether the nullity of the contract. This would certainly not
serve the cause of equity and justice, considering that rights and

obligations have already arisen between the parties. We shall therefore


construe the contract as one of partnership, divided into two parts
namely, a contract of partnership to exploit the fishpond pending its
award to either Felipe Deluao or Nicanor Casteel, and a contract of
partnership to divide the fishpond between them after such award. The
first is valid, the second illegal.
It is well to note that when the appellee Inocencia Deluao and the
appellant entered into the so-called "contract of service" on November
25, 1949, there were two pending applications over the fishpond. One
was Casteel's which was appealed by him to the Secretary of Agriculture
and Natural Resources after it was disallowed by the Director of
Fisheries on October 25, 1949. The other was Felipe Deluao's application
over the same area which was likewise rejected by the Director of
Fisheries on November 29, 1949, refiled by Deluao and later on
withdrawn by him by letter dated March 15, 1950 to the Secretary of
Agriculture and Natural Resources. Clearly, although the fishpond was
then in the possession of Casteel, neither he nor, Felipe Deluao was the
holder of a fishpond permit over the area. But be that as it may, they
were not however precluded from exploiting the fishpond pending
resolution of Casteel's appeal or the approval of Deluao's application over
the same area whichever event happened first. No law, rule or
regulation prohibited them from doing so. Thus, rather than let the
fishpond remain idle they cultivated it.
The evidence preponderates in favor of the view that the initial intention
of the parties was not to form a co-ownership but to establish a
partnership Inocencia Deluao as capitalist partner and Casteel as
industrial partner the ultimate undertaking of which was to divide into
two equal parts such portion of the fishpond as might have been
developed by the amount extended by the plaintiffs-appellees, with the
further provision that Casteel should reimburse the expenses incurred by
the appellees over one-half of the fishpond that would pertain to him.
This can be gleaned, among others, from the letter of Casteel to Felipe
Deluao on November 15, 1949, which states, inter alia:
... [W]ith respect to your allowing me to use your money, same will
redound to your benefit because you are the ones interested in half
of the work we have done so far, besides I did not insist on our
being partners in my fishpond permit, but it was you "Tatay" Eping
the one who wanted that we be partners and it so happened that

we became partners because I am poor, but in the midst of my


poverty it never occurred to me to be unfair to you. Therefore so
that each of us may be secured, let us have a document prepared
to the effect that we are partners in the fishpond that we caused to
be made here in Balasinon, but it does not mean that you will treat
me as one of your "Bantay" (caretaker) on wage basis but not
earning wages at all, while the truth is that we are partners. In the
event that you are not amenable to my proposition and consider
me as "Bantay" (caretaker) instead, do not blame me if I withdraw
all my cases and be left without even a little and you likewise.
(emphasis supplied)9
Pursuant to the foregoing suggestion of the appellant that a document be
drawn evidencing their partnership, the appellee Inocencia Deluao and
the appellant executed exhibit A which, although denominated a
"contract of service," was actually the memorandum of their partnership
agreement. That it was not a contract of the services of the appellant,
was admitted by the appellees themselves in their letter 10 to Casteel
dated December 19, 1949 wherein they stated that they did not employ
him in his (Casteel's) claim but because he used their money in
developing and improving the fishpond, his right must be divided
between them. Of course, although exhibit A did not specify any wage or
share appertaining to the appellant as industrial partner, he was so
entitled this being one of the conditions he specified for the execution
of the document of partnership.11
Further exchanges of letters between the parties reveal the continuing
intent to divide the fishpond. In a letter, 12dated March 24, 1950, the
appellant suggested that they divide the fishpond and the remaining
capital, and offered to pay the Deluaos a yearly installment of P3,000
presumably as reimbursement for the expenses of the appellees for the
development and improvement of the one-half that would pertain to the
appellant. Two days later, the appellee Felipe Deluao replied, 13expressing
his concurrence in the appellant's suggestion and advising the latter to
ask for a reconsideration of the order of the Director of Fisheries
disapproving his (appellant's) application, so that if a favorable decision
was secured, then they would divide the area.
Apparently relying on the partnership agreement, the appellee Felipe
Deluao saw no further need to maintain his petition for the
reinvestigation of Casteel's application. Thus by letter 14 dated March 15,

1950 addressed to the Secretary of Agriculture and Natural Resources,


he withdrew his petition on the alleged ground that he was no longer
interested in the area, but stated however that he wanted his interest to
be protected and his capital to be reimbursed by the highest bidder.
The arrangement under the so-called "contract of service" continued until
the decisions both dated September 15, 1950 were issued by the
Secretary of Agriculture and Natural Resources in DANR Cases 353 and
353-B. This development, by itself, brought about the dissolution of the
partnership. Moreover, subsequent events likewise reveal the intent of
both parties to terminate the partnership because each refused to share
the fishpond with the other.
Art. 1830(3) of the Civil Code enumerates, as one of the causes for the
dissolution of a partnership, "... any event which makes it unlawful for
the business of the partnership to be carried on or for the members to
carry it on in partnership." The approval of the appellant's fishpond
application by the decisions in DANR Cases 353 and 353-B brought to the
fore several provisions of law which made the continuation of the
partnership unlawful and therefore caused its ipso facto dissolution.
Act 4003, known as the Fisheries Act, prohibits the holder of a fishpond
permit (the permittee) from transferring or subletting the fishpond
granted to him, without the previous consent or approval of the Secretary
of Agriculture and Natural Resources.15 To the same effect is Condition
No. 3 of the fishpond permit which states that "The permittee shall not
transfer or sublet all or any area herein granted or any rights acquired
therein without the previous consent and approval of this Office."
Parenthetically, we must observe that in DANR Case 353-B, the permit
granted to one of the parties therein, Leoncio Aradillos, was cancelled
not solely for the reason that his permit covered a portion of the area
included in the appellant's prior fishpond application, but also because,
upon investigation, it was ascertained thru the admission of Aradillos
himself that due to lack of capital, he allowed one Lino Estepa to develop
with the latter's capital the area covered by his fishpond permit F-289-C
with the understanding that he (Aradillos) would be given a share in the
produce thereof.16
Sec. 40 of Commonwealth Act 141, otherwise known as the Public Land
Act, likewise provides that

The lessee shall not assign, encumber, or sublet his rights without
the consent of the Secretary of Agriculture and Commerce, and the
violation of this condition shall avoid the contract; Provided, That
assignment, encumbrance, or subletting for purposes of
speculation shall not be permitted in any case: Provided, further,
That nothing contained in this section shall be understood or
construed to permit the assignment, encumbrance, or subletting of
lands leased under this Act, or under any previous Act, to persons,
corporations, or associations which under this Act, are not
authorized to lease public lands.
Finally, section 37 of Administrative Order No. 14 of the Secretary of
Agriculture and Natural Resources issued in August 1937, prohibits a
transfer or sublease unless first approved by the Director of Lands and
under such terms and conditions as he may prescribe. Thus, it states:
When a transfer or sub-lease of area and improvement may be
allowed. If the permittee or lessee had, unless otherwise
specifically provided, held the permit or lease and actually
operated and made improvements on the area for at least one year,
he/she may request permission to sub-lease or transfer the area
and improvements under certain conditions.
(a) Transfer subject to approval. A sub-lease or transfer shall
only be valid when first approved by the Director under such terms
and conditions as may be prescribed, otherwise it shall be null and
void. A transfer not previously approved or reported shall be
considered sufficient cause for the cancellation of the permit or
lease and forfeiture of the bond and for granting the area to a
qualified applicant or bidder, as provided in subsection (r) of Sec.
33 of this Order.
Since the partnership had for its object the division into two equal parts
of the fishpond between the appellees and the appellant after it shall
have been awarded to the latter, and therefore it envisaged the
unauthorized transfer of one-half thereof to parties other than the
applicant Casteel, it was dissolved by the approval of his application and
the award to him of the fishpond. The approval was an event which made
it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership.

The appellees, however, argue that in approving the appellant's


application, the Secretary of Agriculture and Natural Resources likewise
recognized and/or confirmed their property right to one-half of the
fishpond by virtue of the contract of service, exhibit A. But the
untenability of this argument would readily surface if one were to
consider that the Secretary of Agriculture and Natural Resources did not
do so for the simple reason that he does not possess the authority to
violate the aforementioned prohibitory laws nor to exempt anyone from
their operation.
However, assuming in gratia argumenti that the approval of Casteel's
application, coupled with the foregoing prohibitory laws, was not enough
to cause the dissolution ipso facto of their partnership, succeeding events
reveal the intent of both parties to terminate the partnership by refusing
to share the fishpond with the other.
On December 27, 1950 Casteel wrote17 the appellee Inocencia Deluao,
expressing his desire to divide the fishpond so that he could administer
his own share, such division to be subject to the approval of the
Secretary of Agriculture and Natural Resources. By letter dated
December 29, 1950,18 the appellee Felipe Deluao demurred to Casteel's
proposition because there were allegedly no appropriate grounds to
support the same and, moreover, the conflict over the fishpond had not
been finally resolved.
The appellant wrote on January 4, 1951 a last letter 19 to the appellee
Felipe Deluao wherein the former expressed his determination to
administer the fishpond himself because the decision of the Government
was in his favor and the only reason why administration had been
granted to the Deluaos was because he was indebted to them. In the
same letter, the appellant forbade Felipe Deluao from sending the
couple's encargado, Jesus Donesa, to the fishpond. In reply thereto,
Felipe Deluao wrote a letter20 dated January 5, 1951 in which he
reiterated his refusal to grant the administration of the fishpond to the
appellant, stating as a ground his belief "that only the competent
agencies of the government are in a better position to render any
equitable arrangement relative to the present case; hence, any action we
may privately take may not meet the procedure of legal order."
Inasmuch as the erstwhile partners articulated in the aforecited letters
their respective resolutions not to share the fishpond with each other

in direct violation of the undertaking for which they have established


their partnership each must be deemed to have expressly withdrawn
from the partnership, thereby causing its dissolution pursuant to art.
1830(2) of the Civil Code which provides, inter alia, that dissolution is
caused "by the express will of any partner at any time."
In this jurisdiction, the Secretary of Agriculture and Natural Resources
possesses executive and administrative powers with regard to the survey,
classification, lease, sale or any other form of concession or disposition
and management of the lands of the public domain, and, more
specifically, with regard to the grant or withholding of licenses, permits,
leases and contracts over portions of the public domain to be utilized as
fishponds.21, Thus, we held in Pajo, et al. vs. Ago, et al. (L-15414, June 30,
1960), and reiterated in Ganitano vs. Secretary of Agriculture and
Natural Resources, et al.
(L-21167, March 31, 1966), that
... [T]he powers granted to the Secretary of Agriculture and
Commerce (Natural Resources) by law regarding the disposition of
public lands such as granting of licenses, permits, leases, and
contracts, or approving, rejecting, reinstating, or cancelling
applications, or deciding conflicting applications, are all executive
and administrative in nature. It is a well-recognized principle that
purely administrative and discretionary functions may not be
interfered with by the courts (Coloso v. Board of Accountancy, G.R.
No. L-5750, April 20, 1953). In general, courts have no supervising
power over the proceedings and action of the administrative
departments of the government. This is generally true with respect
to acts involving the exercise of judgment or discretion, and
findings of fact. (54 Am. Jur. 558-559) Findings of fact by an
administrative board or official, following a hearing, are binding
upon the courts and will not be disturbed except where the board
or official has gone beyond his statutory authority, exercised
unconstitutional powers or clearly acted arbitrarily and without
regard to his duty or with grave abuse of discretion... (emphasis
supplied)
In the case at bar, the Secretary of Agriculture and Natural Resources
gave due course to the appellant's fishpond application 1717 and
awarded to him the possession of the area in question. In view of the
finality of the Secretary's decision in DANR Cases 353 and 353-B, and

considering the absence of any proof that the said official exceeded his
statutory authority, exercised unconstitutional powers, or acted with
arbitrariness and in disregard of his duty, or with grave abuse of
discretion, we can do no less than respect and maintain unfettered his
official acts in the premises. It is a salutary rule that the judicial
department should not dictate to the executive department what to do
with regard to the administration and disposition of the public domain
which the law has entrusted to its care and administration. Indeed,
courts cannot superimpose their discretion on that of the land
department and compel the latter to do an act which involves the
exercise of judgment and discretion.22
Therefore, with the view that we take of this case, and even assuming
that the injunction was properly issued because present all the requisite
grounds for its issuance, its continuation, and, worse, its declaration as
permanent, was improper in the face of the knowledge later acquired by
the lower court that it was the appellant's application over the fishpond
which was given due course. After the Secretary of Agriculture and
Natural Resources approved the appellant's application, he became to all
intents and purposes the legal permittee of the area with the
corresponding right to possess, occupy and enjoy the same.
Consequently, the lower court erred in issuing the preliminary mandatory
injunction. We cannot overemphasize that an injunction should not be
granted to take property out of the possession and control of one party
and place it in the hands of another whose title has not been clearly
established by law.23
However, pursuant to our holding that there was a partnership between
the parties for the exploitation of the fishpond before it was awarded to
Casteel, this case should be remanded to the lower court for the
reception of evidence relative to an accounting from November 25, 1949
to September 15, 1950, in order for the court to determine (a) the profits
realized by the partnership, (b) the share (in the profits) of Casteel as
industrial partner, (e) the share (in the profits) of Deluao as capitalist
partner, and (d) whether the amounts totalling about P27,000 advanced
by Deluao to Casteel for the development and improvement of the
fishpond have already been liquidated. Besides, since the appellee
Inocencia Deluao continued in possession and enjoyment of the fishpond
even after it was awarded to Casteel, she did so no longer in the concept
of a capitalist partner but merely as creditor of the appellant, and
therefore, she must likewise submit in the lower court an accounting of
the proceeds of the sales of all the fishes harvested from the fishpond

from September 16, 1950 until Casteel shall have been finally given the
possession and enjoyment of the same. In the event that the appellee
Deluao has received more than her lawful credit of P27,000 (or whatever
amounts have been advanced to Casteel), plus 6% interest thereon per
annum, then she should reimburse the excess to the appellant.
ACCORDINGLY, the judgment of the lower court is set aside. Another
judgment is hereby rendered: (1) dissolving the injunction issued against
the appellant, (2) placing the latter back in possession of the fishpond in
litigation, and (3) remanding this case to the court of origin for the
reception of evidence relative to the accounting that the parties must
perforce render in the premises, at the termination of which the court
shall render judgment accordingly. The appellant's counterclaim is
dismissed. No pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,
Fernando and Capistrano, JJ., concur.

15th Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. 21639

September 25, 1924

ALBERT F. KIEL, plaintiff-appellee,


vs.
ESTATE OF P. S. SABERT, defendant-appellant.
J. F. Yeager for appellant.
J. S. Alano for appellee.
MALCOLM, J.:
This action relates to the legal right of Albert F. Kiel to secure from the
estate of P. S. Sabert the sum of P20,000, on a claim first presented to the
commissioners and disallowed, then on appeal to the Court of First
Instance allowed, and ultimately the subject-matter of the appeal taken
to this court.
A skeletonized statement of the case and the facts based on the
complaint, the findings of the trial judge, and the record, may be made in
the following manner:
In 1907, Albert F. Kiel along with William Milfeil commenced to work on
certain public lands situated in the municipality of Parang, Province of
Cotabato, known as Parang Plantation Company. Kiel subsequently took
over the interest of Milfeil. In 1910, Kiel and P. S. Sabert entered into an
agreement to develop the Parang Plantation Company. Sabert was to
furnish the capital to run the plantation and Kiel was to manage it. They
were to share and share alike in the property. It seems that this
partnership was formed so that the land could be acquired in the name of
Sabert, Kiel being a German citizen and not deemed eligible to acquire
public lands in the Philippines.

By virtue of the agreement, from 1910 to 1917, Kiel worked upon and
developed the plantation. During the World War, he was deported from
the Philippines.
On August 16, 1919, five persons, including P. S. Sabert, organized the
Nituan Plantation Company, with a subscribed capital of P40,000. On
April 10, 1922, P. S. Sabert transferred all of his rights in two parcels of
land situated in the municipality of Parang, Province of Cotabato,
embraced within his homestead application No. 21045 and his purchase
application No. 1048, in consideration of the sum of P1, to the Nituan
Plantation Company.
In this same period, Kiel appears to have tried to secure a settlement
from Sabert. At least in a letter dated June 6, 1918, Sabert wrote Kiel
that he had offered "to sell all property that I have for P40,000 or take in
a partner who is willing to develop the plantation, to take up the K. & S.
debt no matter which way I will straiten out with you." But Sabert's death
came before any amicable arrangement could be reached and before an
action by Kiel against Sabert could be decided. So these proceedings
against the estate of Sabert.
In this court, the defendant-appellant assigns the following errors:
The lower court erred
(1) In finding this was an action to establish a resulting trust in
land.
(2) In finding a resulting trust in land could have been established
in public lands in favor of plaintiff herein who was an alien subject
at the same time said alleged resulting trust was created.
(3) In finding a resulting trust in land had been established by the
evidence in the case.
(4) In admitting the testimony of the plaintiff herein.
(5) In admitting the testimony of William Milfeil, John C.
Beyersdorfer, Frank R. Lasage, Oscar C. Butler and Stephen Jurika

with reference to alleged statements and declarations of the


deceased P. S. Sabert.
(6) In finding any copartnership existed between plaintiff and the
deceased Sabert.
(7) In rendering judgment for the plaintiff herein.
Errors 1, 2, and 3, relating to resulting trusts. These three errors
discussing the same subject may be resolved together. In effect, as will
soon appear, we reach the conclusion that both parties were in error in
devoting so much time to the elaboration of these questions, and that a
ruling on the same is not needed.
It is conceivable, that the facts in this case could have been so presented
to the court by means of allegations in the complaint, as to disclose
characteristics of a resulting trust. But the complaint as framed asks for
a straight money judgment against an estate. In no part of the complaint
did plaintiff allege any interest in land, claim any interest in land, or
pretend to establish a resulting trust in land. That the plaintiff did not
care to press such an action is demonstrated by the relation of the fact of
alienage with the rule, that a trust will not be created when, for the
purpose of evading the law prohibiting one from taking or holding real
property, he takes a conveyance thereof in the name of a third person.
(26 R. C. L., 1214-1222; Leggett vs. Dubois [1835], 5 Paige, N. Y., 114; 28
Am. Dec., 413.)
The parties are wrong in assuming that the trial judge found that this
was an action to establish a resulting trust in land. In reality, all that the
trial judge did was to ground one point of his decision on an authority
coming from the Supreme Court of California, which discussed the
subject of resulting trusts.
Error 4, relating to the admission of testimony of the plaintiff herein.
Well taken.

The Code of Civil Procedure in section 383, No. 7, names as incompetent


witnesses, parties to an action or proceeding against an executor or
administrator of a deceased person upon a claim or demand against the
estate of such deceased person, who "cannot testify as to any matter of
fact occuring before the death of such deceased person." But the trial
judge, misled somewhat by the decision of the Supreme Court of
California in the city of Myers vs. Reinstein ([1885], 67 Cal., 89),
permitted this testimony to go in, whereas if the decision had been read
more carefully, it would have been noted that "the action was not on a
claim or demand against the estate of Reinstein." Here this is exactly the
situation which confronts us.
The case of Maxilom vs. Tabotabo ([1907], 9 Phil., 390), is squarely on all
fours with the case at bar. It was there held that "A party to an action
against an executor or administrator of a deceased person, upon a claim
against the estate of the latter, is absolutely prohibited by law from
giving testimony concerning such claim or demand as to anything that
occurred before the death of the person against whose estate the action
is prosecuted."
Error 5, relating to the testimony of five witnesses with reference to
alleged statements and declarations of the deceased P. S. Sabert. Not
well taken.
By section 282 of the Code of Civil Procedure, the declaration, act, or
omission of a deceased person having sufficient knowledge of the subject,
against his pecuniary interest, is admissible as evidence to that extent
against his successor in interest. By section 298, No. 4, of the same Code,
evidence may be given up a trial of the following facts: ". . . the act or
declaration of a deceased person, done or made against his interest in
respect to his real property." (See Leonardo vs. Santiago [1907], 7 Phil.,
401.) The testimony of these witnesses with reference to the acts or
declarations of Sabert was, therefore, properly received for whatever
they might be worth.
Error 6, relating to the existence of a copartnership between Kiel and
Sabert. Not well taken.

No partnership agreement in writing was entered into by Kiel and


Sabert. The question consequently is whether or not the alleged verbal
copartnership formed by Kiel and Sabert has been proved, if we eliminate
the testimony of Kiel and only consider the relevant testimony of other
witnesses. In performing this task, we are not unaware of the rule of
partnership that the declarations of one partner, not made in the
presence of his copartner, are not competent to prove the existence of a
partnership between them as against such other partner, and that the
existence of a partnership cannot be established by general reputation,
rumor, or hearsay. (Mechem on Partnership, sec. 65; 20 R. C. L., sec. 53;
Owensboro Wagon Company vs. Bliss [1901], 132 Ala., 253.)
The testimony of the plaintiff's witnesses, together with the documentary
evidence, leaves the firm impression with us that Kiel and Sabert did
enter into a partnership, and that they were to share equally. Applying
the tests as to the existence of partnership, we feel that competent
evidence exists establishing the partnership. Even more primary than any
of the rules of partnership above announced, is the injunction to seek out
the intention of the parties, as gathered from the facts and as ascertained
from their language and conduct, and then to give this intention effect.
(Giles vs. Vette [1924], 263 U. S., 553.)
Error 7, relating to the judgment rendered for the plaintiff. Well taken
in part.
The judgment handed down, it will be remembered, permitted the
plaintiff to recover from the estate the full amount claimed, presumably
on the assumption that Sabert having sold by property to the Nituan
Plantation Company for P40,000, Kiel should have one-half of the same,
or P20,000. There is, however, extant in the record absolutely no
evidence as to the precise amount received by Sabert from the sale of
this particular land. If it is true that Sabert sold all his land to the Nituan
Plantation Company for P40,000, although this fact was not proven, what
part of the P40,000 would correspond to the property which belonged to
Kiel and Sabert under their partnership agreement? It impresses us
further that Kiel under the facts had no standing in court to ask for any
part of the land and in fact he does not do so; his only legal right is to ask

for what is in effect an accounting with reference to its improvements


and income as of 1917 when Sabert became the trustee of the estate on
behalf of Kiel.
As we have already intimated, we do not think that Kiel is entitled to any
share in the land itself, but we are of the opinion that he has clearly
shown his right to one-half of the value of the improvements and personal
property on the land as to the date upon which he left the plantation.
Such improvements and personal property include buildings, coconut
palms, and other plantings, cattle and other animals, implements, fences,
and other constructions, as well as outstanding collectible credits, if any,
belonging to the partnership. The value of these improvements and of the
personal property cannot be ascertained from the record and the case
must therefore be remanded for further proceedings.
In resume, we disregard errors 1, 2, and 3, we find well taken, errors 4
and 7, and we find not well taken, errors 5 and 6.
The judgment appealed from is set aside and the record is returned to
the lower court where the plaintiff, if he so desires, may proceed further
to prove his claim against the estate of P. S. Sabert. Without costs. So
ordered. Johnson, Street, Avancea, Villamor, Ostrand and Romualdez,
JJ., concur.

16th Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. 19892

September 6, 1923

TECK SEING AND CO., LTD., petitioner-appellee.


SANTIAGO JO CHUNG, ET AL., partners,
vs.
PACIFIC COMMERCIAL COMPANY, ET AL., creditors-appellants.

Del Rosario & Del Rosario and Block, Johnston and Greenbaum for
appellants.
F. V. Arias for appellants Jo Ibec and Go Tayco.
No appearance for petitioner and appellee.
Jose A. Espiritu and Felipe Ysmael as amici curiae.

municipio de Jagna, Provincia de Bohol, Islas Filipinas, hacemos


constar por la presente, que constituimos y formamos una
sociedad mercantil limitada, bajo las leyes vigentes en las Islas
Filipinas y para ser registrada de acuerdo con los reglamentos
vigentes del Codigo de Comercio en Filipinas.

MALCOLM, J.:

Que la razon social se denominara "Teck Seing & Co., Ltd." y


tendra su domicilio principal en la Calle Magallanes No. 94, de la
Ciudad de Cebu, Provincia de Cebu, Islas Filipinas.

Following the presentation of an application to be adjudged an insolvent


by the "Sociedad Mercantil, Teck Seing & Co., Ltd.," the creditors, the
Pacific Commercial Company, Piol & Company, Riu Hermanos, and W. H.
Anderson & Company, filed a motion in which the Court was prayed to
enter an order: "(A) Declaring the individual partners as described in
paragraph 5 parties to this proceeding; (B) to require each of said
partners to file an inventory of his property in the manner required by
section 51 of Act No. 1956; and (C) that each of said partners be
adjudicated insolvent debtors in this proceeding." The trial judge first
granted the motion, but, subsequently, on opposition being renewed,
denied it. It is from this last order that an appeal was taken in
accordance with section 82 of the Insolvency Law.
There has been laid before us for consideration and decision a question
of some importance and of some intricacy. The issue in the case relates to
a determination of the nature of the mercantile establishment which
operated under the name of Teck Seing & co., Ltd., and this issue
requires us to look into, and analyze, the document constituting Teck
Seing & Co., Ltd. It reads:
ESCRITURA DE SOCIEDAD MERCANTIL LIMITADA

Que el capital social sera de treinta mil pesos (P30,000) moneda


legal de las Islas Filipinas, dividido en cinco acciones de a P6,000
como sigue:

Santiago Jo Chung Cang . . . . . . . .


.....

P6,000.00

Go
Tayco . . . . . . . . . . . . . . . . . . . . . . .
...

6,000.00

Yap Gueco . . . . . . . . . . . . . . . . . . .
.....

6,000.00

Jo
Ybec . . . . . . . . . . . . . . . . . . . . . . .
....

6,000.00

Lim Yogsing . . . . . . . . . . . . . . . . . .
.....

6,000.00

Sepan todos por la presente:


Que nosotros, Santiago Jo Chung Cang, mayor de edad
comerciante, vecino y residente del municipio de Tabogon
Provincia de Cebu, Islas Filipinas, Go Tayco, mayor de edad,
comerciante, vecino y residente del municipio de Cebu Provincia
de Cebu, Islas Filipinas, Yap Gueco, mayor de edad, comerciante,
vecino y residente del municipio y Provincia de Cebu, Islas
Filipinas, Lim Yogsing, mayor de edad comerciante, vecino y
residente del municipio de Cebu, Provincia de Cebu, Islas Filipinas,
y Jo Ybec, mayor de edad, comerciante, vecino y residente del

Total . . . . . . . . . . . . . . . . . . . . . .

30,000.00

Que la duracion de la sociedad sera la de seis aos, a contar de la


fecha de esta escritura, pudiendo prorrogarse este tiempo a
discrecion unanime de todos los accionistas.
El objeto de la sociedad sera la compra y venta de mercaderias en
general.
El administrador o administradores de la sociedad podran, previa
conformidad de los accionistas, establecer cuantas sucursales o
establecimientos considere necesarios para facilitar sus negocios y
el mayor desarrollo del comercio a que se dedica la sociedad,
verificando todas las operaciones que crean convenientes para el
fomento de su capital.
Las ganancias o perdidas que resultaren durante cada ao
comercial, se distribuiran proporcionalmente entre los accionistas,
de acuerdo con el capital aportado por cada uno de los mismos.
Las ganancias que resultaren en cada ao comercial, si resultaren
algunas ganancias, no podran ser retiradas pors los accionistas
hasta dentro del termino de tres aos a contar de la fecha del
primer balance anual del negocio, quedadno por tanto estas
ganancias en reserva, para ampliar el capital aportado opor los
accionistas y ampliar por tanto la esfera de accion emprendida por
la misma sociedad. Al pasar o expirar el termino de tres aos, cada
accionista podra retirar o depositar en poder de la sociedad, las
ganancias que le debiera corresponder durante dicho termino
de tres aos.
Que los accionistas no podran extraer ni disponer en ningun
tiempo cualesquiera cantidad o cantidades de la sociedad, que
haya sido aportado por los mismos, para atender sus gastos
particulares ni aun pagando redito alguno sobre la cantidad que
intenen disponer o extraer de dicha sociedad.

El accionista Sr. Lim Yogsing tendra a su cargo, en union del Sr.


Vicente Jocson Jo, la administracion de la Compaia, quienes
podran usar indistintamente la firma social, quedando por
consiguiente autorizados amobs para hacer en nombre de ella toda
calse de operaciones, negocios y especulaciones mercantiles,
practicando judicial y extra-judicialment cuantos actos se
requieran para el bien de la sociedad, nombrar procuradores o
abogados para reclamaciones y cobro de creditos y proponer ante
los tribunales las demandas, convenios, transacciones y
excepciones procdentes. En caso de ausencia, enfermedad o
cualquier otro impedimento del accionista administrador Sr. Lim
Yogsing, este podra conferir poder general o especial al accionista
que crea conveniente para que en union del administrador auxiliar
Sr. Vicente Jocson Jo, pudieran ambos administrar
convenientemente los negocios de la sociedad. Que los
administradores podran tener los empleados necesarios para el
mejor que debieran percibir dichos empleados por servicios
rendidos a la sociedad.
Que ambos administradores podran disponer de mil discientos
pesos (P1,200) moneda filipina, anualmente, para sus gastos
particulares, siendo dicha cantidad de P1,200 la que corresponde a
cada uno de dichos administradores, como emolumentos o salarios
que se les asigna a cas uno, por sus trabajos en la administracion
de la sociedad. Entendiendose, que, los accionistas podran
disponer cada fin de aola gratificacion quese concedera a cada
administrador, si los negocios del ao fueran boyantes y justifiquen
la concesion de una gratificacion especial, aparte del salario aqui
dispuesto y especificado.
Que pasado el termino de seis aos, y es de la conveniencia de los
accionistas la continuacion del negocio de esta sociedad, dicho
termino sera prorrogado por igual numero de aos, sin necesidas
del otorgamiento de ulteriores escrituras, quedando la presente en
vigor hasta el termino dispuesto por todos los accionistas.
Que las diferencias que pudieran suscitarse entre los accionistas,
bien sea por razon de lo estipulado en esta en ella comprendidos,
se procurara arreglar entre los mismos amistosa y
extrajudicialmente, y si no se consiguiere un arreglo de este modo,
dichos accionistas nombraran un arbitro, cuya resolucion estan

todos obligados y por la presente se comprometen y se obligan a


acatarla en todas sus partes, renunciando ulteriores recursos.
En cuyos terminos dejamos formalizada esta escritura de sociedad
mercantillimitada, y prometemos cumplirla fiel y estrictamente
segun los pactos que hemos establecido.
En testimonio de todo lo cual, firmamos en la Ciudad de Cebu,
Provincia de Cebu, Islas Filipinas, hoy 31 de octubre de mil
novecientos diez y nueve.

Tayco tambien me exhibio la suya expedida en Cebu, Cebu, I.F., el


dia 9 de octubre de 1919 bajo el No. G2042490, Yap Gueco
tambien me exhibio la suya expedida en Cebu, Cebu, I.F. el dia 20
de enero de 1919 bajo el No. F1452296, Lim Yogsing tambien me
exhibio la suya expedida en Cebu, Cebu, I.F., el dia 26 de febrero
de 1919 bajo el No. F1455662, y Ho Seng Sian representante de Jo
Ybec, me exhibio su cedula personal expedida en Cebu, Cebu, I.f.
el dia 4 de febrero de 1919 bajo el No. F1453733.
Ante mi,

(Fdo.) "F.V.ARIAS
"Notario Publico
"Hasta el 1. de enero de 1920

(Fdos.) "LIM YOGSING


"Jo YBec por Ho Seng Sian
"SANTIAGO JO CHUNG CANG
"GO TAYCO
"YAP GUECO

Firnando en presencia de:


(Fdos.) "ATILANO LEYSON
"JULIO DIAZ
"ESTADOS UNIDOS DE AMERCA
"ISLAS FILIPINAS
"PROVINCIA DE CEBU
En el Municipio de Cebu, de la Provincia antes mencionada, I.F.,
hoy 31 de octubre de 1919, A.D., ante mi, Notario Publico que
subscribe, comprecieron personalmente Santiago Jo Chung Cang,
Go Tayco, Yap Gueco, Lim Yogsing y Jo Ybec, representado este
ultimo por Ho Seng Sian, segun autorizacion hecha en telegrama
de fecha 27 de septiembre de 1919 que se me ha presentado en
este mismo acto, de quienes doy fe de que les conozco por ser las
mismas personas que otorgaron el preinserto documento,
ratificando ant emi su contenido y manifestando ser el mismo un
acto de su libre y voluntario otorgamiento. El Sr. Santiago Jo
Chung Cang me exhibio su cedula personal expedida en Cebu,
Cebu, I.F. el dia 19 de septiembre de 1919 bajo el No. H77742, Go

"Asiento No. 157


Pagina No. 95 de mi
Registro Notarial
Serie 1919
Libro 2.
Presentado a las diez y cuarenta y tres minutos de la maana de
hoy, segun el asiento No. 125, pagina 9 del Tomo 1. del Libro
Diario. Cebu, 11 de febrero de 1920.

(Fdo.) "QUIRICO ABETO


[SELLO] "Registrador Mercantil ExOfficio"

Inscrito el documento que preced al folio 84 hoja No. 188,


inscripcion 1.a del Tomo 3. del Libro Registro de Sociedades
Mercantiles. Cebu, 11 de febrero de 1920. Honorarios treinta
pesos con cincuenta centavos. Art. 197, Ley No. 2711, Codigo
Administrativo.

(Fdo.) "QUIRICO ABETO


[SELLO] "Registrador Mercantil ExOfficio"

Proceeding by process of elimination, it is self-evident that Teck Seing &


Co., Ltd., is not a corporation. Neither is it contended by any one that
Teck Seing & Co., Ltd., is accidental partnership denominated cuenta en
participacion(joint account association).
Counsel for the petitioner and appellee described his client in once place
in his opposition to the motion of the creditors as "una verdadera
sociedad anonima" (a true sociedad anonima). The provisions of the Code
of Commerce relating to sociedades anonimas were, however, repealed
by section 191 of the Corporation Law (Act No. 1459), with the
exceptions the sociedades anonimas lawfully organized at the time of the
passage of the Corporation Law were recognized, which is not our case.
The document providing for the partnership contract purported to
form "una sociedad mercantil limitada," and counsel for the petitioner's
first contention was that Teck Seing & Co., Ltd., was not "una sociedad
regular colectiva, ni siquiera comanditaria, sino una sociedad mercantil
limitada." Let us see if the partnership contract created a "sociedad en
comandita," or, as it is known in English, and will hereafter be spoken of,
"a limited partnership."
To establish a limited partnership there must be, at least, one general
partner and the name of the least one of the general partners must
appear in the firm name. (Code of Commerce, arts. 122 [2], 146, 148.)
But neither of these requirements have been fulfilled. The general rule is,
that those who seek to avail themselves of the protection of laws
permitting the creation of limited partnerships must show a substantially
full compliance with such laws. A limited partnership that has not
complied with the law of its creation is not considered a limited
partnership at all, but a general partnership in which all the members
are liable. (Mechem, Elements of Partnership, p. 412; Gilmore,
Partnership, pp. 499, 595; 20 R C. L. 1064.)

The contention of the creditors and appellants is that the partnership


contract established a general partnership.
Article 125 of the Code of Commerce provides that the articles of general
copartnership must estate the names, surnames, and domiciles of the
partners; the firm name; the names, and surnames of the partners to
whom the management of the firm and the use of its signature is
instrusted; the capital which each partner contributes in cash, credits, or
property, stating the value given the latter or the basis on which their
appraisement is to be made; the duration of the copartnership; and the
amounts which, in a proper case, are to be given to each managing
partner annually for his private expenses, while the succeeding article of
the Code provides that the general copartnership must transact business
under the name of all its members, of several of them, or of one only.
Turning to the document before us, it will be noted that all of the
requirements of the Code have been met, with the sole exception of that
relating to the composition of the firm name. We leave consideration of
this phase of the case for later discussion.
The remaining possibility is the revised contention of counsel for the
petitioners to the effect that Teck Seing & Co., Ltd., is "una sociedad
mercantil "de facto" solamente" (only a de facto commercial association),
and that the decision of the Supreme court in the case of Hung-ManYoc vs. Kieng-Chiong-Seng [1906], 6 Phil., 498), is controlling. It was this
argument which convinced the trial judge, who gave effect to his
understanding of the case last cited and which here must be given
serious attention.
The decision in Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, discloses
that the firm Kieng-Chiong-Seng was not organized by means of any
public document; that the partnership had not been recorded in the
mercantile registry; and that Kieng-Chiong-Seng was not proven to be
the firm name, but rather the designation of the partnership. The
conclusion then was, that the partnership in question was merely de
facto and that, therefore, giving effect to the provisions of article 120 of
the Code of Commerce, the right of action was against the persons in
charge of the management of the association.
Laying the facts of the case of Hung-Man-Yoc vs. Kieng-ChiongSeng, supra, side by side with the facts before us, a marked difference is
at once disclosed. In the cited case, the organization of the partnership

was not evidenced by any public document; here, it is by a public


document. In the cited case, the partnership naturally could not present a
public instrument for record in the mercantile registry; here, the contract
of partnership has been duly registered. But the two cases are similar in
that the firm name failed to include the name of any of the partners.
We come then to the ultimate question, which is, whether we should
follow the decision in Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, or
whether we should differentiate the two cases, holding Teck Seing & Co.,
Ltd., a general copartnership, notwithstanding the failure of the firm
name to include the name of one of the partners. Let us now notice this
decisive point in the case.
Article 119 of the Code of Commerce requires every commercial
association before beginning its business to state its article, agreements,
and conditions in a public instrument, which shall be presented for
record in the mercantile registry. Article 120, next following, provides
that the persons in charge of the management of the association who
violate the provisions of the foregoing article shall be responsible in
solidum to the persons not members of the association with whom they
may have transacted business in the name of the association. Applied to
the facts before us, it would seem that Teck Seing & Co., Ltd. has fulfilled
the provisions of article 119. Moreover, to permit the creditors only to
look to the person in charge of the management of the association, the
partner Lim Yogsing, would not prove very helpful to them.
What is said in article 126 of the Code of Commerce relating to the
general copartnership transacting business under the name of all its
members or of several of them or of one only, is wisely included in our
commercial law. It would appear, however, that this provision was
inserted more for the protection of the creditors than of the partners
themselves. A distinction could well be drawn between the right of the
alleged partnership to institute action when failing to live up to the
provisions of the law, or even the rights of the partners as among
themselves, and the right of a third person to hold responsible a general
copartnership which merely lacks a legal firm name in order to make it a
partnership de jure.
The civil law and the common law alike seem to point to a difference
between the rights of the partners who have failed to comply with the
law and the rights of third persons who have dealt with the partnership.

The supreme court of Spain has repeatedly held that notwithstanding the
obligation of the members to register the articles of association in the
commercial registry, agreements containing all the essential requisites
are valid as between the contracting parties, whatever the form adopted,
and that, while the failure to register in the commercial registry
necessarily precludes the members from enforcing rights acquired by
them against third persons, such failure cannot prejudice the rights of
third persons. (See decisions of December 6, 1887, January 25, 1888,
November 10, 1890, and January 26, 1900.) The same reasoning would
be applicable to the less formal requisite pertaining to the firm name.
The common law is to the same effect. The State of Michigan had a
statute prohibiting the transaction of business under an assumed name
or any other than the real name of the individual conducting the same,
unless such person shall file with the county clerk a certificate setting
forth the name under which the business is to be conducted and the real
name of each of the partners, with their residences and post-office
addresses, and making a violation thereof a misdemeanor. The supreme
Court of Michigan said:
The one object of the act is manifestly to protect the public against
imposition and fraud, prohibiting persons from concealing their
identity by doing business under an assumed name, making it
unlawful to use other than their real names in transacting business
without a public record of who they are, available for use in courts,
and to punish those who violate the prohibition. The object of this
act is not limited to facilitating the collection of debts, or the
protection of those giving credit to persons doing business under
an assumed name. It is not unilateral in its application. It applies
to debtor and creditor, contractor and contractee, alike. Parties
doing business with those acting under an assumed name, whether
they buy or sell, have a right, under the law, to know who they are,
and who to hold responsible, in case the question of damages for
failure to perform or breach of warranty should arise.
The general rule is well settled that, where statutes enacted to
protect the public against fraud or imposition, or to safeguard the
public health or morals, contain a prohibition and impose a
penalty, all contracts in violation thereof are void. . . .

As this act involves purely business transactions, and affects only


money interests, we think it should be construed as rendering
contracts made in violation of it unlawful and unforceable at the
instance of the offending party only, but not as designed to take
away the rights of innocent parties who may have dealt with the
offenders in ignorance of their having violated the statute. (Cashin
vs. Pliter [1912], 168 Mich., 386; Ann. Cas. [1913-C, 697.)
The early decision of our Supreme Court in the case of Prautch Scholes &
Co. vs. Hernandez [1903], 1 Phil., 705), contains the following pertinent
observations:
Another case may be supposed. A partnership is organized for
commercial purposes. It fails to comply with the requirements of
article 119. A creditor sues the partnership for a debt contracted
by it, claiming to hold the partners severally. They answer that
their failure to comply with the Code of Commerce makes them a
civil partnership and that they are in accordance with article 1698
of the Civil Code only liable jointly. To allow such liberty of action
would be to permit the parties by a violation of the Code to escape
a liability which the law has seen fit to impose upon persons who
organized commercial partnership; "Because it would be contrary
to all legal principles that the nonperformance of a duty should
redound to the benefit of the person in default either intentional or
unintentional." (Mercantile Law, Eixala, fourth ed., p. 145.)" (See
also Lichauco vs. Lichauco [1916], 33 Phil., 350, 360.)
Dr. Jose de Echavarri y Vivanco, in his Codigo de Comercio, includes the
following comment after articles 121 and 126 of the Code:
From the decisions cited in this and in the previous comments, the
following is deduced: 1st. Defects in the organization cannot affect
relations with third persons. 2d. Members who contract with other
persons before the association is lawfully organized are liable to
these persons. 3d. The intention to form an association is
necessary, so that if the intention of mutual participation in the
profits and losses in a particular business is proved, and there are
no articles of association, there is no association. 4th. An
association, the articles of which have not been registered, is valid
in favor of third persons. 5th. The private pact or agreement to
form a commercial association is governed not by the commercial

law but by the civil law. 6th. Secret stipulationsexpressed in a


public instrument, but not inserted in the articles of association, do
not affect third persons, but are binding on the parties themselves.
7th. An agreement made in a public instrument, other than the
articles of association, by means of which one of the partners
guarantees to another certain profits or secures him from losses, is
valid between them, without affecting the association.
8th. Contracts entered into by commercial associations defectively
organized are valid when they are voluntarily executed by the
parties, if the only controversy relates to whether or not they
complied with the agreement.
xxx

xxx

xxx

The name of the collective merchant is called firm name. By this


name, the new being is distinguished from others, its sphere of
action fixed, and the juridical personality better determined,
without constituting an exclusive character of the general
partnership to such an extent as to serve the purpose of giving a
definition of said kind of a mercantile partnership, as is the case in
our Code.
Having in mind that these partnerships are prevailingly of a
personal character, article 126 says that they must transact
business under the name of all its members, of some of them, or of
one only, the words "and company" to be added in the latter two
cases.
It is rendered impossible for the general partnership to adopt a
firm name appropriate to its commercial object; the law wants to
link, and does link, the solidary and unlimited responsibility of the
members of this partnership with the formation of its name, and
imposes a limitation upon personal liberty in its selection, not only
by prescribing the requisites, but also by prohibiting persons not
members of the company from including their names in its firm
name under penalty of civil solidary responsibility.
Of course, the form required by the Code for the adoption of the
firm name does not prevent the addition thereto of any other title
connected with the commercial purpose of the association. The
reader may see our commentaries on the mercantile registry about

the business names and firm names of associations, but it is proper


to establish here that, while the business name may be alienated
by any of the means admitted by the law, it seems impossible to
separate the firm names of general partnerships from the juridical
entity for the creation of which it was formed. (Vol. 2, pp. 197,
213.)
On the question of whether the fact that the firm name "Teck Seing &
Co., Ltd." does not contain the name of all or any of the partners as
prescribed by the Code of Commerce prevents the creation of a general
partnership, Professor Jose A. Espiritu, as amicus curi, states:
My opinion is that such a fact alone cannot and will not be a
sufficient cause of preventing the formation of a general
partnership, especially if the other requisites are present and the
requisite regarding registration of the articles of association in the
Commercial Registry has been complied with, as in the present
case. I do not believe that the adoption of a wrong name is a
material fact to be taken into consideration in this case; first,
because the mere fact that a person uses a name not his own does
not prevent him from being bound in a contract or an obligation he
voluntarily entered into; second, because such a requirement of
the law is merely a formal and not necessarily an essential one to
the existence of the partnership, and as long as the name adopted
sufficiently identity the firm or partnership intended to use it, the
acts and contracts done and entered into under such a name bind
the firm to third persons; and third, because the failure of the
partners herein to adopt the correct name prescribed by law
cannot shield them from their personal liabilities, as neither law
nor equity will permit them to utilize their own mistake in order to
put the blame on third persons, and much less, on the firm
creditors in order to avoid their personal possibility.
The legal intention deducible from the acts of the parties controls in
determining the existence of a partnership. If they intend to do a thing
which in law constitutes a partnership, they are partners, although their
purpose was to avoid the creation of such relation. Here, the intention of
the persons making up Teck Seing & co., Ltd. was to establish a
partnership which they erroneously denominated a limited partnership. If
this was their purpose, all subterfuges resorted to in order to evade
liability for possible losses, while assuming their enjoyment of the

advantages to be derived from the relation, must be disregarded. The


partners who have disguised their identity under a designation distinct
from that of any of the members of the firm should be penalized, and not
the creditors who presumably have dealt with the partnership in good
faith.
Articles 127 and 237 of the Code of Commerce make all the members of
the general copartnership liable personally and in solidum with all their
property for the results of the transactions made in the name and for the
account of the partnership. Section 51 of the Insolvency Law, likewise,
makes all the property of the partnership and also all the separate
property of each of the partners liable. In other words, if a firm be
insolvent, but one or more partners thereof are solvent, the creditors may
proceed both against the firm and against the solvent partner or
partners, first exhausting the assets of the firm before seizing the
property of the partners. (Brandenburg of Bankcruptcy, sec. 108; De los
Reyes vs. Lukban and Borja [1916], 35 Phil., 757; Involuntary Insolvency
of Campos Rueda & Co. vs. Pacific Commercial Co. [1922], 44 Phil., 916).
We reach the conclusion that the contract of partnership found in the
document hereinbefore quoted established a general partnership or, to
be more exact, a partnership as this word is used in the Insolvency Law.
Wherefore, the order appealed from is reversed, and the record shall be
returned to the court of origin for further proceedings pursuant to the
motion presented by the creditors, in conformity with the provisions of
the Insolvency Law. Without special findings as to the costs in this
instance, it is ordered.
Araullo, C.J., Johnson, Street, Avancea, Villamor, Johns and Romualdez,
JJ., concur.

17th Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-24193

June 28, 1968

MAURICIO AGAD, plaintiff-appellant,


vs.
SEVERINO MABATO and MABATO and AGAD
COMPANY, defendants-appellees.
Angeles, Maskarino and Associates for plaintiff-appellant.
Victorio S. Advincula for defendants-appellees.
CONCEPCION, C.J.:
In this appeal, taken by plaintiff Mauricio Agad, from an order of
dismissal of the Court of First Instance of Davao, we are called upon to
determine the applicability of Article 1773 of our Civil Code to the
contract of partnership on which the complaint herein is based.
Alleging that he and defendant Severino Mabato are pursuant to a
public instrument dated August 29, 1952, copy of which is attached to
the complaint as Annex "A" partners in a fishpond business, to the
capital of which Agad contributed P1,000, with the right to receive 50%
of the profits; that from 1952 up to and including 1956, Mabato who
handled the partnership funds, had yearly rendered accounts of the
operations of the partnership; and that, despite repeated demands,
Mabato had failed and refused to render accounts for the years 1957 to
1963, Agad prayed in his complaint against Mabato and Mabato & Agad
Company, filed on June 9, 1964, that judgment be rendered sentencing
Mabato to pay him (Agad) the sum of P14,000, as his share in the profits
of the partnership for the period from 1957 to 1963, in addition to P1,000
as attorney's fees, and ordering the dissolution of the partnership, as well
as the winding up of its affairs by a receiver to be appointed therefor.

In his answer, Mabato admitted the formal allegations of the complaint


and denied the existence of said partnership, upon the ground that the
contract therefor had not been perfected, despite the execution of Annex
"A", because Agad had allegedly failed to give his P1,000 contribution to
the partnership capital. Mabato prayed, therefore, that the complaint be
dismissed; that Annex "A" be declared void ab initio; and that Agad be
sentenced to pay actual, moral and exemplary damages, as well as
attorney's fees.
Subsequently, Mabato filed a motion to dismiss, upon the ground that the
complaint states no cause of action and that the lower court had no
jurisdiction over the subject matter of the case, because it involves
principally the determination of rights over public lands. After due
hearing, the court issued the order appealed from, granting the motion to
dismiss the complaint for failure to state a cause of action. This
conclusion was predicated upon the theory that the contract of
partnership, Annex "A", is null and void, pursuant to Art. 1773 of our Civil
Code, because an inventory of the fishpond referred in said instrument
had not been attached thereto. A reconsideration of this order having
been denied, Agad brought the matter to us for review by record on
appeal.
Articles 1771 and 1773 of said Code provide:
Art. 1771. A partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto,
in which case a public instrument shall be necessary.
Art. 1773. A contract of partnership is void, whenever immovable
property is contributed thereto, if inventory of said property is not
made, signed by the parties; and attached to the public instrument.
The issue before us hinges on whether or not "immovable property or
real rights" have been contributed to the partnership under
consideration. Mabato alleged and the lower court held that the answer
should be in the affirmative, because "it is really inconceivable how a
partnership engaged in the fishpond business could exist without said

fishpond property (being) contributed to the partnership." It should be


noted, however, that, as stated in Annex "A" the partnership was
established "to operate a fishpond", not to "engage in a fishpond
business". Moreover, none of the partners contributed either a fishpond
or a real right to any fishpond. Their contributions were limited to the
sum of P1,000 each. Indeed, Paragraph 4 of Annex "A" provides:
That the capital of the said partnership is Two Thousand
(P2,000.00) Pesos Philippine Currency, of which One Thousand
(P1,000.00) pesos has been contributed by Severino Mabato and
One Thousand (P1,000.00) Pesos has been contributed by Mauricio
Agad.
xxx
xxx
xxx
The operation of the fishpond mentioned in Annex "A" was the purpose of
the partnership. Neither said fishpond nor a real right thereto was
contributed to the partnership or became part of the capital thereof, even
if a fishpond or a real right thereto could become part of its assets.
WHEREFORE, we find that said Article 1773 of the Civil Code is not in
point and that, the order appealed from should be, as it is hereby set
aside and the case remanded to the lower court for further proceedings,
with the costs of this instance against defendant-appellee, Severino
Mabato. It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and
Fernando, JJ., concur.

18th Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-23497

April 26, 1968

J.M. TUASON and CO., INC., petitioner,


vs.
ESTRELLA VDA. DE LUMANLAN and the COURT OF APPEALS
(FIFTH DIVISION), respondents.
Tuason and Sison for petitioner.
Jose Chuico and Wilfredo E. Dizon for respondents.
REYES, J.B.L., Actg. C.J.:
J. M. Tuason & Co., Inc. petitioned for a review by certiorari of the
decision issued by the Court of Appeals (Fifth Division) in its case CAG.R. No. 27259-R, reversing the judgment rendered by the Court of First
Instance of Rizal (Civil Case No. Q-4243) that ordered defendant (now
respondent) Estrella Vda. de Lumanlan to vacate the lot occupied by her
in Sta. Mesa Heights Subdivision, barrio Tatalon, Quezon City, and to
remove therefrom the house and other structures constructed thereon,
paying P240.00 a month until restoration of the premises to plaintiff.
The facts are stated in the decision of the Court of Appeals (accepted by
both parties) in this wise:1wph1.t
. . . That in the complaint filed in this case by plaintiff, J. M. Tuason
& Co., Inc., hereinafter called Tuason, on 30 April, 1969, the basis
is that it being the registered owner of the property known as
Santa Mesa Heights Subdivision, situated at Barrio North Tatalon,
Quezon City, herein defendant sometime in April, 1949 unlawfully
entered into possession of 800 square meters, and therein
constructed his house so that plaintiff prayed for ejectment and

damages for the occupancy; and defendant in her answer set


forth affirmative defense that on 12 March, 1949, she had bought
the property she was occupying from one Pedro Deudor, and that
in a compromise agreement between Pedro and Tuason on 16
March 1953, approved by the Court of First Instance of Quezon
City, she was one of the buyers therein recognized, so that she
asked that her rights be recognized and the complaint dismissed;
but on the basis of the evidence presented by both parties in the
trial, Lower Court sustained plaintiff, holding that Tuason being
the registered owner, and the question being purely one of
possession, therefore, defendant's said evidence was "completely
immaterial". . . . (Page 2 of Decision, Annex "A" of Petition.)
Upon the facts thus stated, the Fifth Division of the Court of Appeals held
that, pursuant to this Supreme Court's ruling in Evangelista vs. Deudor,
L-12826, September 10, 1959, the Compromise Agreement (Exh. 2)
between the petitioner Tuason & Co. and the Deudors constituted a valid
defense against the possessory action filed by Tuason & Co.; that under
paragraph 7 of said Compromise Agreement, petitioner bound and
committed itself to sell to respondent Lumanlan the lot occupied by her
at a reasonable price; that said respondent had a right to compel
petitioner to accept payment for the lot in question; and that the
compromise agreement legalized the possession of respondent.
These pronouncements are assailed by the petitioner in this appeal as
legally incorrect and contrary to the decisions of this Court.
The terms of the compromise agreement between the heirs of Telesforo
Deudor and J. M. Tuason & Co. have been taken cognizance of in many
decisions of this Court (Evangelista vs. Deudor, jam. cit; Deudor vs. J. M.
Tuason & Co., L-18768, May 30, 1961, and L-20105, Oct. 31, 1963; J. M.
Tuason vs. Jaramillo, et al., L-18932-34, Sept. 30, 1963; J. M. Tuason vs.
Macalindong, L-15398, Dec. 29, 1962 and others). The Deudors had
therein recognized the registered title of Tuason & Co. over the lands
claimed by them, and received payment of certain sums of money; but as
the Deudors had, prior to the compromise, sold their possessory rights to

various persons, paragraphseventh of the compromise agreement (case


Q-135 of the court of origin) provided:
That the sales of the possessory rights claimed by the DEUDORS,
are described in the lists submitted by them to the OWNERS which
are attached hereto marked Annexes "B" and "C" and made part
hereof. Whatever amounts may have been collected by the
DEUDORS on account thereof, shall be deducted from the total
sum of P1,201,063.00 to be paid to them. It shall be the joint and
solidary obligation of the DEUDORS to make the buyer of the lots
purportedly sold by them to recognize the title of the OWNERS
over the property purportedly bought by them, and to make them
sign, whenever possible, new contracts of purchase for said
property at the current paces and terms specified by the OWNERS
in their sales of lots in their subdivision known at "Sta. Mesa
Heights Subdivision." The DEUDORS HEREBY advised the
OWNERS that the buyer listed in Annex "B" herein with the
annotation "continue" shall buy the lots respectively occupied by
them and shall sign contracts, but the sums already paid by them
to the DEUDORS amounting to P134,922.84 (subject to verification
by the Court) shall be credited to the buyers and shall be deducted
from the sums to be paid to the DEUDORS by the OWNERS. The
DEUDORS also advise the OWNERS that, the buyers listed in
Annex "C" herein with the annotation "Refund" have decided not to
continue with their former contracts or purchases with the
DEUDORS and the sums already paid by them to the DEUDORS
TOTALLING P101,182.42 (subject to verification by the Court)
shall be refunded to them by the OWNERS and deducted from the
sums that may be due to the DEUDORS from the OWNERS (J.M.
Tuason & Co., Inc. vs. Jaramillo, L-18932, Sept. 30, 1963);
Careful analysis of this paragraph of the compromise agreement will
show that while the same created "a sort of contractual relation" between
the J. M. Tuason & Co., Inc., and the Deudor vendees (as ruled by this
Court in Evangelista vs. Deudor, ante), the same in no way obligated
Tuason & Co. to sell to those buyers the lots occupied by them at the

price stipulated with the Deudors, but at "the current prices and terms
specified by the OWNERS (Tuason) in their sales of lots in their
subdivision known as 'Sta. Mesa Heights Subdivision'". This is what is
expressly provided. Further, the paragraph plainly imports that these
buyers of the Deudors must "recognize the title of the OWNERS (Tuason)
over the property purportedly bought by them" from the Deudors, and
"sign, whenever possible, new contracts of purchase for said property";
and, if and when they do so, "the sums paid by them to the Deudors . . .
shall be credited to the buyers." All that Tuason & Co. agreed to,
therefore, was to grant the Deudor buyers preferential right to purchase
"at current prices and terms" the lots occupied by them, upon their
recognizing the title of Tuason & Co., Inc., and signing new contracts
therefor; and to credit them for the amounts they had paid to the
Deudors.
Nowhere in her answer did the respondent Estrella Vda. de Lumanlan
claim that she had signed a new contract with J. M. Tuason & Co., Inc. for
the purchase of the lot occupied. What is worse, instead of recognizing
the title of the owners (Tuason & Co.) as required by the aforementioned
compromise agreement, she charged in paragraph 6 of her special
defense (Rec. on Appeal, p. 10) that "Pedro Deudor and his co-owners
and the plaintiff herein . . .conspired together and helped each
other . . . by entering into a supposed Compromise" whereby "Pedro
Deudor and his co-owners renounced, ceded, waived and quitclaimed all
their rights, title and interest in the property including the land sold to
herein defendant, in favor of the plaintiff J. M. Tuason & Co., Inc., in
consideration of the sum of P1,201,063.00, without the knowledge and
consent, and much less the intervention of the herein defendant." In
other words, the respondent Lumanlan in her answer repudiated and
assailed the compromise between the Deudors and J. M. Tuason & Co.
How then can she now claim to take advantage and derive rights from
that compromise?
Without the compromise agreement, Lumanlan must justify her
possession on the basis of a pretended superiority of the Deudors' old
Spanish informacion posesoria over Tuason's Certificate of Title No.

1267, traceable back to the original Certificate of Title No. 735 of Rizal,
issued under the Registration Act No. 496. But, as ruled by this Court in
previous cases, Lumanlan is by now barred from assailing the decree of
registration in favor of Tuason & Co., Inc.'s predecessors twenty years
after its issuance (Tiburcio vs. PHHC, L-13429, Oct. 31, 1959; Tuason &
Co. vs. Bolaos, 95 Phil. 107; Tuason & Co. vs. Santiago, 99 Phil. 622623; Tuason & Co. vs. Macalindong, supra; Tuason & Co. vs. Jaramillo, L16827, Jan. 31, 1963).
It is thus apparent that no legal basis exists for the pronouncement in the
appealed decision that Tuason & Co. had committed itself to sell to
Lumanlan the lot occupied by her at a reasonable price, or that the
compromise agreement legalized the possession of the respondent, since
the latter does not rely on the compromise but, on the contrary, she
assails it.
The Court of Appeals ruled that the price to be paid by Lumanlan to
Tuason & Co., Inc., is governed by Article 1474 of the new Civil Code of
the Philippines, which provides that:
Where the price cannot be determined in accordance with the
preceding articles, or in any other manner, the contract is
inefficacious. However, if the thing or any part thereof has been
delivered to and appropriated by the buyer, he must pay a
reasonable price therefor. What is a reasonable price is a question
of fact dependent on the circumstances of each particular case.
Since there has been no contract between petitioner Tuason & Co. and
respondent Lumanlan for the sale of the lot occupied by the latter, and by
paragraph 7 of the Compromise Agreement (assuming that respondentappellee still has the right to invoke the same, and seek refuge
thereunder), Tuason & Co. did not consider itself bound by the sales
made by the Deudors, but demanded that the Deudor buyers should
sign new contracts with it at current prices specified for the sales of lots
in "Sta. Mesa Heights Subdivision" (ante) the aforequoted Article 1474
can have no bearing on the case, Lumanlan not being a buyer from
Tuason & Co.

As to Lumanlan's allegation in her counterclaim that she should be


deemed a builder in good faith, a similar contention has been rejected
in Tuason & Co. vs. Macalindong, L-15398, December 29, 1962, where
we ruled that there being a presumptive knowledge of the Torrens titles
issued to Tuason & Co. and its predecessors-in-interest since 1914, the
buyer from the Deudors (or from their transferees) can not, in good
conscience, say now that she believed her vendor had rights of ownership
over the lot purchased. The reason given by the Court is that
Had he investigated before buying and before building his house
on the questioned lot, he would have been informed that the land
is registered under the Torrens system in the name of J. M. Tuason
& Co., Inc., If he failed to make the necessary inquiry, appellant is
now bound conclusively by appellee's Torrens title (Sec. 51, Act
496; Emas vs. Zuzuarregui, 35 Phil. 144) (Tuason & Co., Inc. vs.
Macalindong, ante).
Lumanlan had chosen to ignore the Torrens title of Tuason & Co., Inc.
and relied instead upon the Deudors' claim of ownership, perhaps
because such course appeared to her as more advantageous; hence, she
has only herself to blame for the consequences now that the Deudors'
claim has been abandoned by the Deudors themselves, and can not
pretend good faith. The Court of First Instance, therefore, did not err in
holding that she was not a rightful possessor and sentencing her to
vacate.
Respondent could have asked that she recover or be credited with the
amounts paid by her to the Deudors, but as no claim to such credit was
ever advanced by her in the trial Court, no pronouncement can be made
thereon in this appeal. Equity demands, however, that her right to claim
such return, or to have the amount offset against the sums she was
sentenced to pay, should be, as it is, reserved.
WHEREFORE, the decision of the Court of Appeals is reversed and that
of the Court of First Instance reinstated. Costs against respondent,
Estrella Vda. de Lumanlan.

Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro and Fernando,


JJ., concur.
Angeles, J., took no part.
Concepcion, C.J., is on leave.

19th Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM
and CHARLES CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO
V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R.
LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN
YOUNG and AVELINO V. CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO
R. LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A.
BONCAN, BALDWIN YOUNG and AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN,
DAVID P. WHITTINGHAM, CHARLES CHAMSAY and LUCIANO
SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO
V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R.
LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN
YOUNG, AVELINO V. CRUZ and the COURT OF
APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.

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

GUTIERREZ, JR., J.:


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

The Agreement has the following provisions relevant to the issues in


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

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

Chairman and announced that all votes accruing to ASI


shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No.
05617) were being cumulatively voted for the three ASI
nominees and Charles Chamsay, and instructed the
Secretary to so vote. Luciano E. Salazar and other proxy
holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo, AC-G.R.
SP No. 05617) were being voted cumulatively in favor of
Luciano E. Salazar. The Chairman, Baldwin Young,
nevertheless instructed the Secretary to cast all votes
equally in favor of the three ASI nominees, namely, Wolfgang
Aurbach, John Griffin and David Whittingham and the six
originally nominated by Rogelio Vinluan, namely, Ernesto
Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, and Baldwin Young. The
Secretary then certified for the election of the following
Wolfgang Aurbach, John Griffin, David Whittingham Ernesto
Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo,
George F. Lee, Raul A. Boncan, Baldwin Young. The
representative of ASI then moved to recess the meeting
which was duly seconded. There was also a motion to
adjourn (p. 28, Rollo, AC-G.R. SP No. 05617). This motion to
adjourn was accepted by the Chairman, Baldwin Young, who
announced that the motion was carried and declared the
meeting adjourned. Protests against the adjournment were
registered and having been ignored, Mr. Jaqua the ASI
representative, stated that the meeting was not adjourned
but only recessed and that the meeting would be reconvened
in the next room. The Chairman then threatened to have the
stockholders who did not agree to the decision of the
Chairman on the casting of votes bodily thrown out. The ASI
Group, Luciano E. Salazar and other stockholders, allegedly
representing 53 or 54% of the shares of Saniwares, decided
to continue the meeting at the elevator lobby of the
American Standard Building. The continued meeting was
presided by Luciano E. Salazar, while Andres Gatmaitan

acted as Secretary. On the basis of the cumulative votes cast


earlier in the meeting, the ASI Group nominated its four
nominees; Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay. Luciano E. Salazar voted
for himself, thus the said five directors were certified as
elected directors by the Acting Secretary, Andres Gatmaitan,
with the explanation that there was a tie among the other six
(6) nominees for the four (4) remaining positions of directors
and that the body decided not to break the tie. (pp. 37-39,
Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the
parties with the Securities and Exchange Commission (SEC). The first
petition filed was for preliminary injunction by Saniwares, Emesto V.
Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr.,
Enrique Lagdameo and George F. Lee against Luciano Salazar and
Charles Chamsay. The case was denominated as SEC Case No. 2417. The
second petition was for quo warranto and application for receivership by
Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E. Salazar
and Charles Chamsay against the group of Young and Lagdameo
(petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was
docketed as SEC Case No. 2718. Both sets of parties except for Avelino
Cruz claimed to be the legitimate directors of the corporation.
The two petitions were consolidated and tried jointly by a hearing officer
who rendered a decision upholding the election of the Lagdameo Group
and dismissing the quo warranto petition of Salazar and Chamsay. The
ASI Group and Salazar appealed the decision to the SEC en banc which
affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the
Intermediate Appellate Court by Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604)
and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The
petitions were consolidated and the appellate court in its decision
ordered the remand of the case to the Securities and Exchange
Commission with the directive that a new stockholders' meeting of

Saniwares be ordered convoked as soon as possible, under the


supervision of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo
Group) the appellate court (Court of Appeals) rendered the questioned
amended decision. Petitioners Wolfgang Aurbach, John Griffin, David P.
Whittingham and Charles Chamsay in G.R. No. 75875 assign the
following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE
ALLEGED ELECTION OF PRIVATE RESPONDENTS AS
MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION
AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE
STOCKHOLDERS FROM EXERCISING THEIR FULL
VOTING RIGHTS REPRESENTED BY THE NUMBER OF
SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS
AND THE CORPORATION THEY REPRESENT OF THEIR
PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND
READS PROVISIONS INTO THE AGREEMENT OF THE
PARTIES WHICH WERE NOT THERE, WHICH ACTION IT
CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended
decision on the following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard
of binding contractual agreements entered into by
stockholders and the replacement of the conditions of such
agreements with terms never contemplated by the
stockholders but merely dictated by the CA .

11.2. The Amended decision would likewise sanction the


deprivation of the property rights of stockholders without
due process of law in order that a favored group of
stockholders may be illegally benefitted and guaranteed a
continuing monopoly of the control of a corporation. (pp. 1415, Rollo-75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT,
WHILE RECOGNIZING THAT THE STOCKHOLDERS OF
SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO
FULLY ENFORCE THE BASIC INTENT OF THE
AGREEMENT AND THE LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY
RULE THAT PRIVATE PETITIONERS HEREIN WERE THE
DULY ELECTED DIRECTORS DURING THE 8 MARCH 1983
ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P.
24, Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are
discussed jointly.
The main issue hinges on who were the duly elected directors of
Saniwares for the year 1983 during its annual stockholders' meeting held
on March 8, 1983. To answer this question the following factors should
be determined: (1) the nature of the business established by the parties
whether it was a joint venture or a corporation and (2) whether or not the
ASI Group may vote their additional 10% equity during elections of
Saniwares' board of directors.

The rule is that whether the parties to a particular contract have thereby
established among themselves a joint venture or some other relation
depends upon their actual intention which is determined in accordance
with the rules governing the interpretation and construction of contracts.
(Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp
678; Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751,
128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that
the actual intention of the parties should be viewed strictly on the
"Agreement" dated August 15,1962 wherein it is clearly stated that the
parties' intention was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous
Provisions which states:

interest, no evidence of the terms of the agreement other


than the contents of the writing, except in the following
cases:
(a) Where a mistake or imperfection of the writing, or its
failure to express the true intent and agreement of the
parties or the validity of the agreement is put in issue by the
pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded
in their Reply and Answer to Counterclaim in SEC Case No. 2417 that the
Agreement failed to express the true intent of the parties, to wit:
xxx xxx xxx

xxx xxx xxx


c) nothing herein contained shall be construed to constitute
any of the parties hereto partners or joint venturers in
respect of any transaction hereunder. (At P. 66, Rollo-GR No.
75875)
They object to the admission of other evidence which tends to show that
the parties' agreement was to establish a joint venture presented by the
Lagdameo and Young Group on the ground that it contravenes the parol
evidence rule under section 7, Rule 130 of the Revised Rules of Court.
According to them, the Lagdameo and Young Group never pleaded in
their pleading that the "Agreement" failed to express the true intent of
the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an
agreement have been reduced to writing, it is to be
considered as containing all such terms, and therefore,
there can be, between the parties and their successors in

4. While certain provisions of the Agreement would make it


appear that the parties thereto disclaim being partners or
joint venturers such disclaimer is directed at third parties
and is not inconsistent with, and does not preclude, the
existence of two distinct groups of stockholders in
Saniwares one of which (the Philippine Investors) shall
constitute the majority, and the other ASI shall constitute
the minority stockholder. In any event, the evident intention
of the Philippine Investors and ASI in entering into the
Agreement is to enter into ajoint venture enterprise, and if
some words in the Agreement appear to be contrary to the
evident intention of the parties, the latter shall prevail over
the former (Art. 1370, New Civil Code). The various
stipulations of a contract shall be interpreted together
attributing to the doubtful ones that sense which may result
from all of them taken jointly (Art. 1374, New Civil Code).
Moreover, in order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall be
principally considered. (Art. 1371, New Civil Code). (Part I,
Original Records, SEC Case No. 2417)

It has been ruled:


In an action at law, where there is evidence tending to prove
that the parties joined their efforts in furtherance of an
enterprise for their joint profit, the question whether they
intended by their agreement to create a joint adventure, or
to assume some other relation is a question of fact for the
jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653;
Pyroa v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v.
George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)

[Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to
designate the president and plant manager [Sec. 5 (6)]. The
Agreement further provides that the sales policy of
Saniwares shall be that which is normally followed by ASI
[Sec. 13 (a)] and that Saniwares should not export
"Standard" products otherwise than through ASI's Export
Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI
agreed to provide technology and know-how to Saniwares
and the latter paid royalties for the same. (At p. 2).
xxx xxx xxx

In the instant cases, our examination of important provisions of the


Agreement as well as the testimonial evidence presented by the
Lagdameo and Young Group shows that the parties agreed to establish a
joint venture and not a corporation. The history of the organization of
Saniwares and the unusual arrangements which govern its policy making
body are all consistent with a joint venture and not with an ordinary
corporation. As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin
Young, he negotiated the Agreement with ASI in behalf of
the Philippine nationals. He testified that ASI agreed to
accept the role of minority vis-a-vis the Philippine National
group of investors, on the condition that the Agreement
should contain provisions to protect ASI as the minority.
An examination of the Agreement shows that certain
provisions were included to protect the interests of ASI as
the minority. For example, the vote of 7 out of 9 directors is
required in certain enumerated corporate acts [Sec. 3 (b) (ii)
(a) of the Agreement]. ASI is contractually entitled to
designate a member of the Executive Committee and the
vote of this member is required for certain transactions
[Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for
the amendment of the articles and by-laws of Saniwares

It is pertinent to note that the provisions of the Agreement


requiring a 7 out of 9 votes of the board of directors for
certain actions, in effect gave ASI (which designates 3
directors under the Agreement) an effective veto power.
Furthermore, the grant to ASI of the right to designate
certain officers of the corporation; the super-majority voting
requirements for amendments of the articles and by-laws;
and most significantly to the issues of tms case, the
provision that ASI shall designate 3 out of the 9 directors
and the other stockholders shall designate the other 6,
clearly indicate that there are two distinct groups in
Saniwares, namely ASI, which owns 40% of the capital stock
and the Philippine National stockholders who own the
balance of 60%, and that 2) ASI is given certain protections
as the minority stockholder.
Premises considered, we believe that under the Agreement
there are two groups of stockholders who established a
corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other
stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not
"nominated" or "elected" in the selection of the nine directors on a six to

three ratio. Each group is assured of a fixed number of directors in the


board.
Moreover, ASI in its communications referred to the enterprise as joint
venture. Baldwin Young also testified that Section 16(c) of the Agreement
that "Nothing herein contained shall be construed to constitute any of the
parties hereto partners or joint venturers in respect of any transaction
hereunder" was merely to obviate the possibility of the enterprise being
treated as partnership for tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the
industrial and manufacturing capacities of a local firm are constrained to
seek the technology and marketing assistance of huge multinational
corporations of the developed world. Arrangements are formalized where
a foreign group becomes a minority owner of a firm in exchange for its
manufacturing expertise, use of its brand names, and other such
assistance. However, there is always a danger from such arrangements.
The foreign group may, from the start, intend to establish its own sole or
monopolistic operations and merely uses the joint venture arrangement
to gain a foothold or test the Philippine waters, so to speak. Or the
covetousness may come later. As the Philippine firm enlarges its
operations and becomes profitable, the foreign group undermines the
local majority ownership and actively tries to completely or
predominantly take over the entire company. This undermining of joint
ventures is not consistent with fair dealing to say the least. To the extent
that such subversive actions can be lawfully prevented, the courts should
extend protection especially in industries where constitutional and legal
requirements reserve controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of
Appeal
In fact, the Philippine Corporation Code itself recognizes the
right of stockholders to enter into agreements regarding the
exercise of their voting rights.
Sec. 100. Agreements by stockholders.-

xxx xxx xxx


2. An agreement between two or more stockholders, if in
writing and signed by the parties thereto, may provide that
in exercising any voting rights, the shares held by them shall
be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by
them.
Appellants contend that the above provision is included in
the Corporation Code's chapter on close corporations and
Saniwares cannot be a close corporation because it has 95
stockholders. Firstly, although Saniwares had 95
stockholders at the time of the disputed stockholders
meeting, these 95 stockholders are not separate from each
other but are divisible into groups representing a single
Identifiable interest. For example, ASI, its nominees and
lawyers count for 13 of the 95 stockholders. The
YoungYutivo family count for another 13 stockholders, the
Chamsay family for 8 stockholders, the Santos family for 9
stockholders, the Dy family for 7 stockholders, etc. If the
members of one family and/or business or interest group are
considered as one (which, it is respectfully submitted, they
should be for purposes of determining how closely held
Saniwares is there were as of 8 March 1983, practically only
17 stockholders of Saniwares. (Please refer to discussion in
pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11
December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a
close corporation because it has more than 20 stockholders,
the undeniable fact is that it is a close-held corporation.
Surely, appellants cannot honestly claim that Saniwares is a
public issue or a widely held corporation.
In the United States, many courts have taken a realistic
approach to joint venture corporations and have not rigidly

applied principles of corporation law designed primarily for


public issue corporations. These courts have indicated that
express arrangements between corporate joint ventures
should be construed with less emphasis on the ordinary
rules of law usually applied to corporate entities and with
more consideration given to the nature of the agreement
between the joint venturers (Please see Wabash Ry v.
American Refrigerator Transit Co., 7 F 2d 335; Chicago, M
& St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490';
Seaboard Airline Ry v. Atlantic Coast Line Ry; 240 N.C.
495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d
903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90,
295 N.W. 571; Beardsley v. Beardsley, 138 U.S. 262; "The
Legal Status of Joint Venture Corporations", 11 Vand Law
Rev. p. 680,1958). These American cases dealt with legal
questions as to the extent to which the requirements arising
from the corporate form of joint venture corporations should
control, and the courts ruled that substantial justice lay with
those litigants who relied on the joint venture agreement
rather than the litigants who relied on the orthodox
principles of corporation law.
As correctly held by the SEC Hearing Officer:

It is said that participants in a joint venture, in organizing


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

meaning of close corporations to those which comply with


the requisites laid down by section 96, it is entirely possible
that a corporation which is in fact a close corporation will
not come within the definition. In such case, its stockholders
should not be precluded from entering into contracts like
voting agreements if these are otherwise valid. (Campos &
Lopez-Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement
relating to the designation or nomination of directors
restricts the right of the Agreement's signatories to vote for
directors, such contractual provision, as correctly held by
the SEC, is valid and binding upon the signatories thereto,
which include appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote
their additional equity during elections of Saniwares' board of directors,
the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's
participation in the management of the corporation is
spelled out in the Agreement. Section 5(a) hereof says that
three of the nine directors shall be designated by ASI and
the remaining six by the other stockholders, i.e., the Filipino
stockholders. This allocation of board seats is obviously in
consonance with the minority position of ASI.
Having entered into a well-defined contractual relationship,
it is imperative that the parties should honor and adhere to
their respective rights and obligations thereunder.
Appellants seem to contend that any allocation of board
seats, even in joint venture corporations, are null and void to
the extent that such may interfere with the stockholder's
rights to cumulative voting as provided in Section 24 of the
Corporation Code. This Court should not be prepared to hold
that any agreement which curtails in any way cumulative
voting should be struck down, even if such agreement has

been freely entered into by experienced businessmen and do


not prejudice those who are not parties thereto. It may well
be that it would be more cogent to hold, as the Securities
and Exchange Commission has held in the decision appealed
from, that cumulative voting rights may be voluntarily
waived by stockholders who enter into special relationships
with each other to pursue and implement specific purposes,
as in joint venture relationships between foreign and local
stockholders, so long as such agreements do not adversely
affect third parties.
In any event, it is believed that we are not here called upon
to make a general rule on this question. Rather, all that
needs to be done is to give life and effect to the particular
contractual rights and obligations which the parties have
assumed for themselves.
On the one hand, the clearly established minority position of
ASI and the contractual allocation of board seats Cannot be
disregarded. On the other hand, the rights of the
stockholders to cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to
uphold the second over the first. Upon further reflection, we
feel that the proper and just solution to give due
consideration to both factors suggests itself quite clearly.
This Court should recognize and uphold the division of the
stockholders into two groups, and at the same time uphold
the right of the stockholders within each group to
cumulative voting in the process of determining who the
group's nominees would be. In practical terms, as suggested
by appellant Luciano E. Salazar himself, this means that if
the Filipino stockholders cannot agree who their six
nominees will be, a vote would have to be taken among the
Filipino stockholders only. During this voting, each Filipino
stockholder can cumulate his votes. ASI, however, should
not be allowed to interfere in the voting within the Filipino

group. Otherwise, ASI would be able to designate more than


the three directors it is allowed to designate under the
Agreement, and may even be able to get a majority of the
board seats, a result which is clearly contrary to the
contractual intent of the parties.
Such a ruling will give effect to both the allocation of the
board seats and the stockholder's right to cumulative voting.
Moreover, this ruling will also give due consideration to the
issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements of the
Constitution and the laws if ASI is allowed to nominate more
than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the
ASI Group has the right to vote their additional equity pursuant to
Section 24 of the Corporation Code which gives the stockholders of a
corporation the right to cumulate their votes in electing directors.
Petitioner Salazar adds that this right if granted to the ASI Group would
not necessarily mean a violation of the Anti-Dummy Act (Commonwealth
Act 108, as amended). He cites section 2-a thereof which provides:
And provided finally that the election of aliens as members
of the board of directors or governing body of corporations
or associations engaging in partially nationalized activities
shall be allowed in proportion to their allowable
participation or share in the capital of such entities.
(amendments introduced by Presidential Decree 715,
section 1, promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of
the Corporation Code. The point of query, however, is whether or not that
provision is applicable to a joint venture with clearly defined agreements:
The legal concept of ajoint venture is of common law origin.
It has no precise legal definition but it has been generally

understood to mean an organization formed for some


temporary purpose. (Gates v. Megargel, 266 Fed. 811
[1920]) It is in fact hardly distinguishable from the
partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a
mutual right of control. Blackner v. Mc Dermott, 176 F. 2d.
498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043 [1939];
Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P.
2d. 242 [1955]). The main distinction cited by most opinions
in common law jurisdictions is that the partnership
contemplates a general business with some degree of
continuity, while the joint venture is formed for the
execution of a single transaction, and is thus of a temporary
nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500
[1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74
[1947]; Gates v. Megargel 266 Fed. 811 [1920]). This
observation is not entirely accurate in this jurisdiction, since
under the Civil Code, a partnership may be particular or
universal, and a particular partnership may have for its
object a specific undertaking. (Art. 1783, Civil Code). It
would seem therefore that under Philippine law, a joint
venture is a form of partnership and should thus be
governed by the law of partnerships. The Supreme Court
has however recognized a distinction between these two
business forms, and has held that although a corporation
cannot enter into a partnership contract, it may however
engage in a joint venture with others. (At p. 12, Tuazon v.
Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos
Comments, Notes and Selected Cases, Corporation Code
1981)
Moreover, the usual rules as regards the construction and operations of
contracts generally apply to a contract of joint venture. (O' Hara v.
Harman 14 App. Dev. (167) 43 NYS 556).

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

Equally important as the consideration of the contractual intent of the


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

Section 5 (a) of the Agreement which uses the word designates in the
allocation of board directors should not be interpreted in isolation. This
should be construed in relation to section 3 (a) (1) of the Agreement. As
we stated earlier, section 3(a) (1) relates to the manner of voting for
these nominees which is cumulative voting while section 5(a) relates to
the manner of nominating the members of the board of directors. The
petitioners in G.R. No. 75951 agreed to this procedure, hence, they
cannot now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise
under the cumulative voting procedure cannot, however, be ignored. The
validity of the cumulative voting procedure is dependent on the directors
thus elected being genuine members of the Filipino group, not voters
whose interest is to increase the ASI share in the management of
Saniwares. The joint venture character of the enterprise must always be
taken into account, so long as the company exists under its original
agreement. Cumulative voting may not be used as a device to enable ASI
to achieve stealthily or indirectly what they cannot accomplish openly.
There are substantial safeguards in the Agreement which are intended to

preserve the majority status of the Filipino investors as well as to


maintain the minority status of the foreign investors group as earlier
discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875
are DISMISSED and the petition in G.R. No. 75951 is partly GRANTED.
The amended decision of the Court of Appeals is MODIFIED in that
Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V.
Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee are declared as the duly elected
directors of Saniwares at the March 8,1983 annual stockholders'
meeting. In all other respects, the questioned decision is AFFIRMED.
Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.
Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.