Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

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

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

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

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

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

Respondent Suter protested the assessment, and requested its cancellation and
withdrawal, as not in accordance with law, but his request was denied. Unable to secure
a reconsideration, he appealed to the Court of Tax Appeals, which court, after trial,

1
rendered a decision, on 11 November 1965, reversing that of the Commissioner of
Internal Revenue.

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

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

(b) Whether or not the partnership was dissolved after the marriage of the partners,
respondent William J. Suter and Julia Spirig Suter and the subsequent sale to them by
the remaining partner, Gustav Carlson, of his participation of P2,000.00 in the
partnership for a nominal amount of P1.00.

The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of
Suter and Spirig and their subsequent acquisition of the interests of remaining partner
Carlson in the partnership dissolved the limited partnership, and if they did not, the
fiction of juridical personality of the partnership should be disregarded for income tax
purposes because the spouses have exclusive ownership and control of the business;
consequently the income tax return of respondent Suter for the years in question should
have included his and his wife's individual incomes and that of the limited partnership, in
accordance with Section 45 (d) of the National Internal Revenue Code, which provides
as follows:

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

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

We find the Commissioner's appeal unmeritorious.

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

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

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

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

Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad

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

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

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

The following shall be the exclusive property of each spouse:

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

3
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did
not become common property of both after their marriage in 1948.

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

The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the
Visayas, L-13554, Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77
Phil. 504) as authority for disregarding the fiction of legal personality of the corporations
involved therein are not applicable to the present case. In the cited cases, the
corporations were already subject to tax when the fiction of their corporate personality
was pierced; in the present case, to do so would exempt the limited partnership from
income taxation but would throw the tax burden upon the partners-spouses in their
individual capacities. The corporations, in the cases cited, merely served as business
conduits or alter egos of the stockholders, a factor that justified a disregard of their
corporate personalities for tax purposes. This is not true in the present case. Here, the
limited partnership is not a mere business conduit of the partner-spouses; it was
organized for legitimate business purposes; it conducted its own dealings with its
customers prior to appellee's marriage, and had been filing its own income tax returns
as such independent entity. The change in its membership, brought about by the
marriage of the partners and their subsequent acquisition of all interest therein, is no
ground for withdrawing the partnership from the coverage of Section 24 of the tax code,
requiring it to pay income tax. As far as the records show, the partners did not enter into
matrimony and thereafter buy the interests of the remaining partner with the
premeditated scheme or design to use the partnership as a business conduit to dodge
the tax laws. Regularity, not otherwise, is presumed.

As the limited partnership under consideration is taxable on its income, to require that
income to be included in the individual tax return of respondent Suter is to overstretch
the letter and intent of the law. In fact, it would even conflict with what it specifically
provides in its Section 24: for the appellant Commissioner's stand results in equal
treatment, tax wise, of a general copartnership (compañia colectiva) and a limited
partnership, when the code plainly differentiates the two. Thus, the code taxes the latter
on its income, but not the former, because it is in the case of compañias colectivas that
the members, and not the firm, are taxable in their individual capacities for any dividend
or share of the profit derived from the duly registered general partnership (Section 26,

4
N.I.R.C.; Arañas, Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 88-
89).lawphi1.nêt

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

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

5
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

July 30, 1979

PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME "SYCIP,

SALAZAR, FELICIANO, HERNANDEZ & CASTILLO." LUCIANO E. SALAZAR,
FLORENTINO P. FELICIANO, BENILDO G. HERNANDEZ. GREGORIO R.
CASTILLO. ALBERTO P. SAN JUAN, JUAN C. REYES. JR., ANDRES G.
GATMAITAN, JUSTINO H. CACANINDIN, NOEL A. LAMAN, ETHELWOLDO E.
FERNANDEZ, ANGELITO C. IMPERIO, EDUARDO R. CENIZA, TRISTAN A.
CATINDIG, ANCHETA K. TAN, and ALICE V. PESIGAN, petitioners.

IN THE MATTER OF THE PETITION FOR AUTHORITY TO CONTINUE USE OF THE

FIRM NAME "OZAETA, ROMULO, DE LEON, MABANTA & REYES." RICARDO J.
ROMULO, BENJAMIN M. DE LEON, ROMAN MABANTA, JR., JOSE MA, REYES,
JESUS S. J. SAYOC, EDUARDO DE LOS ANGELES, and JOSE F.
BUENAVENTURA, petitioners.

RESOLUTION

MELENCIO-HERRERA, J.:ñé+.£ªwph!1

Two separate Petitions were filed before this Court 1) by the surviving partners of Atty.
Alexander Sycip, who died on May 5, 1975, and 2) by the surviving partners of Atty.
Herminio Ozaeta, who died on February 14, 1976, praying that they be allowed to
continue using, in the names of their firms, the names of partners who had passed
away. In the Court's Resolution of September 2, 1976, both Petitions were ordered
consolidated.

Petitioners base their petitions on the following arguments:

1. Under the law, a partnership is not prohibited from continuing its business under a
firm name which includes the name of a deceased partner; in fact, Article 1840 of the
Civil Code explicitly sanctions the practice when it provides in the last paragraph
that: têñ.£îhqwâ£

The use by the person or partnership continuing the business of the

partnership name, or the name of a deceased partner as part
thereof, shall not of itself make the individual property of the deceased
partner liable for any debts contracted by such person or partnership. 1

6
2. In regulating other professions, such as accountancy and engineering, the legislature
has authorized the adoption of firm names without any restriction as to the use, in such
firm name, of the name of a deceased partner; 2 the legislative authorization given to
those engaged in the practice of accountancy — a profession requiring the same
degree of trust and confidence in respect of clients as that implicit in the relationship of
attorney and client — to acquire and use a trade name, strongly indicates that there is
no fundamental policy that is offended by the continued use by a firm of professionals of
a firm name which includes the name of a deceased partner, at least where such firm
name has acquired the characteristics of a "trade name." 3

3. The Canons of Professional Ethics are not transgressed by the continued use of the
name of a deceased partner in the firm name of a law partnership because Canon 33 of
the Canons of Professional Ethics adopted by the American Bar Association declares
that: têñ.£îhqwâ£

... The continued use of the name of a deceased or former partner when
permissible by local custom, is not unethical but care should be taken that
no imposition or deception is practiced through this use. ... 4

4. There is no possibility of imposition or deception because the deaths of their

respective deceased partners were well-publicized in all newspapers of general
circulation for several days; the stationeries now being used by them carry new
letterheads indicating the years when their respective deceased partners were
connected with the firm; petitioners will notify all leading national and international law
directories of the fact of their respective deceased partners' deaths. 5

5. No local custom prohibits the continued use of a deceased partner's name in a

professional firm's name; 6 there is no custom or usage in the Philippines, or at least in
the Greater Manila Area, which recognizes that the name of a law firm necessarily
Identifies the individual members of the firm. 7

6. The continued use of a deceased partner's name in the firm name of law partnerships
has been consistently allowed by U.S. Courts and is an accepted practice in the legal
profession of most countries in the world.8

The question involved in these Petitions first came under consideration by this Court in
1953 when a law firm in Cebu (the Deen case) continued its practice of including in its
firm name that of a deceased partner, C.D. Johnston. The matter was resolved with this
Court advising the firm to desist from including in their firm designation the name of C.
D. Johnston, who has long been dead."

The same issue was raised before this Court in 1958 as an incident in G. R. No. L-
11964, entitled Register of Deeds of Manila vs. China Banking Corporation. The law
firm of Perkins & Ponce Enrile moved to intervene as amicus curiae. Before acting
thereon, the Court, in a Resolution of April 15, 1957, stated that it "would like to be
informed why the name of Perkins is still being used although Atty. E. A. Perkins is

7
already dead." In a Manifestation dated May 21, 1957, the law firm of Perkins and
Ponce Enrile, raising substantially the same arguments as those now being raised by
petitioners, prayed that the continued use of the firm name "Perkins & Ponce Enrile" be
held proper.

On June 16, 1958, this Court resolved: têñ.£îhqwâ£

After carefully considering the reasons given by Attorneys Alfonso Ponce

Enrile and Associates for their continued use of the name of the deceased
E. G. Perkins, the Court found no reason to depart from the policy it
adopted in June 1953 when it required Attorneys Alfred P. Deen and Eddy
A. Deen of Cebu City to desist from including in their firm designation, the
name of C. D. Johnston, deceased. The Court believes that, in view of the
personal and confidential nature of the relations between attorney and
client, and the high standards demanded in the canons of professional
ethics, no practice should be allowed which even in a remote degree could
give rise to the possibility of deception. Said attorneys are accordingly
advised to drop the name "PERKINS" from their firm name.

Petitioners herein now seek a re-examination of the policy thus far enunciated by the
Court.

The Court finds no sufficient reason to depart from the rulings thus laid down.

A. Inasmuch as "Sycip, Salazar, Feliciano, Hernandez and Castillo" and "Ozaeta,

Romulo, De Leon, Mabanta and Reyes" are partnerships, the use in their partnership
names of the names of deceased partners will run counter to Article 1815 of the Civil
Code which provides: têñ.£îhqwâ£

Art. 1815. Every partnership shall operate under a firm name, which may
or may not include the name of one or more of the partners.

Those who, not being members of the partnership, include their names in
the firm name, shall be subject to the liability, of a partner.

It is clearly tacit in the above provision that names in a firm name of a partnership must
either be those of living partners and. in the case of non-partners, should be living
persons who can be subjected to liability. In fact, Article 1825 of the Civil Code prohibits
a third person from including his name in the firm name under pain of assuming the
liability of a partner. The heirs of a deceased partner in a law firm cannot be held liable
as the old members to the creditors of a firm particularly where they are non-lawyers.
Thus, Canon 34 of the Canons of Professional Ethics "prohibits an agreement for the
payment to the widow and heirs of a deceased lawyer of a percentage, either gross or
net, of the fees received from the future business of the deceased lawyer's clients, both
because the recipients of such division are not lawyers and because such payments will
not represent service or responsibility on the part of the recipient. " Accordingly, neither

8
the widow nor the heirs can be held liable for transactions entered into after the death of
their lawyer-predecessor. There being no benefits accruing, there ran be no
corresponding liability.

Prescinding the law, there could be practical objections to allowing the use by law firms
of the names of deceased partners. The public relations value of the use of an old firm
name can tend to create undue advantages and disadvantages in the practice of the
profession. An able lawyer without connections will have to make a name for himself
starting from scratch. Another able lawyer, who can join an old firm, can initially ride on
that old firm's reputation established by deceased partners.

B. In regards to the last paragraph of Article 1840 of the Civil Code cited by
petitioners, supra, the first factor to consider is that it is within Chapter 3 of Title IX of the
Code entitled "Dissolution and Winding Up." The Article primarily deals with the
exemption from liability in cases of a dissolved partnership, of the individual property of
the deceased partner for debts contracted by the person or partnership which continues
the business using the partnership name or the name of the deceased partner as part
thereof. What the law contemplates therein is a hold-over situation preparatory to formal
reorganization.

Secondly, Article 1840 treats more of a commercial partnership with a good will to
protect rather than of a professional partnership, with no saleable good will but whose
reputation depends on the personal qualifications of its individual members. Thus, it has
been held that a saleable goodwill can exist only in a commercial partnership and
cannot arise in a professional partnership consisting of lawyers. 9têñ.£îhqwâ£

As a general rule, upon the dissolution of a commercial partnership the

succeeding partners or parties have the right to carry on the business
under the old name, in the absence of a stipulation forbidding it, (s)ince
the name of a commercial partnership is a partnership asset inseparable
from the good will of the firm. ... (60 Am Jur 2d, s 204, p. 115) (Emphasis
supplied)

On the other hand, têñ.£îhqwâ£

... a professional partnership the reputation of which depends or; the

individual skill of the members, such as partnerships of attorneys or
physicians, has no good win to be distributed as a firm asset on its
dissolution, however intrinsically valuable such skill and reputation may
be, especially where there is no provision in the partnership agreement
relating to good will as an asset. ... (ibid, s 203, p. 115) (Emphasis
supplied)

C. A partnership for the practice of law cannot be likened to partnerships formed by

other professionals or for business. For one thing, the law on accountancy specifically

9
allows the use of a trade name in connection with the practice of
accountancy.10 têñ.£îhqwâ£

A partnership for the practice of law is not a legal entity. It is a mere

relationship or association for a particular purpose. ... It is not a
partnership formed for the purpose of carrying on trade or business or of
holding property." 11 Thus, it has been stated that "the use of a nom de
plume, assumed or trade name in law practice is improper. 12

The usual reason given for different standards of conduct being applicable
to the practice of law from those pertaining to business is that the law is a
profession.

Dean Pound, in his recently published contribution to the Survey of the

Legal Profession, (The Lawyer from Antiquity to Modern Times, p. 5)
defines a profession as "a group of men pursuing a learned art as a
common calling in the spirit of public service, — no less a public service
because it may incidentally be a means of livelihood."

xxx xxx xxx

Primary characteristics which distinguish the legal profession from

business are:

1. A duty of public service, of which the emolument is a byproduct, and in

which one may attain the highest eminence without making much money.

2. A relation as an "officer of court" to the administration of justice

involving thorough sincerity, integrity, and reliability.

3. A relation to clients in the highest degree fiduciary.

4. A relation to colleagues at the bar characterized by candor, fairness,

and unwillingness to resort to current business methods of advertising and
encroachment on their practice, or dealing directly with their clients. 13

"The right to practice law is not a natural or constitutional right but is in the nature of a
privilege or franchise. 14 It is limited to persons of good moral character with special
qualifications duly ascertained and certified. 15 The right does not only presuppose in its
possessor integrity, legal standing and attainment, but also the exercise of a special
privilege, highly personal and partaking of the nature of a public trust." 16

D. Petitioners cited Canon 33 of the Canons of Professional Ethics of the American Bar
Association" in support of their petitions.

10
It is true that Canon 33 does not consider as unethical the continued use of the name of
a deceased or former partner in the firm name of a law partnership when such a
practice is permissible by local custom but the Canon warns that care should be taken
that no imposition or deception is practiced through this use.

It must be conceded that in the Philippines, no local custom permits or allows the
continued use of a deceased or former partner's name in the firm names of law
partnerships. Firm names, under our custom, Identify the more active and/or more
senior members or partners of the law firm. A glimpse at the history of the firms of
petitioners and of other law firms in this country would show how their firm names have
evolved and changed from time to time as the composition of the partnership
changed. têñ.£îhqwâ£

The continued use of a firm name after the death of one or more of the
partners designated by it is proper only where sustained by local custom
and not where by custom this purports to Identify the active members. ...

There would seem to be a question, under the working of the Canon, as to

the propriety of adding the name of a new partner and at the same time
retaining that of a deceased partner who was never a partner with the new
one. (H.S. Drinker, op. cit., supra, at pp. 207208) (Emphasis supplied).

The possibility of deception upon the public, real or consequential, where the name of a
deceased partner continues to be used cannot be ruled out. A person in search of legal
counsel might be guided by the familiar ring of a distinguished name appearing in a firm
title.

E. Petitioners argue that U.S. Courts have consistently allowed the continued use of a
deceased partner's name in the firm name of law partnerships. But that is so because it
is sanctioned by custom.

In the case of Mendelsohn v. Equitable Life Assurance Society (33 N.Y.S. 2d 733)
which petitioners Salazar, et al. quoted in their memorandum, the New York Supreme
Court sustained the use of the firm name Alexander & Green even if none of the present
ten partners of the firm bears either name because the practice was sanctioned by
custom and did not offend any statutory provision or legislative policy and was adopted
by agreement of the parties. The Court stated therein: têñ.£îhqwâ£

The practice sought to be proscribed has the sanction of custom and

offends no statutory provision or legislative policy. Canon 33 of the
Canons of Professional Ethics of both the American Bar Association and
the New York State Bar Association provides in part as follows: "The
continued use of the name of a deceased or former partner, when
permissible by local custom is not unethical, but care should be taken that
no imposition or deception is practiced through this use." There is no
question as to local custom. Many firms in the city use the names of

11
 deceased members with the approval of other attorneys, bar associations
and the courts. The Appellate Division of the First Department has
considered the matter and reached The conclusion that such practice
should not be prohibited. (Emphasis supplied)

xxx xxx xxx

Neither the Partnership Law nor the Penal Law prohibits the practice in
question. The use of the firm name herein is also sustainable by reason of
agreement between the partners. 18

Not so in this jurisdiction where there is no local custom that sanctions the practice.
Custom has been defined as a rule of conduct formed by repetition of acts, uniformly
observed (practiced) as a social rule, legally binding and obligatory. 19 Courts take no
judicial notice of custom. A custom must be proved as a fact, according to the rules of
evidence. 20 A local custom as a source of right cannot be considered by a court of
justice unless such custom is properly established by competent evidence like any other
fact. 21 We find such proof of the existence of a local custom, and of the elements
requisite to constitute the same, wanting herein. Merely because something is done as
a matter of practice does not mean that Courts can rely on the same for purposes of
adjudication as a juridical custom. Juridical custom must be differentiated from social
custom. The former can supplement statutory law or be applied in the absence of such
statute. Not so with the latter.

Moreover, judicial decisions applying or interpreting the laws form part of the legal
system. 22 When the Supreme Court in the Deen and Perkins cases issued its
Resolutions directing lawyers to desist from including the names of deceased partners
in their firm designation, it laid down a legal rule against which no custom or practice to
the contrary, even if proven, can prevail. This is not to speak of our civil law which
clearly ordains that a partnership is dissolved by the death of any partner. 23 Custom
which are contrary to law, public order or public policy shall not be countenanced. 24

The practice of law is intimately and peculiarly related to the administration of justice
and should not be considered like an ordinary "money-making trade." têñ.£îhqwâ£

... It is of the essence of a profession that it is practiced in a spirit of public

service. A trade ... aims primarily at personal gain; a profession at the
exercise of powers beneficial to mankind. If, as in the era of wide free
opportunity, we think of free competitive self assertion as the highest
good, lawyer and grocer and farmer may seem to be freely competing with
their fellows in their calling in order each to acquire as much of the world's
good as he may within the allowed him by law. But the member of a
profession does not regard himself as in competition with his professional
brethren. He is not bartering his services as is the artisan nor exchanging
the products of his skill and learning as the farmer sells wheat or corn.
There should be no such thing as a lawyers' or physicians' strike. The best

12
 service of the professional man is often rendered for no equivalent or for a
trifling equivalent and it is his pride to do what he does in a way worthy of
his profession even if done with no expectation of reward, This spirit of
public service in which the profession of law is and ought to be exercised
is a prerequisite of sound administration of justice according to law. The
other two elements of a profession, namely, organization and pursuit of a
learned art have their justification in that they secure and maintain that
spirit. 25

In fine, petitioners' desire to preserve the Identity of their firms in the eyes of the public
must bow to legal and ethical impediment.

ACCORDINGLY, the petitions filed herein are denied and petitioners advised to drop
the names "SYCIP" and "OZAETA" from their respective firm names. Those names
may, however, be included in the listing of individuals who have been partners in their
firms indicating the years during which they served as such.

SO ORDERED.
Teehankee, Concepcion, Jr., Santos, Fernandez, Guerrero and De Castro, JJ., concur
Fernando, C.J. and Abad Santos, J., took no part.

Separate Opinions

FERNANDO, C.J., concurring:

The petitions are denied, as there are only four votes for granting them, seven of the
Justices being of the contrary view, as explained in the plurality opinion of Justice
Ameurfina Melencio-Herrera. It is out of delicadeza that the undersigned did not
participate in the disposition of these petitions, as the law office of Sycip, Salazar,
Feliciano, Hernandez and Castillo started with the partnership of Quisumbing, Sycip,
and Quisumbing, the senior partner, the late Ramon Quisumbing, being the father-in-
law of the undersigned, and the most junior partner then, Norberto J. Quisumbing, being
his brother- in-law. For the record, the undersigned wishes to invite the attention of all
concerned, and not only of petitioners, to the last sentence of the opinion of Justice
Ameurfina Melencio-Herrera: 'Those names [Sycip and Ozaeta] may, however, be
included in the listing of individuals wtes

AQUINO, J., dissenting:

I dissent. The fourteen members of the law firm, Sycip, Salazar, Feliciano, Hernandez &
Castillo, in their petition of June 10, 1975, prayed for authority to continue the use of
that firm name, notwithstanding the death of Attorney Alexander Sycip on May 5, 1975
(May he rest in peace). He was the founder of the firm which was originally known as
the Sycip Law Office.

On the other hand, the seven surviving partners of the law firm, Ozaeta, Romulo, De
Leon, Mabanta & Reyes, in their petition of August 13, 1976, prayed that they be
13
allowed to continue using the said firm name notwithstanding the death of two partners,
former Justice Roman Ozaeta and his son, Herminio, on May 1, 1972 and February 14,
1976, respectively.

They alleged that the said law firm was a continuation of the Ozaeta Law Office which
was established in 1957 by Justice Ozaeta and his son and that, as to the said law firm,
the name Ozaeta has acquired an institutional and secondary connotation.

Article 1840 of the Civil Code, which speaks of the use by the partnership of the name
of a deceased partner as part of the partnership name, is cited to justify the petitions.
Also invoked is the canon that the continued use by a law firm of the name of a
deceased partner, "when permissible by local custom, is not unethical" as long as "no
imposition or deception is practised through this use" (Canon 33 of the Canons of Legal
Ethics).

I am of the opinion that the petition may be granted with the condition that it be indicated
in the letterheads of the two firms (as the case may be) that Alexander Sycip, former
Justice Ozaeta and Herminio Ozaeta are dead or the period when they served as
partners should be stated therein.

Obviously, the purpose of the two firms in continuing the use of the names of their
deceased founders is to retain the clients who had customarily sought the legal services
of Attorneys Sycip and Ozaeta and to benefit from the goodwill attached to the names of
those respected and esteemed law practitioners. That is a legitimate motivation.

The retention of their names is not illegal per se. That practice was followed before the
war by the law firm of James Ross. Notwithstanding the death of Judge Ross the
founder of the law firm of Ross, Lawrence, Selph and Carrascoso, his name was
retained in the firm name with an indication of the year when he died. No one
complained that the retention of the name of Judge Ross in the firm name was illegal or
unethical.

# Separate Opinions

FERNANDO, C.J., concurring:

The petitions are denied, as there are only four votes for granting them, seven of the
Justices being of the contrary view, as explained in the plurality opinion of Justice
Ameurfina Melencio-Herrera. It is out of delicadeza that the undersigned did not
participate in the disposition of these petitions, as the law office of Sycip, Salazar,
Feliciano, Hernandez and Castillo started with the partnership of Quisumbing, Sycip,
and Quisumbing, the senior partner, the late Ramon Quisumbing, being the father-in-
law of the undersigned, and the most junior partner then, Norberto J. Quisumbing, being
his brother- in-law. For the record, the undersigned wishes to invite the attention of all
concerned, and not only of petitioners, to the last sentence of the opinion of Justice

14
Ameurfina Melencio-Herrera: 'Those names [Sycip and Ozaeta] may, however, be
included in the listing of individuals wtes

AQUINO, J., dissenting:

I dissent. The fourteen members of the law firm, Sycip, Salazar, Feliciano, Hernandez &
Castillo, in their petition of June 10, 1975, prayed for authority to continue the use of
that firm name, notwithstanding the death of Attorney Alexander Sycip on May 5, 1975
(May he rest in peace). He was the founder of the firm which was originally known as
the Sycip Law Office.

On the other hand, the seven surviving partners of the law firm, Ozaeta, Romulo, De
Leon, Mabanta & Reyes, in their petition of August 13, 1976, prayed that they be
allowed to continue using the said firm name notwithstanding the death of two partners,
former Justice Roman Ozaeta and his son, Herminio, on May 1, 1972 and February 14,
1976, respectively.

They alleged that the said law firm was a continuation of the Ozaeta Law Office which
was established in 1957 by Justice Ozaeta and his son and that, as to the said law firm,
the name Ozaeta has acquired an institutional and secondary connotation.

Article 1840 of the Civil Code, which speaks of the use by the partnership of the name
of a deceased partner as part of the partnership name, is cited to justify the petitions.
Also invoked is the canon that the continued use by a law firm of the name of a
deceased partner, "when permissible by local custom, is not unethical" as long as "no
imposition or deception is practised through this use" (Canon 33 of the Canons of Legal
Ethics).

I am of the opinion that the petition may be granted with the condition that it be indicated
in the letterheads of the two firms (as the case may be) that Alexander Sycip, former
Justice Ozaeta and Herminio Ozaeta are dead or the period when they served as
partners should be stated therein.

Obviously, the purpose of the two firms in continuing the use of the names of their
deceased founders is to retain the clients who had customarily sought the legal services
of Attorneys Sycip and Ozaeta and to benefit from the goodwill attached to the names of
those respected and esteemed law practitioners. That is a legitimate motivation.

The retention of their names is not illegal per se. That practice was followed before the
war by the law firm of James Ross. Notwithstanding the death of Judge Ross the
founder of the law firm of Ross, Lawrence, Selph and Carrascoso, his name was
retained in the firm name with an indication of the year when he died. No one
complained that the retention of the name of Judge Ross in the firm name was illegal or
unethical.

15
**FROM THE PERSPECTIVE OF ART. 11-12 OF THE CIVIL CODEIn The Matter of the
Petition for Authority to Continue Use of the Firm Name “Ozaeta,Romulo, De Leon…”
etc.92 SCRA 1July 30, 1979Melencio-Herrera,
J
.:Facts:The surviving parters of Atty. Herminio Ozaeta filed a petition praying that they
beallowed to continue using, in the name of their firm, the names of their partner
who passed away. One of the petitioners’ arguments stated that no local custom
prohibits thecontinued use of a deceased partner’s name in a professional firm’s name
in so far asGreater Manila Area is concerned. No custom exists which recognizes that
the name of alaw firm necessarily identifies the individual members of the firm. They
also stated thatthe continued use of a deceased partner’s name in the firm name of law
partnerships
has been consistently allowed by U.S. Courts and is an accepted practice in the legal pr
ofession of most countries in the world.Issue:Whether or not the law firm “Ozaeta,
Romulo, De Leon, Mabanta & Reyes” is allowed tosustain the name of their deceased
partner, Atty. Herminio Ozaeta, in the name of
theirfirm.Held: NO. Canon 33 of the Canons of Professional Ethics adopted by the Amer
ican BarAssociation stated the following:“The continued use of the name of a deceased
or former partner when
permissible by local custom,
is not unethical but care should be takenthat no imposition or deception is
practiced through this
use.” No local custom permits or allows the continued use of a deceased or former part
ner’sname in the firm names of law partnerships. Firm names, under Philippine
custom,identify the more active or senior partners in a firm. Firm names in the
Philippineschange and evolve when partners die, leave or a new one is added. It is
questionable toadd the new name of a partner and sustain the name of the deceased
one since they havenever been, technically, partners in the first place. When it comes to
the arguments of
the petitioners stating that U.S. Courts grant the continued use of the deceased partner’
sname, this is so because in the U.S., it is a sanctioned custom as stated in the case of
Mendelsohn v. Equitable Life Assurance Society
(33 N.Y.S 2d 733). This does not applyin the Philippines. The petition filed herein is
denied and petitioner is advised to drop thename “OZAETA” from the firm name.

16
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,

vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:

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

The Case

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

WHEREFORE, [there being] no reversible error in the appealed decision,

the same is hereby affirmed. 2

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

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by

this Court on September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts,
subject to the modifications as hereinafter made by reason of the special

17
and unique facts and circumstances and the proceedings that transpired
during the trial of this case;

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

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

b. 12% interest per annum counted from date of plaintiff's

invoices and computed on their respective amounts as
follows:

i. Accrued interest of P73,221.00 on Invoice

No. 14407 for P385,377.80 dated February 9,
1990;

ii. Accrued interest for P27,904.02 on Invoice

No. 14413 for P146,868.00 dated February 13,
1990;

iii. Accrued interest of P12,920.00 on Invoice

No. 14426 for P68,000.00 dated February 19,
1990;

c. P50,000.00 as and for attorney's fees, plus P8,500.00

representing P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for

storage charges on the nets counted from September 20,
1990 (date of attachment) to September 12, 1991 (date of
auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal

obligation or for the unpaid price of nets and floats in the amount of
P532,045.00 and P68,000.00, respectively, or for the total amount
P600,045.00, this Court noted that these items were attached to
guarantee any judgment that may be rendered in favor of the
plaintiff but, upon agreement of the parties, and, to avoid further
deterioration of the nets during the pendency of this case, it was
ordered sold at public auction for not less than P900,000.00 for
which the plaintiff was the sole and winning bidder. The proceeds of
the sale paid for by plaintiff was deposited in court. In effect, the
amount of P900,000.00 replaced the attached property as a
guaranty for any judgment that plaintiff may be able to secure in

18
 this case with the ownership and possession of the nets and floats
awarded and delivered by the sheriff to plaintiff as the highest
bidder in the public auction sale. It has also been noted that
ownership of the nets [was] retained by the plaintiff until full
payment [was] made as stipulated in the invoices; hence, in effect,
the plaintiff attached its own properties. It [was] for this reason also
that this Court earlier ordered the attachment bond filed by plaintiff
to guaranty damages to defendants to be cancelled and for the
P900,000.00 cash bidded and paid for by plaintiff to serve as its
bond in favor of defendants.

From the foregoing, it would appear therefore that whatever

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

SO ORDERED. 3

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered
into a Contract dated February 7, 1990, for the purchase of fishing nets of various sizes
from the Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that
they were engaged in a business venture with Petitioner Lim Tong Lim, who however
was not a signatory to the agreement. The total price of the nets amounted to P532,045.
Four hundred pieces of floats worth P68,000 were also sold to the Corporation. 4

The buyers, however, failed to pay for the fishing nets and the floats; hence, private
respondents filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a
prayer for a writ of preliminary attachment. The suit was brought against the three in
their capacities as general partners, on the allegation that "Ocean Quest Fishing
Corporation" was a nonexistent corporation as shown by a Certification from the
Securities and Exchange Commission. 5 On September 20, 1990, the lower court
issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the
fishing nets on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.

19
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and
requesting a reasonable time within which to pay. He also turned over to respondent
some of the nets which were in his possession. Peter Yao filed an Answer, after which
he was deemed to have waived his right to cross-examine witnesses and to present
evidence on his behalf, because of his failure to appear in subsequent hearings. Lim
Tong Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and
moved for the lifting of the Writ of Attachment. 6 The trial court maintained the Writ, and
upon motion of private respondent, ordered the sale of the fishing nets at a public
auction. Philippine Fishing Gear Industries won the bidding and deposited with the said
court the sales proceeds of P900,000. 7

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine
Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and
Lim, as general partners, were jointly liable to pay respondent. 8

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on
the testimonies of the witnesses presented and (2) on a Compromise Agreement
executed by the three 9 in Civil Case No. 1492-MN which Chua and Yao had brought
against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of
commercial documents; (b) a reformation of contracts; (c) a declaration of ownership of
fishing boats; (d) an injunction and (e) damages. 10 The Compromise Agreement
provided:

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

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

c) If the proceeds of the sale the vessels will be less than

P5,750,000.00 whatever the deficiency shall be shouldered
and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3
Antonio Chua; 1/3 Peter Yao. 11

The trial court noted that the Compromise Agreement was silent as to the nature of their
obligations, but that joint liability could be presumed from the equal distribution of the
profit and loss. 21

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

20
 Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in
a fishing business and may thus be held liable as a such for the fishing nets and floats
purchased by and for the use of the partnership. The appellate court ruled:

The evidence establishes that all the defendants including herein

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

Hence, petitioner brought this recourse before this Court. 14

The Issues

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

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

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

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS

ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE
BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF
APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND

ATTACHMENT OF PETITIONER LIM'S GOODS.

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

21
 This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability

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

We are not persuaded by the arguments of petitioner. The facts as found by the two
lower courts clearly showed that there existed a partnership among Chua, Yao and him,
pursuant to Article 1767 of the Civil Code which provides:

Art. 1767 — By the contract of partnership, two or more persons bind

themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.

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

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged
in commercial fishing to join him, while Antonio Chua was already Yao's
partner;

(2) That after convening for a few times, Lim, Chua, and Yao verbally
agreed to acquire two fishing boats, the FB Lourdes and the FB Nelson for
the sum of P3.35 million;

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

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

22
 (5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping,
repairing, dry docking and other expenses for the boats would be
shouldered by Chua and Yao;

(6) That because of the "unavailability of funds," Jesus Lim again

extended a loan to the partnership in the amount of P1 million secured by
a check, because of which, Yao and Chua entrusted the ownership papers
of two other boats, Chua's FB Lady Anne Mel and Yao's FB Tracy to Lim
Tong Lim.

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

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

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

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had
decided to engage in a fishing business, which they started by buying boats worth
P3.35 million, financed by a loan secured from Jesus Lim who was petitioner's brother.
In their Compromise Agreement, they subsequently revealed their intention to pay the
loan with the proceeds of the sale of the boats, and to divide equally among them the
excess or loss. These boats, the purchase and the repair of which were financed with
borrowed money, fell under the term "common fund" under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could be an intangible like
credit or industry. That the parties agreed that any loss or profit from the sale and
operation of the boats would be divided equally among them also shows that they had
indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat,
but also to that of the nets and the floats. The fishing nets and the floats, both essential
to fishing, were obviously acquired in furtherance of their business. It would have been
inconceivable for Lim to involve himself so much in buying the boat but not in the
acquisition of the aforesaid equipment, without which the business could not have
proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They purchased the boats, which

23
constituted the main assets of the partnership, and they agreed that the proceeds from
the sales and operations thereof would be divided among them.

We stress that under Rule 45, a petition for review like the present case should involve
only questions of law. Thus, the foregoing factual findings of the RTC and the CA are
binding on this Court, absent any cogent proof that the present action is embraced by
one of the exceptions to the rule. 16 In assailing the factual findings of the two lower
courts, petitioner effectively goes beyond the bounds of a petition for review under Rule
45.

Compromise Agreement

Not the Sole Basis of Partnership

Petitioner argues that the appellate court's sole basis for assuming the existence of a
partnership was the Compromise Agreement. He also claims that the settlement was
entered into only to end the dispute among them, but not to adjudicate their preexisting
rights and obligations. His arguments are baseless. The Agreement was but an
embodiment of the relationship extant among the parties prior to its execution.

A proper adjudication of claimants' rights mandates that courts must review and
thoroughly appraise all relevant facts. Both lower courts have done so and have found,
correctly, a preexisting partnership among the parties. In implying that the lower courts
have decided on the basis of one piece of document alone, petitioner fails to appreciate
that the CA and the RTC delved into the history of the document and explored all the
possible consequential combinations in harmony with law, logic and fairness. Verily, the
two lower courts' factual findings mentioned above nullified petitioner's argument that
the existence of a partnership was based only on the Compromise Agreement.

Petitioner Was a Partner,

Not a Lessor

We are not convinced by petitioner's argument that he was merely the lessor of the
boats to Chua and Yao, not a partner in the fishing venture. His argument allegedly
finds support in the Contract of Lease and the registration papers showing that he was
the owner of the boats, including F/B Lourdes where the nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he
consented to the sale of his own boats to pay a debt of Chua and Yao, with the excess
of the proceeds to be divided among the three of them. No lessor would do what
petitioner did. Indeed, his consent to the sale proved that there was a preexisting
partnership among all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with
Chua and Yao, in which debts were undertaken in order to finance the acquisition and

24
the upgrading of the vessels which would be used in their fishing business. The sale of
the boats, as well as the division among the three of the balance remaining after the
payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his
name, was not his own property but an asset of the partnership. It is not uncommon to
register the properties acquired from a loan in the name of the person the lender trusts,
who in this case is the petitioner himself. After all, he is the brother of the creditor, Jesus
Lim.

We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his

property to pay a debt he did not incur, if the relationship among the three of them was
merely that of lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be
imputed only to Chua and Yao, and not to him. Again, we disagree.

Sec. 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. — All persons who assume to act as a

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

One who assumes an obligation to an ostensible corporation as such,

cannot resist performance thereof on the ground that there was in fact no
corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party
may be estopped from denying its corporate existence. "The reason behind this doctrine
is obvious — an unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes of a corporation as
provided by law; it cannot create agents or confer authority on another to act in its
behalf; thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law that a
person who acts as an agent without authority or without a principal is himself regarded
as the principal, possessed of all the right and subject to all the liabilities of a principal, a
person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent. 17

The doctrine of corporation by estoppel may apply to the alleged corporation and to a
third party. In the first instance, an unincorporated association, which represented itself

25
to be a corporation, will be estopped from denying its corporate capacity in a suit
against it by a third person who relied in good faith on such representation. It cannot
allege lack of personality to be sued to evade its responsibility for a contract it entered
into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated,

nonetheless treated it as a corporation and received benefits from it, may be barred
from denying its corporate existence in a suit brought against the alleged corporation. In
such case, all those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable for contracts they
impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to
be paid for the nets it sold. The only question here is whether petitioner should be held
jointly 18 liable with Chua and Yao. Petitioner contests such liability, insisting that only
those who dealt in the name of the ostensible corporation should be held liable. Since
his name does not appear on any of the contracts and since he never directly
transacted with the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes,
the boat which has earlier been proven to be an asset of the partnership. He in fact
questions the attachment of the nets, because the Writ has effectively stopped his use
of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to
form a corporation. Although it was never legally formed for unknown reasons, this fact
alone does not preclude the liabilities of the three as contracting parties in
representation of it. Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid existence, are held
liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation.
However, having reaped the benefits of the contract entered into by persons with whom
he previously had an existing relationship, he is deemed to be part of said association
and is covered by the scope of the doctrine of corporation by estoppel. We reiterate the
ruling of the Court in Alonso v. Villamor: 19

A litigation is not a game of technicalities in which one, more deeply

schooled and skilled in the subtle art of movement and position, entraps
and destroys the other. It is, rather, a contest in which each contending
party fully and fairly lays before the court the facts in issue and then,
brushing aside as wholly trivial and indecisive all imperfections of form and
technicalities of procedure, asks that justice be done upon the merits.
Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and becomes its great

26
 hindrance and chief enemy, deserves scant consideration from courts.
There should be no vested rights in technicalities.

Third Issue:
Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the
nets. We agree with the Court of Appeals that this issue is now moot and academic. As
previously discussed, F/B Lourdes was an asset of the partnership and that it was
placed in the name of petitioner, only to assure payment of the debt he and his partners
owed. The nets and the floats were specifically manufactured and tailor-made according
to their own design, and were bought and used in the fishing venture they agreed upon.
Hence, the issuance of the Writ to assure the payment of the price stipulated in the
invoices is proper. Besides, by specific agreement, ownership of the nets remained with
Respondent Philippine Fishing Gear, until full payment thereof.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., pls. see concurring opinion.
Separate Opinions
VITUG, J., concurring opinion;

I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice Artemio V.
Panganiban, particularly the finding that Antonio Chua, Peter Yao and petitioner Lim Tong Lim
have incurred the liabilities of general partners. I merely would wish to elucidate a bit, albeit
briefly, the liability of partners in a general partnership.

When a person by his act or deed represents himself as a partner in an existing partnership or
with one or more persons not actual partners, he is deemed an agent of such persons
consenting to such representation and in the same manner, if he were a partner, with respect to
persons who rely upon the representation. 1 The association formed by Chua, Yao and Lim,
should be, as it has been deemed, a de facto partnership with all the consequent obligations for
the purpose of enforcing the rights of third persons. The liability of general partners (in a general
partnership as so opposed to a limited partnership) is laid down in Article 1816 2 which posits
that all partners shall be liable pro rata beyond the partnership assets for all the contracts which
may have been entered into in its name, under its signature, and by a person authorized to act
for the partnership. This rule is to be construed along with other provisions of the Civil Code
which postulate that the partners can be held solidarily liable with the partnership specifically in
these instances — (1) where, by any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership or with the authority of his co-partners, loss or
injury is caused to any person, not being a partner in the partnership, or any penalty is incurred,
the partnership is liable therefor to the same extent as the partner so acting or omitting to act;
(2) where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it; and (3) where the partnership in the course of its
business receives money or property of a third person and the money or property so received is
misapplied by any partner while it is in the custody of the partnership 3 — consistently with the
rules on the nature of civil liability in delicts and quasi-delicts.

27
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19342 May 25, 1972
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B.
OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, 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 Buñales died on March 23, 1944, leaving as heirs her surviving
spouse, Lorenzo T. Oña 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. Oña 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 Oña, were still minors when the project of partition was
approved, Lorenzo T. Oña, 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

28
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. Oña, 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. Oña who
used said properties in business by leasing or selling them and investing
the income derived therefrom and the proceeds from the sales thereof in
real properties and securities. As a result, petitioners' properties and
investments gradually increased from P105,450.00 in 1949 to
P480,005.20 in 1956 as can be gleaned from the following year-end
balances:

Year Investment Land Building

Account Account Account

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

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

From said investments and properties petitioners derived such incomes as

profits from installment sales of subdivided lots, profits from sales of

29
stocks, dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR
rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of
account kept by Lorenzo T. Oña 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. Oña
who, as heretofore pointed out, invested them in real properties and
securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).

On the basis of the foregoing facts, respondent (Commissioner of Internal

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

The original assessment was as follows:

1955

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

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

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

1956

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

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

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

(See Exhibit 13, page 50, BIR records)

30
 Upon further consideration of the case, the 25% surcharge was eliminated
in line with the ruling of the Supreme Court in Collector v. Batangas
Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned
assessment refers solely to the income tax proper for the years 1955 and
1956 and the "Compromise for non-filing," the latter item obviously
referring to the compromise in lieu of the criminal liability for failure of
petitioners to file the corporate income tax returns for said years. (See
Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)

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

I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-OWNERS OF
THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR CORPORATE
INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED
PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED
IN COMMON AND THE LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS
ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME
TAX ON THEIR RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the
facts found by the Court of Tax Appeals, should petitioners be considered as co-owners
of the properties inherited by them from the deceased Julia Buñales 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?

31
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. Oña, the assessment in question refers to the
later years 1955 and 1956. We believe this point to be important because, apparently,
at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only
from 1955 that he considered them as having formed an unregistered partnership. At
least, there is nothing in the record indicating that an earlier assessment had already
been made. Such being the case, and We see no reason how it could be otherwise, it is
easily understandable why petitioners' position that they are co-owners and not
unregistered co-partners, for the purposes of the impugned assessment, cannot be
upheld. Truth to tell, petitioners should find comfort in the fact that they were not
similarly assessed earlier by the Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the deceased
among themselves pursuant to the project of partition approved in 1949, "the properties
remained under the management of Lorenzo T. Oña 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. Oña 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. Oña.

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. Oña,
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. Oña 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.

32
It is but logical that in cases of inheritance, there should be a period when the heirs can
be considered as co-owners rather than unregistered co-partners within the
contemplation of our corporate tax laws aforementioned. Before the partition and
distribution of the estate of the deceased, all the income thereof does belong commonly
to all the heirs, obviously, without them becoming thereby unregistered co-partners, but
it does not necessarily follow that such status as co-owners continues until the
inheritance is actually and physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the partition, they might decide
to continue holding said shares under the common management of the administrator or
executor or of anyone chosen by them and engage in business on that basis. Withal, if
this were to be allowed, it would be the easiest thing for heirs in any inheritance to
circumvent and render meaningless Sections 24 and 84(b) of the National Internal
Revenue Code.

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

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

33
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

34
 "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

35
 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.

36
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS

P. OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.

Demosthenes B. Gadioma for petitioners.

AQUINO, J.:

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

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

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

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

Not only that. He considered the share of the profits of each petitioner in the sum of
P33,584 as a " taxable in full (not a mere capital gain of which ½ is taxable) and
required them to pay deficiency income taxes aggregating P56,707.20 including the
50% fraud surcharge and the accumulated interest.

37
Thus, the petitioners are being held liable for deficiency income taxes and penalties
totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital gains
already paid by them.

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

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

We hold that it is error to consider the petitioners as having formed a partnership under
article 1767 of the Civil Code simply because they allegedly contributed P178,708.12 to
buy the two lots, resold the same and divided the profit among themselves.

To regard the petitioners as having formed a taxable unregistered partnership would

result in oppressive taxation and confirm the dictum that the power to tax involves the
power to destroy. That eventuality should be obviated.

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

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

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y

la sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon

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

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la

que se dice que si en nuestro Derecho positive se ofrecen a veces
dificultades al tratar de fijar la linea divisoria entre comunidad de bienes y
contrato de sociedad, la moderna orientacion de la doctrina cientifica
señala como nota fundamental de diferenciacion aparte del origen de

38
 fuente de que surgen, no siempre uniforme, la finalidad perseguida por los
interesados: lucro comun partible en la sociedad, y mera conservacion y
aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part 1,
10 Ed., 1971, 328- 329).

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

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

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

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

Co-owership distinguished from partnership.—We find that the case at bar

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

All co-ownerships are not deemed unregistered pratnership.—Co-

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

39
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after
an extrajudicial settlement the co-heirs used the inheritance or the incomes derived
therefrom as a common fund to produce profits for themselves, it was held that they
were taxable as an unregistered partnership.

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

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

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

SO ORDERED.

40
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-2484 April 11, 1906

JOHN FORTIS, plaintiff-appellee,

vs.
GUTIERREZ HERMANOS, defendants-appellants.

Hartigan, Rohde and Gutierrez, for appellants.

W. A. Kincaid, for appellee.

WILLARD, J.:

Plaintiff, an employee of defendants during the years 1900, 1901, and 1902, brought
this action to recover a balance due him as salary for the year 1902. He alleged that he
was entitled, as salary, to 5 per cent of the net profits of the business of the defendants
for said year. The complaint also contained a cause of action for the sum of 600 pesos,
money expended by plaintiff for the defendants during the year 1903. The court below,
in its judgment, found that the contract had been made as claimed by the plaintiff; that 5
per cent of the net profits of the business for the year 1902 amounted to 26,378.68
pesos, Mexican currency; that the plaintiff had received on account of such salary
12,811.75 pesos, Mexican currency, and ordered judgment against the defendants for
the sum 13,566.93 pesos, Mexican currency, with interest thereon from December 31,
1904. The court also ordered judgment against the defendants for the 600 pesos
mentioned in the complaint, and intereat thereon. The total judgment rendered against
the defendants in favor of the plaintiff, reduced to Philippine currency, amounted to
P13,025.40. The defendants moved for a new trial, which was denied, and they have
brought the case here by bill of exceptions.

(1) The evidence is sufifcient to support the finding of the court below to the effect that
the plaintiff worked for the defendants during the year 1902 under a contract by which
he was to receive as compensation 5 per cent of the net profits of the business. The
contract was made on the part of the defendants by Miguel Alonzo Gutierrez. By the
provisions of the articles of partnership he was made one of the managers of the
company, with full power to transact all of the business thereof. As such manager he
had authority to make a contract of employment with the plaintiff.

(2) Before answering in the court below, the defendants presented a motion that the
complaint be made more definite and certain. This motion was denied. To the order
denying it the defendants excepted, and they have assigned as error such ruling of the
court below. There is nothing in the record to show that the defendants were in any way

41
prejudiced by this ruling of the court below. If it were error it was error without prejudice,
and not ground for reversal. (Sec. 503, Code of Civil Procedure.)

(3) It is claimed by the appellants that the contract alleged in the complaint made the
plaintiff a copartner of the defendants in the business which they were carrying on. This
contention can not bo sustained. It was a mere contract of employnent. 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 defendants in their business did not in any sense make by a partner therein. The
articles of partnership between the defendants provided that the profits should be
divided among the partners named in a certain proportion. The contract made between
the plaintiff and the then manager of the defendant partnership did not in any way vary
or modify this provision of the articles of partnership. The profits of the business could
not be determined until all of the expenses had been paid. A part of the expenses to be
paid for the year 1902 was the salary of the plaintiff. That salary had to be deducted
before the net profits of the business, which were to be divided among the partners,
could be ascertained. It was undoubtedly necessary in order to determine what the
salary of the plaintiff was, to determine what the profits of the business were, after
paying all of the expenses except his, but that determination was not the final
determination of the net profits of the business. It was made for the purpose of fixing the
basis upon which his compensation should be determined.

(4) It was no necessary that the contract between the plaintiff and the defendants
should be made in writing. (Thunga Chui vs. Que Bentec,1 1 Off. Gaz., 818, October 8,
1903.)

(5) It appearred that Miguel Alonzo Gutierrez, with whom the plaintiff had made the
contract, had died prior to the trial of the action, and the defendants claim that by
reasons of the provisions of section 383, paragraph 7, of the Code of Civil Procedure,
plaintiff could not be a witness at the trial. That paragraph provides that parties to an
action against an executor or aministrator upon a claim or demand against the estate of
a deceased person can not testify as to any matter of fact occurring before the death of
such deceased person. This action was not brought against the administrator of Miguel
Alonzo, nor was it brought upon a claim against his estate. It was brought against a
partnership which was in existence at the time of the trial of the action, and which was
juridical person. The fact that Miguel Alonzo had been a partner in this company, and
that his interest therein might be affected by the result of this suit, is not sufficient to
bring the case within the provisions of the section above cited.

(6) The plaintiff was allowed to testify against the objection and exception of the
defendants, that he had been paid as salary for the year 1900 a part of the profits of the
business. This evidence was competent for the purpose of corroborating the testimony
of the plaintiff as to the existence of the contract set out in the complaint.

(7) The plaintiff was allowed to testify as to the contents of a certain letter written by
Miguel Glutierrez, one of the partners in the defendant company, to Miguel Alonzo

42
Gutierrez, another partner, which letter was read to plaintiff by Miguel Alonzo. It is not
necessary to inquire whether the court committed an error in admitting this evidence.
The case already made by the plaintiff was in itself sufficient to prove the contract
without reference to this letter. The error, if any there were, was not prejudicial, and is
not ground for revesal. (Sec. 503, Code of Civil Procedure.)

(8) For the purpose of proving what the profits of the defendants were for the year 1902,
the plaintiff presented in evidence the ledger of defendants, which contained an entry
made on the 31st of December, 1902, as follows:

Perdidas y Ganancias ...................................... a Varios Ps. 527,573.66

Utilidades liquidas obtenidas durante el ano y que abonamos conforme a la
proporcion que hemos establecido segun el convenio de sociedad.

The defendant presented as a witness on, the subject of profits Miguel Gutierrez, one of
the defendants, who testiffied, among other things, that there were no profits during the
year 1902, but, on the contrary, that the company suffered considerable loss during that
year. We do not think the evidence of this witnees sufficiently definite and certain to
overcome the positive evidence furnished by the books of the defendants themselves.

(9) In reference to the cause of action relating to the 600 pesos, it appears that the
plaintiff left the employ of the defendants on the 19th of Macrh, 1903; that at their
request he went to Hongkong, and was there for about two months looking after the
business of the defendants in the matter of the repair of a certain steamship. The
appellants in their brief say that the plaintiff is entitled to no compensation for his
services thus rendered, because by the provisions of article 1711 of the Civil Code, in
the absence of an agreement to the contrary, the contract of agency is supposed to be
gratuitous. That article i not applicable to this case, because the amount of 600 pesos
not claimed as compensation for services but as a reimbursment for money expended
by the plaintiff in the business of the defendants. The article of the code that is
applicable is article 1728.

The judgment of the court below is affirmed, with the costs, of this instance against the
appellants. After the expiration of twenty days from the date of this decision let final
judgment be entered herein, and ten days thereafter let the case be remanded to the
lower court for execution. So ordered.

43
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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

VICENTE W. PASTOR, plaintiff-appellant,

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

Alfredo Chicote for appellant.

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

WILLARD, J.:

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

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

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

Fifth. The partnership of Nicasio and Gaspar undertakes to return to the said Eguia,
Monserrat, Iboleon, Pastor, and Hermoso the said total sum of 28,000 pesos within
the period of ten years from the date of the instrument, and to guarantee the
fulfillment of said payment they pledge to said parties the said lorchas Pepay, Lola,
Consuelo, India, Niceta, and Castellana, in the sums respectively which said parties
have furnished for the purchase and repair of said vessels, as before stated, ceding
and assigning to said parties, in like proportions the profits and gains which may be
realized from the exploitation of said vessels; the said vessels to be the property of
said Eguia, Monserrat, Iboleon, Pastor, and Hermoso, and of the parties of the first
part, proportionate with the sums which the said parties have invested in said
vessels; the management of said vessels during the time in which said debt remains

44
 unpaid to remain with the partnership of Nicasio and Gaspar, with the understanding
that whatever may be the result of the business of said vessels, neither the said
partnership nor the parties of the first part shall become responsible for the payment
of said debt, except in so far as the said vessels shall respond therefor, and in no
event shall they respond therefor with any other property; injuries to and all losses of
said lorchas to be shared by all the parties hereto, as well as crews' expenses and
other outlays necessary for the preservation of said vessels, in the proportion which
corresponds to each party hereto according to his investment; the parties of the first
part binding themselves not to encumber or pledge said vessels while said debt
remains unsatisfied to the parties of the second part.

It was provided in the seventh clause that the launch Luisa was not included in this contract.

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

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

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

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

45
alienate the lorchas until they had paid the debt, indicating clearly that by paying the debt
they could do so, a thing consistent with the idea of a partnership. (7) By the seventh
paragraph of this contract it is stated that the launch Luisa is not included in the contract.

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

It appears, also, from this contract that when Nicasio and Gaspar enlarged their business
they could devote themselves not only to the launch Luisa and the six lorchas in question
but also to other craft. With such other business the plaintiff would have nothing to do. The
most that he can claim is not that he was a partner in the firm of Nicasio and Gaspar, but
that he and his associates, in connection with that firm, had formed another partnership to
manage these lorchas. The fact that the plaintiff was to share in the profits and losses of the
business and that Nicasio and Gaspar should answer for the payment of the debt only with
the lorchas, and not with their own property, indicates that the plaintiff was a partner. But
these provisions are not conclusive. This is a suit between the parties to the contract. The
rights of third persons are not concerned. Whether the plaintiff would be a partner as to
such third persons is not to be determined. As between themselves the parties could make
any contract that pleased them, provided that it was not illegal (art. 1255, Civil Code). They
could, in making this contract, if they chose, take some provision from the law of partnership
and others from the law of loans. Loans with a right to receive a part of the profits in lieu of
interest are not uncommon. As between the parties, such contract is not one of partnership.

The question on this branch of the case is whether the contract on its face creates a
partnership or not. The court finds that the plaintiff believed that he could not be a partner
because he was a Spanish subject. There can therefore be no doubt as to his intention in
signing this contract. He did not believe that on its face it made him a partner. If he had so
believed, he would not have signed it. If he was willing to sign a contract which on its face
made him a partner, he and his associates would have joined with Nicasio and Gaspar in
the amended articles of partnership which they signed on this very day, and this second
document would have been entirely unnecessary. The inference from these facts is so
strong that it can not be overcome by the fact that in subsequent dealings the parties called
themselves partners. The plaintiff undoubtedly wished to secure, as far as he could, the
rights of a partner without making himself one.

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

It is claimed by the plaintiff that even if the transaction was a loan, it could not be terminated
without his consent until the expiration of the period of ten years. Article 1127 of the Civil
Code does not say that the period allowed for the performance of an obligation is for the

46
benefit of the creditor as well as the debtor. It says that it shall be so presumed unless the
contrary appears. In this case the contrary does appear in two clauses hereinbefore cited
under (5) and (6). Upon paying the loan at the end of ten years, they would have had the
undoubted right to mortgage or sell the lorchas, and then by the mere act of payment would
have ceased to be consignees thereof. No declaration of that kind in the contract was at all
necessary. These rights would result as a matter of law. The insertion of these clauses can
only be explained on the theory that the period was for the benefit of the debtors alone, and
that they would be at liberty at any time, even before the expiration of ten years, to sell the
property, provided they repaid the loan.

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

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

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

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

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

(2) The parties made a verbal agreement which they afterwards reduced to writing. Section
285 of the Code of Civil Procedure prohibits any parol evidence as to other terms not
contained in the writing. Under this section, even if there had been agreements other than
those contained in the instrument and inconsistent therewith, the plaintiff could not testify to
them. The plaintiff claims that this section does not prohibit evidence as to the surrounding
circumstances. This is true, and the plaintiff was the trial allowed to testify that he brought

47
the lorchas himself in Iloilo; that he was paid $500 for so doing; that $20,000 was borrowed
from the Banco Español -- Filipino for the purpose of paying for them; and as to other
details. There was no intrinsic ambiguity in the contract which required explanation. When a
written contract is vague and indefinite, it can be explained by showing what the
surrounding circumstances were (sec. 289), but not by showing by parol what the prior
agreement in fact was.

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

4. The following exception appears in the record:

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

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

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

6. The following exception appears in the record:

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

48
This ruling was correct. What Salvador would have done was of no importance. The
plaintiff's agent was allowed to testify that he would not have given the plaintiff's consent if
he had known that the defendants intended to continue the business.

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

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

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

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

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

Separate Opinions

COOPER, J., concurring:

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

49
court below and retry the questions of fact involved in the decision of the case — that is,
whether the dissolution was obtained by the fraud of the defendants.

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

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

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

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

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

The stipulations contained in the contract were such as might be lawfully made between the
parties themselves, though they may not have been binding with respect to third persons.

50
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-5236 January 10, 1910
PEDRO MARTINEZ, plaintiff-appellee,
vs.
ONG PONG CO and ONG LAY, defendants.
ONG PONG CO., appellant.
Fernando de la Cantera for appellant.
O'Brien and DeWitt for appellee.
ARELLANO, C.J.:
On the 12th of December, 1900, the plaintiff herein delivered P1,500 to the defendants
who, in a private document, acknowledged that they had received the same with the
agreement, as stated by them, "that we are to invest the amount in a store, the profits or
losses of which we are to divide with the former, in equal shares."
The plaintiff filed a complaint on April 25, 1907, in order to compel the defendants to
render him an accounting of the partnership as agreed to, or else to refund him the
P1,500 that he had given them for the said purpose. Ong Pong Co alone appeared to
answer the complaint; he admitted the fact of the agreement and the delivery to him and
to Ong Lay of the P1,500 for the purpose aforesaid, but he alleged that Ong Lay, who
was then deceased, was the one who had managed the business, and that nothing had
resulted therefrom save the loss of the capital of P1,500, to which loss the plaintiff
agreed.
The judge of the Court of First Instance of the city of Manila who tried the case ordered
Ong Pong Co to return to the plaintiff one-half of the said capital of P1,500 which,
together with Ong Lay, he had received from the plaintiff, to wit, P750, plus P90 as one-
half of the profits, calculated at the rate of 12 per cent per annum for the six months that
the store was supposed to have been open, both sums in Philippine currency, making a
total of P840, with legal interest thereon at the rate of 6 per cent per annum, from the
12th of June, 1901, when the business terminated and on which date he ought to have
returned the said amount to the plaintiff, until the full payment thereof with costs.
From this judgment Ong Pong Co appealed to this court, and assigned the following
errors:
1. For not having taken into consideration the fact that the reason for the closing of the
store was the ejectment from the premises occupied by it.
2. For not having considered the fact that there were losses.
3. For holding that there should have been profits.
4. For having applied article 1138 of the Civil Code.
5. and 6. For holding that the capital ought to have yielded profits, and that the latter
should be calculated 12 per cent per annum; and
7. The findings of the ejectment.
As to the first assignment of error, the fact that the store was closed by virtue of
ejectment proceedings is of no importance for the effects of the suit. The whole action is
based upon the fact that the defendants received certain capital from the plaintiff for the
purpose of organizing a company; they, according to the agreement, were to handle the

51
said money and invest it in a store which was the object of the association; they, in the
absence of a special agreement vesting in one sole person the management of the
business, were the actual administrators thereof; as such administrators they were the
agent of the company and incurred the liabilities peculiar to every agent, among which
is that of rendering account to the principal of their transactions, and paying him
everything they may have received by virtue of the mandatum. (Arts. 1695 and 1720,
Civil Code.) Neither of them has rendered such account nor proven the losses referred
to by Ong Pong Co; they are therefore obliged to refund the money that they received
for the purpose of establishing the said store — the object of the association. This was
the principal pronouncement of the judgment.
With regard to the second and third assignments of error, this court, like the court
below, finds no evidence that the entire capital or any part thereof was lost. It is no
evidence of such loss to aver, without proof, that the effects of the store were ejected.
Even though this were proven, it could not be inferred therefrom that the ejectment was
due to the fact that no rents were paid, and that the rent was not paid on account of the
loss of the capital belonging to the enterprise.
With regard to the possible profits, the finding of the court below are based on the
statements of the defendant Ong Pong Co, to the effect that "there were some profits,
but not large ones." This court, however, does not find that the amount thereof has been
proven, nor deem it possible to estimate them to be a certain sum, and for a given
period of time; hence, it can not admit the estimate, made in the judgment, of 12 per
cent per annum for the period of six months.
Inasmuch as in this case nothing appears other than the failure to fulfill an obligation on
the part of a partner who acted as agent in receiving money for a given purpose, for
which he has rendered no accounting, such agent is responsible only for the losses
which, by a violation of the provisions of the law, he incurred. This being an obligation to
pay in cash, there are no other losses than the legal interest, which interest is not due
except from the time of the judicial demand, or, in the present case, from the filing of the
complaint. (Arts. 1108 and 1100, Civil Code.) We do not consider that article 1688 is
applicable in this case, in so far as it provides "that the partnership is liable to every
partner for the amounts he may have disbursed on account of the same and for the
proper interest," for the reason that no other money than that contributed as is involved.
As in the partnership there were two administrators or agents liable for the above-
named amount, article 1138 of the Civil Code has been invoked; this latter deals with
debts of a partnership where the obligation is not a joint one, as is likewise provided by
article 1723 of said code with respect to the liability of two or more agents with respect
to the return of the money that they received from their principal. Therefore, the other
errors assigned have not been committed.
In view of the foregoing judgment appealed from is hereby affirmed, provided, however,
that the defendant Ong Pong Co shall only pay the plaintiff the sum of P750 with the
legal interest thereon at the rate of 6 per cent per annum from the time of the filing of
the complaint, and the costs, without special ruling as to the costs of this instance. So
ordered.
Torres, Johnson, Carson, and Moreland, JJ., concur.

52
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 85494 May 7, 1991

CHOITHRAM JETHMAL RAMNANI AND/OR NIRMLA V. RAMNANI and MOTI G.

RAMNANI, petitioners,
vs.
COURT OF APPEALS, SPOUSES ISHWAR JETHMAL RAMNANI, SONYA
JETHMAL RAMNANI and OVERSEAS HOLDING CO., LTD., respondents.

G.R. No. 85496 May 7, 1991

SPOUSES ISHWAR JETHMAL RAMNANI AND SONYA JET RAMNANI, petitioners,

vs.
THE HONORABLE COURT OF APPEALS, ORTIGAS & CO., LTD. PARTNERSHIP,
and OVERSEAS HOLDING CO., LTD., respondents.

Quasha, Asperilla Ancheta, Peña and Nolasco for petitioners Ishwar Jethmal Ramnani
& Sonya Ramnani.
Salonga, Andres, Hernandez & Allado for Choithram Jethmal Ramnani, Nirmla Ramnani
& Moti Ramnani.
Rama Law Office for private respondents in collaboration with Salonga, Andres,
Hernandez & Allado.
Eulogio R. Rodriguez for Ortigas & Co., Ltd.

GANCAYCO, J.:

This case involves the bitter quarrel of two brothers over two (2) parcels of land and its
improvements now worth a fortune. The bone of contention is the apparently conflicting
factual findings of the trial court and the appellate court, the resolution of which will
materially affect the result of the contest.

The following facts are not disputed.

Ishwar, Choithram and Navalrai, all surnamed Jethmal Ramnani, are brothers of the full
blood. Ishwar and his spouse Sonya had their main business based in New York.
Realizing the difficulty of managing their investments in the Philippines they executed a
general power of attorney on January 24, 1966 appointing Navalrai and Choithram as

53
attorneys-in-fact, empowering them to manage and conduct their business concern in
the Philippines.1

On February 1, 1966 and on May 16, 1966, Choithram, in his capacity as aforesaid
attorney-in-fact of Ishwar, entered into two agreements for the purchase of two parcels
of land located in Barrio Ugong, Pasig, Rizal, from Ortigas & Company, Ltd. Partnership
(Ortigas for short) with a total area of approximately 10,048 square meters. 2Per
agreement, Choithram paid the down payment and installments on the lot with his
personal checks. A building was constructed thereon by Choithram in 1966 and this was
occupied and rented by Jethmal Industries and a wardrobe shop called Eppie's
Creation. Three other buildings were built thereon by Choithram through a loan of
P100,000.00 obtained from the Merchants Bank as well as the income derived from the
first building. The buildings were leased out by Choithram as attorney-in-fact of Ishwar.
Two of these buildings were later burned.

Sometime in 1970 Ishwar asked Choithram to account for the income and expenses
relative to these properties during the period 1967 to 1970. Choithram failed and
refused to render such accounting. As a consequence, on February 4, 1971, Ishwar
revoked the general power of attorney. Choithram and Ortigas were duly notified of
such revocation on April 1, 1971 and May 24, 1971, respectively. 3 Said notice was also
registered with the Securities and Exchange Commission on March 29, 1971 4 and was
published in the April 2, 1971 issue of The Manila Times for the information of the
general public.5

Nevertheless, Choithram as such attorney-in-fact of Ishwar, transferred all rights and

interests of Ishwar and Sonya in favor of his daughter-in-law, Nirmla Ramnani, on
February 19, 1973. Her husband is Moti, son of Choithram. Upon complete payment of
the lots, Ortigas executed the corresponding deeds of sale in favor of Nirmla.6 Transfer
Certificates of Title Nos. 403150 and 403152 of the Register of Deeds of Rizal were
issued in her favor.

Thus, on October 6, 1982, Ishwar and Sonya (spouses Ishwar for short) filed a
complaint in the Court of First Instance of Rizal against Choithram and/or spouses
Nirmla and Moti (Choithram et al. for brevity) and Ortigas for reconveyance of said
properties or payment of its value and damages. An amended complaint for damages
was thereafter filed by said spouses.

After the issues were joined and the trial on the merits, a decision was rendered by the
trial court on December 3, 1985 dismissing the complaint and counterclaim. A motion
for reconsideration thereof filed by spouses Ishwar was denied on March 3, 1986.

An appeal therefrom was interposed by spouses Ishwar to the Court of Appeals wherein
in due course a decision was promulgated on March 14, 1988, the dispositive part of
which reads as follows:

54
WHEREFORE, judgment is hereby rendered reversing and setting aside the
appealed decision of the lower court dated December 3, 1985 and the Order
dated March 3, 1986 which denied plaintiffs-appellants' Motion for
Reconsideration from aforesaid decision. A new decision is hereby rendered
sentencing defendants- appellees Choithram Jethmal Ramnani, Nirmla V.
Ramnani, Moti C. Ramnani, and Ortigas and Company Limited Partnership to
pay, jointly and severally, plaintiffs-appellants the following:

1. Actual or compensatory damages to the extent of the fair market value of the
properties in question and all improvements thereon covered by Transfer
Certificate of Title No. 403150 and Transfer Certificate of Title No. 403152 of the
Registry of Deeds of Rizal, prevailing at the time of the satisfaction of the
judgment but in no case shall such damages be less than the value of said
properties as appraised by Asian Appraisal, Inc. in its Appraisal Report dated
August 1985 (Exhibits T to T-14, inclusive).

2. All rental incomes paid or ought to be paid for the use and occupancy of the
properties in question and all improvements thereon consisting of buildings, and
to be computed as follows:

a) On Building C occupied by Eppie's Creation and Jethmal Industries

from 1967 to 1973, inclusive, based on the 1967 to 1973 monthly rentals
paid by Eppie's Creation;

b) Also on Building C above, occupied by Jethmal Industries and Lavine

from 1974 to 1978, the rental incomes based on then rates prevailing as
shown under Exhibit "P"; and from 1979 to 1981, based on then prevailing
rates as indicated under Exhibit "Q";

c) On Building A occupied by Transworld Knitting Mills from 1972 to 1978,

the rental incomes based upon then prevailing rates shown under Exhibit
"P", and from 1979 to 1981, based on prevailing rates per Exhibit "Q";

d) On the two Bays Buildings occupied by Sigma-Mariwasa from 1972 to

1978, the rentals based on the Lease Contract, Exhibit "P", and from 1979
to 1980, the rentals based on the Lease Contract, Exhibit "Q",

and thereafter commencing 1982, to account for and turn over the rental incomes
paid or ought to be paid for the use and occupancy of the properties and all
improvements totalling 10,048 sq. m based on the rate per square meter
prevailing in 1981 as indicated annually cumulative up to 1984. Then,
commencing 1985 and up to the satisfaction of the judgment, rentals shall be
computed at ten percent (10%) annually of the fair market values of the
properties as appraised by the Asian Appraisal, Inc. in August 1985 (Exhibits T to
T-14, inclusive.)

55
 3. Moral damages in the sum of P200,000.00;

4. Exemplary damages in the sum of P100,000.00;

5. Attorney's fees equivalent to 10% of the award herein made;

6. Legal interest on the total amount awarded computed from first demand in
1967 and until the full amount is paid and satisfied; and

7. The cost of suit.7

Acting on a motion for reconsideration filed by Choithram, et al. and Ortigas, the
appellate court promulgated an amended decision on October 17, 1988 granting the
motion for reconsideration of Ortigas by affirming the dismissal of the case by the lower
court as against Ortigas but denying the motion for reconsideration of Choithram, et al.8

Choithram, et al. thereafter filed a petition for review of said judgment of the appellate
court alleging the following grounds:

1. The Court of Appeals gravely abused its discretion in making a factual finding
not supported by and contrary, to the evidence presented at the Trial Court.

2. The Court of Appeals acted in excess of jurisdiction in awarding damages

based on the value of the real properties in question where the cause of action of
private respondents is recovery of a sum of money.

ARGUMENTS

THE COURT OF APPEALS ACTED IN GRAVE ABUSE OF ITS DISCRETION IN

MAKING A FACTUAL FINDING THAT PRIVATE RESPONDENT ISHWAR
REMITTED THE AMOUNT OF US $150,000.00 TO PETITIONER CHOITHRAM
IN THE ABSENCE OF PROOF OF SUCH REMITTANCE.

II

THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION

AND MANIFEST PARTIALITY IN DISREGARDING THE TRIAL COURTS
FINDINGS BASED ON THE DIRECT DOCUMENTARY AND TESTIMONIAL
EVIDENCE PRESENTED BY CHOITHRAM IN THE TRIAL COURT
ESTABLISHING THAT THE PROPERTIES WERE PURCHASED WITH
PERSONAL FUNDS OF PETITIONER CHOITHRAM AND NOT WITH MONEY
ALLEGEDLY REMITTED BY RESPONDENT ISHWAR.

III

56
 THE COURT OF APPEALS ACTED IN EXCESS OF JURISDICTION IN
AWARDING DAMAGES BASED ON THE VALUE OF THE PROPERTIES AND
THE FRUITS OF THE IMPROVEMENTS THEREON.9

Similarly, spouses Ishwar filed a petition for review of said amended decision of the
appellate court exculpating Ortigas of liability based on the following assigned errors

THE RESPONDENT HONORABLE COURT OF APPEALS COMMITTED

GRAVE ERROR AND HAS DECIDED A QUESTION OF SUBSTANCE NOT IN
ACCORD WITH LAW AND/OR WITH APPLICABLE DECISIONS OF THIS
HONORABLE COURT—

A) IN PROMULGATING THE QUESTIONED AMENDED DECISION

(ANNEX "A") RELIEVING RESPONDENT ORTIGAS FROM LIABILITY
AND DISMISSING PETITIONERS' AMENDED COMPLAINT IN CIVIL
CASE NO. 534-P, AS AGAINST SAID RESPONDENT ORTIGAS;

B) IN HOLDING IN SAID AMENDED DECISION THAT AT ANY RATE NO

ONE EVER TESTIFIED THAT ORTIGAS WAS A SUBSCRIBER TO THE
MANILA TIMES PUBLICATION OR THAT ANY OF ITS OFFICERS READ
THE NOTICE AS PUBLISHED IN THE MANILA TIMES, THEREBY
ERRONEOUSLY CONCLUDING THAT FOR RESPONDENT ORTIGAS
TO BE CONSTRUCTIVELY BOUND BY THE PUBLISHED NOTICE OF
REVOCATION, ORTIGAS AND/OR ANY OF ITS OFFICERS MUST BE A
SUBSCRIBER AND/OR THAT ANY OF ITS OFFICERS SHOULD READ
THE NOTICE AS ACTUALLY PUBLISHED;

C) IN HOLDING IN SAID AMENDED DECISION THAT ORTIGAS COULD

NOT BE HELD LIABLE JOINTLY AND SEVERALLY WITH THE
DEFENDANTS-APPELLEES CHOITHRAM, MOTI AND NIRMLA
RAMNANI, AS ORTIGAS RELIED ON THE WORD OF CHOITHRAM
THAT ALL ALONG HE WAS ACTING FOR AND IN BEHALF OF HIS
BROTHER ISHWAR WHEN IT TRANSFERRED THE RIGHTS OF THE
LATTER TO NIRMLA V. RAMNANI;

D) IN IGNORING THE EVIDENCE DULY PRESENTED AND ADMITTED

DURING THE TRIAL THAT ORTIGAS WAS PROPERLY NOTIFIED OF
THE NOTICE OF REVOCATION OF THE GENERAL POWER OF
ATTORNEY GIVEN TO CHOITHRAM, EVIDENCED BY THE
PUBLICATION IN THE MANILA TIMES ISSUE OF APRIL 2, 1971 (EXH.
F) WHICH CONSTITUTES NOTICE TO THE WHOLE WORLD; THE
RECEIPT OF THE NOTICE OF SUCH REVOCATION WHICH WAS
SENT TO ORTIGAS ON MAY 22, 1971 BY ATTY. MARIANO P.
MARCOS AND RECEIVED BY ORTIGAS ON MAY 24, 1971 (EXH. G)

57
 AND THE FILING OF THE NOTICE WITH THE SECURITIES AND
EXCHANGE COMMISSION ON MARCH 29,1971 (EXH. H);

E) IN DISCARDING ITS FINDINGS CONTAINED IN ITS DECISION OF

14 MARCH 1988 (ANNEX B) THAT ORTIGAS WAS DULY NOTIFIED OF
THE REVOCATION OF THE POWER OF ATTORNEY OF CHOITHRAM,
HENCE ORTIGAS ACTED IN BAD FAITH IN EXECUTING THE DEED
OF SALE TO THE PROPERTIES IN QUESTION IN FAVOR OF NIRMLA
V. RAMNANI;

F) IN SUSTAINING RESPONDENT ORTIGAS VACUOUS REHASHED

ARGUMENTS IN ITS MOTION FOR RECONSIDERATION THAT IT
WOULD NOT GAIN ONE CENTAVO MORE FROM CHOITHRAM FOR
THE SALE OF SAID LOTS AND THE SUBSEQUENT TRANSFER OF
THE SAME TO THE MATTER'S DAUGHTER-IN-LAW, AND THAT IT
WAS IN GOOD FAITH WHEN IT TRANSFERRED ISHWAR'S RIGHTS
TO THE LOTS IN QUESTION.

II

THE RESPONDENT HONORABLE COURT OF APPEALS HAS SO FAR

DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDING WHEN IT HELD IN THE QUESTIONED AMENDED DECISION
OF 17 NOVEMBER 1988 (ANNEX A) THAT RESPONDENT ORTIGAS & CO.,
LTD., IS NOT JOINTLY AND SEVERALLY LIABLE WITH DEFENDANTS-
APPELLEES CHOITHRAM, MOTI AND NIRMLA RAMNANI IN SPITE OF ITS
ORIGINAL DECISION OF 14 MARCH 1988 THAT ORTIGAS WAS DULY
NOTIFIED OF THE REVOCATION OF THE POWER OF ATTORNEY OF
CHOITHRAM RAMNANI.10

The center of controversy is the testimony of Ishwar that during the latter part of 1965,
he sent the amount of US $150,000.00 to Choithram in two bank drafts of
US$65,000.00 and US$85,000.00 for the purpose of investing the same in real estate in
the Philippines. The trial court considered this lone testimony unworthy of faith and
credit. On the other hand, the appellate court found that the trial court misapprehended
the facts in complete disregard of the evidence, documentary and testimonial.

Another crucial issue is the claim of Choithram that because he was then a British
citizen, as a temporary arrangement, he arranged the purchase of the properties in the
name of Ishwar who was an American citizen and who was then qualified to purchase
property in the Philippines under the then Parity Amendment. The trial court believed
this account but it was debunked by the appellate court.

As to the issue of whether of not spouses Ishwar actually sent US$150,000.00 to

Choithram precisely to be used in the real estate business, the trial court made the
following disquisition —

58
 After a careful, considered and conscientious examination of the evidence
adduced in the case at bar, plaintiff Ishwar Jethmal Ramanani's main evidence,
which centers on the alleged payment by sending through registered mail from
New York two (2) US$ drafts of $85,000.00 and $65,000.00 in the latter part of
1965 (TSN 28 Feb. 1984, p. 10-11). The sending of these moneys were before
the execution of that General Power of Attorney, which was dated in New York,
on January 24, 1966. Because of these alleged remittances of US $150,000.00
and the subsequent acquisition of the properties in question, plaintiffs averred
that they constituted a trust in favor of defendant Choithram Jethmal
Ramnani. This Court can be in full agreement if the plaintiffs were only able to
prove preponderantly these remittances. The entire record of this case is bereft
of even a shred of proof to that effect. It is completely barren. His uncorroborated
testimony that he remitted these amounts in the "later part of 1965" does not
engender enough faith and credence. Inadequacy of details of such remittance
on the two (2) US dollar drafts in such big amounts is completely not positive,
credible, probable and entirely not in accord with human experience. This is a
classic situation, plaintiffs not exhibiting any commercial document or any
document and/or paper as regard to these alleged remittances. Plaintiff Ishwar
Ramnani is not an ordinary businessman in the strict sense of the word.
Remember his main business is based in New York, and he should know better
how to send these alleged remittances. Worst, plaintiffs did not present even a
scum of proof, that defendant Choithram Ramnani received the alleged two US
dollar drafts. Significantly, he does not know even the bank where these two (2)
US dollar drafts were purchased. Indeed, plaintiff Ishwar Ramnani's lone
testimony is unworthy of faith and credit and, therefore, deserves scant
consideration, and since the plaintiffs' theory is built or based on such testimony,
their cause of action collapses or falls with it.

Further, the rate of exchange that time in 1966 was P4.00 to $1.00. The alleged
two US dollar drafts amounted to $150,000.00 or about P600,000.00. Assuming
the cash price of the two (2) lots was only P530,000.00 (ALTHOUGH he said:
"Based on my knowledge I have no evidence," when asked if he even knows the
cash price of the two lots). If he were really the true and bonafide investor and
purchaser for profit as he asserted, he could have paid the price in full in cash
directly and obtained the title in his name and not thru "Contracts To Sell" in
installments paying interest and thru an attorney-in fact (TSN of May 2, 1984, pp.
10-11) and, again, plaintiff Ishwar Ramnani told this Court that he does not know
whether or not his late father-in-law borrowed the two US dollar drafts from the
Swiss Bank or whether or not his late father-in-law had any debit memo from the
Swiss Bank (TSN of May 2, 1984, pp. 9-10).11

On the other hand, the appellate court, in giving credence to the version of Ishwar, had
this to say —

While it is true, that generally the findings of fact of the trial court are binding
upon the appellate courts, said rule admits of exceptions such as when (1) the

59
conclusion is a finding grounded entirely on speculations, surmises and
conjectures; (2) when the inferences made is manifestly mistaken, absurd and
impossible; (3) when there is grave abuse of discretion; (4) when the judgment is
based on a misapprehension of facts and when the court, in making its findings,
went beyond the issues of the case and the same are contrary to the admissions
of both appellant and appellee (Ramos vs. Court of Appeals, 63 SCRA 33;
Philippine American Life Assurance Co. vs. Santamaria, 31 SCRA 798; Aldaba
vs. Court of Appeals, 24 SCRA 189).

The evidence on record shows that the t court acted under a misapprehension of
facts and the inferences made on the evidence palpably a mistake.

The trial court's observation that "the entire records of the case is bereft of even
a shred of proof" that plaintiff-appellants have remitted to defendant-appellee
Choithram Ramnani the amount of US $ 150,000.00 for investment in real estate
in the Philippines, is not borne by the evidence on record and shows the trial
court's misapprehension of the facts if not a complete disregard of the evidence,
both documentary and testimonial.

Plaintiff-appellant Ishwar Jethmal Ramnani testifying in his own behalf, declared

that during the latter part of 1965, he sent the amount of US $150,000.00 to his
brother Choithram in two bank drafts of US $65,000.00 and US $85,000.00 for
the purpose of investing the same in real estate in the Philippines. His testimony
is as follows:

ATTY. MARAPAO:

Mr. Witness, you said that your attorney-in-fact paid in your behalf. Can
you tell this Honorable Court where your attorney-in-fact got the money to
pay this property?

ATTY. CRUZ:

Wait. It is now clear it becomes incompetent or hearsay.

COURT:

Witness can answer.

A I paid through my attorney-in-fact. I am the one who gave him the

money.

ATTY. MARAPAO:

Q You gave him the money?

60
A That's right.

Q How much money did you give him?

A US $ 150,000.00.

Q How was it given then?

A Through Bank drafts. US $65,000.00 and US $85,000.00 bank drafts.

The total amount which is $ 150,000.00 (TSN, 28 February 1984, p. 10;
Emphasis supplied.)

xxx xxx xxx

ATTY. CRUZ:

Q The two bank drafts which you sent I assume you bought that from
some banks in New York?

A No, sir.

Q But there is no question those two bank drafts were for the purpose of
paying down payment and installment of the two parcels of land?

A Down payment, installment and to put up the building.

Q I thought you said that the buildings were constructed . . . subject to our
continuing objection from rentals of first building?

ATTY. MARAPAO:

Your Honor, that is misleading.

COURT;

Witness (may) answer.

A Yes, the first building was immediately put up after the purchase of the
two parcels of land that was in 1966 and the finds were used for the
construction of the building from the US $150,000.00 (TSN, 7 March 1984,
page 14; Emphasis supplied.)

xxx xxx xxx

Q These two bank drafts which you mentioned and the use for it you sent
them by registered mail, did you send them from New Your?

61
 A That is right.

Q And the two bank drafts which were put in the registered mail, the
registered mail was addressed to whom?

A Choithram Ramnani. (TSN, 7 March 1984, pp. 14-15).

On cross-examination, the witness reiterated the remittance of the money to his

brother Choithram, which was sent to him by his father-in-law, Rochiram L.
Mulchandoni from Switzerland, a man of immense wealth, which even
defendants-appellees' witness Navalrai Ramnani admits to be so (tsn., p. 16, S.
Oct. 13, 1985). Thus, on cross-examination, Ishwar testified as follows:

Q How did you receive these two bank drafts from the bank the name of
which you cannot remember?

A I got it from my father-in-law.

Q From where did your father- in-law sent these two bank drafts?

A From Switzerland.

Q He was in Switzerland.

A Probably, they sent out these two drafts from Switzerland.

(TSN, 7 March 1984, pp. 16-17; Emphasis supplied.)

This positive and affirmative testimony of plaintiff-appellant that he sent the two
(2) bank drafts totalling US $ 150,000.00 to his brother, is proof of said
remittance. Such positive testimony has greater probative force than defendant-
appellee's denial of receipt of said bank drafts, for a witness who testifies
affirmatively that something did happen should be believed for it is unlikely that a
witness will remember what never happened (Underhill's Cr. Guidance, 5th Ed.,
Vol. 1, pp. 10-11).

That is not all. Shortly thereafter, plaintiff-appellant Ishwar Ramnani executed a

General Power of Attorney (Exhibit "A") dated January 24, 1966 appointing his
brothers, defendants-appellees Navalrai and Choithram as attorney-in-fact
empowering the latter to conduct and manage plaintiffs-appellants' business
affairs in the Philippines and specifically—

No. 14. To acquire, purchase for us, real estates and improvements for
the purpose of real estate business anywhere in the Philippines and to
develop, subdivide, improve and to resell to buying public (individual, firm
or corporation); to enter in any contract of sale in oar behalf and to enter

62
 mortgages between the vendees and the herein grantors that may be
needed to finance the real estate business being undertaken.

Pursuant thereto, on February 1, 1966 and May 16, 1966, Choithram Jethmal
Ramnani entered into Agreements (Exhibits "B' and "C") with the other
defendant. Ortigas and Company, Ltd., for the purchase of two (2) parcels of land
situated at Barrio Ugong, Pasig, Rizal, with said defendant-appellee signing the
Agreements in his capacity as Attorney-in-fact of Ishwar Jethmal Ramnani.

Again, on January 5, 1972, almost seven (7) years after Ishwar sent the US $
150,000.00 in 1965, Choithram Ramnani, as attorney-in fact of Ishwar entered
into a Contract of Lease with Sigma-Mariwasa (Exhibit "P") thereby re-affirming
the ownership of Ishwar over the disputed property and the trust relationship
between the latter as principal and Choithram as attorney-in-fact of Ishwar.

All of these facts indicate that if plaintiff-appellant Ishwar had not earlier sent the
US $ 150,000.00 to his brother, Choithram, there would be no purpose for him to
execute a power of attorney appointing his brothers as s attorney-in-fact in
buying real estate in the Philippines.

As against Choithram's denial that he did not receive the US $150,000.00

remitted by Ishwar and that the Power of Attorney, as well as the Agreements
entered into with Ortigas & Co., were only temporary arrangements, Ishwar's
testimony that he did send the bank drafts to Choithram and was received by the
latter, is the more credible version since it is natural, reasonable and probable. It
is in accord with the common experience, knowledge and observation of ordinary
men (Gardner vs. Wentors 18 Iowa 533). And in determining where the superior
weight of the evidence on the issues involved lies, the court may consider the
probability or improbability of the testimony of the witness (Sec. 1, Rule 133,
Rules of Court).

Contrary, therefore, to the trial court's sweeping observation that 'the entire
records of the case is bereft of even a shred of proof that Choithram received the
alleged bank drafts amounting to US $ 150,000.00, we have not only testimonial
evidence but also documentary and circumstantial evidence proving said
remittance of the money and the fiduciary relationship between the former and
Ishwar.12

The Court agrees. The environmental circumstances of this case buttress the claim of
Ishwar that he did entrust the amount of US $ 150,000.00 to his brother, Choithram,
which the latter invested in the real property business subject of this litigation in his
capacity as attorney-in-fact of Ishwar.

True it is that there is no receipt whatever in the possession of Ishwar to evidence the
same, but it is not unusual among brothers and close family members to entrust money

63
and valuables to each other without any formalities or receipt due to the special
relationship of trust between them.

And another proof thereof is the fact that Ishwar, out of frustration when Choithram
failed to account for the realty business despite his demands, revoked the general
power of attorney he extended to Choithram and Navalrai. Thereafter, Choithram wrote
a letter to Ishwar pleading that the power of attorney be renewed or another authority to
the same effect be extended, which reads as follows:

June 25,1971

MR. ISHWAR JETHMAL

NEW YORK

(1) Send power of Atty. immediately, because the case has been
postponed for two weeks. The same way as it has been send before in
favor of both names. Send it immediately otherwise everything will be lost
unnecessarily, and then it will take us in litigation. Now that we have gone
ahead with a case and would like to end it immediately otherwise
squatters will take the entire land. Therefore, send it immediately.

(2) Ortigas also has sued us because we are holding the installments,
because they have refused to give a rebate of P5.00 per meter which they
have to give us as per contract. They have filed the law suit that since we
have not paid the installment they should get back the land. The hearing
of this case is in the month of July. Therefore, please send the power
immediately. In one case DADA (Elder Brother) will represent and in
another one, I shall.

(3) In case if you do not want to give power then make one letter in favor
of Dada and the other one in my favor showing that in any litigation we
can represent you and your wife, and whatever the court decide it will be
acceptable by me. You can ask any lawyer, he will be able to prepare
these letters. After that you can have these letters ratify before P.I.
Consulate. It should be dated April 15, 1971.

(4) Try to send the power because it will be more useful. Make it in any
manner whatever way you have confident in it. But please send it
immediately.

You have cancelled the power. Therefore, you have lost your reputation everywhere.
What can I further write you about it. I have told everybody that due to certain reasons I
have written you to do this that is why you have done this. This way your reputation
have been kept intact. Otherwise if I want to do something about it, I can show you that
inspite of the power you have cancelled you can not do anything. You can keep this
letter because my conscience is clear. I do not have anything in my mind.

64
I should not be writing you this, but because my conscience is clear do you know that if I
had predated papers what could you have done? Or do you know that I have many
paper signed by you and if had done anything or do then what can you do about it? It is
not necessary to write further about this. It does not matter if you have cancelled the
power. At that time if I had predated and done something about it what could you have
done? You do not know me. I am not after money. I can earn money anytime. It has
been ten months since I have not received a single penny for expenses from Dada
(elder brother). Why there are no expenses? We can not draw a single penny from
knitting (factory). Well I am not going to write you further, nor there is any need for it.
This much I am writing you because of the way you have conducted yourself. But
remember, whenever I hale the money I will not keep it myself Right now I have not got
anything at all.

I am not going to write any further.

Keep your business clean with Naru. Otherwise he will discontinue because he likes to
keep his business very clean.13

The said letter was in Sindhi language. It was translated to English by the First
Secretary of the Embassy of Pakistan, which translation was verified correct by the
Chairman, Department of Sindhi, University of Karachi.14

From the foregoing letter what could be gleaned is that—

1. Choithram asked for the issuance of another power of attorney in their favor so
they can continue to represent Ishwar as Ortigas has sued them for unpaid
installments. It also appears therefrom that Ortigas learned of the revocation of
the power of attorney so the request to issue another.

2. Choithram reassured Ishwar to have confidence in him as he was not after

money, and that he was not interested in Ishwar's money.

3. To demonstrate that he can be relied upon, he said that he could have ante-
dated the sales agreement of the Ortigas lots before the issuance of the powers
of attorney and acquired the same in his name, if he wanted to, but he did not do
so.

4. He said he had not received a single penny for expenses from Dada (their
elder brother Navalrai). Thus, confirming that if he was not given money by
Ishwar to buy the Ortigas lots, he could not have consummated the sale.

5. It is important to note that in said letter Choithram never claimed ownership of

the property in question. He affirmed the fact that he bought the same as mere
agent and in behalf of Ishwar. Neither did he mention the alleged temporary
arrangement whereby Ishwar, being an American citizen, shall appear to be the

65
 buyer of the said property, but that after Choithram acquires Philippine
citizenship, its ownership shall be transferred to Choithram.

This brings us to this temporary arrangement theory of Choithram.

The appellate court disposed of this matter in this wise

Choithram's claim that he purchased the two parcels of land for himself in 1966
but placed it in the name of his younger brother, Ishwar, who is an American
citizen, as a temporary arrangement,' because as a British subject he is
disqualified under the 1935 Constitution to acquire real property in the
Philippines, which is not so with respect to American citizens in view of the
Ordinance Appended to the Constitution granting them parity rights, there is
nothing in the records showing that Ishwar ever agreed to such a temporary
arrangement.

During the entire period from 1965, when the US $ 150,000. 00 was transmitted
to Choithram, and until Ishwar filed a complaint against him in 1982, or over 16
years, Choithram never mentioned of a temporary arrangement nor can he
present any memorandum or writing evidencing such temporary arrangement,
prompting plaintiff-appellant to observe:

The properties in question which are located in a prime industrial site in

Ugong, Pasig, Metro Manila have a present fair market value of no less
than P22,364,000.00 (Exhibits T to T-14, inclusive), and yet for such
valuable pieces of property, Choithram who now belatedly that he
purchased the same for himself did not document in writing or in a
memorandum the alleged temporary arrangement with Ishwar' (pp. 4-41,
Appellant's Brief).

Such verbal allegation of a temporary arrangement is simply improbable and

inconsistent. It has repeatedly been held that important contracts made without
evidence are highly improbable.

The improbability of such temporary arrangement is brought to fore when we

consider that Choithram has a son (Haresh Jethmal Ramnani) who is an
American citizen under whose name the properties in question could be
registered, both during the time the contracts to sell were executed and at the
time absolute title over the same was to be delivered. At the time the Agreements
were entered into with defendant Ortigas & Co. in 1966, Haresh, was already 18
years old and consequently, Choithram could have executed the deeds in trust
for his minor son. But, he did not do this. Three (3) years, thereafter, or in 1968
after Haresh had attained the age of 21, Choithram should have terminated the
temporary arrangement with Ishwar, which according to him would be effective
only pending the acquisition of citizenship papers. Again, he did not do anything.

66
 Evidence to be believed, said Vice Chancellor Van Fleet of New Jersey,
must not only proceed from the mouth of a credible witness, but it must be
credible in itself—such as the common experience and observation of
mankind can approve as probable under the circumstances. We have no
test of the truth of human testimony, except its conformity to our
knowledge, observation and experience. Whatever is repugnant to these
belongs to the miraculous and is outside of judicial cognizance. (Daggers
vs. Van Dyek 37 M.J. Eq. 130, 132).

Another factor that can be counted against the temporary arrangement excuse is
that upon the revocation on February 4, 1971 of the Power of attorney dated
January 24, 1966 in favor of Navalrai and Choithram by Ishwar, Choithram wrote
(tsn, p. 21, S. July 19, 1985) a letter dated June 25, 1971 (Exhibits R, R-1, R-2
and R-3) imploring Ishwar to execute a new power of attorney in their favor. That
if he did not want to give power, then Ishwar could make a letter in favor of Dada
and another in his favor so that in any litigation involving the properties in
question, both of them could represent Ishwar and his wife. Choithram tried to
convince Ishwar to issue the power of attorney in whatever manner he may want.
In said letter no mention was made at all of any temporary arrangement.

On the contrary, said letter recognize(s) the existence of principal and attorney-
in-fact relationship between Ishwar and himself. Choithram wrote: . . . do you
know that if I had predated papers what could you have done? Or do you know
that I have many papers signed by you and if I had done anything or do then
what can you do about it?' Choithram was saying that he could have repudiated
the trust and ran away with the properties of Ishwar by predating documents and
Ishwar would be entirely helpless. He was bitter as a result of Ishwar's revocation
of the power of attorney but no mention was made of any temporary arrangement
or a claim of ownership over the properties in question nor was he able to
present any memorandum or document to prove the existence of such temporary
arrangement.

Choithram is also estopped in pais or by deed from claiming an interest over the
properties in question adverse to that of Ishwar. Section 3(a) of Rule 131 of the
Rules of Court states that whenever a party has, by his own declaration, act, or
omission intentionally and deliberately led another to believe a particular thing
true and act upon such belief, he cannot in any litigation arising out of such
declaration, act or omission be permitted to falsify it.' While estoppel by deed is a
bar which precludes a party to a deed and his privies from asserting as against
the other and his privies any right of title in derogation of the deed, or from
denying the truth of any material fact asserted in it (31 C.J.S. 195; 19 Am. Jur.
603).

Thus, defendants-appellees are not permitted to repudiate their admissions and

representations or to assert any right or title in derogation of the deeds or from
denying the truth of any material fact asserted in the (1) power of attorney dated

67
January 24, 1966 (Exhibit A); (2) the Agreements of February 1, 1966 and May
16, 1966 (Exhibits B and C); and (3) the Contract of Lease dated January 5,
1972 (Exhibit P).

. . . The doctrine of estoppel is based upon the grounds of public policy,

fair dealing, good faith and justice, and its purpose is to forbid one to
speak against his own act, representations, or commitments to the injury
of one to whom they were directed and who reasonably relied thereon.
The doctrine of estoppel springs from equitable principles and the equities
in the case. It is designed to aid the law in the administration of justice
where without its aid injustice might result. It has been applied by court
wherever and whenever special circumstances of a case so demands'
(Philippine National Bank vs. Court of Appeals, 94 SCRA 357, 368
[1979]).

It was only after the services of counsel has been obtained that Choithram
alleged for the first time in his Answer that the General Power of attorney (Annex
A) with the Contracts to Sell (Annexes B and C) were made only for the sole
purpose of assuring defendants' acquisition and ownership of the lots described
thereon in due time under the law; that said instruments do not reflect the true
intention of the parties (par. 2, Answer dated May 30, 1983), seventeen (17) long
years from the time he received the money transmitted to him by his brother,
Ishwar.

Moreover, Choithram's 'temporary arrangement,' by which he claimed purchasing

the two (2) parcels in question in 1966 and placing them in the name of Ishwar
who is an American citizen, to circumvent the disqualification provision of aliens
acquiring real properties in the Philippines under the 1935 Philippine
Constitution, as Choithram was then a British subject, show a palpable disregard
of the law of the land and to sustain the supposed "temporary arrangement" with
Ishwar would be sanctioning the perpetration of an illegal act and culpable
violation of the Constitution.

Defendants-appellees likewise violated the Anti-Dummy Law (Commonwealth

Act 108, as amended), which provides in Section 1 thereof that:

In all cases in which any constitutional or legal provision requires

Philippine or any other specific citizenship as a requisite for the exercise
or enjoyment of a right, franchise or privilege, . . . any alien or foreigner
profiting thereby, shall be punished . . . by imprisonment . . . and of a fine
of not less than the value of the right, franchise or privileges, which is
enjoyed or acquired in violation of the provisions hereof . . .

Having come to court with unclean hands, Choithram must not be permitted foist
his 'temporary arrangement' scheme as a defense before this court. Being in
delicto, he does not have any right whatsoever being shielded from his own

68
wrong-doing, which is not so with respect to Ishwar, who was not a party to such
an arrangement.

The falsity of Choithram's defense is further aggravated by the material

inconsistencies and contradictions in his testimony. While on January 23, 1985
he testified that he purchased the land in question on his own behalf (tsn, p. 4, S.
Jan. 23, 1985), in the July 18, 1985 hearing, forgetting probably what he stated
before, Choithram testified that he was only an attorney-in-fact of Ishwar (tsn, p.
5, S. July 18, 1985). Also in the hearing of January 23, 1985, Choithram declared
that nobody rented the building that was constructed on the parcels of land in
question (tsn, pp. 5 and 6), only to admit in the hearing of October 30, 1985, that
he was in fact renting the building for P12,000. 00 per annum (tsn, p. 3). Again, in
the hearing of July 19, 1985, Choithram testified that he had no knowledge of the
revocation of the Power of Attorney (tsn, pp. 20- 21), only to backtrack when
confronted with the letter of June 25, 1971 (Exhibits R to R-3), which he admitted
to be in "his own writing," indicating knowledge of the revocation of the Power of
Attorney.

These inconsistencies are not minor but go into the entire credibility of the
testimony of Choithram and the rule is that contradictions on a very crucial point
by a witness, renders s testimony incredible People vs. Rafallo, 80 Phil. 22). Not
only this the doctrine of falsus in uno, falsus in omnibus is fully applicable as far
as the testimony of Choithram is concerned. The cardinal rule, which has served
in all ages, and has been applied to all conditions of men, is that a witness
willfully falsifying the truth in one particular, when upon oath, ought never to be
believed upon the strength of his own testimony, whatever he may assert (U.S.
vs. Osgood 27 Feb. Case No. 15971-a, p. 364); Gonzales vs. Mauricio, 52 Phil,
728), for what ground of judicial relief can there be left when the party has shown
such gross insensibility to the difference between right and wrong, between truth
and falsehood? (The Santisima Trinidad, 7 Wheat, 283, 5 U.S. [L. ed.] 454).

True, that Choithram's testimony finds corroboration from the testimony of his
brother, Navalrai, but the same would not be of much help to Choithram. Not only
is Navalrai an interested and biased witness, having admitted his close
relationship with Choithram and that whenever he or Choithram had problems,
they ran to each other (tsn, pp. 17-18, S. Sept. 20, 1985), Navalrai has a
pecuniary interest in the success of Choithram in the case in question. Both he
and Choithram are business partners in Jethmal and Sons and/or Jethmal
Industries, wherein he owns 60% of the company and Choithram, 40% (p. 62,
Appellant's Brief). Since the acquisition of the properties in question in 1966,
Navalrai was occupying 1,200 square meters thereof as a factory site plus the
fact that his son (Navalrais) was occupying the apartment on top of the factory
with his family rent free except the amount of P l,000.00 a month to pay for taxes
on said properties (tsn, p. 17, S. Oct. 3, 1985).

69
 Inherent contradictions also marked Navalrai testimony. "While the latter was
very meticulous in keeping a receipt for the P 10,000.00 that he paid Ishwar as
settlement in Jethmal Industries, yet in the alleged payment of P 100,000.00 to
Ishwar, no receipt or voucher was ever issued by him (tsn, p. 17, S. Oct. 3,
1983).15

We concur.
The foregoing findings of facts of the Court of Appeals which are supported by the
evidence is conclusive on this Court. The Court finds that Ishwar entrusted
US$150,000.00 to Choithram in 1965 for investment in the realty business. Soon
thereafter, a general power of attorney was executed by Ishwar in favor of both Navalrai
and Choithram. If it is true that the purpose only is to enable Choithram to purchase
realty temporarily in the name of Ishwar, why the inclusion of their elder brother Navalrai
as an attorney-in-fact?

Then, acting as attorney-in-fact of Ishwar, Choithram purchased two parcels of land

located in Barrio Ugong Pasig, Rizal, from Ortigas in 1966. With the balance of the
money of Ishwar, Choithram erected a building on said lot. Subsequently, with a loan
obtained from a bank and the income of the said property, Choithram constructed three
other buildings thereon. He managed the business and collected the rentals. Due to
their relationship of confidence it was only in 1970 when Ishwar demanded for an
accounting from Choithram. And even as Ishwar revoked the general power of attorney
on February 4, 1971, of which Choithram was duly notified, Choithram wrote to Ishwar
on June 25, 1971 requesting that he execute a new power of attorney in their
favor.16 When Ishwar did not respond thereto, Choithram nevertheless proceeded as
such attorney-in-fact to assign all the rights and interest of Ishwar to his daughter-in-law
Nirmla in 1973 without the knowledge and consent of Ishwar. Ortigas in turn executed
the corresponding deeds of sale in favor of Nirmla after full payment of the purchase
accomplice of the lots.

In the prefatory statement of their petition, Choithram pictured Ishwar to be so motivated

by greed and ungratefulness, who squandered the family business in New York, who
had to turn to his wife for support, accustomed to living in ostentation and who resorted
to blackmail in filing several criminal and civil suits against them. These statements find
no support and should be stricken from the records. Indeed, they are irrelevant to the
proceeding.

Moreover, assuming Ishwar is of such a low character as Choithram proposes to make

this Court to believe, why is it that of all persons, under his temporary arrangement
theory, Choithram opted to entrust the purchase of valuable real estate and built four
buildings thereon all in the name of Ishwar? Is it not an unconscious emergence of the
truth that this otherwise wayward brother of theirs was on the contrary able to raise
enough capital through the generosity of his father-in-law for the purchase of the very
properties in question? As the appellate court aptly observed if truly this temporary
arrangement story is the only motivation, why Ishwar of all people? Why not the own
son of Choithram, Haresh who is also an American citizen and who was already 18

70
years old at the time of purchase in 1966? The Court agrees with the observation that
this theory is an afterthought which surfaced only when Choithram, Nirmla and Moti filed
their answer.

When Ishwar asked for an accounting in 1970 and revoked the general power of
attorney in 1971, Choithram had a total change of heart. He decided to claim the
property as his. He caused the transfer of the rights and interest of Ishwar to Nirmla. On
his representation, Ortigas executed the deeds of sale of the properties in favor of
Nirmla. Choithram obviously surmised Ishwar cannot stake a valid claim over the
property by so doing.

Clearly, this transfer to Nirmla is fictitious and, as admitted by Choithram, was intended
only to place the property in her name until Choithram acquires Philippine
citizenship.17 What appears certain is that it appears to be a scheme of Choithram to
place the property beyond the reach of Ishwar should he successfully claim the same.
Thus, it must be struck down.

Worse still, on September 27, 1990 spouses Ishwar filed an urgent motion for the
issuance of a writ of preliminary attachment and to require Choithram, et al. to submit
certain documents, inviting the attention of this Court to the following:

a) Donation by Choithram of his 2,500 shares of stock in General Garments

Corporation in favor of his children on December 29, 1989;18

b) Sale on August 2, 1990 by Choithram of his 100 shares in Biflex (Phils.), Inc.,
in favor of his children;19 and

c) Mortgage on June 20, 1989 by Nirmla through her attorney-in-fact, Choithram,

of the properties subject of this litigation, for the amount of $3 Million in favor of
Overseas Holding, Co. Ltd., (Overseas for brevity), a corporation which appears
to be organized and existing under and by virtue of the laws of Cayman Islands,
with a capital of only $100.00 divided into 100 shares of $1.00 each, and with
address at P.O. Box 1790, Grand Cayman, Cayman Islands.20

An opposition thereto was filed by Choithram, et al. but no documents were produced. A
manifestation and reply to the opposition was filed by spouses Ishwar.

All these acts of Choithram, et al. appear to be fraudulent attempts to remove these
properties to the detriment of spouses Ishwar should the latter prevail in this litigation.

On December 10, 1990 the court issued a resolution that substantially reads as follows:

Considering the allegations of petitioners Ishwar Jethmal Ramnani and Sonya

Ramnani that respondents Choithram Jethmal Ramnani, Nirmla Ramnani and
Moti G. Ramnani have fraudulently executed a simulated mortgage of the
properties subject of this litigation dated June 20, 1989, in favor of Overseas

71
 Holding Co., Ltd. which appears to be a corporation organized in Cayman
Islands, for the amount of $ 3,000,000.00, which is much more than the value of
the properties in litigation; that said alleged mortgagee appears to be a "shell"
corporation with a capital of only $100.00; and that this alleged transaction
appears to be intended to defraud petitioners Ishwar and Sonya Jethmal
Ramnani of any favorable judgment that this Court may render in this case;

Wherefore the Court Resolved to issue a writ of preliminary injunction enjoining

and prohibiting said respondents Choithram Jethmal Ramnani, Nirmla V.
Ramnani, Moti G. Ramnani and the Overseas Holding Co., Ltd. from
encumbering, selling or otherwise disposing of the properties and improvements
subject of this litigation until further orders of the Court. Petitioners Ishwar and
Sonya Jethmal Ramnani are hereby required to post a bond of P 100,000.00 to
answer for any damages d respondents may suffer by way of this injunction if the
Court finally decides the said petitioners are not entitled thereto.

The Overseas Holding Co., Ltd. with address at P.O. Box 1790 Grand Cayman,
Cayman Islands, is hereby IMPLEADED as a respondent in these cases, and is
hereby required to SUBMIT its comment on the Urgent Motion for the Issuance of
a Writ of Preliminary Attachment and Motion for Production of Documents, the
Manifestation and the Reply to the Opposition filed by said petitioners, within
Sixty (60) days after service by publication on it in accordance with the provisions
of Section 17, Rule 14 of the Rules of Court, at the expense of petitioners Ishwar
and Sonya Jethmal Ramnani.

Let copies of this resolution be served on the Register of Deeds of Pasig, Rizal,
and the Provincial Assessor of Pasig, Rizal, both in Metro Manila, for its
annotation on the transfer Certificates of Titles Nos. 403150 and 403152
registered in the name of respondent Nirmla V. Ramnani, and on the tax
declarations of the said properties and its improvements subject of this
litigation.21

The required injunction bond in the amount of P 100,000.00 was filed by the spouses
Ishwar which was approved by the Court. The above resolution of the Court was
published in the Manila Bulletin issue of December 17, 1990 at the expense of said
spouses.22 On December 19, 1990 the said resolution and petition for review with
annexes in G.R. Nos. 85494 and 85496 were transmitted to respondent Overseas,
Grand Cayman Islands at its address c/o Cayman Overseas Trust Co. Ltd., through the
United Parcel Services Bill of Lading23 and it was actually delivered to said company on
January 23, 1991.24

On January 22, 1991, Choithram, et al., filed a motion to dissolve the writ of preliminary
injunction alleging that there is no basis therefor as in the amended complaint what is
sought is actual damages and not a reconveyance of the property, that there is no
reason for its issuance, and that acts already executed cannot be enjoined. They also
offered to file a counterbond to dissolve the writ.

72
A comment/opposition thereto was filed by spouses Ishwar that there is basis for the
injunction as the alleged mortgage of the property is simulated and the other donations
of the shares of Choithram to his children are fraudulent schemes to negate any
judgment the Court may render for petitioners.

No comment or answer was filed by Overseas despite due notice, thus it is and must be
considered to be in default and to have lost the right to contest the representations of
spouses Ishwar to declare the aforesaid alleged mortgage nun and void.

This purported mortgage of the subject properties in litigation appears to be fraudulent

and simulated. The stated amount of $3 Million for which it was mortgaged is much
more than the value of the mortgaged properties and its improvements. The alleged
mortgagee-company (Overseas) was organized only on June 26,1989 but the mortgage
was executed much earlier, on June 20, 1989, that is six (6) days before Overseas was
organized. Overseas is a "shelf" company worth only $100.00. 25 In the manifestation of
spouses Ishwar dated April 1, 1991, the Court was informed that this matter was
brought to the attention of the Central Bank (CB) for investigation, and that in a letter of
March 20, 1991, the CB informed counsel for spouses Ishwar that said alleged foreign
loan of Choithram, et al. from Overseas has not been previously approved/registered
with the CB.26

Obviously, this is another ploy of Choithram, et al. to place these properties beyond the
reach of spouses Ishwar should they obtain a favorable judgment in this case. The
Court finds and so declares that this alleged mortgage should be as it is hereby
declared null and void.

All these contemporaneous and subsequent acts of Choithram, et al., betray the
weakness of their cause so they had to take an steps, even as the case was already
pending in Court, to render ineffective any judgment that may be rendered against
them.

The problem is compounded in that respondent Ortigas is caught in the web of this
bitter fight. It had all the time been dealing with Choithram as attorney-in-fact of Ishwar.
However, evidence had been adduced that notice in writing had been served not only
on Choithram, but also on Ortigas, of the revocation of Choithram's power of attorney by
Ishwar's lawyer, on May 24, 1971.27 A publication of said notice was made in the April 2,
1971 issue of The Manila Times for the information of the general public.28 Such notice
of revocation in a newspaper of general circulation is sufficient warning to third persons
including Ortigas.29 A notice of revocation was also registered with the Securities and
Exchange Commission on March 29, 1 971.30

Indeed in the letter of Choithram to Ishwar of June 25, 1971, Choithram was pleading
that Ishwar execute another power of attorney to be shown to Ortigas who apparently
learned of the revocation of Choithram's power of attorney.31 Despite said notices,
Ortigas nevertheless acceded to the representation of Choithram, as alleged attorney-
in-fact of Ishwar, to assign the rights of petitioner Ishwar to Nirmla. While the primary

73
blame should be laid at the doorstep of Choithram, Ortigas is not entirely without fault. It
should have required Choithram to secure another power of attorney from Ishwar. For
recklessly believing the pretension of Choithram that his power of attorney was still
good, it must, therefore, share in the latter's liability to Ishwar.

In the original complaint, the spouses Ishwar asked for a reconveyance of the properties
and/or payment of its present value and damages.32 In the amended complaint they
asked, among others, for actual damages of not less than the present value of the real
properties in litigation, moral and exemplary damages, attorneys fees, costs of the suit
and further prayed for "such other reliefs as may be deemed just and equitable in the
premises .33 The amended complaint contain the following positive allegations:

7. Defendant Choithram Ramnani, in evident bad faith and despite due notice of
the revocation of the General Power of Attorney, Annex 'D" hereof, caused the
transfer of the rights over the said parcels of land to his daughter-in-law,
defendant Nirmla Ramnani in connivance with defendant Ortigas & Co., the latter
having agreed to the said transfer despite receiving a letter from plaintiffs' lawyer
informing them of the said revocation; copy of the letter is hereto attached and
made an integral part hereof as Annex "H";

8. Defendant Nirmla Ramnani having acquired the aforesaid property by fraud is,
by force of law, considered a trustee of an implied trust for the benefit of plaintiff
and is obliged to return the same to the latter:

9. Several efforts were made to settle the matter within the family but defendants
(Choithram Ramnani, Nirmla Ramnani and Moti Ramnani) refused and up to now
fail and still refuse to cooperate and respond to the same; thus, the present case;

10. In addition to having been deprived of their rights over the properties
(described in par. 3 hereof), plaintiffs, by reason of defendants' fraudulent act,
suffered actual damages by way of lost rental on the property which defendants
(Choithram Ramnani, Nirmla Ramnani and Moti Ramnani have collected for
themselves;34

In said amended complaint, spouses Ishwar, among others, pray for payment of actual
damages in an amount no less than the value of the properties in litigation instead of a
reconveyance as sought in the original complaint. Apparently they opted not to insist on
a reconveyance as they are American citizens as alleged in the amended complaint.

The allegations of the amended complaint above reproduced clearly spelled out that the
transfer of the property to Nirmla was fraudulent and that it should be considered to be
held in trust by Nirmla for spouses Ishwar. As above-discussed, this allegation is well-
taken and the transfer of the property to Nirmla should be considered to have created
an implied trust by Nirmla as trustee of the property for the benefit of spouses Ishwar. 35

74
The motion to dissolve the writ of preliminary injunction filed by Choithram, et al. should
be denied. Its issuance by this Court is proper and warranted under the circumstances
of the case. Under Section 3(c) Rule 58 of the Rules of Court, a writ of preliminary
injunction may be granted at any time after commencement of the action and before
judgment when it is established:

(c) that the defendant is doing, threatens, or is about to do, or is procuring or

suffering to be done, some act probably in violation of plaintiffs's rights respecting
the subject of the action, and tending to render the judgment ineffectual.

As above extensively discussed, Choithram, et al. have committed and threaten to

commit further acts of disposition of the properties in litigation as well as the other
assets of Choithram, apparently designed to render ineffective any judgment the Court
may render favorable to spouses Ishwar.

The purpose of the provisional remedy of preliminary injunction is to preserve the status
quo of the things subject of the litigation and to protect the rights of the spouses Ishwar
respecting the subject of the action during the pendency of the Suit36 and not to obstruct
the administration of justice or prejudice the adverse party.37 In this case for damages,
should Choithram, et al. continue to commit acts of disposition of the properties subject
of the litigation, an award of damages to spouses Ishwar would thereby be rendered
ineffectual and meaningless.38

Consequently, if only to protect the interest of spouses Ishwar, the Court hereby finds
and holds that the motion for the issuance of a writ of preliminary attachment filed by
spouses Ishwar should be granted covering the properties subject of this litigation.

Section 1, Rule 57 of the Rules of Court provides that at the commencement of an

action or at any time thereafter, the plaintiff or any proper party may have the property
of the adverse party attached as security for the satisfaction of any judgment that may
be recovered, in, among others, the following cases:

(d) In an action against a party who has been guilty of a fraud in contracting the
debt or incurring the obligation upon which the action is brought, or in concealing
or disposing of the property for the taking, detention or conversion of which the
action is brought;

(e) In an action against a party who has removed or disposed of his property, or
is about to do so, with intent to defraud his creditors; . . .

Verily, the acts of Choithram, et al. of disposing the properties subject of the litigation
disclose a scheme to defraud spouses Ishwar so they may not be able to recover at all
given a judgment in their favor, the requiring the issuance of the writ of attachment in
this instance.

75
Nevertheless, under the peculiar circumstances of this case and despite the fact that
Choithram, et al., have committed acts which demonstrate their bad faith and scheme to
defraud spouses Ishwar and Sonya of their rightful share in the properties in litigation,
the Court cannot ignore the fact that Choithram must have been motivated by a strong
conviction that as the industrial partner in the acquisition of said assets he has as much
claim to said properties as Ishwar, the capitalist partner in the joint venture.

The scenario is clear. Spouses Ishwar supplied the capital of $150,000.00 for the
business.1âwphi1 They entrusted the money to Choithram to invest in a profitable
business venture in the Philippines. For this purpose they appointed Choithram as their
attorney-in-fact.

Choithram in turn decided to invest in the real estate business. He bought the two (2)
parcels of land in question from Ortigas as attorney-in-fact of Ishwar- Instead of paying
for the lots in cash, he paid in installments and used the balance of the capital entrusted
to him, plus a loan, to build two buildings. Although the buildings were burned later,
Choithram was able to build two other buildings on the property. He rented them out
and collected the rentals. Through the industry and genius of Choithram, Ishwar's
property was developed and improved into what it is now—a valuable asset worth
millions of pesos. As of the last estimate in 1985, while the case was pending before the
trial court, the market value of the properties is no less than P22,304,000.00. 39 It should
be worth much more today.

We have a situation where two brothers engaged in a business venture. One furnished
the capital, the other contributed his industry and talent. Justice and equity dictate that
the two share equally the fruit of their joint investment and efforts. Perhaps this
Solomonic solution may pave the way towards their reconciliation. Both would stand to
gain. No one would end up the loser. After all, blood is thicker than water.

However, the Court cannot just close its eyes to the devious machinations and schemes
that Choithram employed in attempting to dispose of, if not dissipate, the properties to
deprive spouses Ishwar of any possible means to recover any award the Court may
grant in their favor. Since Choithram, et al. acted with evident bad faith and malice, they
should pay moral and exemplary damages as well as attorney's fees to spouses Ishwar.

WHEREFORE, the petition in G.R. No. 85494 is DENIED, while the petition in G.R. No.
85496 is hereby given due course and GRANTED. The judgment of the Court of
Appeals dated October 18, 1988 is hereby modified as follows:

1. Dividing equally between respondents spouses Ishwar, on the one hand, and
petitioner Choithram Ramnani, on the other, (in G.R. No. 85494) the two parcels of land
subject of this litigation, including all the improvements thereon, presently covered by
transfer Certificates of Title Nos. 403150 and 403152 of the Registry of Deeds, as well
as the rental income of the property from 1967 to the present.

76
2. Petitioner Choithram Jethmal Ramnani, Nirmla V. Ramnani, Moti C. Ramnani and
respondent Ortigas and Company, Limited Partnership (in G.R. No. 85496) are ordered
solidarily to pay in cash the value of said one-half (1/2) share in the said land and
improvements pertaining to respondents spouses Ishwar and Sonya at their fair market
value at the time of the satisfaction of this judgment but in no case less than their value
as appraised by the Asian Appraisal, Inc. in its Appraisal Report dated August 1985
(Exhibits T to T-14, inclusive).

3. Petitioners Choithram, Nirmla and Moti Ramnani and respondent Ortigas & Co., Ltd.
Partnership shall also be jointly and severally liable to pay to said respondents spouses
Ishwar and Sonya Ramnani one-half (1/2) of the total rental income of said properties
and improvements from 1967 up to the date of satisfaction of the judgment to be
computed as follows:

a. On Building C occupied by Eppie's Creation and Jethmal Industries

from 1967 to 1973, inclusive, based on the 1967 to 1973 monthly rentals
paid by Eppie's Creation;

b. Also on Building C above, occupied by Jethmal Industries and Lavine

from 1974 to 1978, the rental incomes based on then rates prevailing as
shown under Exhibit "P"; and from 1979 to 1981, based on then prevailing
rates as indicated under Exhibit "Q";

c. On Building A occupied by Transworld Knitting Mills from 1972 to 1978,

the rental incomes based upon then prevailing rates shown under Exhibit
"P", and from 1979 to 1981, based on prevailing rates per Exhibit "Q";

d. On the two Bays Buildings occupied by Sigma-Mariwasa from 1972 to

1978, the rentals based on the Lease Contract, Exhibit "P", and from 1979
to 1980, the rentals based on the Lease Contract, Exhibit "Q".

and thereafter commencing 1982, to account for and turn over the rental incomes paid
or ought to be paid for the use and occupancy of the properties and all improvements
totalling 10,048 sq. m., based on the rate per square meter prevailing in 1981 as
indicated annually cumulative up to 1984. Then, commencing 1985 and up to the
satisfaction of the judgment, rentals shall be computed at ten percent (10%) annually of
the fair market values of the properties as appraised by the Asian Appraisals, Inc. in
August 1985. (Exhibits T to T-14, inclusive.)

4. To determine the market value of the properties at the time of the satisfaction of this
judgment and the total rental incomes thereof, the trial court is hereby directed to hold a
hearing with deliberate dispatch for this purpose only and to have the judgment
immediately executed after such determination.

5. Petitioners Choithram, Nirmla and Moti, all surnamed Ramnani, are also jointly and
severally liable to pay respondents Ishwar and Sonya Ramnani the amount of

77
P500,000.00 as moral damages, P200,000.00 as exemplary damages and attorney's
fees equal to 10% of the total award. to said respondents spouses.

6. The motion to dissolve the writ of preliminary injunction dated December 10, 1990
filed by petitioners Choithram, Nirmla and Moti, all surnamed Ramnani, is hereby
DENIED and the said injunction is hereby made permanent. Let a writ of attachment be
issued and levied against the properties and improvements subject of this litigation to
secure the payment of the above awards to spouses Ishwar and Sonya.

7. The mortgage constituted on the subject property dated June 20, 1989 by petitioners
Choithram and Nirmla, both surnamed Ramnani in favor of respondent Overseas
Holding, Co. Ltd. (in G.R. No. 85496) for the amount of $3-M is hereby declared null
and void. The Register of Deeds of Pasig, Rizal, is directed to cancel the annotation of d
mortgage on the titles of the properties in question.

8. Should respondent Ortigas Co., Ltd. Partnership pay the awards to Ishwar and Sonya
Ramnani under this judgment, it shall be entitled to reimbursement from petitioners
Choithram, Nirmla and Moti, all surnamed Ramnani.

9. The above awards shag bear legal rate of interest of six percent (6%) per
annum from the time this judgment becomes final until they are fully paid by petitioners
Choithram Ramnani, Nirmla V. Ramnani, Moti C. Ramnani and Ortigas, Co., Ltd.
Partnership. Said petitioners Choithram, et al. and respondent Ortigas shall also pay the
costs.

SO ORDERED.

78
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-11624 January 21, 1918

E. M. BACHRACH, plaintiff-appellee,
vs.
"LA PROTECTORA", ET AL., defendants-appellants.

Vicente Foz for appellants.

A. J. Burke for appellee.

STREET, J.:

In the year 1913, the individuals named as defendants in this action formed a civil
partnership, called "La Protectora," for the purpose of engaging in the business of
transporting passengers and freight at Laoag, Ilocos Norte. In order to provide the
enterprise with means of transportation, Marcelo Barba, acting as manager, came to
Manila and upon June 23, 1913, negotiated the purchase of two automobile trucks from
the plaintiff, E. M. Bachrach, for the agree price of P16,500. He paid the sum of 3,000 in
cash, and for the balance executed promissory notes representing the deferred
payments. These notes provided for the payment of interest from June 23, 1913, the
date of the notes, at the rate of 10 per cent per annum. Provision was also made in the
notes for the payment of 25 per cent of the amount due if it should be necessary to
place the notes in the hands of an attorney for collection. Three of these notes, for the
sum of P3,375 each, have been made the subject of the present action, and there are
exhibited with the complaint in the cause. One was signed by Marcelo Barba in the
following manner:

P. P. La Protectora
By Marcelo Barba
Marcelo Barba.

The other two notes are signed in the same way with the word "By" omitted before the
name of Marcelo Barba in the second line of the signature. It is obvious that in thus
signing the notes Marcelo Barba intended to bind both the partnership and himself. In
the body of the note the word "I" (yo) instead of "we" (nosotros) is used before the
words "promise to pay" (prometemos) used in the printed form. It is plain that the
singular pronoun here has all the force of the plural.

As preliminary to the purchase of these trucks, the defendants Nicolas Segundo,

Antonio Adiarte, Ignacio Flores, and Modesto Serrano, upon June 12, 1913, executed in
due form a document in which they declared that they were members of the firm "La

79
Protectora" and that they had granted to its president full authority "in the name and
representation of said partnership to contract for the purchase of two automobiles" (en
nombre y representacion de la mencionada sociedad contratante la compra de dos
automoviles). This document was apparently executed in obedience to the requirements
of subsection 2 of article 1697 of the Civil Code, for the purpose of evidencing the
authority of Marcelo Barba to bind the partnership by the purchase. The document in
question was delivered by him to Bachrach at the time the automobiles were purchased.

From time to time after this purchase was made, Marcelo Barba purchased of the
plaintiff various automobile effects and accessories to be used in the business of "La
Protectora." Upon May 21, 1914, the indebtedness resulting from these additional
purchases amounted to the sum of P2,916.57

In May, 1914, the plaintiff foreclosed a chattel mortgage which he had retained on the
trucks in order to secure the purchase price. The amount realized from this sale was
P1,000. This was credited unpaid. To recover this balance, together with the sum due
for additional purchases, the present action was instituted in the Court of First Instance
of the city of Manila, upon May 29, 1914, against "La Protectora" and the five individuals
Marcelo Barba, Nicolas Segundo, Antonio Adiarte, Ignacio Flores, and Modesto
Serrano. No question has been made as to the propriety of impleading "La Protectora"
as if it were a legal entity. At the hearing, judgment was rendered against all of the
defendants. From this judgment no appeal was taken in behalf either of "La Protectora"
or Marcelo Barba; and their liability is not here under consideration. The four individuals
who signed the document to which reference has been made, authorizing Barba to
purchase the two trucks have, however, appealed and assigned errors. The question
here to be determined is whether or not these individuals are liable for the firm debts
and if so to what extent.

The amount of indebtedness owing to the plaintiff is not in dispute, as the principal of
the debt is agreed to be P7,037. Of this amount it must now be assumed, in view of the
finding of the trial court, from which no appeal has been taken by the plaintiff, that the
unpaid balance of the notes amounts to P4,121, while the remainder (P2,916)
represents the amount due for automobile supplies and accessories.

The business conducted under the name of "La Protectora" was evidently that of a civil
partnership; and the liability of the partners to this association must be determined
under the provisions of the Civil Code. The authority of Marcelo Barba to bind the
partnership, in the purchase of the trucks, is fully established by the document executed
by the four appellants upon June 12, 1913. The transaction by which Barba secured
these trucks was in conformity with the tenor of this document. The promissory notes
constitute the obligation exclusively of "La Protectora" and of Marcelo Barba; and they
do not in any sense constitute an obligation directly binding on the four appellants. Their
liability is based on the fact that they are members of the civil partnership and as such
are liable for its debts. It is true that article 1698 of the Civil Code declares that a
member of a civil partnership is not liable in solidum(solidariamente) with his fellows for
its entire indebtedness; but it results from this article, in connection with article 1137 of

80
the Civil Code, that each is liable with the others (mancomunadamente) for his aliquot
part of such indebtedness. And so it has been held by this court. (Co-Pitco vs. Yulo, 8
Phil. Rep., 544.)

The Court of First Instance seems to have founded its judgment against the appellants
in part upon the idea that the document executed by them constituted an authority for
Marcelo Barba to bind them personally, as contemplated in the second clause of article
1698 of the Civil Code. That cause says that no member of the partnership can bind the
others by a personal act if they have not given him authority to do so. We think that the
document referred to was intended merely as an authority to enable Barba to bind the
partnership and that the parties to that instrument did not intend thereby to confer upon
Barba an authority to bind them personally. It is obvious that the contract which Barba in
fact executed in pursuance of that authority did not by its terms profess to bind the
appellants personally at all, but only the partnership and himself. It follows that the four
appellants cannot be held to have been personally obligated by that instrument; but, as
we have already seen, their liability rests upon the general principles underlying
partnership liability.

As to so much of the indebtedness as is based upon the claim for automobile supplies
and accessories, it is obvious that the document of June 12, 1913, affords no authority
for holding the appellants liable. Their liability upon this account is, however, no less
obvious than upon the debt incurred by the purchase of the trucks; and such liability is
derived from the fact that the debt was lawfully incurred in the prosecution of the
partnership enterprise.

There is no proof in the record showing what the agreement, if any, was made with
regard to the form of management. Under these circumstances it is declared in article
1695 of the Civil Code that all the partners are considered agents of the partnership.
Barba therefore must be held to have had authority to incur these expenses. But in
addition to this he is shown to have been in fact the president or manager, and there
can be no doubt that he had actual authority to incur this obligation.

From what has been said it results that the appellants are severally liable for their
respective shares of the entire indebtedness found to be due; and the Court of First
Instance committed no error in giving judgment against them. The amount for which
judgment should be entered is P7,037, to which shall be added (1) interest at 10 per
cent per annum from June 23, 1913, to be calculated upon the sum of P4.121; (2)
interest at 6 per cent per annum from July 21, 1915, to be calculated upon the sum of
P2,961; (3) the further sum of P1,030.25, this being the amount stipulated to be paid by
way of attorney's fees. However, it should be noted that any property pertaining to "La
Protectora" should first be applied to this indebtedness pursuant to the judgment
already entered in this case in the court below; and each of the four appellants shall be
liable only for the one-fifth part of the remainder unpaid.

Let judgment be entered accordingly, without any express finding of costs of this
instance. So ordered.

81
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-40098 August 29, 1975

ANTONIO LIM TANHU, DY OCHAY, ALFONSO LEONARDO NG SUA and CO

OYO, petitioners,
vs.
HON. JOSE R. RAMOLETE as Presiding Judge, Branch III, CFI, Cebu and TAN
PUT, respondents.

Zosa, Zosa, Castillo, Alcudia & Koh for petitioners.

Fidel Manalo and Florido & Associates for respondents.

BARREDO, J.:

Petition for (1) certiorari to annul and set aside certain actuations of respondent Court of
First Instance of Cebu Branch III in its Civil Case No. 12328, an action for accounting of
properties and money totalling allegedly about P15 million pesos filed with a common
cause of action against six defendants, in which after declaring four of the said
defendants herein petitioners, in default and while the trial as against the two
defendants not declared in default was in progress, said court granted plaintiff's motion
to dismiss the case in so far as the non-defaulted defendants were concerned and
thereafter proceeded to hear ex-parte the rest of the plaintiffs evidence and
subsequently rendered judgment by default against the defaulted defendants, with the
particularities that notice of the motion to dismiss was not duly served on any of the
defendants, who had alleged a compulsory counterclaim against plaintiff in their joint
answer, and the judgment so rendered granted reliefs not prayed for in the complaint,
and (2) prohibition to enjoin further proceedings relative to the motion for immediate
execution of the said judgment.

Originally, this litigation was a complaint filed on February 9, 1971 by respondent Tan
Put only against the spouses-petitioners Antonio Lim Tanhu and Dy Ochay.
Subsequently, in an amended complaint dated September 26, 1972, their son Lim Teck
Chuan and the other spouses-petitioners Alfonso Leonardo Ng Sua and Co Oyo and
their son Eng Chong Leonardo were included as defendants. In said amended
complaint, respondent Tan alleged that she "is the widow of Tee Hoon Lim Po Chuan,
who was a partner in the commercial partnership, Glory Commercial Company ... with

82
Antonio Lim Tanhu and Alfonso Ng Sua that "defendant Antonio Lim Tanhu, Alfonso
Leonardo Ng Sua, Lim Teck Chuan, and Eng Chong Leonardo, through fraud and
machination, took actual and active management of the partnership and although Tee
Hoon Lim Po Chuan was the manager of Glory Commercial Company, defendants
managed to use the funds of the partnership to purchase lands and building's in the
cities of Cebu, Lapulapu, Mandaue, and the municipalities of Talisay and Minglanilla,
some of which were hidden, but the description of those already discovered were as
follows: (list of properties) ...;" and that:

13. (A)fter the death of Tee Hoon Lim Po Chuan, the defendants, without
liquidation continued the business of Glory Commercial Company by
purportedly organizing a corporation known as the Glory Commercial
Company, Incorporated, with paid up capital in the sum of P125,000.00,
which money and other assets of the said Glory Commercial Company,
Incorporated are actually the assets of the defunct Glory Commercial
Company partnership, of which the plaintiff has a share equivalent to one
third (¹/3 ) thereof;

14. (P)laintiff, on several occasions after the death of her husband, has
asked defendants of the above-mentioned properties and for the
liquidation of the business of the defunct partnership, including
investments on real estate in Hong Kong, but defendants kept on
promising to liquidate said properties and just told plaintiff to

15. (S)ometime in the month of November, 1967, defendants, Antonio Lim

Tanhu, by means of fraud deceit and misrepresentations did then and
there, induce and convince the plaintiff to execute a quitclaim of all her
rights and interests, in the assets of the partnership of Glory Commercial
Company, which is null and void, executed through fraud and without any
legal effect. The original of said quitclaim is in the possession of the
adverse party defendant Antonio Lim Tanhu.

16. (A)s a matter of fact, after the execution of said quitclaim, defendant
Antonio Lim Tanhu offered to pay the plaintiff the amount P65,000.00
within a period of one (1) month, for which plaintiff was made to sign a
receipt for the amount of P65,000.00 although no such amount was given
and plaintiff was not even given a copy of said document;

17. (T)hereafter, in the year 1968-69, the defendants who had earlier
promised to liquidate the aforesaid properties and assets in favor among
others of plaintiff and until the middle of the year 1970 when the plaintiff
formally demanded from the defendants the accounting of real and
personal properties of the Glory Commercial Company, defendants
refused and stated that they would not give the share of the plaintiff. (Pp.
36-37, Record.)

83
 She prayed as follows:

WHEREFORE, it is most respectfully prayed that judgment be rendered:

a) Ordering the defendants to render an accounting of the real and

personal properties of the Glory Commercial Company including those
registered in the names of the defendants and other persons, which
properties are located in the Philippines and in Hong Kong;

b) Ordering the defendants to deliver to the plaintiff after accounting, one

third (¹/3 ) of the total value of all the properties which is approximately
P5,000,000.00 representing the just share of the plaintiff;

c) Ordering the defendants to pay the attorney of the plaintiff the sum of
Two Hundred Fifty Thousand Pesos (P250,000.00) by way of attorney's
fees and damages in the sum of One Million Pesos (P1,000,000.00).

This Honorable Court is prayed for other remedies and reliefs consistent
with law and equity and order the defendants to pay the costs. (Page 38,
Record.)

The admission of said amended complaint was opposed by defendants upon the
ground that there were material modifications of the causes of action previously alleged,
but respondent judge nevertheless allowed the amendment reasoning that:

The present action is for accounting of real and personal properties as

well as for the recovery of the same with damages.

An objective consideration of pars. 13 and 15 of the amended complaint

pointed out by the defendants to sustain their opposition will show that the
allegations of facts therein are merely to amplify material averments
constituting the cause of action in the original complaint. It likewise include
necessary and indispensable defendants without whom no final
determination can be had in the action and in order that complete relief is
to be accorded as between those already parties.

Considering that the amendments sought to be introduced do not change

the main causes of action in the original complaint and the reliefs
demanded and to allow amendments is the rule, and to refuse them the
exception and in order that the real question between the parties may be
properly and justly threshed out in a single proceeding to avoid multiplicity
of actions. (Page 40, Record.)

In a single answer with counterclaim, over the signature of their common counsel,
defendants denied specifically not only the allegation that respondent Tan is the widow
of Tee Hoon because, according to them, his legitimate wife was Ang Siok Tin still living

84
and with whom he had four (4) legitimate children, a twin born in 1942, and two others
born in 1949 and 1965, all presently residing in Hongkong, but also all the allegations of
fraud and conversion quoted above, the truth being, according to them, that proper
liquidation had been regularly made of the business of the partnership and Tee Hoon
used to receive his just share until his death, as a result of which the partnership was
dissolved and what corresponded to him were all given to his wife and children. To
quote the pertinent portions of said answer:

AND BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES,

defendants hereby incorporate all facts averred and alleged in the answer,
and further most respectfully declare:

1. That in the event that plaintiff is filing the present complaint as an heir of
Tee Hoon Lim Po Chuan, then, she has no legal capacity to sue as such,
considering that the legitimate wife, namely: Ang Siok Tin, together with
their children are still alive. Under Sec. 1, (d), Rule 16 of the Revised
Rules of Court, lack of legal capacity to sue is one of the grounds for a
motion to dismiss and so defendants prays that a preliminary hearing be
conducted as provided for in Sec. 5, of the same rule;

2. That in the alternative case or event that plaintiff is filing the present
case under Art. 144 of the Civil Code, then, her claim or demand has been
paid, waived abandoned or otherwise extinguished as evidenced by the
'quitclaim' Annex 'A' hereof, the ground cited is another ground for a
motion to dismiss (Sec. 1, (h), Rule 16) and hence defendants pray that a
preliminary hearing be made in connection therewith pursuant to Section 5
of the aforementioned rule;

3. That Tee Hoon Lim Po Chuan was legally married to Ang Siok Tin and
were blessed with the following children, to wit: Ching Siong Lim and
Ching Hing Lim (twins) born on February 16, 1942; Lim Shing Ping born
on March 3, 1949 and Lim Eng Lu born on June 25, 1965 and presently
residing in Hongkong;

4. That even before the death of Tee Hoon Lim Po Chuan, the plaintiff was
no longer his common law wife and even though she was not entitled to
anything left by Tee Hoon Lim Po Chuan, yet, out of the kindness and
generosity on the part of the defendants, particularly Antonio Lain Tanhu,
who, was inspiring to be monk and in fact he is now a monk, plaintiff was
given a substantial amount evidenced by the 'quitclaim' (Annex 'A');

5. That the defendants have acquired properties out of their own personal
fund and certainly not from the funds belonging to the partnership, just as
Tee Hoon Lim Po Chuan had acquired properties out of his personal fund

85
and which are now in the possession of the widow and neither the
defendants nor the partnership have anything to do about said properties;

6. That it would have been impossible to buy properties from funds

belonging to the partnership without the other partners knowing about it
considering that the amount taken allegedly is quite big and with such big
amount withdrawn the partnership would have been insolvent;

7. That plaintiff and Tee Hoon Lim Po Chuan were not blessed with
children who would have been lawfully entitled to succeed to the
properties left by the latter together with the widow and legitimate children;

8. That despite the fact that plaintiff knew that she was no longer entitled
to anything of the shares of the late Tee Hoon Lim Po Chuan, yet, this suit
was filed against the defendant who have to interpose the following —

COUNTERCLAIM

A. That the defendants hereby reproduced, by way of reference, all the

allegations and foregoing averments as part of this counterclaim; .

B. That plaintiff knew and was aware she was merely the common-law
wife of Tee Hoon Lim Po Chuan and that the lawful and legal is still living,
together with the legitimate children, and yet she deliberately suppressed
this fact, thus showing her bad faith and is therefore liable for exemplary
damages in an amount which the Honorable Court may determine in the
exercise of its sound judicial discretion. In the event that plaintiff is married
to Tee Hoon Lim Po Chuan, then, her marriage is bigamous and should
suffer the consequences thereof;

C. That plaintiff was aware and had knowledge about the 'quitclaim', even
though she was not entitled to it, and yet she falsely claimed that
defendants refused even to see her and for filing this unfounded,
baseless, futile and puerile complaint, defendants suffered mental anguish
and torture conservatively estimated to be not less than P3,000.00;

D. That in order to defend their rights in court, defendants were

constrained to engage the services of the undersigned counsel, obligating
themselves to pay P500,000.00 as attorney's fees;

E. That by way of litigation expenses during the time that this case will be
before this Honorable Court and until the same will be finally terminated
and adjudicated, defendants will have to spend at least P5,000.00. (Pp.
44-47. Record.)

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After unsuccessfully trying to show that this counterclaim is merely permissive and
should be dismissed for non-payment of the corresponding filing fee, and after being
overruled by the court, in due time, plaintiff answered the same, denying its material
allegations.

On February 3, 1973, however, the date set for the pre-trial, both of the two defendants-
spouses the Lim Tanhus and Ng Suas, did not appear, for which reason, upon motion of
plaintiff dated February 16, 1973, in an order of March 12, 1973, they were all "declared
in DEFAULT as of February 3, 1973 when they failed to appear at the pre-trial." They
sought to hive this order lifted thru a motion for reconsideration, but the effort failed
when the court denied it. Thereafter, the trial started, but at the stage thereof where the
first witness of the plaintiff by the name of Antonio Nuñez who testified that he is her
adopted son, was up for re-cross-examination, said plaintiff unexpectedly filed on
October 19, 1974 the following simple and unreasoned

MOTION TO DROP DEFENDANTS LIM TECK

CHUAN AND ENG CHONG LEONARDO

COMES now plaintiff, through her undersigned counsel, unto the

Honorable Court most respectfully moves to drop from the complaint the
defendants Lim Teck Chuan and Eng Chong Leonardo and to consider
the case dismissed insofar as said defendants Lim Teck Chuan and Eng
Chong Leonardo are concerned.

WHEREFORE, it is most respectfully prayed of the Honorable Court to

drop from the complaint the defendants Lim Teck Chuan and Eng Chong
Leonardo and to dismiss the case against them without pronouncement as
to costs. (Page 50, Record.)

which she set for hearing on December 21, 1974. According to petitioners,
none of the defendants declared in default were notified of said motion, in
violation of Section 9 of Rule 13, since they had asked for the lifting of the
order of default, albeit unsuccessfully, and as regards the defendants not
declared in default, the setting of the hearing of said motion on October
21, 1974 infringed the three-day requirement of Section 4 of Rule 15,
inasmuch as Atty. Adelino Sitoy of Lim Teck Chuan was served with a
copy of the motion personally only on October 19, 1974, while Atty.
Benjamin Alcudia of Eng Chong Leonardo was served by registered mail
sent only on the same date.

Evidently without even verifying the notices of service, just as simply as

plaintiff had couched her motion, and also without any legal grounds
stated, respondent court granted the prayer of the above motion thus:

ORDER

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 Acting on the motion of the plaintiff praying for the dismissal of the
complaint as against defendants Lim Teck Chuan and Eng Chong
Leonardo. —

The same is hereby GRANTED. The complaint as against defendant Lim

Teck Chuan and Eng Chong Leonardo is hereby ordered DISMISSED
without pronouncement as to costs.

Simultaneously, the following order was also issued:

Considering that defendants Antonio Lim Tanhu and his spouse Dy Ochay
as well as defendants Alfonso Ng Sua and his spouse Co Oyo have been
declared in default for failure to appear during the pre-trial and as to the
other defendants the complaint had already been ordered dismissed as
against them.

Let the hearing of the plaintiff's evidence ex-parte be set on November 20,
1974, at 8:30 A.M. before the Branch Clerk of Court who is deputized for
the purpose, to swear in witnesses and to submit her report within ten (10)
days thereafter. Notify the plaintiff.

SO ORDERED.

Cebu City, Philippines, October 21, 1974. (Page 52, Record.)

But, in connection with this last order, the scheduled ex-parte reception of evidence did
not take place on November 20, 1974, for on October 28, 1974, upon verbal motion of
plaintiff, the court issued the following self-explanatory order: .

Acting favorably on the motion of the plaintiff dated October 18, 1974, the
Court deputized the Branch Clerk of Court to receive the evidence of the
plaintiff ex-parte to be made on November 20, 1974. However, on October
28, 1974, the plaintiff, together with her witnesses, appeared in court and
asked, thru counsel, that she be allowed to present her evidence.

Considering the time and expenses incurred by the plaintiff in bringing her
witnesses to the court, the Branch Clerk of Court is hereby authorized to
receive immediately the evidence of the plaintiff ex-parte.

SO ORDERED.

Cebu City, Philippines, October 28, 1974. (Page 53. Record.)

Upon learning of these orders on October 23, 1973, the defendant Lim Teck Cheng,
thru counsel, Atty. Sitoy, filed a motion for reconsideration thereof, and on November 1,
1974, defendant Eng Chong Leonardo, thru counsel Atty. Alcudia, filed also his own

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motion for reconsideration and clarification of the same orders. These motions were
denied in an order dated December 6, 1974 but received by the movants only on
December 23, 1974. Meanwhile, respondent court rendered the impugned decision on
December 20, 1974. It does not appear when the parties were served copies of this
decision.

Subsequently, on January 6, 1975, all the defendants, thru counsel, filed a motion to
quash the order of October 28, 1974. Without waiting however for the resolution thereof,
on January 13, 1974, Lim Teck Chuan and Eng Chong Leonardo went to the Court of
Appeals with a petition for certiorari seeking the annulment of the above-mentioned
orders of October 21, 1974 and October 28, 1974 and decision of December 20, 1974.
By resolution of January 24, 1975, the Court of Appeals dismissed said petition, holding
that its filing was premature, considering that the motion to quash the order of October
28, 1974 was still unresolved by the trial court. This holding was reiterated in the
subsequent resolution of February 5, 1975 denying the motion for reconsideration of the
previous dismissal.

On the other hand, on January 20, 1975, the other defendants, petitioners herein, filed
their notice of appeal, appeal bond and motion for extension to file their record on
appeal, which was granted, the extension to expire after fifteen (15) days from January
26 and 27, 1975, for defendants Lim Tanhu and Ng Suas, respectively. But on February
7, 1975, before the perfection of their appeal, petitioners filed the present petition with
this Court. And with the evident intent to make their procedural position clear, counsel
for defendants, Atty. Manuel Zosa, filed with respondent court a manifestation dated
February 14, 1975 stating that "when the non-defaulted defendants Eng Chong
Leonardo and Lim Teck Chuan filed their petition in the Court of Appeals, they in effect
abandoned their motion to quash the order of October 28, 1974," and that similarly
"when Antonio Lim Tanhu, Dy Ochay, Alfonso Leonardo Ng Sua and Co Oyo, filed their
petition for certiorari and prohibition ... in the Supreme Court, they likewise abandoned
their motion to quash." This manifestation was acted upon by respondent court together
with plaintiffs motion for execution pending appeal in its order of the same date
February 14, 1975 this wise:

ORDER

When these incidents, the motion to quash the order of October 28, 1974
and the motion for execution pending appeal were called for hearing
today, counsel for the defendants-movants submitted their manifestation
inviting the attention of this Court that by their filing for certiorari and
prohibition with preliminary injunction in the Court of Appeals which was
dismissed and later the defaulted defendants filed with the Supreme Court
certiorari with prohibition they in effect abandoned their motion to quash.

IN VIEW HEREOF, the motion to quash is ordered ABANDONED. The

resolution of the motion for execution pending appeal shall be resolved

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 after the petition for certiorari and prohibition shall have been resolved by
the Supreme Court.

SO ORDERED.

Cebu City, Philippines, February 14, 1975. (Page 216, Record.)

Upon these premises, it is the position of petitioners that respondent court acted
illegally, in violation of the rules or with grave abuse of discretion in acting on
respondent's motion to dismiss of October 18, 1974 without previously ascertaining
whether or not due notice thereof had been served on the adverse parties, as, in fact,
no such notice was timely served on the non-defaulted defendants Lim Teck Chuan and
Eng Chong Leonardo and no notice at all was ever sent to the other defendants, herein
petitioners, and more so, in actually ordering the dismissal of the case by its order of
October 21, 1974 and at the same time setting the case for further hearing as against
the defaulted defendants, herein petitioners, actually hearing the same ex-parte and
thereafter rendering the decision of December 20, 1974 granting respondent Tan even
reliefs not prayed for in the complaint. According to the petitioners, to begin with, there
was compulsory counterclaim in the common answer of the defendants the nature of
which is such that it cannot be decided in an independent action and as to which the
attention of respondent court was duly called in the motions for reconsideration.
Besides, and more importantly, under Section 4 of Rule 18, respondent court had no
authority to divide the case before it by dismissing the same as against the non-
defaulted defendants and thereafter proceeding to hear it ex-parte and subsequently
rendering judgment against the defaulted defendants, considering that in their view,
under the said provision of the rules, when a common cause of action is alleged against
several defendants, the default of any of them is a mere formality by which those
defaulted are not allowed to take part in the proceedings, but otherwise, all the
defendants, defaulted and not defaulted, are supposed to have but a common fate, win
or lose. In other words, petitioners posit that in such a situation, there can only be one
common judgment for or against all the defendant, the non-defaulted and the defaulted.
Thus, petitioners contend that the order of dismissal of October 21, 1974 should be
considered also as the final judgment insofar as they are concerned, or, in the
alternative, it should be set aside together with all the proceedings and decision held
and rendered subsequent thereto, and that the trial be resumed as of said date, with the
defendants Lim Teck Chuan and Eng Chong Leonardo being allowed to defend the
case for all the defendants.

On the other hand, private respondent maintains the contrary view that inasmuch as
petitioners had been properly declared in default, they have no personality nor interest
to question the dismissal of the case as against their non-defaulted co-defendants and
should suffer the consequences of their own default. Respondent further contends, and
this is the only position discussed in the memorandum submitted by her counsel, that
since petitioners have already made or at least started to make their appeal, as they are
in fact entitled to appeal, this special civil action has no reason for being. Additionally,
she invokes the point of prematurity upheld by the Court of Appeals in regard to the

90
above-mentioned petition therein of the non-defaulted defendants Lim Teck Chuan and
Eng Chong Leonardo. Finally, she argues that in any event, the errors attributed to
respondent court are errors of judgment and may be reviewed only in an appeal.

After careful scrutiny of all the above-related proceedings, in the court below and
mature deliberation, the Court has arrived at the conclusion that petitioners should be
granted relief, if only to stress emphatically once more that the rules of procedure may
not be misused and abused as instruments for the denial of substantial justice. A review
of the record of this case immediately discloses that here is another demonstrative
instance of how some members of the bar, availing of their proficiency in invoking the
letter of the rules without regard to their real spirit and intent, succeed in inducing courts
to act contrary to the dictates of justice and equity, and, in some instances, to wittingly
or unwittingly abet unfair advantage by ironically camouflaging their actuations as
earnest efforts to satisfy the public clamor for speedy disposition of litigations, forgetting
all the while that the plain injunction of Section 2 of Rule 1 is that the "rules shall be
liberally construed in order to promote their object and to assist the parties in obtaining
not only 'speedy' but more imperatively, "just ... and inexpensive determination of every
action and proceeding." We cannot simply pass over the impression that the procedural
maneuvers and tactics revealed in the records of the case at bar were deliberately
planned with the calculated end in view of depriving petitioners and their co-defendants
below of every opportunity to properly defend themselves against a claim of more than
substantial character, considering the millions of pesos worth of properties involved as
found by respondent judge himself in the impugned decision, a claim that appears, in
the light of the allegations of the answer and the documents already brought to the
attention of the court at the pre-trial, to be rather dubious. What is most regrettable is
that apparently, all of these alarming circumstances have escaped respondent judge
who did not seem to have hesitated in acting favorably on the motions of the plaintiff
conducive to the deplorable objective just mentioned, and which motions, at the very
least, appeared to be 'of highly controversial' merit, considering that their obvious
tendency and immediate result would be to convert the proceedings into a one-sided
affair, a situation that should be readily condemnable and intolerable to any court of
justice.

Indeed, a seeming disposition on the part of respondent court to lean more on the
contentions of private respondent may be discerned from the manner it resolved the
attempts of defendants Dy Ochay and Antonio Lim Tanhu to have the earlier order of
default against them lifted. Notwithstanding that Dy Ochay's motion of October 8, 1971,
co-signed by her with their counsel, Atty. Jovencio Enjambre (Annex 2 of respondent
answer herein) was over the jurat of the notary public before whom she took her oath, in
the order of November 2, 1971, (Annex 3 id.) it was held that "the oath appearing at the
bottom of the motion is not the one contemplated by the abovequoted pertinent
provision (See. 3, Rule 18) of the rules. It is not even a verification. (See. 6, Rule 7.)
What the rule requires as interpreted by the Supreme Court is that the motion must
have to be accompanied by an affidavit of merits that the defendant has a meritorious
defense, thereby ignoring the very simple legal point that the ruling of the Supreme
Court in Ong Peng vs. Custodio, 1 SCRA 781, relied upon by His Honor, under which a

91
separate affidavit of merit is required refers obviously to instances where the motion is
not over oath of the party concerned, considering that what the cited provision literally
requires is no more than a "motion under oath." Stated otherwise, when a motion to lift
an order of default contains the reasons for the failure to answer as well as the facts
constituting the prospective defense of the defendant and it is sworn to by said
defendant, neither a formal verification nor a separate affidavit of merit is necessary.

What is worse, the same order further held that the motion to lift the order of default "is
an admission that there was a valid service of summons" and that said motion could not
amount to a challenge against the jurisdiction of the court over the person of the
defendant. Such a rationalization is patently specious and reveals an evident failure to
grasp the import of the legal concepts involved. A motion to lift an order of default on the
ground that service of summons has not been made in accordance with the rules is in
order and is in essence verily an attack against the jurisdiction of the court over the
person of the defendant, no less than if it were worded in a manner specifically
embodying such a direct challenge.

And then, in the order of February 14, 1972 (Annex 6, id.) lifting at last the order of
default as against defendant Lim Tanhu, His Honor posited that said defendant "has a
defense (quitclaim) which renders the claim of the plaintiff contentious." We have read
defendants' motion for reconsideration of November 25, 1971 (Annex 5, id.), but We
cannot find in it any reference to a "quitclaim". Rather, the allegation of a quitclaim is in
the amended complaint (Pars. 15-16, Annex B of the petition herein) in which plaintiff
maintains that her signature thereto was secured through fraud and deceit. In truth, the
motion for reconsideration just mentioned, Annex 5, merely reiterated the allegation in
Dy Ochay's earlier motion of October 8, 1971, Annex 2, to set aside the order of default,
that plaintiff Tan could be but the common law wife only of Tee Hoon, since his
legitimate wife was still alive, which allegation, His Honor held in the order of November
2, 1971, Annex 3, to be "not good and meritorious defense". To top it all, whereas, as
already stated, the order of February 19, 1972, Annex 6, lifted the default against Lim
Tanhu because of the additional consideration that "he has a defense (quitclaim) which
renders the claim of the plaintiff contentious," the default of Dy Ochay was maintained
notwithstanding that exactly the same "contentions" defense as that of her husband was
invoked by her.

Such tenuous, if not altogether erroneous reasonings and manifest inconsistency in the
legal postures in the orders in question can hardly convince Us that the matters here in
issue were accorded due and proper consideration by respondent court. In fact, under
the circumstances herein obtaining, it seems appropriate to stress that, having in view
the rather substantial value of the subject matter involved together with the obviously
contentious character of plaintiff's claim, which is discernible even on the face of the
complaint itself, utmost care should have been taken to avoid the slightest suspicion of
improper motivations on the part of anyone concerned. Upon the considerations
hereunder to follow, the Court expresses its grave concern that much has to be done to
dispel the impression that herein petitioners and their co-defendants are being
railroaded out of their rights and properties without due process of law, on the strength

92
of procedural technicalities adroitly planned by counsel and seemingly unnoticed and
undetected by respondent court, whose orders, gauged by their tenor and the citations
of supposedly pertinent provisions and jurisprudence made therein, cannot be said to
have proceeded from utter lack of juridical knowledgeability and competence.

–1–

The first thing that has struck the Court upon reviewing the record is the seeming
alacrity with which the motion to dismiss the case against non-defaulted defendants Lim
Teck Chuan and Eng Chong Leonardo was disposed of, which definitely ought not to
have been the case. The trial was proceeding with the testimony of the first witness of
plaintiff and he was still under re-cross-examination. Undoubtedly, the motion to dismiss
at that stage and in the light of the declaration of default against the rest of the
defendants was a well calculated surprise move, obviously designed to secure utmost
advantage of the situation, regardless of its apparent unfairness. To say that it must
have been entirely unexpected by all the defendants, defaulted and non-defaulted , is
merely to rightly assume that the parties in a judicial proceeding can never be the
victims of any procedural waylaying as long as lawyers and judges are imbued with the
requisite sense of equity and justice.

But the situation here was aggravated by the indisputable fact that the adverse parties
who were entitled to be notified of such unanticipated dismissal motion did not get due
notice thereof. Certainly, the non-defaulted defendants had the right to the three-day
prior notice required by Section 4 of Rule 15. How could they have had such
indispensable notice when the motion was set for hearing on Monday, October 21,
1974, whereas the counsel for Lim Teck Chuan, Atty. Sitoy was personally served with
the notice only on Saturday, October 19, 1974 and the counsel for Eng Chong
Leonardo, Atty. Alcudia, was notified by registered mail which was posted only that
same Saturday, October 19, 1974? According to Chief Justice Moran, "three days at
least must intervene between the date of service of notice and the date set for the
hearing, otherwise the court may not validly act on the motion." (Comments on the
Rules of Court by Moran, Vol. 1, 1970 ed. p. 474.) Such is the correct construction of
Section 4 of Rule 15. And in the instant case, there can be no question that the notices
to the non-defaulted defendants were short of the requirement of said provision.

We can understand the over-anxiety of counsel for plaintiff, but what is

incomprehensible is the seeming inattention of respondent judge to the explicit mandate
of the pertinent rule, not to speak of the imperatives of fairness, considering he should
have realized the far-reaching implications, specially from the point of view he
subsequently adopted, albeit erroneously, of his favorably acting on it. Actually, he was
aware of said consequences, for simultaneously with his order of dismissal, he
immediately set the case for the ex-parte hearing of the evidence against the defaulted
defendants, which, incidentally, from the tenor of his order which We have quoted
above, appears to have been done by him motu propio As a matter of fact, plaintiff's
motion also quoted above did not pray for it.

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Withal, respondent court's twin actions of October 21, 1974 further ignores or is
inconsistent with a number of known juridical principles concerning defaults, which We
will here take occasion to reiterate and further elucidate on, if only to avoid a repetition
of the unfortunate errors committed in this case. Perhaps some of these principles have
not been amply projected and elaborated before, and such paucity of elucidation could
be the reason why respondent judge must have acted as he did. Still, the Court cannot
but express its vehement condemnation of any judicial actuation that unduly deprives
any party of the right to be heard without clear and specific warrant under the terms of
existing rules or binding jurisprudence. Extreme care must be the instant reaction of
every judge when confronted with a situation involving risks that the proceedings may
not be fair and square to all the parties concerned. Indeed, a keen sense of fairness,
equity and justice that constantly looks for consistency between the letter of the
adjective rules and these basic principles must be possessed by every judge, If
substance is to prevail, as it must, over form in our courts. Literal observance of the
rules, when it is conducive to unfair and undue advantage on the part of any litigant
before it, is unworthy of any court of justice and equity. Withal, only those rules and
procedure informed, with and founded on public policy deserve obedience in accord
with their unequivocal language or words..

Before proceeding to the discussion of the default aspects of this case, however, it
should not be amiss to advert first to the patent incorrectness, apparent on the face of
the record, of the aforementioned order of dismissal of October 21, 1974 of the case
below as regards non-defaulted defendants Lim and Leonardo. While it is true that said
defendants are not petitioners herein, the Court deems it necessary for a full view of the
outrageous procedural strategy conceived by respondent's counsel and sanctioned by
respondent court to also make reference to the very evident fact that in ordering said
dismissal respondent court disregarded completely the existence of defendant's
counterclaim which it had itself earlier held if indirectly, to be compulsory in nature when
it refused to dismiss the same on the ground alleged by respondent Tan that he
docketing fees for the filing thereof had not been paid by defendants.

Indeed, that said counterclaim is compulsory needs no extended elaboration. As may

be noted in the allegations hereof aforequoted, it arose out of or is necessarily
connected with the occurrence that is the subject matter of the plaintiff's claim, (Section
4, Rule 9) namely, plaintiff's allegedly being the widow of the deceased Tee Hoon
entitled, as such, to demand accounting of and to receive the share of her alleged late
husband as partner of defendants Antonio Lim Tanhu and Alfonso Leonardo Ng Sua in
Glory Commercial Company, the truth of which allegations all the defendants have
denied. Defendants maintain in their counterclaim that plaintiff knew of the falsity of said
allegations even before she filed her complaint, for she had in fact admitted her
common-law relationship with said deceased in a document she had jointly executed
with him by way of agreement to terminate their illegitimate relationship, for which she
received P40,000 from the deceased, and with respect to her pretended share in the
capital and profits in the partnership, it is also defendants' posture that she had already
quitclaimed, with the assistance of able counsel, whatever rights if any she had thereto
in November, 1967, for the sum of P25,000 duly receipted by her, which quitclaim was,

94
however, executed, according to respondent herself in her amended complaint, through
fraud. And having filed her complaint knowing, according to defendants, as she ought to
have known, that the material allegations thereof are false and baseless, she has
caused them to suffer damages. Undoubtedly, with such allegations, defendants'
counterclaim is compulsory, not only because the same evidence to sustain it will also
refute the cause or causes of action alleged in plaintiff's complaint, (Moran, supra p.
352) but also because from its very nature, it is obvious that the same cannot "remain
pending for independent adjudication by the court." (Section 2, Rule 17.)

The provision of the rules just cited specifically enjoins that "(i)f a counterclaim has been
pleaded by a defendant prior to the service upon him of the plaintiff's motion to dismiss,
the action shall not be dismissed against the defendant's objection unless the
counterclaim can remain pending for independent adjudication by the court."
Defendants Lim and Leonardo had no opportunity to object to the motion to dismiss
before the order granting the same was issued, for the simple reason that they were not
opportunity notified of the motion therefor, but the record shows clearly that at least
defendant Lim immediately brought the matter of their compulsory counterclaim to the
attention of the trial court in his motion for reconsideration of October 23, 1974, even as
the counsel for the other defendant, Leonardo, predicated his motion on other grounds.
In its order of December 6, 1974, however, respondent court not only upheld the
plaintiffs supposed absolute right to choose her adversaries but also held that the
counterclaim is not compulsory, thereby virtually making unexplained and inexplicable
180-degree turnabout in that respect.

There is another equally fundamental consideration why the motion to dismiss should
not have been granted. As the plaintiff's complaint has been framed, all the six
defendants are charged with having actually taken part in a conspiracy to
misappropriate, conceal and convert to their own benefit the profits, properties and all
other assets of the partnership Glory Commercial Company, to the extent that they have
allegedly organized a corporation, Glory Commercial Company, Inc. with what they had
illegally gotten from the partnership. Upon such allegations, no judgment finding the
existence of the alleged conspiracy or holding the capital of the corporation to be the
money of the partnership is legally possible without the presence of all the defendants.
The non-defaulted defendants are alleged to be stockholders of the corporation and any
decision depriving the same of all its assets cannot but prejudice the interests of said
defendants. Accordingly, upon these premises, and even prescinding from the other
reasons to be discussed anon it is clear that all the six defendants below, defaulted and
non-defaulted, are indispensable parties. Respondents could do no less than grant that
they are so on page 23 of their answer. Such being the case, the questioned order of
dismissal is exactly the opposite of what ought to have been done. Whenever it appears
to the court in the course of a proceeding that an indispensable party has not been
joined, it is the duty of the court to stop the trial and to order the inclusion of such party.
(The Revised Rules of Court, Annotated & Commented by Senator Vicente J.
Francisco, Vol. 1, p. 271, 1973 ed. See also Cortez vs. Avila, 101 Phil. 705.) Such an
order is unavoidable, for the "general rule with reference to the making of parties in a
civil action requires the joinder of all necessary parties wherever possible, and the

95
joinder of all indispensable parties under any and all conditions, the presence of those
latter being a sine qua non of the exercise of judicial power." (Borlasa vs. Polistico, 47
Phil. 345, at p. 347.) It is precisely " when an indispensable party is not before the court
(that) the action should be dismissed." (People v. Rodriguez, 106 Phil. 325, at p. 327.)
The absence of an indispensable party renders all subsequent actuations of the court
null and void, for want of authority to act, not only as to the absent parties but even as to
those present. In short, what respondent court did here was exactly the reverse of what
the law ordains — it eliminated those who by law should precisely be joined.

As may he noted from the order of respondent court quoted earlier, which resolved the
motions for reconsideration of the dismissal order filed by the non-defaulted defendants,
His Honor rationalized his position thus:

It is the rule that it is the absolute prerogative of the plaintiff to choose, the
theory upon which he predicates his right of action, or the parties he
desires to sue, without dictation or imposition by the court or the adverse
party. If he makes a mistake in the choice of his right of action, or in that of
the parties against whom he seeks to enforce it, that is his own concern as
he alone suffers therefrom. The plaintiff cannot be compelled to choose
his defendants, He may not, at his own expense, be forced to implead
anyone who, under the adverse party's theory, is to answer for
defendant's liability. Neither may the Court compel him to furnish the
means by which defendant may avoid or mitigate their liability. (Vaño vs.
Alo, 95 Phil. 495-496.)

This being the rule this court cannot compel the plaintiff to continue
prosecuting her cause of action against the defendants-movants if in the
course of the trial she believes she can enforce it against the remaining
defendants subject only to the limitation provided in Section 2, Rule 17 of
the Rules of Court. ... (Pages 6263, Record.)

Noticeably, His Honor has employed the same equivocal terminology as in plaintiff's
motion of October 18, 1974 by referring to the action he had taken as being "dismissal
of the complaint against them or their being dropped therefrom", without perceiving that
the reason for the evidently intentional ambiguity is transparent. The apparent idea is to
rely on the theory that under Section 11 of Rule 3, parties may be dropped by the court
upon motion of any party at any stage of the action, hence "it is the absolute right
prerogative of the plaintiff to choose—the parties he desires to sue, without dictation or
imposition by the court or the adverse party." In other words, the ambivalent pose is
suggested that plaintiff's motion of October 18, 1974 was not predicated on Section 2 of
Rule 17 but more on Section 11 of Rule 3. But the truth is that nothing can be more
incorrect. To start with, the latter rule does not comprehend whimsical and irrational
dropping or adding of parties in a complaint. What it really contemplates is erroneous or
mistaken non-joinder and misjoinder of parties. No one is free to join anybody in a
complaint in court only to drop him unceremoniously later at the pleasure of the plaintiff.
The rule presupposes that the original inclusion had been made in the honest conviction

96
that it was proper and the subsequent dropping is requested because it has turned out
that such inclusion was a mistake. And this is the reason why the rule ordains that the
dropping be "on such terms as are just" — just to all the other parties. In the case at
bar, there is nothing in the record to legally justify the dropping of the non-defaulted
defendants, Lim and Leonardo. The motion of October 18, 1974 cites none. From all
appearances, plaintiff just decided to ask for it, without any relevant explanation at all.
Usually, the court in granting such a motion inquires for the reasons and in the
appropriate instances directs the granting of some form of compensation for the trouble
undergone by the defendant in answering the complaint, preparing for or proceeding
partially to trial, hiring counsel and making corresponding expenses in the premises.
Nothing of these, appears in the order in question. Most importantly, His Honor ought to
have considered that the outright dropping of the non-defaulted defendants Lim and
Leonardo, over their objection at that, would certainly be unjust not only to the
petitioners, their own parents, who would in consequence be entirely defenseless, but
also to Lim and Leonardo themselves who would naturally correspondingly suffer from
the eventual judgment against their parents. Respondent court paid no heed at all to the
mandate that such dropping must be on such terms as are just" — meaning to all
concerned with its legal and factual effects.

Thus, it is quite plain that respondent court erred in issuing its order of dismissal of
October 21, 1974 as well as its order of December 6, 1974 denying reconsideration of
such dismissal. As We make this ruling, We are not oblivious of the circumstance that
defendants Lim and Leonardo are not parties herein. But such consideration is
inconsequential. The fate of the case of petitioners is inseparably tied up with said order
of dismissal, if only because the order of ex-parte hearing of October 21, 1974 which
directly affects and prejudices said petitioners is predicated thereon. Necessarily,
therefore, We have to pass on the legality of said order, if We are to decide the case of
herein petitioners properly and fairly.

The attitude of the non-defaulted defendants of no longer pursuing further their

questioning of the dismissal is from another point of view understandable. On the one
hand, why should they insist on being defendants when plaintiff herself has already
release from her claims? On the other hand, as far as their respective parents-co-
defendants are concerned, they must have realized that they (their parents) could even
be benefited by such dismissal because they could question whether or not plaintiff can
still prosecute her case against them after she had secured the order of dismissal in
question. And it is in connection with this last point that the true and correct concept of
default becomes relevant.

At this juncture, it may also be stated that the decision of the Court of Appeals of
January 24, 1975 in G. R. No. SP-03066 dismissing the petition for certiorari of non-
defaulted defendants Lim and Leonardo impugning the order of dismissal of October 21,
1974, has no bearing at all in this case, not only because that dismissal was premised
by the appellate court on its holding that the said petition was premature inasmuch as
the trial court had not yet resolved the motion of the defendants of October 28, 1974
praying that said disputed order be quashed, but principally because herein petitioners

97
were not parties in that proceeding and cannot, therefore, be bound by its result. In
particular, We deem it warranted to draw the attention of private respondent's counsel to
his allegations in paragraphs XI to XIV of his answer, which relate to said decision of the
Court of Appeals and which have the clear tendency to make it appear to the Court that
the appeals court had upheld the legality and validity of the actuations of the trial court
being questioned, when as a matter of indisputable fact, the dismissal of the petition
was based solely and exclusively on its being premature without in any manner delving
into its merits. The Court must and does admonish counsel that such manner of
pleading, being deceptive and lacking in candor, has no place in any court, much less in
the Supreme Court, and if We are adopting a passive attitude in the premises, it is due
only to the fact that this is counsel's first offense. But similar conduct on his part in the
future will definitely be dealt with more severely. Parties and counsel would be well
advised to avoid such attempts to befuddle the issues as invariably then will be exposed
for what they are, certainly unethical and degrading to the dignity of the law profession.
Moreover, almost always they only betray the inherent weakness of the cause of the
party resorting to them.

–2–

Coming now to the matter itself of default, it is quite apparent that the impugned orders
must have proceeded from inadequate apprehension of the fundamental precepts
governing such procedure under the Rules of Court. It is time indeed that the concept of
this procedural device were fully understood by the bench and bar, instead of being
merely taken for granted as being that of a simple expedient of not allowing the
offending party to take part in the proceedings, so that after his adversary shall have
presented his evidence, judgment may be rendered in favor of such opponent, with
hardly any chance of said judgment being reversed or modified.

The Rules of Court contain a separate rule on the subject of default, Rule 18. But said
rule is concerned solely with default resulting from failure of the defendant or
defendants to answer within the reglementary period. Referring to the simplest form of
default, that is, where there is only one defendant in the action and he fails to answer on
time, Section 1 of the rule provides that upon "proof of such failure, (the court shall)
declare the defendant in default. Thereupon the court shall proceed to receive the
plaintiff's evidence and render judgment granting him such relief as the complaint and
the facts proven may warrant." This last clause is clarified by Section 5 which says that
"a judgment entered against a party in default shall not exceed the amount or be
different in kind from that prayed for."

Unequivocal, in the literal sense, as these provisions are, they do not readily convey the
full import of what they contemplate. To begin with, contrary to the immediate notion
that can be drawn from their language, these provisions are not to be understood as
meaning that default or the failure of the defendant to answer should be "interpreted as
an admission by the said defendant that the plaintiff's cause of action find support in the
law or that plaintiff is entitled to the relief prayed for." (Moran, supra, p. 535 citing
Macondary & Co. v. Eustaquio, 64 Phil. 466, citing with approval Chaffin v. McFadden,

98
41 Ark. 42; Johnson v. Pierce, 12 Ark. 599; Mayden v. Johnson, 59 Ga. 105; People v.
Rust, 292 111. 328; Ken v. Leopold 21 111. A. 163; Chicago, etc. Electric R. Co. v.
Krempel 116 111. A. 253.)

Being declared in default does not constitute a waiver of rights except that of being
heard and of presenting evidence in the trial court. According to Section 2, "except as
provided in Section 9 of Rule 13, a party declared in default shall not be entitled to
notice of subsequent proceedings, nor to take part in the trial." That provision referred to
reads: "No service of papers other than substantially amended pleadings and final
orders or judgments shall be necessary on a party in default unless he files a motion to
set aside the order of default, in which event he shall be entitled to notice of all further
proceedings regardless of whether the order of default is set aside or not." And pursuant
to Section 2 of Rule 41, "a party who has been declared in default may likewise appeal
from the judgment rendered against him as contrary to the evidence or to the law, even
if no petition for relief to set aside the order of default has been presented by him in
accordance with Rule 38.".

In other words, a defaulted defendant is not actually thrown out of court. While in a
sense it may be said that by defaulting he leaves himself at the mercy of the court, the
rules see to it that any judgment against him must be in accordance with law. The
evidence to support the plaintiff's cause is, of course, presented in his absence, but the
court is not supposed to admit that which is basically incompetent. Although the
defendant would not be in a position to object, elementary justice requires that, only
legal evidence should be considered against him. If the evidence presented should not
be sufficient to justify a judgment for the plaintiff, the complaint must be dismissed. And
if an unfavorable judgment should be justifiable, it cannot exceed in amount or be
different in kind from what is prayed for in the complaint.

Incidentally, these considerations argue against the present widespread practice of trial
judges, as was done by His Honor in this case, of delegating to their clerks of court the
reception of the plaintiff's evidence when the defendant is in default. Such a Practice is
wrong in principle and orientation. It has no basis in any rule. When a defendant allows
himself to be declared in default, he relies on the faith that the court would take care
that his rights are not unduly prejudiced. He has a right to presume that the law and the
rules will still be observed. The proceedings are held in his forced absence, and it is but
fair that the plaintiff should not be allowed to take advantage of the situation to win by
foul or illegal means or with inherently incompetent evidence. Thus, in such instances,
there is need for more attention from the court, which only the judge himself can
provide. The clerk of court would not be in a position much less have the authority to act
in the premises in the manner demanded by the rules of fair play and as contemplated
in the law, considering his comparably limited area of discretion and his presumably
inferior preparation for the functions of a judge. Besides, the default of the defendant is
no excuse for the court to renounce the opportunity to closely observe the demeanor
and conduct of the witnesses of the plaintiff, the better to appreciate their truthfulness
and credibility. We therefore declare as a matter of judicial policy that there being no
imperative reason for judges to do otherwise, the practice should be discontinued.

99
Another matter of practice worthy of mention at this point is that it is preferable to leave
enough opportunity open for possible lifting of the order of default before proceeding
with the reception of the plaintiff's evidence and the rendition of the decision. "A
judgment by default may amount to a positive and considerable injustice to the
defendant; and the possibility of such serious consequences necessitates a careful and
liberal examination of the grounds upon which the defendant may seek to set it aside."
(Moran, supra p. 534, citing Coombs vs. Santos, 24 Phil. 446; 449-450.) The
expression, therefore, in Section 1 of Rule 18 aforequoted which says that "thereupon
the court shall proceed to receive the plaintiff's evidence etc." is not to be taken literally.
The gain in time and dispatch should the court immediately try the case on the very day
of or shortly after the declaration of default is far outweighed by the inconvenience and
complications involved in having to undo everything already done in the event the
defendant should justify his omission to answer on time.

The foregoing observations, as may be noted, refer to instances where the only
defendant or all the defendants, there being several, are declared in default. There are
additional rules embodying more considerations of justice and equity in cases where
there are several defendants against whom a common cause of action is averred and
not all of them answer opportunely or are in default, particularly in reference to the
power of the court to render judgment in such situations. Thus, in addition to the
limitation of Section 5 that the judgment by default should not be more in amount nor
different in kind from the reliefs specifically sought by plaintiff in his complaint, Section 4
restricts the authority of the court in rendering judgment in the situations just mentioned
as follows:

Sec. 4. Judgment when some defendants answer, and other make

difficult. — When a complaint states a common cause of action against
several defendant some of whom answer, and the others fail to do so, the
court shall try the case against all upon the answer thus filed and render
judgment upon the evidence presented. The same proceeding applies
when a common cause of action is pleaded in a counterclaim, cross-claim
and third-party claim.

Very aptly does Chief Justice Moran elucidate on this provision and the controlling
jurisprudence explanatory thereof this wise:

Where a complaint states a common cause of action against several

defendants and some appear to defend the case on the merits while
others make default, the defense interposed by those who appear to
litigate the case inures to the benefit of those who fail to appear, and if the
court finds that a good defense has been made, all of the defendants must
be absolved. In other words, the answer filed by one or some of the
defendants inures to the benefit of all the others, even those who have not
seasonably filed their answer. (Bueno v. Ortiz, L-22978, June 27, 1968, 23
SCRA 1151.) The proper mode of proceeding where a complaint states a
common cause of action against several defendants, and one of them

100
makes default, is simply to enter a formal default order against him, and
proceed with the cause upon the answers of the others. The defaulting
defendant merely loses his standing in court, he not being entitled to the
service of notice in the cause, nor to appear in the suit in any way. He
cannot adduce evidence; nor can he be heard at the final hearing, (Lim
Toco v. Go Fay, 80 Phil. 166.) although he may appeal the judgment
rendered against him on the merits. (Rule 41, sec. 2.) If the case is finally
decided in the plaintiff's favor, a final decree is then entered against all the
defendants; but if the suit should be decided against the plaintiff, the
action will be dismissed as to all the defendants alike. (Velez v. Ramas, 40
Phil. 787-792; Frow v. de la Vega, 15 Wal. 552,21 L. Ed. 60.) In other
words the judgment will affect the defaulting defendants either favorably or
adversely. (Castro v. Peña, 80 Phil. 488.)

Defaulting defendant may ask execution if judgment is in his favor. (Castro

v. Peña, supra.) (Moran, Rules of Court, Vol. 1, pp. 538-539.)

In Castro vs. Peña, 80 Phil. 488, one of the numerous cases cited by
Moran, this Court elaborated on the construction of the same rule when it
sanctioned the execution, upon motion and for the benefit of the defendant
in default, of a judgment which was adverse to the plaintiff. The Court
held:

As above stated, Emilia Matanguihan, by her counsel, also was a movant

in the petition for execution Annex 1. Did she have a right to be such,
having been declared in default? In Frow vs. De la Vega, supra, cited as
authority in Velez vs. Ramas, supra, the Supreme Court of the United
States adopted as ground for its own decision the following ruling of the
New York Court of Errors in Clason vs. Morris, 10 Jons., 524:

It would be unreasonable to hold that because one defendant had made

default, the plaintiff should have a decree even against him, where the
court is satisfied from the proofs offered by the other, that in fact the
plaintiff is not entitled to a decree. (21 Law, ed., 61.)

The reason is simple: justice has to be consistent. The complaint stating a

common cause of action against several defendants, the complainant's
rights — or lack of them — in the controversy have to be the same, and
not different, as against all the defendant's although one or some make
default and the other or others appear, join issue, and enter into trial. For
instance, in the case of Clason vs. Morris above cited, the New York Court
of Errors in effect held that in such a case if the plaintiff is not entitled to a
decree, he will not be entitled to it, not only as against the defendant
appearing and resisting his action but also as against the one who made
default. In the case at bar, the cause of action in the plaintiff's complaint
was common against the Mayor of Manila, Emilia Matanguihan, and the

101
other defendants in Civil Case No. 1318 of the lower court. The Court of
First Instance in its judgment found and held upon the evidence adduced
by the plaintiff and the defendant mayor that as between said plaintiff and
defendant Matanguihan the latter was the one legally entitled to occupy
the stalls; and it decreed, among other things, that said plaintiff
immediately vacate them. Paraphrasing the New York Court of Errors, it
would be unreasonable to hold now that because Matanguihan had made
default, the said plaintiff should be declared, as against her, legally entitled
to the occupancy of the stalls, or to remain therein, although the Court of
First Instance was so firmly satisfied, from the proofs offered by the other
defendant, that the same plaintiff was not entitled to such occupancy that
it peremptorily ordered her to vacate the stalls. If in the cases of Clason
vs. Morris, supra, Frow vs. De la Vega, supra, and Velez vs. Ramas,
supra the decrees entered inured to the benefit of the defaulting
defendants, there is no reason why that entered in said case No. 1318
should not be held also to have inured to the benefit of the defaulting
defendant Matanguihan and the doctrine in said three cases plainly
implies that there is nothing in the law governing default which would
prohibit the court from rendering judgment favorable to the defaulting
defendant in such cases. If it inured to her benefit, it stands to reason that
she had a right to claim that benefit, for it would not be a benefit if the
supposed beneficiary were barred from claiming it; and if the benefit
necessitated the execution of the decree, she must be possessed of the
right to ask for the execution thereof as she did when she, by counsel,
participated in the petition for execution Annex 1.

Section 7 of Rule 35 would seem to afford a solid support to the above

considerations. It provides that when a complaint states a common cause
of action against several defendants, some of whom answer, and the
others make default, 'the court shall try the case against all upon the
answer thus filed and render judgment upon the evidence presented by
the parties in court'. It is obvious that under this provision the case is tried
jointly not only against the defendants answering but also against those
defaulting, and the trial is held upon the answer filed by the former; and
the judgment, if adverse, will prejudice the defaulting defendants no less
than those who answer. In other words, the defaulting defendants are held
bound by the answer filed by their co-defendants and by the judgment
which the court may render against all of them. By the same token, and by
all rules of equity and fair play, if the judgment should happen to be
favorable, totally or partially, to the answering defendants, it must
correspondingly benefit the defaulting ones, for it would not be just to let
the judgment produce effects as to the defaulting defendants only when
adverse to them and not when favorable.

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In Bueno vs. Ortiz, 23 SCRA 1151, the Court applied the provision under discussion in
the following words:

In answer to the charge that respondent Judge had committed a grave

abuse of discretion in rendering a default judgment against the PC,
respondents allege that, not having filed its answer within the
reglementary period, the PC was in default, so that it was proper for
Patanao to forthwith present his evidence and for respondent Judge to
render said judgment. It should be noted, however, that in entering the
area in question and seeking to prevent Patanao from continuing his
logging operations therein, the PC was merely executing an order of the
Director of Forestry and acting as his agent. Patanao's cause of action
against the other respondents in Case No. 190, namely, the Director of
Forestry, the District Forester of Agusan, the Forest Officer of Bayugan,
Agusan, and the Secretary of Agriculture and Natural Resources.
Pursuant to Rule 18, Section 4, of the Rules of Court, 'when a complaint
states a common cause of action against several defendants some of
whom answer and the others fail to do so, the court shall try the case
against all upon the answer thus filed (by some) and render judgment
upon the evidence presented.' In other words, the answer filed by one or
some of the defendants inures to the benefit of all the others, even those
who have not seasonably filed their answer.

Indeed, since the petition in Case No. 190 sets forth a common cause of
action against all of the respondents therein, a decision in favor of one of
them would necessarily favor the others. In fact, the main issue, in said
case, is whether Patanao has a timber license to undertake logging
operations in the disputed area. It is not possible to decide such issue in
the negative, insofar as the Director of Forestry, and to settle it otherwise,
as regards the PC, which is merely acting as agent of the Director of
Forestry, and is, therefore, his alter ego, with respect to the disputed forest
area.

Stated differently, in all instances where a common cause of action is alleged against
several defendants, some of whom answer and the others do not, the latter or those in
default acquire a vested right not only to own the defense interposed in the answer of
their co- defendant or co-defendants not in default but also to expect a result of the
litigation totally common with them in kind and in amount whether favorable or
unfavorable. The substantive unity of the plaintiff's cause against all the defendants is
carried through to its adjective phase as ineluctably demanded by the homogeneity and
indivisibility of justice itself. Indeed, since the singleness of the cause of action also
inevitably implies that all the defendants are indispensable parties, the court's power to
act is integral and cannot be split such that it cannot relieve any of them and at the
same time render judgment against the rest. Considering the tenor of the section in
question, it is to be assumed that when any defendant allows himself to be declared in
default knowing that his defendant has already answered, he does so trusting in the

103
assurance implicit in the rule that his default is in essence a mere formality that deprives
him of no more than the right to take part in the trial and that the court would deem
anything done by or for the answering defendant as done by or for him. The
presumption is that otherwise he would not -have seen to that he would not be in
default. Of course, he has to suffer the consequences of whatever the answering
defendant may do or fail to do, regardless of possible adverse consequences, but if the
complaint has to be dismissed in so far as the answering defendant is concerned it
becomes his inalienable right that the same be dismissed also as to him. It does not
matter that the dismissal is upon the evidence presented by the plaintiff or upon the
latter's mere desistance, for in both contingencies, the lack of sufficient legal basis must
be the cause. The integrity of the common cause of action against all the defendants
and the indispensability of all of them in the proceedings do not permit any possibility of
waiver of the plaintiff's right only as to one or some of them, without including all of
them, and so, as a rule, withdrawal must be deemed to be a confession of weakness as
to all. This is not only elementary justice; it also precludes the concomitant hazard that
plaintiff might resort to the kind of procedural strategem practiced by private respondent
herein that resulted in totally depriving petitioners of every opportunity to defend
themselves against her claims which, after all, as will be seen later in this opinion, the
record does not show to be invulnerable, both in their factual and legal aspects, taking
into consideration the tenor of the pleadings and the probative value of the competent
evidence which were before the trial court when it rendered its assailed decision where
all the defendants are indispensable parties, for which reason the absence of any of
them in the case would result in the court losing its competency to act validly, any
compromise that the plaintiff might wish to make with any of them must, as a matter of
correct procedure, have to await until after the rendition of the judgment, at which stage
the plaintiff may then treat the matter of its execution and the satisfaction of his claim as
variably as he might please. Accordingly, in the case now before Us together with the
dismissal of the complaint against the non-defaulted defendants, the court should have
ordered also the dismissal thereof as to petitioners.

Indeed, there is more reason to apply here the principle of unity and indivisibility of the
action just discussed because all the defendants here have already joined genuine
issues with plaintiff. Their default was only at the pre-trial. And as to such absence of
petitioners at the pre-trial, the same could be attributed to the fact that they might not
have considered it necessary anymore to be present, since their respective children Lim
and Leonardo, with whom they have common defenses, could take care of their
defenses as well. Anything that might have had to be done by them at such pre-trial
could have been done for them by their children, at least initially, specially because in
the light of the pleadings before the court, the prospects of a compromise must have
appeared to be rather remote. Such attitude of petitioners is neither uncommon nor
totally unjustified. Under the circumstances, to declare them immediately and
irrevocably in default was not an absolute necessity. Practical considerations and
reasons of equity should have moved respondent court to be more understanding in
dealing with the situation. After all, declaring them in default as respondent court did not
impair their right to a common fate with their children.

104
–3–

Another issue to be resolved in this case is the question of whether or not herein
petitioners were entitled to notice of plaintiff's motion to drop their co-defendants Lim
and Leonardo, considering that petitioners had been previously declared in default. In
this connection, the decisive consideration is that according to the applicable rule,
Section 9, Rule 13, already quoted above, (1) even after a defendant has been declared
in default, provided he "files a motion to set aside the order of default, — he shall be
entitled to notice of all further proceedings regardless of whether the order of default is
set aside or not" and (2) a party in default who has not filed such a motion to set aside
must still be served with all "substantially amended or supplemented pleadings." In the
instant case, it cannot be denied that petitioners had all filed their motion for
reconsideration of the order declaring them in default. Respondents' own answer to the
petition therein makes reference to the order of April 3, 1973, Annex 8 of said answer,
which denied said motion for reconsideration. On page 3 of petitioners' memorandum
herein this motion is referred to as "a motion to set aside the order of default." But as
We have not been favored by the parties with a copy of the said motion, We do not
even know the excuse given for petitioners' failure to appear at the pre-trial, and We
cannot, therefore, determine whether or not the motion complied with the requirements
of Section 3 of Rule 18 which We have held to be controlling in cases of default for
failure to answer on time. (The Philippine-British Co. Inc. etc. et al. vs. The Hon.
Walfrido de los Angeles etc. et al., 63 SCRA 50.)

We do not, however, have here, as earlier noted, a case of default for failure to answer
but one for failure to appear at the pre-trial. We reiterate, in the situation now before Us,
issues have already been joined. In fact, evidence had been partially offered already at
the pre-trial and more of it at the actual trial which had already begun with the first
witness of the plaintiff undergoing re-cross-examination. With these facts in mind and
considering that issues had already been joined even as regards the defaulted
defendants, it would be requiring the obvious to pretend that there was still need for an
oath or a verification as to the merits of the defense of the defaulted defendants in their
motion to reconsider their default. Inasmuch as none of the parties had asked for a
summary judgment there can be no question that the issues joined were genuine, and
consequently, the reason for requiring such oath or verification no longer holds.
Besides, it may also be reiterated that being the parents of the non-defaulted
defendants, petitioners must have assumed that their presence was superfluous,
particularly because the cause of action against them as well as their own defenses are
common. Under these circumstances, the form of the motion by which the default was
sought to be lifted is secondary and the requirements of Section 3 of Rule 18 need not
be strictly complied with, unlike in cases of default for failure to answer. We can thus
hold as We do hold for the purposes of the revival of their right to notice under Section 9
of Rule 13, that petitioner's motion for reconsideration was in substance legally
adequate regardless of whether or not it was under oath.

In any event, the dropping of the defendants Lim and Leonardo from plaintiff's amended
complaint was virtually a second amendment of plaintiffs complaint. And there can be

105
no doubt that such amendment was substantial, for with the elimination thereby of two
defendants allegedly solidarily liable with their co-defendants, herein petitioners, it had
the effect of increasing proportionally what each of the remaining defendants, the said
petitioners, would have to answer for jointly and severally. Accordingly, notice to
petitioners of the plaintiff's motion of October 18, 1974 was legally indispensable under
the rule above-quoted. Consequently, respondent court had no authority to act on the
motion, to dismiss, pursuant to Section 6 of Rule 15, for according to Senator Francisco,
"(t) he Rules of Court clearly provide that no motion shall be acted upon by the Court
without the proof of service of notice thereof, together with a copy of the motion and
other papers accompanying it, to all parties concerned at least three days before the
hearing thereof, stating the time and place for the hearing of the motion. (Rule 26,
section 4, 5 and 6, Rules of Court (now Sec. 15, new Rules). When the motion does not
comply with this requirement, it is not a motion. It presents no question which the court
could decide. And the Court acquires no jurisdiction to consider it. (Roman Catholic
Bishop of Lipa vs. Municipality of Unisan 44 Phil., 866; Manakil vs. Revilla, 42 Phil., 81.)
(Laserna vs. Javier, et al., CA-G.R. No. 7885, April 22, 1955; 21 L.J. 36, citing Roman
Catholic Bishop of Lipa vs. Municipality of Unisan 44 Phil., 866; Manakil vs. Revilla, 42
Phil., 81.) (Francisco. The Revised Rules of Court in the Philippines, pp. 861-862.)
Thus, We see again, from a different angle, why respondent court's order of dismissal of
October 21, 1974 is fatally ineffective.

–4–

The foregoing considerations notwithstanding, it is respondents' position that certiorari is

not the proper remedy of petitioners. It is contended that inasmuch as said petitioners
have in fact made their appeal already by filing the required notice of appeal and appeal
bond and a motion for extension to file their record on appeal, which motion was
granted by respondent court, their only recourse is to prosecute that appeal.
Additionally, it is also maintained that since petitioners have expressly withdrawn their
motion to quash of January 4, 1975 impugning the order of October 28, 1974, they have
lost their right to assail by certiorari the actuations of respondent court now being
questioned, respondent court not having been given the opportunity to correct any
possible error it might have committed.

We do not agree. As already shown in the foregoing discussion, the proceedings in the
court below have gone so far out of hand that prompt action is needed to restore order
in the entangled situation created by the series of plainly illegal orders it had issued.
The essential purpose of certiorari is to keep the proceedings in lower judicial courts
and tribunals within legal bounds, so that due process and the rule of law may prevail at
all times and arbitrariness, whimsicality and unfairness which justice abhors may
immediately be stamped out before graver injury, juridical and otherwise, ensues. While
generally these objectives may well be attained in an ordinary appeal, it is undoubtedly
the better rule to allow the special remedy of certiorari at the option of the party
adversely affected, when the irregularity committed by the trial court is so grave and so
far reaching in its consequences that the long and cumbersome procedure of appeal will
only further aggravate the situation of the aggrieved party because other untoward

106
actuations are likely to materialize as natural consequences of those already
perpetrated. If the law were otherwise, certiorari would have no reason at all for being.

No elaborate discussion is needed to show the urgent need for corrective measures in
the case at bar. Verily, this is one case that calls for the exercise of the Supreme Court's
inherent power of supervision over all kinds of judicial actions of lower courts. Private
respondent's procedural technique designed to disable petitioners to defend themselves
against her claim which appears on the face of the record itself to be at least highly
controversial seems to have so fascinated respondent court that none would be
surprised should her pending motion for immediate execution of the impugned judgment
receive similar ready sanction as her previous motions which turned the proceedings
into a one-sided affair. The stakes here are high. Not only is the subject matter
considerably substantial; there is the more important aspect that not only the spirit and
intent of the rules but even the basic rudiments of fair play have been disregarded. For
the Court to leave unrestrained the obvious tendency of the proceedings below would
be nothing short of wittingly condoning inequity and injustice resulting from erroneous
construction and unwarranted application of procedural rules.

–5–

The sum and total of all the foregoing disquisitions is that the decision here in question
is legally anomalous. It is predicated on two fatal malactuations of respondent court
namely (1) the dismissal of the complaint against the non-defaulted defendants Lim and
Leonardo and (2) the ex-parte reception of the evidence of the plaintiff by the clerk of
court, the subsequent using of the same as basis for its judgment and the rendition of
such judgment.

For at least three reasons which We have already fully discussed above, the order of
dismissal of October 21, 1974 is unworthy of Our sanction: (1) there was no timely
notice of the motion therefor to the non-defaulted defendants, aside from there being no
notice at all to herein petitioners; (2) the common answer of the defendants, including
the non-defaulted, contained a compulsory counterclaim incapable of being determined
in an independent action; and (3) the immediate effect of such dismissal was the
removal of the two non-defaulted defendants as parties, and inasmuch as they are both
indispensable parties in the case, the court consequently lost the" sine qua non of the
exercise of judicial power", per Borlasa vs. Polistico, supra. This is not to mention
anymore the irregular delegation to the clerk of court of the function of receiving
plaintiff's evidence. And as regards the ex-parte reception of plaintiff's evidence and
subsequent rendition of the judgment by default based thereon, We have seen that it
was violative of the right of the petitioners, under the applicable rules and principles on
default, to a common and single fate with their non-defaulted co-defendants. And We
are not yet referring, as We shall do this anon to the numerous reversible errors in the
decision itself.

It is to be noted, however, that the above-indicated two fundamental flaws in respondent

court's actuations do not call for a common corrective remedy. We cannot simply rule

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that all the impugned proceedings are null and void and should be set aside, without
being faced with the insurmountable obstacle that by so doing We would be reviewing
the case as against the two non-defaulted defendants who are not before Us not being
parties hereto. Upon the other hand, for Us to hold that the order of dismissal should be
allowed to stand, as contended by respondents themselves who insist that the same is
already final, not only because the period for its finality has long passed but also
because allegedly, albeit not very accurately, said 'non-defaulted defendants
unsuccessfully tried to have it set aside by the Court of Appeals whose decision on their
petition is also already final, We would have to disregard whatever evidence had been
presented by the plaintiff against them and, of course, the findings of respondent court
based thereon which, as the assailed decision shows, are adverse to them. In other
words, whichever of the two apparent remedies the Court chooses, it would necessarily
entail some kind of possible juridical imperfection. Speaking of their respective practical
or pragmatic effects, to annul the dismissal would inevitably prejudice the rights of the
non-defaulted defendants whom We have not heard and who even respondents would
not wish to have anything anymore to do with the case. On the other hand, to include
petitioners in the dismissal would naturally set at naught every effort private respondent
has made to establish or prove her case thru means sanctioned by respondent court. In
short, We are confronted with a legal para-dilemma. But one thing is certain — this
difficult situations has been brought about by none other than private respondent who
has quite cynically resorted to procedural maneuvers without realizing that the
technicalities of the adjective law, even when apparently accurate from the literal point
of view, cannot prevail over the imperatives of the substantive law and of equity that
always underlie them and which have to be inevitably considered in the construction of
the pertinent procedural rules.

All things considered, after careful and mature deliberation, the Court has arrived at the
conclusion that as between the two possible alternatives just stated, it would only be
fair, equitable and proper to uphold the position of petitioners. In other words, We rule
that the order of dismissal of October 21, 1974 is in law a dismissal of the whole case of
the plaintiff, including as to petitioners herein. Consequently, all proceedings held by
respondent court subsequent thereto including and principally its decision of December
20, 1974 are illegal and should be set aside.

This conclusion is fully justified by the following considerations of equity:

1. It is very clear to Us that the procedural maneuver resorted to by private respondent

in securing the decision in her favor was ill-conceived. It was characterized by that
which every principle of law and equity disdains — taking unfair advantage of the rules
of procedure in order to unduly deprive the other party of full opportunity to defend his
cause. The idea of "dropping" the non-defaulted defendants with the end in view of
completely incapacitating their co-defendants from making any defense, without
considering that all of them are indispensable parties to a common cause of action to
which they have countered with a common defense readily connotes an intent to secure
a one-sided decision, even improperly. And when, in this connection, the obvious
weakness of plaintiff's evidence is taken into account, one easily understands why such

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tactics had to be availed of. We cannot directly or indirectly give Our assent to the
commission of unfairness and inequity in the application of the rules of procedure,
particularly when the propriety of reliance thereon is not beyond controversy.

2. The theories of remedial law pursued by private respondents, although approved by

His Honor, run counter to such basic principles in the rules on default and such
elementary rules on dismissal of actions and notice of motions that no trial court should
be unaware of or should be mistaken in applying. We are at a loss as to why His Honor
failed to see through counsel's inequitous strategy, when the provisions (1) on the three-
day rule on notice of motions, Section 4 of Rule 15, (2) against dismissal of actions on
motion of plaintiff when there is a compulsory counterclaim, Section 2, Rule 17, (3)
against permitting the absence of indispensable parties, Section 7, Rule 3, (4) on
service of papers upon defendants in default when there are substantial amendments to
pleadings, Section 9, Rule 13, and (5) on the unity and integrity of the fate of defendants
in default with those not in default where the cause of action against them and their own
defenses are common, Section 4, Rule 18, are so plain and the jurisprudence
declaratory of their intent and proper construction are so readily comprehensible that
any error as to their application would be unusual in any competent trial court.

3. After all, all the malactuations of respondent court are traceable to the initiative of
private respondent and/or her counsel. She cannot, therefore, complain that she is
being made to unjustifiably suffer the consequences of what We have found to be
erroneous orders of respondent court. It is only fair that she should not be allowed to
benefit from her own frustrated objective of securing a one-sided decision.

4. More importantly, We do not hesitate to hold that on the basis of its own recitals, the
decision in question cannot stand close scrutiny. What is more, the very considerations
contained therein reveal convincingly the inherent weakness of the cause of the plaintiff.
To be sure, We have been giving serious thought to the idea of merely returning this
case for a resumption of trial by setting aside the order of dismissal of October 21,
1974, with all its attendant difficulties on account of its adverse effects on parties who
have not been heard, but upon closer study of the pleadings and the decision and other
circumstances extant in the record before Us, We are now persuaded that such a
course of action would only lead to more legal complications incident to attempts on the
part of the parties concerned to desperately squeeze themselves out of a bad situation.
Anyway, We feel confident that by and large, there is enough basis here and now for Us
to rule out the claim of the plaintiff.

Even a mere superficial reading of the decision would immediately reveal that it is
littered on its face with deficiencies and imperfections which would have had no reason
for being were there less haste and more circumspection in rendering the same.
Recklessness in jumping to unwarranted conclusions, both factual and legal, is at once
evident in its findings relative precisely to the main bases themselves of the reliefs
granted. It is apparent therein that no effort has been made to avoid glaring
inconsistencies. Where references are made to codal provisions and jurisprudence,
inaccuracy and inapplicability are at once manifest. It hardly commends itself as a

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deliberate and consciencious adjudication of a litigation which, considering the
substantial value of the subject matter it involves and the unprecedented procedure that
was followed by respondent's counsel, calls for greater attention and skill than the
general run of cases would.

Inter alia, the following features of the decision make it highly improbable that if We took
another course of action, private respondent would still be able to make out any case
against petitioners, not to speak of their co-defendants who have already been
exonerated by respondent herself thru her motion to dismiss:

1. According to His Honor's own statement of plaintiff's case, "she is the widow of the
late Tee Hoon Po Chuan (Po Chuan, for short) who was then one of the partners in the
commercial partnership, Glory Commercial Co. with defendants Antonio Lim Tanhu (Lim
Tanhu, for short) and Alfonso Leonardo Ng Sua (Ng Sua, for short) as co-partners; that
after the death of her husband on March 11, 1966 she is entitled to share not only in the
capital and profits of the partnership but also in the other assets, both real and personal,
acquired by the partnership with funds of the latter during its lifetime."

Relatedly, in the latter part of the decision, the findings are to the following effect: .

That the herein plaintiff Tan Put and her late husband Po Chuan married
at the Philippine Independent Church of Cebu City on December, 20,
1949; that Po Chuan died on March 11, 1966; that the plaintiff and the late
Po Chuan were childless but the former has a foster son Antonio Nuñez
whom she has reared since his birth with whom she lives up to the
present; that prior to the marriage of the plaintiff to Po Chuan the latter
was already managing the partnership Glory Commercial Co. then
engaged in a little business in hardware at Manalili St., Cebu City; that
prior to and just after the marriage of the plaintiff to Po Chuan she was
engaged in the drugstore business; that not long after her marriage, upon
the suggestion of Po Chuan the plaintiff sold her drugstore for
P125,000.00 which amount she gave to her husband in the presence of
defendant Lim Tanhu and was invested in the partnership Glory
Commercial Co. sometime in 1950; that after the investment of the above-
stated amount in the partnership its business flourished and it embarked in
the import business and also engaged in the wholesale and retail trade of
cement and GI sheets and under huge profits;

xxx xxx xxx

That the late Po Chuan was the one who actively managed the business
of the partnership Glory Commercial Co. he was the one who made the
final decisions and approved the appointments of new personnel who
were taken in by the partnership; that the late Po Chuan and defendants
Lim Tanhu and Ng Sua are brothers, the latter two (2) being the elder
brothers of the former; that defendants Lim Tanhu and Ng Sua are both

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 naturalized Filipino citizens whereas the late Po Chuan until the time of his
death was a Chinese citizen; that the three (3) brothers were partners in
the Glory Commercial Co. but Po Chuan was practically the owner of the
partnership having the controlling interest; that defendants Lim Tanhu and
Ng Sua were partners in name but they were mere employees of Po
Chuan .... (Pp. 89-91, Record.)

How did His Honor arrive at these conclusions? To start with, it is not clear in the
decision whether or not in making its findings of fact the court took into account the
allegations in the pleadings of the parties and whatever might have transpired at the
pre-trial. All that We can gather in this respect is that references are made therein to
pre-trial exhibits and to Annex A of the answer of the defendants to plaintiff's amended
complaint. Indeed, it was incumbent upon the court to consider not only the evidence
formally offered at the trial but also the admissions, expressed or implied, in the
pleadings, as well as whatever might have been placed before it or brought to its
attention during the pre-trial. In this connection, it is to be regretted that none of the
parties has thought it proper to give Us an idea of what took place at the pre-trial of the
present case and what are contained in the pre-trial order, if any was issued pursuant to
Section 4 of Rule 20.

The fundamental purpose of pre-trial, aside from affording the parties every opportunity
to compromise or settle their differences, is for the court to be apprised of the unsettled
issues between the parties and of their respective evidence relative thereto, to the end
that it may take corresponding measures that would abbreviate the trial as much as
possible and the judge may be able to ascertain the facts with the least observance of
technical rules. In other words whatever is said or done by the parties or their counsel at
the pre- trial serves to put the judge on notice of their respective basic positions, in
order that in appropriate cases he may, if necessary in the interest of justice and a more
accurate determination of the facts, make inquiries about or require clarifications of
matters taken up at the pre-trial, before finally resolving any issue of fact or of law. In
brief, the pre-trial constitutes part and parcel of the proceedings, and hence, matters
dealt with therein may not be disregarded in the process of decision making. Otherwise,
the real essence of compulsory pre-trial would be insignificant and worthless.

Now, applying these postulates to the findings of respondent court just quoted, it will be
observed that the court's conclusion about the supposed marriage of plaintiff to the
deceased Tee Hoon Lim Po Chuan is contrary to the weight of the evidence brought
before it during the trial and the pre-trial.

Under Article 55 of the Civil Code, the declaration of the contracting parties that they
take each other as husband and wife "shall be set forth in an instrument" signed by the
parties as well as by their witnesses and the person solemnizing the marriage.
Accordingly, the primary evidence of a marriage must be an authentic copy of the
marriage contract. While a marriage may also be proved by other competent evidence,
the absence of the contract must first be satisfactorily explained. Surely, the certification
of the person who allegedly solemnized a marriage is not admissible evidence of such

111
marriage unless proof of loss of the contract or of any other satisfactory reason for its
non-production is first presented to the court. In the case at bar, the purported
certification issued by a Mons. Jose M. Recoleto, Bishop, Philippine Independent
Church, Cebu City, is not, therefore, competent evidence, there being absolutely no
showing as to unavailability of the marriage contract and, indeed, as to the authenticity
of the signature of said certifier, the jurat allegedly signed by a second assistant
provincial fiscal not being authorized by law, since it is not part of the functions of his
office. Besides, inasmuch as the bishop did not testify, the same is hearsay.

As regards the testimony of plaintiff herself on the same point and that of her witness
Antonio Nuñez, there can be no question that they are both self-serving and of very little
evidentiary value, it having been disclosed at the trial that plaintiff has already assigned
all her rights in this case to said Nuñez, thereby making him the real party in interest
here and, therefore, naturally as biased as herself. Besides, in the portion of the
testimony of Nuñez copied in Annex C of petitioner's memorandum, it appears admitted
that he was born only on March 25, 1942, which means that he was less than eight
years old at the supposed time of the alleged marriage. If for this reason alone, it is
extremely doubtful if he could have been sufficiently aware of such event as to be
competent to testify about it.

Incidentally, another Annex C of the same memorandum purports to be the certificate of

birth of one Antonio T. Uy supposed to have been born on March 23, 1937 at Centro
Misamis, Misamis Occidental, the son of one Uy Bien, father, and Tan Put, mother.
Significantly, respondents have not made any adverse comment on this document. It is
more likely, therefore, that the witness is really the son of plaintiff by her husband Uy
Kim Beng. But she testified she was childless. So which is which? In any event, if on the
strength of this document, Nuñez is actually the legitimate son of Tan Put and not her
adopted son, he would have been but 13 years old in 1949, the year of her alleged
marriage to Po Chuan, and even then, considering such age, his testimony in regard
thereto would still be suspect.

Now, as against such flimsy evidence of plaintiff, the court had before it, two documents
of great weight belying the pretended marriage. We refer to (1) Exhibit LL, the income
tax return of the deceased Tee Hoon Lim Po Chuan indicating that the name of his wife
was Ang Sick Tin and (2) the quitclaim, Annex A of the answer, wherein plaintiff Tan Put
stated that she had been living with the deceased without benefit of marriage and that
she was his "common-law wife". Surely, these two documents are far more reliable than
all the evidence of the plaintiff put together.

Of course, Exhibit LL is what might be termed as pre-trial evidence. But it is evidence

offered to the judge himself, not to the clerk of court, and should have at least moved
him to ask plaintiff to explain if not rebut it before jumping to the conclusion regarding
her alleged marriage to the deceased, Po Chuan. And in regard to the quitclaim
containing the admission of a common-law relationship only, it is to be observed that
His Honor found that "defendants Lim Tanhu and Ng Sua had the plaintiff execute a
quitclaim on November 29, 1967 (Annex "A", Answer) where they gave plaintiff the

112
amount of P25,000 as her share in the capital and profits of the business of Glory
Commercial Co. which was engaged in the hardware business", without making
mention of any evidence of fraud and misrepresentation in its execution, thereby
indicating either that no evidence to prove that allegation of the plaintiff had been
presented by her or that whatever evidence was actually offered did not produce
persuasion upon the court. Stated differently, since the existence of the quitclaim has
been duly established without any circumstance to detract from its legal import, the
court should have held that plaintiff was bound by her admission therein that she was
the common-law wife only of Po Chuan and what is more, that she had already
renounced for valuable consideration whatever claim she might have relative to the
partnership Glory Commercial Co.

And when it is borne in mind that in addition to all these considerations, there are
mentioned and discussed in the memorandum of petitioners (1) the certification of the
Local Civil Registrar of Cebu City and (2) a similar certification of the Apostolic Prefect
of the Philippine Independent Church, Parish of Sto. Niño, Cebu City, that their
respective official records corresponding to December 1949 to December 1950 do not
show any marriage between Tee Hoon Lim Po Chuan and Tan Put, neither of which
certifications have been impugned by respondent until now, it stands to reason that
plaintiff's claim of marriage is really unfounded. Withal, there is still another document,
also mentioned and discussed in the same memorandum and unimpugned by
respondents, a written agreement executed in Chinese, but purportedly translated into
English by the Chinese Consul of Cebu, between Tan Put and Tee Hoon Lim Po Chuan
to the following effect:

CONSULATE OF THE REPUBLIC OF CHINA Cebu City, Philippines

TRANSLATION

This is to certify that 1, Miss Tan Ki Eng Alias Tan Put, have lived with Mr.
Lim Po Chuan alias TeeHoon since 1949 but it recently occurs that we are
incompatible with each other and are not in the position to keep living
together permanently. With the mutual concurrence, we decided to
terminate the existing relationship of common law-marriage and promised
not to interfere each other's affairs from now on. The Forty Thousand
Pesos (P40,000.00) has been given to me by Mr. Lim Po Chuan for my
subsistence.

Witnesses:

Mr. Lim Beng Guan Mr. Huang Sing Se

Signed on the 10 day of the 7th month of the 54th year of the Republic of
China (corresponding to the year 1965).

(SGD) TAN KI ENG

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 Verified from the records. JORGE TABAR (Pp. 283-284, Record.)

Indeed, not only does this document prove that plaintiff's relation to the deceased was
that of a common-law wife but that they had settled their property interests with the
payment to her of P40,000.

In the light of all these circumstances, We find no alternative but to hold that plaintiff Tan
Put's allegation that she is the widow of Tee Hoon Lim Po Chuan has not been
satisfactorily established and that, on the contrary, the evidence on record convincingly
shows that her relation with said deceased was that of a common-law wife and
furthermore, that all her claims against the company and its surviving partners as well
as those against the estate of the deceased have already been settled and paid. We
take judicial notice of the fact that the respective counsel who assisted the parties in the
quitclaim, Attys. H. Hermosisima and Natalio Castillo, are members in good standing of
the Philippine Bar, with the particularity that the latter has been a member of the
Cabinet and of the House of Representatives of the Philippines, hence, absent any
credible proof that they had allowed themselves to be parties to a fraudulent document
His Honor did right in recognizing its existence, albeit erring in not giving due legal
significance to its contents.

2. If, as We have seen, plaintiff's evidence of her alleged status as legitimate wife of Po
Chuan is not only unconvincing but has been actually overcome by the more competent
and weighty evidence in favor of the defendants, her attempt to substantiate her main
cause of action that defendants Lim Tanhu and Ng Sua have defrauded the partnership
Glory Commercial Co. and converted its properties to themselves is even more dismal.
From the very evidence summarized by His Honor in the decision in question, it is clear
that not an iota of reliable proof exists of such alleged misdeeds.

Of course, the existence of the partnership has not been denied, it is actually admitted
impliedly in defendants' affirmative defense that Po Chuan's share had already been
duly settled with and paid to both the plaintiff and his legitimate family. But the evidence
as to the actual participation of the defendants Lim Tanhu and Ng Sua in the operation
of the business that could have enabled them to make the extractions of funds alleged
by plaintiff is at best confusing and at certain points manifestly inconsistent.

In her amended complaint, plaintiff repeatedly alleged that as widow of Po Chuan she is
entitled to ¹/3 share of the assets and properties of the partnership. In fact, her prayer in
said complaint is, among others, for the delivery to her of such ¹/3 share. His Honor's
statement of the case as well as his findings and judgment are all to that same effect.
But what did she actually try to prove at the ex- parte hearing?

According to the decision, plaintiff had shown that she had money of her own when she
"married" Po Chuan and "that prior to and just after the marriage of the plaintiff to Po
Chuan, she was engaged in the drugstore business; that not long after her marriage,
upon the suggestion of Po Chuan, the plaintiff sold her drugstore for P125,000 which
amount she gave to her husband in the presence of Tanhu and was invested in the

114
partnership Glory Commercial Co. sometime in 1950; that after the investment of the
above-stated amount in the partnership, its business flourished and it embarked in the
import business and also engaged in the wholesale and retail trade of cement and GI
sheets and under (sic) huge profits." (pp. 25-26, Annex L, petition.)

To begin with, this theory of her having contributed of P125,000 to the capital of the
partnership by reason of which the business flourished and amassed all the millions
referred to in the decision has not been alleged in the complaint, and inasmuch as what
was being rendered was a judgment by default, such theory should not have been
allowed to be the subject of any evidence. But inasmuch as it was the clerk of court who
received the evidence, it is understandable that he failed to observe the rule. Then, on
the other hand, if it was her capital that made the partnership flourish, why would she
claim to be entitled to only to ¹/3 of its assets and profits? Under her theory found proven
by respondent court, she was actually the owner of everything, particularly because His
Honor also found "that defendants Lim Tanhu and Ng Sua were partners in the name
but they were employees of Po Chuan that defendants Lim Tanhu and Ng Sua had no
means of livelihood at the time of their employment with the Glory Commercial Co.
under the management of the late Po Chuan except their salaries therefrom; ..." (p.
27, id.) Why then does she claim only ¹/3 share? Is this an indication of her generosity
towards defendants or of a concocted cause of action existing only in her confused
imagination engendered by the death of her common-law husband with whom she had
settled her common-law claim for recompense of her services as common law wife for
less than what she must have known would go to his legitimate wife and children?

Actually, as may be noted from the decision itself, the trial court was confused as to the
participation of defendants Lim Tanhu and Ng Sua in Glory Commercial Co. At one
point, they were deemed partners, at another point mere employees and then
elsewhere as partners-employees, a newly found concept, to be sure, in the law on
partnership. And the confusion is worse comfounded in the judgment which allows
these "partners in name" and "partners-employees" or employees who had no means of
livelihood and who must not have contributed any capital in the business, "as Po Chuan
was practically the owner of the partnership having the controlling interest", ¹/3 each of
the huge assets and profits of the partnership. Incidentally, it may be observed at this
juncture that the decision has made Po Chuan play the inconsistent role of being
"practically the owner" but at the same time getting his capital from the P125,000 given
to him by plaintiff and from which capital the business allegedly "flourished."

Anent the allegation of plaintiff that the properties shown by her exhibits to be in the
names of defendants Lim Tanhu and Ng Sua were bought by them with partnership
funds, His Honor confirmed the same by finding and holding that "it is likewise clear that
real properties together with the improvements in the names of defendants Lim Tanhu
and Ng Sua were acquired with partnership funds as these defendants were only
partners-employees of deceased Po Chuan in the Glory Commercial Co. until the time
of his death on March 11, 1966." (p. 30, id.) It Is Our considered view, however, that this
conclusion of His Honor is based on nothing but pure unwarranted conjecture. Nowhere
is it shown in the decision how said defendants could have extracted money from the

115
partnership in the fraudulent and illegal manner pretended by plaintiff. Neither in the
testimony of Nuñez nor in that of plaintiff, as these are summarized in the decision, can
there be found any single act of extraction of partnership funds committed by any of
said defendants. That the partnership might have grown into a multi-million enterprise
and that the properties described in the exhibits enumerated in the decision are not in
the names of Po Chuan, who was Chinese, but of the defendants who are Filipinos, do
not necessarily prove that Po Chuan had not gotten his share of the profits of the
business or that the properties in the names of the defendants were bought with money
of the partnership. In this connection, it is decisively important to consider that on the
basis of the concordant and mutually cumulative testimonies of plaintiff and Nuñez,
respondent court found very explicitly that, and We reiterate:

xxx xxx xxx

That the late Po Chuan was the one who actively managed the business
of the partnership Glory Commercial Co. he was the one who made the
final decisions and approved the appointments of new Personnel who
were taken in by the partnership; that the late Po Chuan and defendants
Lim Tanhu and Ng Sua are brothers, the latter to (2) being the elder
brothers of the former; that defendants Lim Tanhu and Ng Sua are both
naturalized Filipino citizens whereas the late Po Chuan until the time of his
death was a Chinese citizen; that the three (3) brothers were partners in
the Glory Commercial Co. but Po Chuan was practically the owner of the
partnership having the controlling interest; that defendants Lim Tanhu and
Ng Sua were partners in name but they were mere employees of Po
Chuan; .... (Pp. 90-91, Record.)

If Po Chuan was in control of the affairs and the running of the partnership, how could
the defendants have defrauded him of such huge amounts as plaintiff had made his
Honor believe? Upon the other hand, since Po Chuan was in control of the affairs of the
partnership, the more logical inference is that if defendants had obtained any portion of
the funds of the partnership for themselves, it must have been with the knowledge and
consent of Po Chuan, for which reason no accounting could be demanded from them
therefor, considering that Article 1807 of the Civil Code refers only to what is taken by a
partner without the consent of the other partner or partners. Incidentally again, this
theory about Po Chuan having been actively managing the partnership up to his death
is a substantial deviation from the allegation in the amended complaint to the effect that
"defendants Antonio Lim Tanhu, Alfonso Leonardo Ng Sua, Lim Teck Chuan and Eng
Chong Leonardo, through fraud and machination, took actual and active management
of the partnership and although Tee Hoon Lim Po Chuan was the manager of Glory
Commercial Co., defendants managed to use the funds of the partnership to purchase
lands and buildings etc. (Par. 4, p. 2 of amended complaint, Annex B of petition) and
should not have been permitted to be proven by the hearing officer, who naturally did
not know any better.

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Moreover, it is very significant that according to the very tax declarations and land titles
listed in the decision, most if not all of the properties supposed to have been acquired
by the defendants Lim Tanhu and Ng Sua with funds of the partnership appear to have
been transferred to their names only in 1969 or later, that is, long after the partnership
had been automatically dissolved as a result of the death of Po Chuan. Accordingly,
defendants have no obligation to account to anyone for such acquisitions in the
absence of clear proof that they had violated the trust of Po Chuan during the existence
of the partnership. (See Hanlon vs. Hansserman and. Beam, 40 Phil. 796.)

There are other particulars which should have caused His Honor to readily disbelieve
plaintiffs' pretensions. Nuñez testified that "for about 18 years he was in charge of the
GI sheets and sometimes attended to the imported items of the business of Glory
Commercial Co." Counting 18 years back from 1965 or 1966 would take Us to 1947 or
1948. Since according to Exhibit LL, the baptismal certificate produced by the same
witness as his birth certificate, shows he was born in March, 1942, how could he have
started managing Glory Commercial Co. in 1949 when he must have been barely six or
seven years old? It should not have escaped His Honor's attention that the photographs
showing the premises of Philippine Metal Industries after its organization "a year or two
after the establishment of Cebu Can Factory in 1957 or 1958" must have been taken
after 1959. How could Nuñez have been only 13 years old then as claimed by him to
have been his age in those photographs when according to his "birth certificate", he was
born in 1942? His Honor should not have overlooked that according to the same
witness, defendant Ng Sua was living in Bantayan until he was directed to return to
Cebu after the fishing business thereat floundered, whereas all that the witness knew
about defendant Lim Teck Chuan's arrival from Hongkong and the expenditure of
partnership money for him were only told to him allegedly by Po Chuan, which
testimonies are veritably exculpatory as to Ng Sua and hearsay as to Lim Teck Chuan.
Neither should His Honor have failed to note that according to plaintiff herself, "Lim
Tanhu was employed by her husband although he did not go there always being a mere
employee of Glory Commercial Co." (p. 22, Annex the decision.)

The decision is rather emphatic in that Lim Tanhu and Ng Sua had no known income
except their salaries. Actually, it is not stated, however, from what evidence such
conclusion was derived in so far as Ng Sua is concerned. On the other hand, with
respect to Lim Tanhu, the decision itself states that according to Exhibit NN-Pre trial, in
the supposed income tax return of Lim Tanhu for 1964, he had an income of P4,800 as
salary from Philippine Metal Industries alone and had a total assess sable net income of
P23,920.77 that year for which he paid a tax of P4,656.00. (p. 14. Annex L, id.) And per
Exhibit GG-Pretrial in the year, he had a net income of P32,000 for which be paid a tax
of P3,512.40. (id.) As early as 1962, "his fishing business in Madridejos Cebu was
making money, and he reported "a net gain from operation (in) the amount of P865.64"
(id., per Exhibit VV-Pre-trial.) From what then did his Honor gather the conclusion that
all the properties registered in his name have come from funds malversed from the
partnership?

117
It is rather unusual that His Honor delved into financial statements and books of Glory
Commercial Co. without the aid of any accountant or without the same being explained
by any witness who had prepared them or who has knowledge of the entries therein.
This must be the reason why there are apparent inconsistencies and inaccuracies in the
conclusions His Honor made out of them. In Exhibit SS-Pre-trial, the reported total
assets of the company amounted to P2,328,460.27 as of December, 1965, and yet,
Exhibit TT-Pre-trial, according to His Honor, showed that the total value of goods
available as of the same date was P11,166,327.62. On the other hand, per Exhibit XX-
Pre-trial, the supposed balance sheet of the company for 1966, "the value of inventoried
merchandise, both local and imported", as found by His Honor, was P584,034.38.
Again, as of December 31, 1966, the value of the company's goods available for sale
was P5,524,050.87, per Exhibit YY and YY-Pre-trial. Then, per Exhibit II-3-Pre-trial, the
supposed Book of Account, whatever that is, of the company showed its "cash analysis"
was P12,223,182.55. We do not hesitate to make the observation that His Honor,
unless he is a certified public accountant, was hardly qualified to read such exhibits and
draw any definite conclusions therefrom, without risk of erring and committing an
injustice. In any event, there is no comprehensible explanation in the decision of the
conclusion of His Honor that there were P12,223,182.55 cash money defendants have
to account for, particularly when it can be very clearly seen in Exhibits 11-4, 11-4- A, 11-
5 and 11-6-Pre-trial, Glory Commercial Co. had accounts payable as of December 31,
1965 in the amount of P4,801,321.17. (p. 15, id.) Under the circumstances, We are not
prepared to permit anyone to predicate any claim or right from respondent court's
unaided exercise of accounting knowledge.

Additionally, We note that the decision has not made any finding regarding the
allegation in the amended complaint that a corporation denominated Glory Commercial
Co., Inc. was organized after the death of Po Chuan with capital from the funds of the
partnership. We note also that there is absolutely no finding made as to how the
defendants Dy Ochay and Co Oyo could in any way be accountable to plaintiff, just
because they happen to be the wives of Lim Tanhu and Ng Sua, respectively. We
further note that while His Honor has ordered defendants to deliver or pay jointly and
severally to the plaintiff P4,074,394.18 or ¹/3 of the P12,223,182.55, the supposed cash
belonging to the partnership as of December 31, 1965, in the same breath, they have
also been sentenced to partition and give ¹/3share of the properties enumerated in the
dispositive portion of the decision, which seemingly are the very properties allegedly
purchased from the funds of the partnership which would naturally include the
P12,223,182.55 defendants have to account for. Besides, assuming there has not yet
been any liquidation of the partnership, contrary to the allegation of the defendants, then
Glory Commercial Co. would have the status of a partnership in liquidation and the only
right plaintiff could have would be to what might result after such liquidation to belong to
the deceased partner, and before this is finished, it is impossible to determine, what
rights or interests, if any, the deceased had (Bearneza vs. Dequilla 43 Phil. 237). In
other words, no specific amounts or properties may be adjudicated to the heir or legal
representative of the deceased partner without the liquidation being first terminated.

118
Indeed, only time and the fear that this decision would be much more extended than it is
already prevent us from further pointing out the inexplicable deficiencies and
imperfections of the decision in question. After all, what have been discussed should be
more than sufficient to support Our conclusion that not only must said decision be set
aside but also that the action of the plaintiff must be totally dismissed, and, were it not
seemingly futile and productive of other legal complications, that plaintiff is liable on
defendants' counterclaims. Resolution of the other issues raised by the parties albeit
important and perhaps pivotal has likewise become superfluous.

IN VIEW OF ALL THE FOREGOING, the petition is granted. All proceedings held in
respondent court in its Civil Case No. 12328 subsequent to the order of dismissal of
October 21, 1974 are hereby annulled and set aside, particularly the ex-
parte proceedings against petitioners and the decision on December 20, 1974.
Respondent court is hereby ordered to enter an order extending the effects of its order
of dismissal of the action dated October 21, 1974 to herein petitioners Antonio Lim
Tanhu, Dy Ochay, Alfonso Leonardo Ng Sua and Co Oyo. And respondent court is
hereby permanently enjoined from taking any further action in said civil case gave and
except as herein indicated. Costs against private respondent.

Makalintal, C.J., Fernando, Aquino and Concepcion Jr., JJ., concur.

119
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-31684 June 28, 1973

EVANGELISTA & CO., DOMINGO C. EVANGELISTA, JR., CONCHITA B. NAVARRO

and LEONARDA ATIENZA ABAD SABTOS, petitioners,
vs.
ESTRELLA ABAD SANTOS, respondent.

Leonardo Abola for petitioners.

Baisas, Alberto & Associates for respondent.

MAKALINTAL, J.:

On October 9, 1954 a co-partnership was formed under the name of "Evangelista &
Co." On June 7, 1955 the Articles of Co-partnership was amended as to include herein
respondent, Estrella Abad Santos, as industrial partner, with herein petitioners Domingo
C. Evangelista, Jr., Leonardo Atienza Abad Santos and Conchita P. Navarro, the
original capitalist partners, remaining in that capacity, with a contribution of P17,500
each. The amended Articles provided, inter alia, that "the contribution of Estrella Abad
Santos consists of her industry being an industrial partner", and that the profits and
losses "shall be divided and distributed among the partners ... in the proportion of 70%
for the first three partners, Domingo C. Evangelista, Jr., Conchita P. Navarro and
Leonardo Atienza Abad Santos to be divided among them equally; and 30% for the
fourth partner Estrella Abad Santos."

On December 17, 1963 herein respondent filed suit against the three other partners in
the Court of First Instance of Manila, alleging that the partnership, which was also made
a party-defendant, had been paying dividends to the partners except to her; and that
notwithstanding her demands the defendants had refused and continued to refuse and
let her examine the partnership books or to give her information regarding the
partnership affairs to pay her any share in the dividends declared by the partnership.
She therefore prayed that the defendants be ordered to render accounting to her of the
partnership business and to pay her corresponding share in the partnership profits after
such accounting, plus attorney's fees and costs.

120
The defendants, in their answer, denied ever having declared dividends or distributed
profits of the partnership; denied likewise that the plaintiff ever demanded that she be
allowed to examine the partnership books; and byway of affirmative defense alleged
that the amended Articles of Co-partnership did not express the true agreement of the
parties, which was that the plaintiff was not an industrial partner; that she did not in fact
contribute industry to the partnership; and that her share of 30% was to be based on the
profits which might be realized by the partnership only until full payment of the loan
which it had obtained in December, 1955 from the Rehabilitation Finance Corporation in
the sum of P30,000, for which the plaintiff had signed a promisory note as co-maker and
mortgaged her property as security.

The parties are in agreement that the main issue in this case is "whether the plaintiff-
appellee (respondent here) is an industrial partner as claimed by her or merely a profit
sharer entitled to 30% of the net profits that may be realized by the partnership from
June 7, 1955 until the mortgage loan from the Rehabilitation Finance Corporation shall
be fully paid, as claimed by appellants (herein petitioners)." On that issue the Court of
First Instance found for the plaintiff and rendered judgement "declaring her an industrial
partner of Evangelista & Co.; ordering the defendants to render an accounting of the
business operations of the (said) partnership ... from June 7, 1955; to pay the plaintiff
such amounts as may be due as her share in the partnership profits and/or dividends
after such an accounting has been properly made; to pay plaintiff attorney's fees in the
sum of P2,000.00 and the costs of this suit."

The defendants appealed to the Court of Appeals, which thereafter affirmed judgments
of the court a quo.

In the petition before Us the petitioners have assigned the following errors:

I. The Court of Appeals erred in the finding that the respondent is an

industrial partner of Evangelista & Co., notwithstanding the admitted fact
that since 1954 and until after promulgation of the decision of the
appellate court the said respondent was one of the judges of the City
Court of Manila, and despite its findings that respondent had been paid for
services allegedly contributed by her to the partnership. In this connection
the Court of Appeals erred:

(A) In finding that the "amended Articles of Co-partnership,"

Exhibit "A" is conclusive evidence that respondent was in
fact made an industrial partner of Evangelista & Co.

(B) In not finding that a portion of respondent's testimony

quoted in the decision proves that said respondent did not
bind herself to contribute her industry, and she could not,
and in fact did not, because she was one of the judges of the
City Court of Manila since 1954.

121
 (C) In finding that respondent did not in fact contribute her
industry, despite the appellate court's own finding that she
has been paid for the services allegedly rendered by her, as
well as for the loans of money made by her to the
partnership.

II. The lower court erred in not finding that in any event the respondent
was lawfully excluded from, and deprived of, her alleged share, interests
and participation, as an alleged industrial partner, in the partnership
Evangelista & Co., and its profits or net income.

III. The Court of Appeals erred in affirming in toto the decision of the trial
court whereby respondent was declared an industrial partner of the
petitioner, and petitioners were ordered to render an accounting of the
business operation of the partnership from June 7, 1955, and to pay the
respondent her alleged share in the net profits of the partnership plus the
sum of P2,000.00 as attorney's fees and the costs of the suit, instead of
dismissing respondent's complaint, with costs, against the respondent.

It is quite obvious that the questions raised in the first assigned errors refer to the facts
as found by the Court of Appeals. The evidence presented by the parties as the trial in
support of their respective positions on the issue of whether or not the respondent was
an industrial partner was thoroughly analyzed by the Court of Appeals on its decision, to
the extent of reproducing verbatim therein the lengthy testimony of the witnesses.

It is not the function of the Supreme Court to analyze or weigh such evidence all over
again, its jurisdiction being limited to reviewing errors of law that might have been
commited by the lower court. It should be observed, in this regard, that the Court of
Appeals did not hold that the Articles of Co-partnership, identified in the record as
Exhibit "A", was conclusive evidence that the respondent was an industrial partner of
the said company, but considered it together with other factors, consisting of both
testimonial and documentary evidences, in arriving at the factual conclusion expressed
in the decision.

The findings of the Court of Appeals on the various points raised in the first assignment
of error are hereunder reproduced if only to demonstrate that the same were made after
a through analysis of then evidence, and hence are beyond this Court's power of
review.

The aforequoted findings of the lower Court are assailed under Appellants'
first assigned error, wherein it is pointed out that "Appellee's documentary
evidence does not conclusively prove that appellee was in fact admitted
by appellants as industrial partner of Evangelista & Co." and that "The
grounds relied upon by the lower Court are untenable" (Pages 21 and 26,
Appellant's Brief).

122
The first point refers to Exhibit A, B, C, K, K-1, J, N and S, appellants'
complaint being that "In finding that the appellee is an industrial partner of
appellant Evangelista & Co., herein referred to as the partnership — the
lower court relied mainly on the appellee's documentary evidence, entirely
disregarding facts and circumstances established by appellants" evidence
which contradict the said finding' (Page 21, Appellants' Brief). The lower
court could not have done otherwise but rely on the exhibits just
mentioned, first, because appellants have admitted their genuineness and
due execution, hence they were admitted without objection by the lower
court when appellee rested her case and, secondly the said exhibits
indubitably show the appellee is an industrial partner of appellant
company. Appellants are virtually estopped from attempting to detract
from the probative force of the said exhibits because they all bear the
imprint of their knowledge and consent, and there is no credible showing
that they ever protested against or opposed their contents prior of the filing
of their answer to appellee's complaint. As a matter of fact, all the
appellant Evangelista, Jr., would have us believe — as against the
cumulative force of appellee's aforesaid documentary evidence — is the
appellee's Exhibit "A", as confirmed and corroborated by the other exhibits
already mentioned, does not express the true intent and agreement of the
parties thereto, the real understanding between them being the appellee
would be merely a profit sharer entitled to 30% of the net profits that may
be realized between the partners from June 7, 1955, until the mortgage
loan of P30,000.00 to be obtained from the RFC shall have been fully
paid. This version, however, is discredited not only by the aforesaid
documentary evidence brought forward by the appellee, but also by the
fact that from June 7, 1955 up to the filing of their answer to the complaint
on February 8, 1964 — or a period of over eight (8) years — appellants
did nothing to correct the alleged false agreement of the parties contained
in Exhibit "A". It is thus reasonable to suppose that, had appellee not filed
the present action, appellants would not have advanced this obvious
afterthought that Exhibit "A" does not express the true intent and
agreement of the parties thereto.

At pages 32-33 of appellants' brief, they also make much of the argument
that 'there is an overriding fact which proves that the parties to the
Amended Articles of Partnership, Exhibit "A", did not contemplate to make
the appellee Estrella Abad Santos, an industrial partner of Evangelista &
Co. It is an admitted fact that since before the execution of the amended
articles of partnership, Exhibit "A", the appellee Estrella Abad Santos has
been, and up to the present time still is, one of the judges of the City Court
of Manila, devoting all her time to the performance of the duties of her
public office. This fact proves beyond peradventure that it was never
contemplated between the parties, for she could not lawfully contribute her
full time and industry which is the obligation of an industrial partner
pursuant to Art. 1789 of the Civil Code.

123
The Court of Appeals then proceeded to consider appellee's testimony on this point,
quoting it in the decision, and then concluded as follows:

One cannot read appellee's testimony just quoted without gaining the very
definite impression that, even as she was and still is a Judge of the City
Court of Manila, she has rendered services for appellants without which
they would not have had the wherewithal to operate the business for
which appellant company was organized. Article 1767 of the New Civil
Code which provides that "By contract of partnership two or more persons
bind themselves, to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves, 'does not
specify the kind of industry that a partner may thus contribute, hence the
said services may legitimately be considered as appellee's contribution to
the common fund. Another article of the same Code relied upon appellants
reads:

'ART. 1789. An industrial partner cannot engage in business

for himself, unless the partnership expressly permits him to
do so; and if he should do so, the capitalist partners may
either exclude him from the firm or avail themselves of the
benefits which he may have obtained in violation of this
provision, with a right to damages in either case.'

It is not disputed that the provision against the industrial partner engaging
in business for himself seeks to prevent any conflict of interest between
the industrial partner and the partnership, and to insure faithful compliance
by said partner with this prestation. There is no pretense, however, even
on the part of the appellee is engaged in any business antagonistic to that
of appellant company, since being a Judge of one of the branches of the
City Court of Manila can hardly be characterized as a business. That
appellee has faithfully complied with her prestation with respect to
appellants is clearly shown by the fact that it was only after filing of the
complaint in this case and the answer thereto appellants exercised their
right of exclusion under the codal art just mentioned by alleging in their
Supplemental Answer dated June 29, 1964 — or after around nine (9)
years from June 7, 1955 — subsequent to the filing of defendants' answer
to the complaint, defendants reached an agreement whereby the herein
plaintiff been excluded from, and deprived of, her alleged share, interests
or participation, as an alleged industrial partner, in the defendant
partnership and/or in its net profits or income, on the ground plaintiff has
never contributed her industry to the partnership, instead she has been
and still is a judge of the City Court (formerly Municipal Court) of the City
of Manila, devoting her time to performance of her duties as such judge
and enjoying the privilege and emoluments appertaining to the said office,
aside from teaching in law school in Manila, without the express consent
of the herein defendants' (Record On Appeal, pp. 24-25). Having always

124
 knows as a appellee as a City judge even before she joined appellant
company on June 7, 1955 as an industrial partner, why did it take
appellants many yearn before excluding her from said company as
aforequoted allegations? And how can they reconcile such exclusive with
their main theory that appellee has never been such a partner because
"The real agreement evidenced by Exhibit "A" was to grant the appellee a
share of 30% of the net profits which the appellant partnership may realize
from June 7, 1955, until the mortgage of P30,000.00 obtained from the
Rehabilitation Finance Corporal shall have been fully paid." (Appellants
Brief, p. 38).

What has gone before persuades us to hold with the lower Court that
appellee is an industrial partner of appellant company, with the right to
demand for a formal accounting and to receive her share in the net profit
that may result from such an accounting, which right appellants take
exception under their second assigned error. Our said holding is based on
the following article of the New Civil Code:

'ART. 1899. Any partner shall have the right to a formal

account as to partnership affairs:

(1) If he is wrongfully excluded from the partnership business or

possession of its property by his co-partners;

(2) If the right exists under the terms of any agreement;

(3) As provided by article 1807;

(4) Whenever other circumstance render it just and reasonable.

We find no reason in this case to depart from the rule which limits this Court's appellate
jurisdiction to reviewing only errors of law, accepting as conclusive the factual findings
of the lower court upon its own assessment of the evidence.

The judgment appealed from is affirmed, with costs.

125
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-39780 November 11, 1985

ELMO MUÑASQUE, petitioner,

vs.
COURT OF APPEALS,CELESTINO GALAN TROPICAL COMMERCIAL COMPANY
and RAMON PONS, respondents.

John T. Borromeo for petitioner.

Juan D. Astete for respondent C. Galan.

Paul Gornes for respondent R. Pons.

Viu Montecillo for respondent Tropical.

Paterno P. Natinga for Intervenor Blue Diamond Glass Palace.

GUTTIERREZ, JR., J.:

In this petition for certiorari, the petitioner seeks to annul and set added the decision of
the Court of Appeals affirming the existence of a partnership between petitioner and one
of the respondents, Celestino Galan and holding both of them liable to the two
intervenors which extended credit to their partnership. The petitioner wants to be
excluded from the liabilities of the partnership.

Petitioner Elmo Muñasque filed a complaint for payment of sum of money and damages
against respondents Celestino Galan, Tropical Commercial, Co., Inc. (Tropical) and
Ramon Pons, alleging that the petitioner entered into a contract with respondent
Tropical through its Cebu Branch Manager Pons for remodelling a portion of its building
without exchanging or expecting any consideration from Galan although the latter was
casually named as partner in the contract; that by virtue of his having introduced the
petitioner to the employing company (Tropical). Galan would receive some kind of
compensation in the form of some percentages or commission; that Tropical, under the
terms of the contract, agreed to give petitioner the amount of P7,000.00 soon after the
construction began and thereafter, the amount of P6,000.00 every fifteen (15) days
during the construction to make a total sum of P25,000.00; that on January 9, 1967,
Tropical and/or Pons delivered a check for P7,000.00 not to the plaintiff but to a
stranger to the contract, Galan, who succeeded in getting petitioner's indorsement on

126
the same check persuading the latter that the same be deposited in a joint account; that
on January 26, 1967 when the second check for P6,000.00 was due, petitioner refused
to indorse said cheek presented to him by Galan but through later manipulations,
respondent Pons succeeded in changing the payee's name from Elmo Muñasque to
Galan and Associates, thus enabling Galan to cash the same at the Cebu Branch of the
Philippine Commercial and Industrial Bank (PCIB) placing the petitioner in great
financial difficulty in his construction business and subjecting him to demands of
creditors to pay' for construction materials, the payment of which should have been
made from the P13,000.00 received by Galan; that petitioner undertook the construction
at his own expense completing it prior to the March 16, 1967 deadline;that because of
the unauthorized disbursement by respondents Tropical and Pons of the sum of
P13,000.00 to Galan petitioner demanded that said amount be paid to him by
respondents under the terms of the written contract between the petitioner and
respondent company.

The respondents answered the complaint by denying some and admitting some of the
material averments and setting up counterclaims.

During the pre-trial conference, the petitioners and respondents agreed that the issues
to be resolved are:

(1) Whether or not there existed a partners between Celestino Galan and
Elmo Muñasque; and

(2) Whether or not there existed a justifiable cause on the part of

respondent Tropical to disburse money to respondent Galan.

The business firms Cebu Southern Hardware Company and Blue Diamond Glass
Palace were allowed to intervene, both having legal interest in the matter in litigation.

After trial, the court rendered judgment, the dispositive portion of which states:

IN VIEW WHEREOF, Judgment is hereby rendered:

(1) ordering plaintiff Muñasque and defendant Galan to pay jointly and
severally the intervenors Cebu and Southern Hardware Company and
Blue Diamond Glass Palace the amount of P6,229.34 and P2,213.51,
respectively;

(2) absolving the defendants Tropical Commercial Company and Ramon

Pons from any liability,

No damages awarded whatsoever.

The petitioner and intervenor Cebu Southern Company and its proprietor, Tan Siu filed
motions for reconsideration.

127
On January 15, 197 1, the trial court issued 'another order amending its judgment to
make it read as follows:

IN VIEW WHEREOF, Judgment is hereby rendered:

(1) ordering plaintiff Muñasque and defendant Galan to pay jointly and
severally the intervenors Cebu Southern Hardware Company and Blue
Diamond Glass Palace the amount of P6,229.34 and P2,213.51,
respectively,

(2) ordering plaintiff and defendant Galan to pay Intervenor Cebu

Southern Hardware Company and Tan Siu jointly and severally interest at
12% per annum of the sum of P6,229.34 until the amount is fully paid;

(3) ordering plaintiff and defendant Galan to pay P500.00 representing

attorney's fees jointly and severally to Intervenor Cebu Southern Hardware
Company:

(4) absolving the defendants Tropical Commercial Company and Ramon

Pons from any liability,

No damages awarded whatsoever.

On appeal, the Court of Appeals affirmed the judgment of the trial court with the sole
modification that the liability imposed in the dispositive part of the decision on the credit
of Cebu Southern Hardware and Blue Diamond Glass Palace was changed from "jointly
and severally" to "jointly."

Not satisfied, Mr. Muñasque filed this petition.

The present controversy began when petitioner Muñasque in behalf of the partnership
of "Galan and Muñasque" as Contractor entered into a written contract with respondent
Tropical for remodelling the respondent's Cebu branch building. A total amount of
P25,000.00 was to be paid under the contract for the entire services of the Contractor.
The terms of payment were as follows: thirty percent (30%) of the whole amount upon
the signing of the contract and the balance thereof divided into three equal installments
at the lute of Six Thousand Pesos (P6,000.00) every fifteen (15) working days.

The first payment made by respondent Tropical was in the form of a check for
P7,000.00 in the name of the petitioner.Petitioner, however, indorsed the check in favor
of respondent Galan to enable the latter to deposit it in the bank and pay for the
materials and labor used in the project.

Petitioner alleged that Galan spent P6,183.37 out of the P7,000.00 for his personal use
so that when the second check in the amount of P6,000.00 came and Galan asked the
petitioner to indorse it again, the petitioner refused.

128
The check was withheld from the petitioner. Since Galan informed the Cebu branch of
Tropical that there was a"misunderstanding" between him and petitioner, respondent
Tropical changed the name of the payee in the second check from Muñasque to "Galan
and Associates" which was the duly registered name of the partnership between Galan
and petitioner and under which name a permit to do construction business was issued
by the mayor of Cebu City. This enabled Galan to encash the second check.

Meanwhile, as alleged by the petitioner, the construction continued through his sole
efforts. He stated that he borrowed some P12,000.00 from his friend, Mr. Espina and
although the expenses had reached the amount of P29,000.00 because of the failure of
Galan to pay what was partly due the laborers and partly due for the materials, the
construction work was finished ahead of schedule with the total expenditure reaching
P34,000.00.

The two remaining checks, each in the amount of P6,000.00,were subsequently given
to the petitioner alone with the last check being given pursuant to a court order.

As stated earlier, the petitioner filed a complaint for payment of sum of money and
damages against the respondents,seeking to recover the following: the amounts
covered by the first and second checks which fell into the hands of respondent Galan,
the additional expenses that the petitioner incurred in the construction, moral and
exemplary damages, and attorney's fees.

Both the trial and appellate courts not only absolved respondents Tropical and its Cebu
Manager, Pons, from any liability but they also held the petitioner together with
respondent Galan, hable to the intervenors Cebu Southern Hardware Company and
Blue Diamond Glass Palace for the credit which the intervenors extended to the
partnership of petitioner and Galan

In this petition the legal questions raised by the petitioner are as follows: (1) Whether or
not the appellate court erred in holding that a partnership existed between petitioner and
respondent Galan. (2) Assuming that there was such a partnership, whether or not the
court erred in not finding Galan guilty of malversing the P13,000.00 covered by the first
and second checks and therefore, accountable to the petitioner for the said amount; and
(3) Whether or not the court committed grave abuse of discretion in holding that the
payment made by Tropical through its manager Pons to Galan was "good payment, "

Petitioner contends that the appellate court erred in holding that he and respondent
Galan were partners, the truth being that Galan was a sham and a perfidious partner
who misappropriated the amount of P13,000.00 due to the petitioner.Petitioner also
contends that the appellate court committed grave abuse of discretion in holding that
the payment made by Tropical to Galan was "good" payment when the same gave
occasion for the latter to misappropriate the proceeds of such payment.

The contentions are without merit.

129
The records will show that the petitioner entered into a con-tract with Tropical for the
renovation of the latter's building on behalf of the partnership of "Galan and Muñasque."
This is readily seen in the first paragraph of the contract where it states:

This agreement made this 20th day of December in the year 1966 by
Galan and Muñasque hereinafter called the Contractor, and Tropical
Commercial Co., Inc., hereinafter called the owner do hereby for and in
consideration agree on the following: ... .

There is nothing in the records to indicate that the partner-ship organized by the two
men was not a genuine one. If there was a falling out or misunderstanding between the
partners, such does not convert the partnership into a sham organization.

Likewise, when Muñasque received the first payment of Tropical in the amount of
P7,000.00 with a check made out in his name, he indorsed the check in favor of Galan.
Respondent Tropical therefore, had every right to presume that the petitioner and Galan
were true partners. If they were not partners as petitioner claims, then he has only
himself to blame for making the relationship appear otherwise, not only to Tropical but
to their other creditors as well. The payments made to the partnership were, therefore,
valid payments.

In the case of Singsong v. Isabela Sawmill (88 SCRA 643),we ruled:

Although it may be presumed that Margarita G. Saldajeno had acted in

good faith, the appellees also acted in good faith in extending credit to the
partnership. Where one of two innocent persons must suffer, that person
who gave occasion for the damages to be caused must bear the
consequences.

No error was committed by the appellate court in holding that the payment made by
Tropical to Galan was a good payment which binds both Galan and the petitioner. Since
the two were partners when the debts were incurred, they, are also both liable to third
persons who extended credit to their partnership. In the case of George Litton v. Hill and
Ceron, et al, (67 Phil. 513, 514), we ruled:

There is a general presumption that each individual partner is an

authorized agent for the firm and that he has authority to bind the firm in
carrying on the partnership transactions. (Mills vs. Riggle,112 Pan, 617).

The presumption is sufficient to permit third persons to hold the firm liable
on transactions entered into by one of members of the firm acting
apparently in its behalf and within the scope of his authority. (Le Roy vs.
Johnson, 7 U.S. (Law. ed.), 391.)

Petitioner also maintains that the appellate court committed grave abuse of discretion in
not holding Galan liable for the amounts which he "malversed" to the prejudice of the

130
petitioner. He adds that although this was not one of the issues agreed upon by the
parties during the pretrial, he, nevertheless, alleged the same in his amended complaint
which was, duly admitted by the court.

When the petitioner amended his complaint, it was only for the purpose of impleading
Ramon Pons in his personal capacity. Although the petitioner made allegations as to the
alleged malversations of Galan, these were the same allegations in his original
complaint. The malversation by one partner was not an issue actually raised in the
amended complaint but the alleged connivance of Pons with Galan as a means to serve
the latter's personal purposes.

The petitioner, therefore, should be bound by the delimitation of the issues during the
pre-trial because he himself agreed to the same. In Permanent Concrete Products, Inc.
v. Teodoro, (26 SCRA 336), we ruled:

xxx xxx xxx

... The appellant is bound by the delimitation of the issues contained in the
trial court's order issued on the very day the pre-trial conference was held.
Such an order controls the subsequent course of the action, unless
modified before trial to prevent manifest injustice.In the case at bar,
modification of the pre-trial order was never sought at the instance of any
party.

Petitioner could have asked at least for a modification of the issues if he really wanted
to include the determination of Galan's personal liability to their partnership but he
chose not to do so, as he vehemently denied the existence of the partnership. At any
rate, the issue raised in this petition is the contention of Muñasque that the amounts
payable to the intervenors should be shouldered exclusively by Galan. We note that the
petitioner is not solely burdened by the obligations of their illstarred partnership. The
records show that there is an existing judgment against respondent Galan, holding him
liable for the total amount of P7,000.00 in favor of Eden Hardware which extended
credit to the partnership aside from the P2, 000. 00 he already paid to Universal
Lumber.

We, however, take exception to the ruling of the appellate court that the trial court's
ordering petitioner and Galan to pay the credits of Blue Diamond and Cebu Southern
Hardware"jointly and severally" is plain error since the liability of partners under the law
to third persons for contracts executed inconnection with partnership business is only
pro rata under Art. 1816, of the Civil Code.

While it is true that under Article 1816 of the Civil Code,"All partners, including industrial
ones, shall be liable prorate with all their property and after all the partnership assets
have been exhausted, for the contracts which may be entered into the name and fm the
account cd the partnership, under its signature and by a person authorized to act for the
partner-ship. ...". this provision should be construed together with Article 1824 which

131
provides that: "All partners are liable solidarily with the partnership for everything
chargeable to the partnership under Articles 1822 and 1823." In short, while the liability
of the partners are merely joint in transactions entered into by the partnership, a third
person who transacted with said partnership can hold the partners solidarily liable for
the whole obligation if the case of the third person falls under Articles 1822 or 1823.

Articles 1822 and 1823 of the Civil Code provide:

Art. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of the
business of the partner-ship or with the authority of his co-partners, loss or injury is caused to any
person, not being a partner in the partnership or any penalty is incurred, the partnership is liable
therefor to the same extent as the partner so acting or omitting to act.

Art. 1823. The partnership is bound to make good:

(1) Where one partner acting within the scope of his apparent authority receives money or property of a
third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property of a third person and
t he money or property so received is misapplied by any partner while it is in the custody of the
partnership.

The obligation is solidary, because the law protects him, who in good faith relied upon
the authority of a partner, whether such authority is real or apparent. That is why under
Article 1824 of the Civil Code all partners, whether innocent or guilty, as well as the
legal entity which is the partnership, are solidarily liable.

In the case at bar the respondent Tropical had every reason to believe that a
partnership existed between the petitioner and Galan and no fault or error can be
imputed against it for making payments to "Galan and Associates" and delivering the
same to Galan because as far as it was concerned, Galan was a true partner with real
authority to transact on behalf of the partnership with which it was dealing. This is even
more true in the cases of Cebu Southern Hardware and Blue Diamond Glass Palace
who supplied materials on credit to the partnership. Thus, it is but fair that the
consequences of any wrongful act committed by any of the partners therein should be
answered solidarily by all the partners and the partnership as a whole

However. as between the partners Muñasque and Galan,justice also dictates that
Muñasque be reimbursed by Galan for the payments made by the former representing
the liability of their partnership to herein intervenors, as it was satisfactorily established
that Galan acted in bad faith in his dealings with Muñasque as a partner.

WHEREFORE, the decision appealed from is hereby AFFIRMED with the

MODIFICATION that the liability of petitioner and respondent Galan to intervenors Blue
Diamond Glass and Cebu Southern Hardware is declared to be joint and solidary.
Petitioner may recover from respondent Galan any amount that he pays, in his capacity
as a partner, to the above intervenors,

132
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-22493 July 31, 1975

ISLAND SALES, INC., plaintiff-appellee,

vs.
UNITED PIONEERS GENERAL CONSTRUCTION COMPANY, ET. AL defendants.
BENJAMIN C. DACO, defendant-appellant.

Grey, Buenaventura and Santiago for plaintiff-appellee.

Anacleto D. Badoy, Jr. for defendant-appellant.

CONCEPCION JR., J.:

This is an appeal interposed by the defendant Benjamin C. Daco from the decision of
the Court of First Instance of Manila, Branch XVI, in Civil Case No. 50682, the
dispositive portion of which reads:

WHEREFORE, the Court sentences defendant United Pioneer General

Construction Company to pay plaintiff the sum of P7,119.07 with interest
at the rate of 12% per annum until it is fully paid, plus attorney's fees
which the Court fixes in the sum of Eight Hundred Pesos (P800.00) and
costs.

The defendants Benjamin C. Daco, Daniel A. Guizona, Noel C. Sim and

Augusto Palisoc are sentenced to pay the plaintiff in this case with the
understanding that the judgment against these individual defendants shall
be enforced only if the defendant company has no more leviable
properties with which to satisfy the judgment against it. .

The individual defendants shall also pay the costs.

On April 22, 1961, the defendant company, a general partnership duly registered under
the laws of the Philippines, purchased from the plaintiff a motor vehicle on the
installment basis and for this purpose executed a promissory note for P9,440.00,
payable in twelve (12) equal monthly installments of P786.63, the first installment
payable on or before May 22, 1961 and the subsequent installments on the 22nd day of

133
every month thereafter, until fully paid, with the condition that failure to pay any of said
installments as they fall due would render the whole unpaid balance immediately due
and demandable.

Having failed to receive the installment due on July 22, 1961, the plaintiff sued the
defendant company for the unpaid balance amounting to P7,119.07. Benjamin C. Daco,
Daniel A. Guizona, Noel C. Sim, Romulo B. Lumauig, and Augusto Palisoc were
included as co-defendants in their capacity as general partners of the defendant
company.

Daniel A. Guizona failed to file an answer and was consequently declared in default. 1

Subsequently, on motion of the plaintiff, the complaint was dismissed insofar as the
defendant Romulo B. Lumauig is concerned.2

When the case was called for hearing, the defendants and their counsels failed to
appear notwithstanding the notices sent to them. Consequently, the trial court
authorized the plaintiff to present its evidence ex-parte3 , after which the trial court
rendered the decision appealed from.

The defendants Benjamin C. Daco and Noel C. Sim moved to reconsider the decision
claiming that since there are five (5) general partners, the joint and subsidiary liability of
each partner should not exceed one-fifth (1/5 ) of the obligations of the defendant
company. But the trial court denied the said motion notwithstanding the conformity of
the plaintiff to limit the liability of the defendants Daco and Sim to only one-fifth (1/5 ) of
the obligations of the defendant company.4 Hence, this appeal.

The only issue for resolution is whether or not the dismissal of the complaint to favor
one of the general partners of a partnership increases the joint and subsidiary liability of
each of the remaining partners for the obligations of the partnership.

Article 1816 of the Civil Code provides:

Art. 1816. All partners including industrial ones, shall be liable pro
rata with all their property and after all the partnership assets have been
exhausted, for the contracts which may be entered into in the name and
for the account of the partnership, under its signature and by a person
authorized to act for the partnership. However, any partner may enter into
a separate obligation to perform a partnership contract.

In the case of Co-Pitco vs. Yulo (8 Phil. 544) this Court held:

The partnership of Yulo and Palacios was engaged in the operation of a

sugar estate in Negros. It was, therefore, a civil partnership as
distinguished from a mercantile partnership. Being a civil partnership, by
the express provisions of articles l698 and 1137 of the Civil Code, the

134
 partners are not liable each for the whole debt of the partnership. The
liability is pro rata and in this case Pedro Yulo is responsible to plaintiff for
only one-half of the debt. The fact that the other partner, Jaime Palacios,
had left the country cannot increase the liability of Pedro Yulo.

In the instant case, there were five (5) general partners when the promissory note in
question was executed for and in behalf of the partnership. Since the liability of the
partners is pro rata, the liability of the appellant Benjamin C. Daco shall be limited to
only one-fifth (1/5 ) of the obligations of the defendant company. The fact that the
complaint against the defendant Romulo B. Lumauig was dismissed, upon motion of the
plaintiff, does not unmake the said Lumauig as a general partner in the defendant
company. In so moving to dismiss the complaint, the plaintiff merely condoned
Lumauig's individual liability to the plaintiff.

WHEREFORE, the appealed decision as thus clarified is hereby AFFIRMED, without

pronouncement as to costs.

SO ORDERED.

Makalintal, C.J., Fernando (Chairman), Barredo and Aquino, JJ., concur.

135
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT,
INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S.
LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,

vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of
Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of First
Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R.
No. 84197) against all defendants (respondents in G.R. No. 84197) was dismissed but
in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim

requiring Lim to pay plaintiff the amount of P311,056.02, with interest at
the rate of 12% per annum compounded monthly; plus 15% of the amount

136
awarded to plaintiff as attorney's fees from July 2,1966, until full payment
is made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of
P184,878.74. Defendant Jacob S. Lim is further required to pay cross
party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the
other half, the amount of Pl84,878.74 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P184,878.84 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the

Cervanteses, and another P20,000.00 to Constancio B. Maglana as
attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer

against defendants Bormaheco, the Cervanteses and Constancio B.
Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of P20,000.00 as
attorney's fees and the amount of P4,379.21, per year from 1966 with
legal rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the

amount of P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action

was filed in good faith. The fact that the properties of the Bormaheco and
the Cervanteses were attached and that they were required to file a
counterbond in order to dissolve the attachment, is not an act of bad faith.
When a man tries to protect his rights, he should not be saddled with
moral or exemplary damages. Furthermore, the rights exercised were
provided for in the Rules of Court, and it was the court that ordered it, in
the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the

third-party defendant, for it only secured the attachment prayed for by the
plaintiff Pioneer. If an insurance company would be liable for damages in
performing an act which is clearly within its power and which is the reason
for its being, then nobody would engage in the insurance business. No
further claim or counter-claim for or against anybody is declared by this
Court. (Rollo - G.R. No. 24197, pp. 15-16)

137
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline
business as owner-operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into
and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A
Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718,
arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July
18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in
G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in
favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and
spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana
(respondents in both petitions) contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were supposed to be their contributions to a
new corporation proposed by Lim to expand his airline business. They executed two (2)
separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed
by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors principally
agree and bind themselves jointly and severally to indemnify and hold and save
harmless Pioneer from and against any/all damages, losses, costs, damages, taxes,
penalties, charges and expenses of whatever kind and nature which Pioneer may incur
in consequence of having become surety upon the bond/note and to pay, reimburse and
make good to Pioneer, its successors and assigns, all sums and amounts of money
which it or its representatives should or may pay or cause to be paid or become liable to
pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in
favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in
favor of the former. It was stipulated therein that Lim transfer and convey to the surety
the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the
Register of Deeds of the City of Manila and with the Civil Aeronautics Administration
pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No.
776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request

payments from the surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage
before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third
party claim alleging that they are co-owners of the aircrafts,

138
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a
writ of preliminary attachment against Lim and respondents, the Cervanteses,
Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against
Lim alleging that they were not privies to the contracts signed by Lim and, by way of
counterclaim, sought for damages for being exposed to litigation and for recovery of the
sums of money they advanced to Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but
dismissed Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects the
trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT

DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND
THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF
THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT
IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE
TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer

had reinsured its risk of liability under the surety bond in favor of JDA and
subsequently collected the proceeds of such reinsurance in the sum of
P295,000.00. Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiffs instant action for the recovery of the amount
of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is
not the real party in interest to institute the instant action as it does not
stand to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover

the amount from defendants, hence, it instituted the action is utterly devoid
of merit. Plaintiff did not even present any evidence that it is the attorney-
in-fact of the reinsurance company, authorized to institute an action for
and in behalf of the latter. To qualify a person to be a real party in interest
in whose name an action must be prosecuted, he must appear to be the
present real owner of the right sought to be enforced (Moran, Vol. I,

139
 Comments on the Rules of Court, 1979 ed., p. 155). It has been held that
the real party in interest is the party who would be benefited or injured by
the judgment or the party entitled to the avails of the suit (Salonga v.
Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is
meant a present substantial interest as distinguished from a mere
expectancy or a future, contingent, subordinate or consequential interest
(Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E.
2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of
Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered

as the real party in interest as it has already been paid by the reinsurer the
sum of P295,000.00 — the bulk of defendants' alleged obligation to
Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff

Pioneer from its reinsurer, the former was able to foreclose extra-judicially
one of the subject airplanes and its spare engine, realizing the total
amount of P37,050.00 from the sale of the mortgaged chattels. Adding the
sum of P37,050.00, to the proceeds of the reinsurance amounting to
P295,000.00, it is patent that plaintiff has been overpaid in the amount of
P33,383.72 considering that the total amount it had paid to JDA totals to
only P298,666.28. To allow plaintiff Pioneer to recover from defendants
the amount in excess of P298,666.28 would be tantamount to unjust
enrichment as it has already been paid by the reinsurance company of the
amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis
defendant Lim's liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New
Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding
that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has
never been raised by any of the parties herein both in their answers in the court below
and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming
hypothetically that it was paid by its reinsurer, still none of the respondents had any
interest in the matter since the reinsurance is strictly between the petitioner and the re-
insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and
Maglana; and (4) the principle of unjust enrichment is not applicable considering that
whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money
was never raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:

140
 xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so

much of its obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer

still any claim against defendants, considering the amount it has realized
from the sale of the mortgaged properties? (Record on Appeal, p. 359,
Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond
it had executed in favor of JDA, collected the proceeds of such
reinsurance in the sum of P295,000, and paid with the said amount the
bulk of its alleged liability to JDA under the said surety bond, it is plain that
on this score it no longer has any right to collect to the extent of the said
amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that

is suing defendants for the amount paid to it by the reinsurers,
notwithstanding that the cause of action pertains to the latter, Pioneer
says: The reinsurers opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety
Corporation is representing the reinsurers to recover the amount.' In other
words, insofar as the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint
that Pioneer is suing as attorney-in- fact of the reinsurers for any amount.
Lastly, and most important of all, Pioneer has no right to institute and
maintain in its own name an action for the benefit of the reinsurers. It is
well-settled that an action brought by an attorney-in-fact in his own name
instead of that of the principal will not prosper, and this is so even where
the name of the principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that

'Every action must be prosecuted in the name of the real
party in interest.' This provision is mandatory. The real party
in interest is the party who would be benefitted or injured by
the judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact

is not a real party in interest, that there is no law permitting
an action to be brought by an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484; Luchauco v.

141
 Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial
Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA
706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer

has collected P295,000.00 from the reinsurers, the uninsured portion of
what it paid to JDA is the difference between the two amounts, or
P3,666.28. This is the amount for which Pioneer may sue defendants,
assuming that the indemnity agreement is still valid and effective. But
since the amount realized from the sale of the mortgaged chattels are
P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or
a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore,
Pioneer has no more claim against defendants. (Record on Appeal, pp.
360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate
court. Considering this admitted payment, the only issue that cropped up was the effect
of payment made by the reinsurers to the petitioner. Therefore, the petitioner's
argument that the respondents had no interest in the reinsurance contract as this is
strictly between the petitioner as insured and the reinsuring company pursuant to
Section 91 (should be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by

subrogation as are acquired in similar cases where the original insurer
pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F
2nd 925).

The rules of practice in actions on original insurance policies are in

general applicable to actions or contracts of reinsurance. (Delaware, Ins.
Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con.
1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of
the wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. If the amount paid by the
insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing
the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald
Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany
Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):

142
 Note that if a property is insured and the owner receives the indemnity
from the insurer, it is provided in said article that the insurer is deemed
subrogated to the rights of the insured against the wrongdoer and if the
amount paid by the insurer does not fully cover the loss, then the
aggrieved party is the one entitled to recover the deficiency. Evidently,
under this legal provision, the real party in interest with regard to the
portion of the indemnity paid is the insurer and not the insured. (Emphasis
supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-
fact of the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner was
not the real party in interest in the complaint and, therefore, has no cause of action
against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors
should not have been dismissed on the premise that the evidence on record shows that
it is entitled to recover from the counter indemnitors. It does not, however, cite any
grounds except its allegation that respondent "Maglanas defense and evidence are
certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence
to substantiate its finding that the counter-indemnitors are not liable to the petitioner.
The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to

be valid and effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts
involved, agreed to issue the bond provided that the same would be
mortgaged to it, but this was not possible because the planes were still in
Japan and could not be mortgaged here in the Philippines. As soon as the
aircrafts were brought to the Philippines, they would be mortgaged to
Pioneer Insurance to cover the bond, and this indemnity agreement would
be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties

have impaired and rendered insufficient the security under
the chattel mortgage and there is thus no other sufficient
security for the claim sought to be enforced by this action.

143
This is judicial admission and aside from the chattel mortgage there is no
other security for the claim sought to be enforced by this action, which
necessarily means that the indemnity agreement had ceased to have any
force and effect at the time this action was instituted. Sec 2, Rule 129,
Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel

mortgage on the planes and spare parts, no longer has any further action
against the defendants as indemnitors to recover any unpaid balance of
the price. The indemnity agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These defendants, as indemnitors,
would be entitled to be subrogated to the right of Pioneer should they
make payments to the latter. Articles 2067 and 2080 of the New Civil
Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the

remedy of foreclosure precludes any further action to recover any unpaid
balance of the price.

SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the payments
to JDA, the alternative remedies open to Pioneer were as provided in
Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both

by extrajudicial foreclosure and the instant suit. Such being the case, as
provided by the aforementioned provisions, Pioneer shall have no further
action against the purchaser to recover any unpaid balance and any
agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment &
Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through

the contention that Pioneer is not the vendor but JDA. The reason is that
Pioneer is actually exercising the rights of JDA as vendor, having
subrogated it in such rights. Nor may the application of the provision be
validly opposed on the ground that these defendants and defendant
Maglana are not the vendee but indemnitors. Pascual, et al. v. Universal
Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their
maturity dates discharged these defendants from any liability as alleged
indemnitors. The change of the maturity dates of the obligations of Lim, or
SAL extinguish the original obligations thru novations thus discharging the
indemnitors.

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 The principal hereof shall be paid in eight equal successive
three months interval installments, the first of which shall be
due and payable 25 August 1965, the remainder of which ...
shall be due and payable on the 26th day x x x of each
succeeding three months and the last of which shall be due
and payable 26th May 1967.

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

executed by SAL or Lim and JDA, modifying the maturity dates of the
obligations, as follows:

The principal hereof shall be paid in eight equal successive

three month interval installments the first of which shall be
due and payable 4 September 1965, the remainder of which
... shall be due and payable on the 4th day ... of each
succeeding months and the last of which shall be due and
payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes
bearing maturity dates different from that fixed in the aforesaid
memorandum; the due date of the first installment appears as October 15,
1965, and those of the rest of the installments, the 15th of each
succeeding three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates,

effected twice, were done without the knowledge, much less, would have it
believed that these defendants Maglana (sic). Pioneer's official Numeriano
Carbonel would have it believed that these defendants and defendant
Maglana knew of and consented to the modification of the obligations. But
if that were so, there would have been the corresponding documents in
the form of a written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of this
was the extinguishment of the obligations and of the surety bond secured
by the indemnity agreement which was thereby also extinguished.
Applicable by analogy are the rulings of the Supreme Court in the case of
Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of
Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor

without the consent of the guarantor extinguishes the
guaranty The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extension time referred to herein, (New
Civil Code).'

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 Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer

paid the same. Consequently, Pioneer has no more cause of action to
recover from these defendants, as supposed indemnitors, what it has paid
to JDA. By virtue of an express stipulation in the surety bond, the failure of
JDA to present its claim to Pioneer within ten days from default of Lim or
SAL on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these

defendants thru the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him

to reimbursement from his co-debtors if such payment is
made after the obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees

from Pioneer and its surety by reason of the filing of the instant case
against them and the attachment and garnishment of their properties. The
instant action is clearly unfounded insofar as plaintiff drags these
defendants and defendant Maglana.' (Record on Appeal, pp. 363-369,
Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

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

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose

agreement was to do business through the corporate vehicle but who
failed to incorporate the entity in which they had chosen to invest? How
are the losses to be treated in situations where their contributions to the
intended 'corporation' were invested not through the corporate form? This
Petition presents these fundamental questions which we believe were
resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of
respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim
to incorporate, a de facto partnership among them was created, and that as a
consequence of such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution. The petitioner, therefore, questions the

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appellate court's findings ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants'

cross-claims in the total amount of P184,878.74 as correctly found by the
trial court, with interest from the filing of the cross-complaints until the
amount is fully paid. Defendant Lim should pay one-half of the said
amount to Bormaheco and the Cervanteses and the other one-half to
defendant Maglana. It is established in the records that defendant Lim had
duly received the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of the
subject airplanes and spare parts (Exhibit 58). In addition, the cross-party
plaintiffs incurred additional expenses, hence, the total sum of P
184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be governed
by the supposed charter and the laws of the state relating thereto and not
by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121,
96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who
attempt, but fail, to form a corporation and who carry on business under
the corporate name occupy the position of partners inter se (Lynch v.
Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase
property to carry on a business, and their organization is so defective as to
come short of creating a corporation within the statute, they become in
legal effect partners inter se, and their rights as members of the company
to the property acquired by the company will be recognized (Smith v.
Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker,
29 Mich. 369). So, where certain persons associated themselves as a
corporation for the development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them contracted to pay a
third the difference in the proportionate value of the land conveyed by him,
and no stock was ever issued in the corporation, it was treated as a
trustee for the associates in an action between them for an accounting,
and its capital stock was treated as partnership assets, sold, and the
proceeds distributed among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a
relation does not necessarily exist, for ordinarily persons cannot be made
to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist (London Assur. Corp. v.
Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it
should be implied only when necessary to do justice between the parties;
thus, one who takes no part except to subscribe for stock in a proposed

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 corporation which is never legally formed does not become a partner with
other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution (Ward v. Brigham,
127 Mass. 24). A partnership relation between certain stockholders and
other stockholders, who were also directors, will not be implied in the
absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen, 44
N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics
supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his
failure to appear during the pretrial despite notification. In his answer, the petitioner
denied having received any amount from respondents Bormaheco, the Cervanteses
and Maglana. The trial court and the appellate court, however, found through Exhibit 58,
that the petitioner received the amount of P151,000.00 representing the participation of
Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave P75,000.00 to
petitioner Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with
the respondents despite his representations to them. This gives credence to the cross-
claims of the respondents to the effect that they were induced and lured by the
petitioner to make contributions to a proposed corporation which was never formed
because the petitioner reneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco

Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary certificates of
public convenience and necessity as well as the required permits for the
operation thereof. Maglana sometime in May 1965, gave Cervantes his
share of P75,000.00 for delivery to Lim which Cervantes did and Lim
acknowledged receipt thereof. Cervantes, likewise, delivered his share of
the undertaking. Lim in an undertaking sometime on or about August
9,1965, promised to incorporate his airline in accordance with their
agreement and proceeded to acquire the planes on his own account.
Since then up to the filing of this answer, Lim has refused, failed and still
refuses to set up the corporation or return the money of Maglana. (Record
on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer,

counterclaim, cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering
defendants to purchase two airplanes and spare parts from Japan which
the latter considered as their lawful contribution and participation in the

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 proposed corporation to be known as SAL. Arrangements and
negotiations were undertaken by defendant Lim. Down payments were
advanced by defendants Bormaheco and the Cervanteses and
Constancio Maglana (Exh. E- 1). Contrary to the agreement among the
defendants, defendant Lim in connivance with the plaintiff, signed and
executed the alleged chattel mortgage and surety bond agreement in his
personal capacity as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery and misrepresentation
of the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic)
allegedly executed by defendant Lim, thereby forcing them to file an
adverse claim in the form of third party claim. Notwithstanding repeated
oral demands made by defendants Bormaheco and Cervanteses, to
defendant Lim, to surrender the possession of the two planes and their
accessories and or return the amount advanced by the former amounting
to an aggregate sum of P 178,997.14 as evidenced by a statement of
accounts, the latter ignored, omitted and refused to comply with them.
(Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily,
no de facto partnership was created among the parties which would entitle the petitioner
to a reimbursement of the supposed losses of the proposed corporation. The record
shows that the petitioner was acting on his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.

SO ORDERED.

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