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G.R. No.

L-49982 April 27, 1988

JR., petitioner,
Agustin O. Benitez for petitioner.

1. to execute a public document embodying all the provisions of the

partnership agreement entered into between plaintiffs and defendant as
provided in Article 1771 of the New Civil Code;
2. to render a formal accounting of the business operation covering the
period from May 6, 1966 up to December 21, 1968 and from January 1,
1969 up to the time the order is issued and that the same be subject to
proper audit;

Benjamin C. Yatco for private respondents.

3. to pay the plaintiffs their lawful shares and participation in the net
profits of the business in an amount of no less than P l50,000.00 with
interest at the rate of 1% per month from date of demand until full
payment thereof for the entire duration of the business; and


4. to pay the plaintiffs the amount of P 10,000.00 as attorney's fees and

costs of the suit (pp. 13-14 Record on Appeal.)

By this petition for certiorari the Court is asked to determine if a partnership exists between
members of the same family arising from their joint ownership of certain properties.
Petitioner and private respondents are brothers and sisters who are co-owners of certain lots at
the corner of Annapolis and Aurora Blvd., QuezonCity which were then being leased to the
Shell Company of the Philippines Limited (SHELL). They agreed to open and operate a gas
station thereat to be known as Estanislao Shell Service Station with an initial investment of P
15,000.00 to be taken from the advance rentals due to them from SHELL for the occupancy of
the said lots owned in common by them. A joint affidavit was executed by them on April 11,
1966 which was prepared byAtty. Democrito Angeles 1 They agreed to help their brother,
petitioner herein, by allowing him to operate and manage the gasoline service station of the
family. They negotiated with SHELL. For practical purposes and in order not to run counter to
the company's policy of appointing only one dealer, it was agreed that petitioner would apply
for the dealership. Respondent Remedios helped in managing the bussiness with petitioner
from May 3, 1966 up to February 16, 1967.

After trial on the merits, on October 15, 1975, Hon. Lino Anover who was then the temporary
presiding judge of Branch IV of the trial court, rendered judgment dismissing the complaint
and counterclaim and ordering private respondents to pay petitioner P 3,000.00 attorney's fee
and costs. Private respondent filed a motion for reconsideration of the decision. On December
10, 1975, Hon. Ricardo Tensuan who was the newly appointed presiding judge of the same
branch, set aside the aforesaid derision and rendered another decision in favor of said
The dispositive part thereof reads as follows:
WHEREFORE, the Decision of this Court dated October 14, 1975 is
hereby reconsidered and a new judgment is hereby rendered in favor of the
plaintiffs and as against the defendant:

On May 26, 1966, the parties herein entered into an Additional Cash Pledge Agreement with
SHELL wherein it was reiterated that the P 15,000.00 advance rental shall be deposited with
SHELL to cover advances of fuel to petitioner as dealer with a proviso that said agreement
"cancels and supersedes the Joint Affidavit dated 11 April 1966 executed by the co-owners." 2

(1) Ordering the defendant to execute a public instrument embodying all

the provisions of the partnership agreement entered into between plaintiffs
and defendant as provided for in Article 1771, Civil Code of the

For sometime, the petitioner submitted financial statements regarding the operation of the
business to private respondents, but therafter petitioner failed to render subsequent accounting.
Hence through Atty. Angeles, a demand was made on petitioner to render an accounting of the

(2) Ordering the defendant to render a formal accounting of the business

operation from April 1969 up to the time this order is issued, the same to
be subject to examination and audit by the plaintiff,

The financial report of December 31, 1968 shows that the business was able to make a profit
of P 87,293.79 and that by the year ending 1969, a profit of P 150,000.00 was realized. 3
Thus, on August 25, 1970 private respondents filed a complaint in the Court of First Instance
of Rizal against petitioner praying among others that the latter be ordered:

(3) Ordering the defendant to pay plaintiffs their lawful shares and
participation in the net profits of the business in the amount of P
150,000.00, with interest thereon at the rate of One (1%) Per Cent per
month from date of demand until full payment thereof;
(4) Ordering the defendant to pay the plaintiffs the sum of P 5,000.00 by
way of attorney's fees of plaintiffs' counsel; as well as the costs of suit.
(pp. 161-162. Record on Appeal).

Petitioner then interposed an appeal to the Court of Appeals enumerating seven (7) errors
allegedly committed by the trial court. In due course, a decision was rendered by the Court of
Appeals on November 28,1978 affirming in toto the decision of the lower court with costs
against petitioner. *
A motion for reconsideration of said decision filed by petitioner was denied on January 30,
1979. Not satisfied therewith, the petitioner now comes to this court by way of this petition for
certiorari alleging that the respondent court erred:
1. In interpreting the legal import of the Joint Affidavit (Exh. 'A') vis-a-vis
the Additional Cash Pledge Agreement (Exhs. "B-2","6", and "L"); and

our estimate and one-half months from May 25, 1966 or until the 10th of
October, 1966 more or less;
(5) That we have likewise agreed among ourselves that the SHELL
COMPANY OF THE PHILIPPINES LIMITED execute an instrument for
us to sign embodying our conformity that the said amount that it will
generously grant us as requested be applied as ADVANCED RENTALS;
(b) The Additional Cash Pledge Agreement of May 20,1966, Exhibit 6, is as follows:

2. In declaring that a partnership was established by and among the

petitioner and the private respondents as regards the ownership and or
operation of the gasoline service station business.
Petitioner relies heavily on the provisions of the Joint Affidavit of April 11, 1966 (Exhibit A)
and the Additional Cash Pledge Agreement of May 20, 1966 (Exhibit 6) which are herein
reproduced(a) The joint Affidavit of April 11, 1966, Exhibit A reads:
(1) That we are the Lessors of two parcels of land fully describe in
Transfer Certificates of Title Nos. 45071 and 71244 of the Register of
Deeds of Quezon City, in favor of the LESSEE - SHELL COMPANY OF
THE PHILIPPINES LIMITED a corporation duly licensed to do business
in the Philippines;
(2) That we have requested the said SHELL COMPANY OF THE
PHILIPPINE LIMITED advanced rentals in the total amount of FIFTEEN
THOUSAND PESOS (P l5,000.00) Philippine Currency, so that we can
use the said amount to augment our capital investment in the operation of
that gasoline station constructed ,by the said company on our two lots
aforesaid by virtue of an outstanding Lease Agreement we have entered
into with the said company;
out of its benevolence and desire to help us in aumenting our capital
investment in the operation of the said gasoline station, has agreed to give
us the said amount of P 15,000.00, which amount will partake the nature
(4) That we have freely and voluntarily agreed that upon receipt of the said
amount of FIFTEEN THOUSAND PESOS (P l6,000.00) from he SHELL
ADVANCED RENTALS to us be applied as monthly rentals for the sai
two lots under our Lease Agreement starting on the 25th of May, 1966
until such time that the said of P 15,000.00 be applicable, which time to

WHEREAS, under the lease Agreement dated 13th November, 1963

(identified as doc. Nos. 491 & 1407, Page Nos. 99 & 66, Book Nos. V &
III, Series of 1963 in the Notarial Registers of Notaries Public Rosauro
Marquez, and R.D. Liwanag, respectively) executed in favour of SHELL
by the herein CO-OWNERS and another Lease Agreement dated 19th
March 1964 . . . also executed in favour of SHELL by CO-OWNERS
Remedios and MARIA ESTANISLAO for the lease of adjoining portions
of two parcels of land at Aurora Blvd./ Annapolis, Quezon City, the CO
OWNERS RECEIVE a total monthly rental of PESOS THREE
3,382.29), Philippine Currency;
WHEREAS, CO-OWNER Eligio Estanislao Jr. is the Dealer of the Shell
Station constructed on the leased land, and as Dealer under the Cash
Pledge Agreement dated llth May 1966, he deposited to SHELL in cash
the amount of PESOS TEN THOUSAND (P 10,000), Philippine Currency,
to secure his purchase on credit of Shell petroleum products; . . .
WHEREAS, said DEALER, in his desire, to be granted an increased the
limit up to P 25,000, has secured the conformity of his CO-OWNERS to
waive and assign to SHELL the total monthly rentals due to all of them to
accumulate the equivalent amount of P 15,000, commencing 24th May
1966, this P 15,000 shall be treated as additional cash deposit to SHELL
under the same terms and conditions of the aforementioned Cash Pledge
Agreement dated llth May 1966.
NOW, THEREFORE, for and in consideration of the foregoing
premises,and the mutual covenants among the CO-OWNERS herein and
SHELL, said parties have agreed and hereby agree as follows:
l. The CO-OWNERS dohere by waive in favor of DEALER the monthly
rentals due to all CO-OWNERS, collectively, under the above describe
two Lease Agreements, one dated 13th November 1963 and the other
dated 19th March 1964 to enable DEALER to increase his existing cash
deposit to SHELL, from P 10,000 to P 25,000, for such purpose, the
SHELL CO-OWNERS and DEALER hereby irrevocably assign to

SHELL the monthly rental of P 3,382.29 payable to them respectively as

they fall due, monthly, commencing 24th May 1966, until such time that
the monthly rentals accumulated, shall be equal to P l5,000.
2. The above stated monthly rentals accumulated shall be treated as
additional cash deposit by DEALER to SHELL, thereby in increasing his
credit limit from P 10,000 to P 25,000. This agreement, therefore, cancels
and supersedes the Joint affidavit dated 11 April 1966 executed by the
3. Effective upon the signing of this agreement, SHELL agrees to allow
DEALER to purchase from SHELL petroleum products, on credit, up to
the amount of P 25,000.
4. This increase in the credit shall also be subject to the same terms and
conditions of the above-mentioned Cash Pledge Agreement dated llth May
1966. (Exhs. "B-2," "L," and "6"; emphasis supplied)
In the aforesaid Joint Affidavit of April 11, 1966 (Exhibit A), it is clearly stipulated by the
parties that the P 15,000.00 advance rental due to them from SHELL shall augment their
"capital investment" in the operation of the gasoline station, which advance rentals shall be
credited as rentals from May 25, 1966 up to four and one-half months or until 10 October
1966, more or less covering said P 15,000.00.
In the subsequent document entitled "Additional Cash Pledge Agreement" above reproduced
(Exhibit 6), the private respondents and petitioners assigned to SHELL the monthly rentals
due them commencing the 24th of May 1966 until such time that the monthly rentals
accumulated equal P 15,000.00 which private respondents agree to be a cash deposit of
petitioner in favor of SHELL to increase his credit limit as dealer. As above-stated it provided
therein that "This agreement, therefore, cancels and supersedes the Joint Affidavit dated 11
April 1966 executed by the CO-OWNERS."
Petitioner contends that because of the said stipulation cancelling and superseding that
previous Joint Affidavit, whatever partnership agreement there was in said previous agreement
had thereby been abrogated. We find no merit in this argument. Said cancelling provision was
necessary for the Joint Affidavit speaks of P 15,000.00 advance rentals starting May 25, 1966
while the latter agreement also refers to advance rentals of the same amount starting May 24,
1966. There is, therefore, a duplication of reference to the P 15,000.00 hence the need to
provide in the subsequent document that it "cancels and supersedes" the previous one. True it
is that in the latter document, it is silent as to the statement in the Joint Affidavit that the P
15,000.00 represents the "capital investment" of the parties in the gasoline station business and
it speaks of petitioner as the sole dealer, but this is as it should be for in the latter document
SHELL was a signatory and it would be against its policy if in the agreement it should be
stated that the business is a partnership with private respondents and not a sole proprietorship
of petitioner.
Moreover other evidence in the record shows that there was in fact such partnership agreement
between the parties. This is attested by the testimonies of private respondent Remedies
Estanislao and Atty. Angeles. Petitioner submitted to private respondents periodic accounting

of the business. 4 Petitioner gave a written authority to private respondent Remedies

Estanislao, his sister, to examine and audit the books of their "common business' aming
negosyo). 5 Respondent Remedios assisted in the running of the business. There is no doubt
that the parties hereto formed a partnership when they bound themselves to contribute money
to a common fund with the intention of dividing the profits among themselves. 6 The sole
dealership by the petitioner and the issuance of all government permits and licenses in the
name of petitioner was in compliance with the afore-stated policy of SHELL and the
understanding of the parties of having only one dealer of the SHELL products.
Further, the findings of facts of the respondent court are conclusive in this proceeding, and its
conclusion based on the said facts are in accordancewith the applicable law.
WHEREFORE, the judgment appealed from is AFFIRMED in toto with costs against
petitioner. This decision is immediately executory and no motion for extension of time to file a
motion for reconsideration shag beentertained.
Narvasa, Cruz and Grio-Aquino, JJ., concur.

G.R. No. 159333

July 31, 2006

MENDIOLA, petitioner,
On appeal are the Decision 1 and Resolution2 of the Court of Appeals, dated January 30, 2003
and July 30, 2003, respectively, in CA-G.R. SP No. 71028, affirming the ruling 3 of the
National Labor Relations Commission (NLRC), which in turn set aside the July 30, 2001
Decision4 of the labor arbiter. The labor arbiter declared illegal the dismissal of petitioner from
employment and awarded separation pay, moral and exemplary damages, and attorney's fees.

In July 2000, petitioner wrote Kevin Daley, Vice President for Asia of Pacfor, seeking
confirmation of his 50% equity of Pacfor Phils. 10 Private respondent Pacfor, through William
Gleason, its President, replied that petitioner is not a part-owner of Pacfor Phils. because the
latter is merely Pacfor-USA's representative office and not an entity separate and distinct from
Pacfor-USA. "It's simply a 'theoretical company' with the purpose of dividing the income 5050."11 Petitioner presumably knew of this arrangement from the start, having been the one to
propose to private respondent Pacfor the setting up of a representative office, and "not a
branch office" in the Philippines to save on taxes. 12
Petitioner claimed that he was all along made to believe that he was in a joint venture with
them. He alleged he would have been better off remaining as an independent agent or
representative of Pacfor-USA as ATM Marketing Corp. 13 Had he known that no joint venture
existed, he would not have allowed Pacfor to take the profitable business of his own company,
ATM Marketing Corp.14 Petitioner raised other issues, such as the rentals of office furniture,
salary of the employees, company car, as well as commissions allegedly due him. The issues
were not resolved, hence, in October 2000, petitioner wrote Pacfor-USA demanding payment
of unpaid commissions and office furniture and equipment rentals, amounting to more than
one million dollars.15

The facts are as follows:

Private respondent Pacific Forest Resources, Phils., Inc. (Pacfor) is a corporation organized
and existing under the laws of California, USA. It is a subsidiary of Cellulose Marketing
International, a corporation duly organized under the laws of Sweden, with principal office in
Gothenburg, Sweden.
Private respondent Pacfor entered into a "Side Agreement on Representative Office known as
Pacific Forest Resources (Phils.), Inc." 5 with petitioner Arsenio T. Mendiola (ATM), effective
May 1, 1995, "assuming that Pacfor-Phils. is already approved by the Securities and Exchange
Commission [SEC] on the said date." 6 The Side Agreement outlines the business relationship
of the parties with regard to the Philippine operations of Pacfor. Private respondent will
establish a Pacfor representative office in the Philippines, to be known as Pacfor Phils, and
petitioner ATM will be its President. Petitioner's base salary and the overhead expenditures of
the company shall be borne by the representative office and funded by Pacfor/ATM, since
Pacfor Phils. is equally owned on a 50-50 equity by ATM and Pacfor-usa.
On July 14, 1995, the SEC granted the application of private respondent Pacfor for a license to
transact business in the Philippines under the name of Pacfor or Pacfor Phils. 7 In its
application, private respondent Pacfor proposed to establish its representative office in the
Philippines with the purpose of monitoring and coordinating the market activities for paper
products. It also designated petitioner as its resident agent in the Philippines, authorized to
accept summons and processes in all legal proceedings, and all notices affecting the
In March 1997, the Side Agreement was amended through a "Revised Operating and Profit
Sharing Agreement for the Representative Office Known as Pacific Forest Resources
(Philippines),"9 where the salary of petitioner was increased to $78,000 per annum. Both
agreements show that the operational expenses will be borne by the representative office and
funded by all parties "as equal partners," while the profits and commissions will be shared
among them.

On November 27, 2000, private respondent Pacfor, through counsel, ordered petitioner to turn
over to it all papers, documents, files, records, and other materials in his or ATM Marketing
Corporation's possession that belong to Pacfor or Pacfor Phils. 16 On December 18, 2000,
private respondent Pacfor also required petitioner to remit more than three hundred thousandpeso Christmas giveaway fund for clients of Pacfor Phils. 17 Lastly, private respondent Pacfor
withdrew all its offers of settlement and ordered petitioner to transfer title and turn over to it
possession of the service car.18
Private respondent Pacfor likewise sent letters to its clients in the Philippines, advising them
not to deal with Pacfor Phils. In its letter to Intercontinental Paper Industries, Inc., dated
November 21, 2000, private respondent Pacfor stated:
Until further notice, please course all inquiries and communications for Pacific
Forest Resources (Philippines) to:
(415) 381 4358 fax




Please do not send any communication to Mr. Arsenio "Boy" T. Mendiola or to the
offices of ATM Marketing Corporation at Room 504, Concorde Building, Legaspi
Village, Makati City, Philippines.19
In another letter addressed to Davao Corrugated Carton Corp. (DAVCOR), dated December
2000, private respondent directed said client "to please communicate directly with us on any
further questions associated with these payments or any future business. Do not communicate
with [Pacfor] and/or [ATM]."20

Petitioner construed these directives as a severance of the "unregistered partnership" between

him and Pacfor, and the termination of his employment as resident manager of Pacfor
Phils.21 In a memorandum to the employees of Pacfor Phils., dated January 29, 2001, he stated:
I received a letter from Pacific Forest Resources, Inc. demanding the turnover of all
records to them effective December 19, 2000. The company records were turned
over only on January 26, 2001. This means our jobs with Pacific Forest were
terminated effective December 19, 2000. I am concerned about your welfare. I
would like to help you by offering you to work with ATM Marketing Corporation.
Please let me know if you are interested. 22
On the basis of the "Side Agreement," petitioner insisted that he and Pacfor equally own
Pacfor Phils. Thus, it follows that he and Pacfor likewise own, on a 50/50 basis, Pacfor Phils.'
office furniture and equipment and the service car. He also reiterated his demand for unpaid
commissions, and proposed to offset these with the remaining Christmas giveaway fund in his
possession.23 Furthermore, he did not renew the lease contract with Pulp and Paper, Inc., the
lessor of the office premises of Pacfor Phils., wherein he was the signatory to the lease

Labor Arbiter Felipe Pati ruled in favor of petitioner, finding there was constructive dismissal.
By directing petitioner to turn over all office records and materials, regardless of whether he
may have retained copies, private respondent Pacfor virtually deprived petitioner of his job by
the gradual diminution of his authority as resident manager. Petitioner's position as resident
manager whose duty, among others, was to maintain the security of its business transactions
and communications was rendered meaningless. The dispositive portion of the decision of the
Labor Arbiter reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering herein
respondents Cellmark AB and Pacific Forest Resources, Inc., jointly and severally to
compensate complainant Arsenio T. Mendiola separation pay equivalent to at least
one month for every year of service, whichever is higher (sic), as reinstatement is no
longer feasible by reason of the strained relations of the parties equivalent to five (5)
months in the amount of $32,000.00 plus the sum of P250,000.00; pay complainant
the sum of P500,000.00 as moral and exemplary damages and ten percent (10%) of
the amounts awarded as and for attorney's fees.
All other claims are dismissed for lack of basis.

On February 2, 2001, private respondent Pacfor placed petitioner on preventive suspension

and ordered him to show cause why no disciplinary action should be taken against him.
Private respondent Pacfor charged petitioner with willful disobedience and serious misconduct
for his refusal to turn over the service car and the Christmas giveaway fund which he applied
to his alleged unpaid commissions. Private respondent also alleged loss of confidence and
gross neglect of duty on the part of petitioner for allegedly allowing another corporation
owned by petitioner's relatives, High End Products, Inc. (HEPI), to use the same telephone and
facsimile numbers of Pacfor, to possibly steal and divert the sales and business of private
respondent for HEPI's principal, International Forest Products, a competitor of private
Petitioner denied the charges. He reiterated that he considered the import of Pacfor President
William Gleason's letters as a "cessation of his position and of the existence of Pacfor Phils."
He likewise informed private respondent Pacfor that ATM Marketing Corp. now occupies
Pacfor Phils.' office premises,26 and demanded payment of his separation pay.27 On February
15, 2001, petitioner filed his complaint for illegal dismissal, recovery of separation pay, and
payment of attorney's fees with the NLRC. 28

Private respondent Pacfor appealed to the NLRC which ruled in its favor. On December 20,
2001, the NLRC set aside the July 30, 2001 decision of the labor arbiter, for lack of
jurisdiction and lack of merit. 31 It held there was no employer-employee relationship between
the parties. Based on the two agreements between the parties, it concluded that petitioner is
not an employee of private respondent Pacfor, but a full co-owner (50/50 equity).
The NLRC denied petitioner's Motion for Reconsideration. 32
Petitioner was not successful on his appeal to the Court of Appeals. The appellate court upheld
the ruling of the NLRC.
Petitioner's Motion for Reconsideration33 of the decision of the Court of Appeals was denied.
Hence, this appeal.34
Petitioner assigns the following errors:

In the meantime, private respondent Pacfor lodged fresh charges against petitioner. In a
memorandum dated March 5, 2001, private respondent directed petitioner to explain why he
should not be disciplined for serious misconduct and conflict of interest. Private respondent
charged petitioner anew with serious misconduct for the latter's alleged act of fraud and
misrepresentation in authorizing the release of an additional peso salary for himself, besides
the dollar salary agreed upon by the parties. Private respondent also accused petitioner of
disloyalty and representation of conflicting interests for having continued using the Pacfor
Phils.' office for operations of HEPI. In addition, petitioner allegedly solicited business for
HEPI from a competitor company of private respondent Pacfor.29

A. The Respondent Court of Appeals committed reversible error and abused its
discretion in rendering judgment against petitioner since jurisdiction has been
acquired over the subject matter of the case as there exists employer-employee
relationship between the parties.
B. The Respondent Court of Appeals committed reversible error and abused its
discretion in ruling that jurisdiction over the subject matter cannot be waived and
may be alleged even for the first time on appeal or considered by the court motu

The first issue is whether an employer-employee relationship exists between petitioner and
private respondent Pacfor.
Petitioner argues that he is an industrial partner of the partnership he formed with private
respondent Pacfor, and also an employee of the partnership. Petitioner insists that an industrial
partner may at the same time be an employee of the partnership, provided there is such an
agreement, which, in this case, is the "Side Agreement" and the "Revised Operating and Profit
Sharing Agreement." The Court of Appeals denied the appeal of petitioner, holding that "the
legal basis of the complaint is not employment but perhaps partnership, co-ownership, or
independent contractorship." Hence, the Labor Code cannot apply.
We hold that petitioner is an employee of private respondent Pacfor and that no partnership or
co-ownership exists between the parties.
In a partnership, the members become co-owners of what is contributed to the firm capital and
of all property that may be acquired thereby and through the efforts of the members. 36 The
property or stock of the partnership forms a community of goods, a common fund, in which
each party has a proprietary interest. 37 In fact, the New Civil Code regards a partner as a coowner of specific partnership property.38 Each partner possesses a joint interest in the whole of
partnership property. If the relation does not have this feature, it is not one of
partnership.39 This essential element, the community of interest, or co-ownership of, or joint
interest in partnership property is absent in the relations between petitioner and private
respondent Pacfor. Petitioner is not a part-owner of Pacfor Phils. William Gleason, private
respondent Pacfor's President established this fact when he said that Pacfor Phils. is simply a
"theoretical company" for the purpose of dividing the income 50-50. He stressed that
petitioner knew of this arrangement from the very start, having been the one to propose to
private respondent Pacfor the setting up of a representative office, and "not a branch office" in
the Philippines to save on taxes. Thus, the parties in this case, merely shared profits. This
alone does not make a partnership.40
Besides, a corporation cannot become a member of a partnership in the absence of express
authorization by statute or charter.41 This doctrine is based on the following considerations: (1)
that the mutual agency between the partners, whereby the corporation would be bound by the
acts of persons who are not its duly appointed and authorized agents and officers, would be
inconsistent with the policy of the law that the corporation shall manage its own affairs
separately and exclusively; and, (2) that such an arrangement would improperly allow
corporate property to become subject to risks not contemplated by the stockholders when they
originally invested in the corporation.42 No such authorization has been proved in the case at
Be that as it may, we hold that on the basis of the evidence, an employer-employee
relationship is present in the case at bar. The elements to determine the existence of an
employment relationship are: (a) the selection and engagement of the employee; (b) the
payment of wages; (c) the power of dismissal; and (d) the employer's power to control the
employee's conduct. The most important element is the employer's control of the employee's
conduct, not only as to the result of the work to be done, but also as to the means and methods
to accomplish it.43

In the instant case, all the foregoing elements are present. First, it was private respondent
Pacfor which selected and engaged the services of petitioner as its resident agent in the
Philippines. Second, as stipulated in their Side Agreement, private respondent Pacfor pays
petitioner his salary amounting to $65,000 per annum which was later increased to $78,000.
Third, private respondent Pacfor holds the power of dismissal, as may be gleaned through the
various memoranda it issued against petitioner, placing the latter on preventive suspension
while charging him with various offenses, including willful disobedience, serious misconduct,
and gross neglect of duty, and ordering him to show cause why no disciplinary action should
be taken against him.
Lastly and most important, private respondent Pacfor has the power of control over the means
and method of petitioner in accomplishing his work.
The power of control refers merely to the existence of the power, and not to the actual exercise
thereof. The principal consideration is whether the employer has the right to control the
manner of doing the work, and it is not the actual exercise of the right by interfering with the
work, but the right to control, which constitutes the test of the existence of an employeremployee relationship.44 In the case at bar, private respondent Pacfor, as employer, clearly
possesses such right of control. Petitioner, as private respondent Pacfor's resident agent in the
Philippines, is, exactly so, only an agent of the corporation, a representative of Pacfor, who
transacts business, and accepts service on its behalf.
This right of control was exercised by private respondent Pacfor during the period of
November to December 2000, when it directed petitioner to turn over to it all records of
Pacfor Phils.; when it ordered petitioner to remit the Christmas giveaway fund intended for
clients of Pacfor Phils.; and, when it withdrew all its offers of settlement and ordered
petitioner to transfer title and turn over to it the possession of the service car. It was also
during this period when private respondent Pacfor sent letters to its clients in the Philippines,
particularly Intercontinental Paper Industries, Inc. and DAVCOR, advising them not to deal
with petitioner and/or Pacfor Phils. In its letter to DAVCOR, private respondent Pacfor replied
to the client's request for an invoice payment extension, and formulated a revised payment
program for DAVCOR. This is one unmistakable proof that private respondent Pacfor
exercises control over the petitioner.
Next, we shall determine if petitioner was constructively dismissed from employment.
The evidence shows that when petitioner insisted on his 50% equity in Pacfor Phils., and
would not quit however, private respondent Pacfor began to systematically deprive petitioner
of his duties and benefits to make him feel that his presence in the company was no longer
wanted. First, private respondent Pacfor directed petitioner to turn over to it all records of
Pacfor Phils. This would certainly make the work of petitioner very difficult, if not impossible.
Second, private respondent Pacfor ordered petitioner to remit the Christmas giveaway fund
intended for clients of Pacfor Phils. Then it ordered petitioner to transfer title and turn over to
it the possession of the service car. It also advised its clients in the Philippines, particularly
Intercontinental Paper Industries, Inc. and DAVCOR, not to deal with petitioner and/or Pacfor
Phils. Lastly, private respondent Pacfor appointed a new resident agent for Pacfor Phils. 45
Although there is no reduction of the salary of petitioner, constructive dismissal is still present
because continued employment of petitioner is rendered, at the very least,

unreasonable.46 There is an act of clear discrimination, insensibility or disdain by the employer

that continued employment may become so unbearable on the part of the employee so as to
foreclose any choice on his part except to resign from such employment. 47
The harassing acts of the private respondent are unjustified. They were undertaken when
petitioner sought clarification from the private respondent about his supposed 50% equity on
Pacfor Phils. Private respondent Pacfor invokes its rights as an owner. Allegedly, its issuance
of the foregoing directives against petitioner was a valid exercise of management prerogative.
We remind private respondent Pacfor that the exercise of management prerogative is not
absolute. "By its very nature, encompassing as it could be, management prerogative must be
exercised in good faith and with due regard to the rights of labor verily, with the principles
of fair play at heart and justice in mind." The exercise of management prerogative cannot be
utilized as an implement to circumvent our laws and oppress employees. 48
As resident agent of private respondent corporation, petitioner occupied a position involving
trust and confidence. In the light of the strained relations between the parties, the full
restoration of an employment relationship based on trust and confidence is no longer possible.
He should be awarded separation pay, in lieu of reinstatement.
IN VIEW WHEREOF, the petition is GRANTED. The Court of Appeals' January 30, 2003
Decision in CA-G.R. SP No. 71028 and July 30, 2003 Resolution, affirming the December 20,
2001 Decision of the National Labor Relations Commission, are ANNULED and SET
ASIDE. The July 30, 2001 Decision of the Labor Arbiter isREINSTATED with
the MODIFICATION that the amount of P250,000.00 representing an alleged increase in
petitioner's salary shall be deducted from the grant of separation pay for lack of evidence.
Sandoval-Gutierrez, Corona, Azcuna, Garcia, J.J., concur.

In June , 1946, they executed a supplementary agreement, extending the partnership for a
period of three years beginning January 1, 1948 to December 31, 1950. The benefits are to be
divided between them at the rate of 50-50 and after December 31, 1950, the showhouse
Yulo.chanroblesvirtualawlibrary chanrobles virtual law library
G.R. No. L-12541 August 28, 1959
ROSARIO U. YULO, assisted by her husband JOSE C. YULO, Plaintiffs-Appellants,
vs.YANG CHIAO SENG, Defendant-Appellee.
Augusto Francisco and Julian T. Ocampo for appellee.



LABRADOR, J.: chanrobles virtual law library

Appeal from the judgment of the Court of First Instance of Manila, Hon. Bienvenido A. Tan,
presiding, dismissing plaintiff's complaint as well as defendant's counterclaim. The appeal is
prosecuted by plaintiff.chanroblesvirtualawlibrary chanrobles virtual law library
The record discloses that on June 17, 1945, defendant Yang Chiao Seng wrote a letter to the
palintiff Mrs. Rosario U. Yulo, proposing the formation of a partnership between them to run
and operate a theatre on the premises occupied by former Cine Oro at Plaza Sta. Cruz, Manila.
The principal conditions of the offer are (1) that Yang Chiao Seng guarantees Mrs. Yulo a
monthly participation of P3,000 payable quarterly in advance within the first 15 days of each
quarter, (2) that the partnership shall be for a period of two years and six months, starting from
July 1, 1945 to December 31, 1947, with the condition that if the land is expropriated or
rendered impracticable for the business, or if the owner constructs a permanent building
thereon, or Mrs. Yulo's right of lease is terminated by the owner, then the partnership shall be
terminated even if the period for which the partnership was agreed to be established has not
yet expired; (3) that Mrs. Yulo is authorized personally to conduct such business in the lobby
of the building as is ordinarily carried on in lobbies of theatres in operation, provided the said
business may not obstruct the free ingress and agrees of patrons of the theatre; (4) that after
December 31, 1947, all improvements placed by the partnership shall belong to Mrs. Yulo, but
if the partnership agreement is terminated before the lapse of one and a half years period under
any of the causes mentioned in paragraph (2), then Yang Chiao Seng shall have the right to
remove and take away all improvements that the partnership may place in the
premises.chanroblesvirtualawlibrary chanrobles virtual law library
Pursuant to the above offer, which plaintiff evidently accepted, the parties executed a
partnership agreement establishing the "Yang & Company, Limited," which was to exist from
July 1, 1945 to December 31, 1947. It states that it will conduct and carry on the business of
operating a theatre for the exhibition of motion and talking pictures. The capital is fixed at
P100,000, P80,000 of which is to be furnished by Yang Chiao Seng and P20,000, by Mrs.
Yulo. All gains and profits are to be distributed among the partners in the same proportion as
their capital contribution and the liability of Mrs. Yulo, in case of loss, shall be limited to her
capital contribution (Exh. "B").chanroblesvirtualawlibrary chanrobles virtual law library

The land on which the theatre was constructed was leased by plaintiff Mrs. Yulo from Emilia
Carrion Santa Marina and Maria Carrion Santa Marina. In the contract of lease it was
stipulated that the lease shall continue for an indefinite period of time, but that after one year
the lease may be cancelled by either party by written notice to the other party at least 90 days
before the date of cancellation. The last contract was executed between the owners and Mrs.
Yulo on April 5, 1948. But on April 12, 1949, the attorney for the owners notified Mrs. Yulo of
the owner's desire to cancel the contract of lease on July 31, 1949. In view of the above notice,
Mrs. Yulo and her husband brought a civil action to the Court of First Instance of Manila on
July 3, 1949 to declare the lease of the premises. On February 9, 1950, the Municipal Court of
Manila rendered judgment ordering the ejectment of Mrs. Yulo and Mr. Yang. The judgment
was appealed. In the Court of First Instance, the two cases were afterwards heard jointly, and
judgment was rendered dismissing the complaint of Mrs. Yulo and her husband, and declaring
the contract of lease of the premises terminated as of July 31, 1949, and fixing the reasonable
monthly rentals of said premises at P100. Both parties appealed from said decision and the
judgment.chanroblesvirtualawlibrary chanrobles virtual law library
On October 27, 1950, Mrs. Yulo demanded from Yang Chiao Seng her share in the profits of
the business. Yang answered the letter saying that upon the advice of his counsel he had to
suspend the payment (of the rentals) because of the pendency of the ejectment suit by the
owners of the land against Mrs. Yulo. In this letter Yang alleges that inasmuch as he is a
sublessee and inasmuch as Mrs. Yulo has not paid to the lessors the rentals from August, 1949,
he was retaining the rentals to make good to the landowners the rentals due from Mrs. Yulo in
arrears (Exh. "E").chanroblesvirtualawlibrary chanrobles virtual law library
In view of the refusal of Yang to pay her the amount agreed upon, Mrs. Yulo instituted this
action on May 26, 1954, alleging the existence of a partnership between them and that the
defendant Yang Chiao Seng has refused to pay her share from December, 1949 to December,
1950; that after December 31, 1950 the partnership between Mrs. Yulo and Yang terminated,
as a result of which, plaintiff became the absolute owner of the building occupied by the Cine
Astor; that the reasonable rental that the defendant should pay therefor from January, 1951 is
P5,000; that the defendant has acted maliciously and refuses to pay the participation of the
plaintiff in the profits of the business amounting to P35,000 from November, 1949 to October,
1950, and that as a result of such bad faith and malice on the part of the defendant, Mrs. Yulo
has suffered damages in the amount of P160,000 and exemplary damages to the extent of
P5,000. The prayer includes a demand for the payment of the above sums plus the sum of
P10,000 for the attorney's fees.chanroblesvirtualawlibrary chanrobles virtual law library
In answer to the complaint, defendant alleges that the real agreement between the plaintiff and
the defendant was one of lease and not of partnership; that the partnership was adopted as a
subterfuge to get around the prohibition contained in the contract of lease between the owners
and the plaintiff against the sublease of the said property. As to the other claims, he denies the
same and alleges that the fair rental value of the land is only P1,100. By way of counterclaim
he alleges that by reason of an attachment issued against the properties of the defendant the

latter has suffered damages amounting to P100,000.chanroblesvirtualawlibrary chanrobles

virtual law library
The first hearing was had on April 19, 1955, at which time only the plaintiff appeared. The
court heard evidence of the plaintiff in the absence of the defendant and thereafter rendered
judgment ordering the defendant to pay to the plaintiff P41,000 for her participation in the
business up to December, 1950; P5,000 as monthly rental for the use and occupation of the
building from January 1, 1951 until defendant vacates the same, and P3,000 for the use and
occupation of the lobby from July 1, 1945 until defendant vacates the property. This decision,
however, was set aside on a motion for reconsideration. In said motion it is claimed that
defendant failed to appear at the hearing because of his honest belief that a joint petition for
postponement filed by both parties, in view of a possible amicable settlement, would be
granted; that in view of the decision of the Court of Appeals in two previous cases between the
owners of the land and the plaintiff Rosario Yulo, the plaintiff has no right to claim the alleged
participation in the profit of the business, etc. The court, finding the above motion, wellfounded, set aside its decision and a new trial was held. After trial the court rendered the
decision making the following findings: that it is not true that a partnership was created
between the plaintiff and the defendant because defendant has not actually contributed the sum
mentioned in the Articles of Partnership, or any other amount; that the real agreement between
the plaintiff and the defendant is not of the partnership but one of the lease for the reason that
under the agreement the plaintiff did not share either in the profits or in the losses of the
business as required by Article 1769 of the Civil Code; and that the fact that plaintiff was
granted a "guaranteed participation" in the profits also belies the supposed existence of a
partnership between them. It. therefore, denied plaintiff's claim for damages or supposed
participation in the profits.chanroblesvirtualawlibrary chanrobles virtual law library
As to her claim for damages for the refusal of the defendant to allow the use of the supposed
lobby of the theatre, the court after ocular inspection found that the said lobby was very
narrow space leading to the balcony of the theatre which could not be used for business
purposes under existing ordinances of the City of Manila because it would constitute a hazard
and danger to the patrons of the theatre. The court, therefore, dismissed the complaint; so did it
dismiss the defendant's counterclaim, on the ground that the defendant failed to present
sufficient evidence to sustain the same. It is against this decision that the appeal has been
prosecuted by plaintiff to this Court.chanroblesvirtualawlibrary chanrobles virtual law library
The first assignment of error imputed to the trial court is its order setting aside its former
decision and allowing a new trial. This assignment of error is without merit. As that parties
agreed to postpone the trial because of a probable amicable settlement, the plaintiff could not
take advantage of defendant's absence at the time fixed for the hearing. The lower court,
therefore, did not err in setting aside its former judgment. The final result of the hearing shown
by the decision indicates that the setting aside of the previous decision was in the interest of
justice.chanroblesvirtualawlibrary chanrobles virtual law library
In the second assignment of error plaintiff-appellant claims that the lower court erred in not
striking out the evidence offered by the defendant-appellee to prove that the relation between
him and the plaintiff is one of the sublease and not of partnership. The action of the lower
court in admitting evidence is justified by the express allegation in the defendant's answer that
the agreement set forth in the complaint was one of lease and not of partnership, and that the
partnership formed was adopted in view of a prohibition contained in plaintiff's lease against a
sublease of the property.chanroblesvirtualawlibrary chanrobles virtual law library

The most important issue raised in the appeal is that contained in the fourth assignment of
error, to the effect that the lower court erred in holding that the written contracts, Exhs. "A",
"B", and "C, between plaintiff and defendant, are one of lease and not of partnership. We have
gone over the evidence and we fully agree with the conclusion of the trial court that the
agreement was a sublease, not a partnership. The following are the requisites of partnership:
(1) two or more persons who bind themselves to contribute money, property, or industry to a
common fund; (2) intention on the part of the partners to divide the profits among themselves.
(Art. 1767, Civil Code.).chanroblesvirtualawlibrary chanrobles virtual law library
In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place,
she did not furnish any help or intervention in the management of the theatre. In the third
place, it does not appear that she has ever demanded from defendant any accounting of the
expenses and earnings of the business. Were she really a partner, her first concern should have
been to find out how the business was progressing, whether the expenses were legitimate,
whether the earnings were correct, etc. She was absolutely silent with respect to any of the acts
that a partner should have done; all that she did was to receive her share of P3,000 a month,
which can not be interpreted in any manner than a payment for the use of the premises which
she had leased from the owners. Clearly, plaintiff had always acted in accordance with the
original letter of defendant of June 17, 1945 (Exh. "A"), which shows that both parties
considered this offer as the real contract between them.chanroblesvirtualawlibrary chanrobles
virtual law library
Plaintiff claims the sum of P41,000 as representing her share or participation in the business
from December, 1949. But the original letter of the defendant, Exh. "A", expressly states that
the agreement between the plaintiff and the defendant was to end upon the termination of the
right of the plaintiff to the lease. Plaintiff's right having terminated in July, 1949 as found by
the Court of Appeals, the partnership agreement or the agreement for her to receive a
date.chanroblesvirtualawlibrary chanrobles virtual law library
We find no error in the judgment of the court below and we affirm it in toto, with costs against
plaintiff-appellant.chanroblesvirtualawlibrary chanrobles virtual law library
Paras C.J., Padilla, Bautista Angelo, Endencia, and Barrera, JJ., concur.

(4) During the said grace period, the FIRST PARTY obliges herself not to file any lis pendens
or whatever claims on the property nor shall be cause the annotation of say claim at the back
of the title to the said property;
(5) With the execution of the deed of absolute sale, the FIRST PARTY warrants her
ownership of the property and shall defend the rights of the SECOND PARTY against any
party whom may have any interests over the property;
[G.R. No. 127347. November 25, 1999]


This is a petition for review on certiorari of the decision[1] of the Court of Appeals, dated
November 29, 1990, which reversed the decision of the Regional Trial Court, Branch 273,
Marikina, Metro Manila, dated April 11, 1995. The trial court dismissed the petition for
declaration of nullity of a deed of sale filed by private respondent Felicidad S. Vda. de
Abrogar against petitioner Alfredo N. Aguila, Jr.
The facts are as follows:
Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in lending
activities. Private respondent and her late husband, Ruben M. Abrogar, were the registered
owners of a house and lot, covered by Transfer Certificate of Title No. 195101, in Marikina,
Metro Manila. On April 18, 1991, private respondent, with the consent of her late husband,
and A.C. Aguila & Sons, Co., represented by petitioner, entered into a Memorandum of
Agreement, which provided:
(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy the above-described
property from the FIRST PARTY [Felicidad S. Vda. de Abrogar], and pursuant to this
agreement, a Deed of Absolute Sale shall be executed by the FIRST PARTY conveying the
property to the SECOND PARTY for and in consideration of the sum of Two Hundred
Thousand Pesos (P200,000.00), Philippine Currency;
(2) The FIRST PARTY is hereby given by the SECOND PARTY the option to repurchase the
said property within a period of ninety (90) days from the execution of this memorandum of
agreement effective April 18, 1991, for the amount of TWO HUNDRED THIRTY
THOUSAND PESOS (P230,000.00);
(3) In the event that the FIRST PARTY fail to exercise her option to repurchase the said
property within a period of ninety (90) days, the FIRST PARTY is obliged to deliver
peacefully the possession of the property to the SECOND PARTY within fifteen (15) days
after the expiration of the said 90 day grace period;

(6) All expenses for documentation and other incidental expenses shall be for the account of
(7) Should the FIRST PARTY fail to deliver peaceful possession of the property to the
SECOND PARTY after the expiration of the 15-day grace period given in paragraph 3 above,
the FIRST PARTY shall pay an amount equivalent to Five Percent of the principal amount of
TWO HUNDRED PESOS (P200.00) or P10,000.00 per month of delay as and for rentals and
liquidated damages;
(8) Should the FIRST PARTY fail to exercise her option to repurchase the property within
ninety (90) days period above-mentioned, this memorandum of agreement shall be deemed
cancelled and the Deed of Absolute Sale, executed by the parties shall be the final contract
considered as entered between the parties and the SECOND PARTY shall proceed to transfer
ownership of the property above described to its name free from lines and encumbrances. [2]
On the same day, April 18, 1991, the parties likewise executed a deed of absolute sale,
dated June 11, 1991, wherein private respondent, with the consent of her late husband, sold
the subject property to A.C. Aguila & Sons, Co., represented by petitioner, for
P200,000.00. In a special power of attorney dated the same day, April 18, 1991, private
respondent authorized petitioner to cause the cancellation of TCT No. 195101 and the issuance
of a new certificate of title in the name of A.C. Aguila and Sons, Co., in the event she failed to
redeem the subject property as provided in the Memorandum of Agreement. [4]

Private respondent failed to redeem the property within the 90-day period as provided in
the Memorandum of Agreement. Hence, pursuant to the special power of attorney mentioned
above, petitioner caused the cancellation of TCT No. 195101 and the issuance of a new
certificate of title in the name of A.C. Aguila and Sons, Co. [5]
Private respondent then received a letter dated August 10, 1991 from Atty. Lamberto C.
Nanquil, counsel for A.C. Aguila & Sons, Co., demanding that she vacate the premises within
15 days after receipt of the letter and surrender its possession peacefully to A.C. Aguila &
Sons, Co. Otherwise, the latter would bring the appropriate action in court. [6]
Upon the refusal of private respondent to vacate the subject premises, A.C. Aguila &
Sons, Co. filed an ejectment case against her in the Metropolitan Trial Court, Branch 76,
Marikina, Metro Manila. In a decision, dated April 3, 1992, the Metropolitan Trial Court ruled
in favor of A.C. Aguila & Sons, Co. on the ground that private respondent did not redeem the
subject property before the expiration of the 90-day period provided in the Memorandum of
Agreement. Private respondent appealed first to the Regional Trial Court, Branch 163, Pasig,
Metro Manila, then to the Court of Appeals, and later to this Court, but she lost in all the cases.
Private respondent then filed a petition for declaration of nullity of a deed of sale with
the Regional Trial Court, Branch 273, Marikina, Metro Manila on December 4, 1993. She

alleged that the signature of her husband on the deed of sale was a forgery because he was
already dead when the deed was supposed to have been executed on June 11, 1991.
It appears, however, that private respondent had filed a criminal complaint for
falsification against petitioner with the Office of the Prosecutor of Quezon City which was
dismissed in a resolution, dated February 14, 1994.

period. Otherwise stated, plaintiff-appellant is to retain physical possession of the thing

allegedly sold.
In fact, plaintiff-appellant retained possession of the property sold as if they were still the
absolute owners. There was no provision for maintenance or expenses, much less for payment
of rent.

On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:

Plaintiffs claim therefore that the Deed of Absolute Sale is a forgery because they could not
personally appear before Notary Public Lamberto C. Nanquil on June 11, 1991 because her
husband, Ruben Abrogar, died on May 8, 1991 or one month and 2 days before the execution
of the Deed of Absolute Sale, while the plaintiff was still in the Quezon City Medical Center
recuperating from wounds which she suffered at the same vehicular accident on May 8, 1991,
cannot be sustained. The Court is convinced that the three required documents, to wit: the
Memorandum of Agreement, the Special Power of Attorney, and the Deed of Absolute Sale
were all signed by the parties on the same date on April 18, 1991. It is a common and
accepted business practice of those engaged in money lending to prepare an undated absolute
deed of sale in loans of money secured by real estate for various reasons, foremost of which is
the evasion of taxes and surcharges. The plaintiff never questioned receiving the sum of
P200,000.00 representing her loan from the defendant. Common sense dictates that an
established lending and realty firm like the Aguila & Sons, Co. would not part with
P200,000.00 to the Abrogar spouses, who are virtual strangers to it, without the simultaneous
accomplishment and signing of all the required documents, more particularly the Deed of
Absolute Sale, to protect its interest.
WHEREFORE, foregoing premises considered, the case in caption is hereby ORDERED
DISMISSED, with costs against the plaintiff.
On appeal, the Court of Appeals reversed. It held:
The facts and evidence show that the transaction between plaintiff-appellant and defendantappellee is indubitably an equitable mortgage. Article 1602 of the New Civil Code finds
strong application in the case at bar in the light of the following circumstances.
First: The purchase price for the alleged sale with right to repurchase is unusually inadequate.
The property is a two hundred forty (240) sq. m. lot. On said lot, the residential house of
plaintiff-appellant stands. The property is inside a subdivision/village. The property is
situated in Marikina which is already part of Metro Manila. The alleged sale took place in
1991 when the value of the land had considerably increased.
For this property, defendant-appellee pays only a measly P200,000.00 or P833.33 per square
meter for both the land and for the house.
Second: The disputed Memorandum of Agreement specifically provides that plaintiffappellant is obliged to deliver peacefully the possession of the property to the SECOND
PARTY within fifteen (15) days after the expiration of the said ninety (90) day grace

Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the property
sold. It is well-known that payment of taxes accompanied by actual possession of the land
covered by the tax declaration, constitute evidence of great weight that a person under whose
name the real taxes were declared has a claim of right over the land.
It is well-settled that the presence of even one of the circumstances in Article 1602 of the New
Civil Code is sufficient to declare a contract of sale with right to repurchase an equitable
Considering that plaintiff-appellant, as vendor, was paid a price which is unusually inadequate,
has retained possession of the subject property and has continued paying the realty taxes over
the subject property, (circumstances mentioned in par. (1) (2) and (5) of Article 1602 of the
New Civil Code), it must be conclusively presumed that the transaction the parties actually
entered into is an equitable mortgage, not a sale with right to repurchase. The factors cited are
in support to the finding that the Deed of Sale/Memorandum of Agreement with right to
repurchase is in actuality an equitable mortgage.
Moreover, it is undisputed that the deed of sale with right of repurchase was executed by
reason of the loan extended by defendant-appellee to plaintiff-appellant. The amount of loan
being the same with the amount of the purchase price.
Since the real intention of the party is to secure the payment of debt, now deemed to be
repurchase price: the transaction shall then be considered to be an equitable mortgage.
Being a mortgage, the transaction entered into by the parties is in the nature of a pactum
commissorium which is clearly prohibited by Article 2088 of the New Civil Code. Article
2088 of the New Civil Code reads:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1)
that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way
of security for the payment of principal obligation; and (2) that there should be a stipulation
for an automatic appropriation by the creditor of the thing pledged and mortgaged in the event
of non-payment of the principal obligation within the stipulated period.
In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiff-appellant
secured by a mortgage on the property of plaintiff-appellant. The loan was payable within

ninety (90) days, the period within which plaintiff-appellant can repurchase the
property. Plaintiff-appellant will pay P230,000.00 and not P200,000.00, the P30,000.00
excess is the interest for the loan extended. Failure of plaintiff-appellee to pay the
P230,000,00 within the ninety (90) days period, the property shall automatically belong to
defendant-appellee by virtue of the deed of sale executed.

Regional Trial Court and the Court of Appeals sidestepped this issue when it was squarely
raised before them by petitioner.

Clearly, the agreement entered into by the parties is in the nature of pactum
commissorium. Therefore, the deed of sale should be declared void as we hereby so declare to
be invalid, for being violative of law.

WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the
complaint against petitioner is DISMISSED.


Our conclusion that petitioner is not the real party in interest against whom this action
should be prosecuted makes it unnecessary to discuss the other issues raised by him in this

Bellosillo, (Chairman), Quisumbing, Buena, and De Leon, Jr., JJ., concur.

WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET
ASIDE. The questioned Deed of Sale and the cancellation of the TCT No. 195101 issued in
favor of plaintiff-appellant and the issuance of TCT No. 267073 issued in favor of defendantappellee pursuant to the questioned Deed of Sale is hereby declared VOID and is hereby
ANNULLED. Transfer Certificate of Title No. 195101 of the Registry of Marikina is hereby
ordered REINSTATED. The loan in the amount of P230,000.00 shall be paid within ninety
(90) days from the finality of this decision. In case of failure to pay the amount of
P230,000.00 from the period therein stated, the property shall be sold at public auction to
satisfy the mortgage debt and costs and if there is an excess, the same is to be given to the
Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila &
Co., against which this case should have been brought; (2) the judgment in the ejectment case
is a bar to the filing of the complaint for declaration of nullity of a deed of sale in this case;
and (3) the contract between A.C. Aguila & Sons, Co. and private respondent is a pacto de
retro sale and not an equitable mortgage as held by the appellate court.
The petition is meritorious.
Rule 3, 2 of the Rules of Court of 1964, under which the complaint in this case was
filed, provided that every action must be prosecuted and defended in the name of the real
party in interest. A real party in interest is one who would be benefited or injured by the
judgment, or who is entitled to the avails of the suit. [7] This ruling is now embodied in Rule 3,
2 of the 1997 Revised Rules of Civil Procedure. Any decision rendered against a person who
is not a real party in interest in the case cannot be executed. [8] Hence, a complaint filed against
such a person should be dismissed for failure to state a cause of action. [9]
Under Art. 1768 of the Civil Code, a partnership has a juridical personality separate and
distinct from that of each of the partners. The partners cannot be held liable for the
obligations of the partnership unless it is shown that the legal fiction of a different juridical
personality is being used for fraudulent, unfair, or illegal purposes. [10] In this case, private
respondent has not shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is being
used for fraudulent, unfair, or illegal purposes. Moreover, the title to the subject property is in
the name of A.C. Aguila & Sons, Co. and the Memorandum of Agreement was executed
between private respondent, with the consent of her late husband, and A. C. Aguila & Sons,
Co., represented by petitioner. Hence, it is the partnership, not its officers or agents, which
should be impleaded in any litigation involving property registered in its name. A violation of
this rule will result in the dismissal of the complaint. [11] We cannot understand why both the