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G.R. No.

L-9996 October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,


vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.


Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor
Felicisimo R. Rosete for Respondents.

CONCEPCION, J.:

This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review
of a decision of the Court of Tax Appeals, the dispositive part of which reads:

FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer's
tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent's
assessment for the same in the total amount of P6,878.34, which is hereby affirmed and the petition for
review filed by petitioner is hereby dismissed with costs against petitioners.

It appears from the stipulation submitted by the parties:

1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together with
their personal monies was used by them for the purpose of buying real properties,.

2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq.
m. including improvements thereon from the sum of P100,000.00; this property has an assessed value
of P57,517.00 as of 1948;

3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate
area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this property has an assessed
value of P82,255.00 as of 1948;

4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m.
including improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of
1948;

5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.34. This property has an assessed value of P59,140.00 as of 1948;

6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to
'manage their properties with full power to lease; to collect and receive rents; to issue receipts therefor;
in default of such payment, to bring suits against the defaulting tenants; to sign all letters, contracts,
etc., for and in their behalf, and to endorse and deposit all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners had the same rented or
leases to various tenants;

8. That from the month of March, 1945 up to an including December, 1945, the total amount collected
as rents on their real properties was P9,599.00 while the expenses amounted to P3,650.00 thereby
leaving them a net rental income of P5,948.33;

9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount
was deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental income of
P7,498.13;

10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was
deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35.

It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded the
payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for
the years 1945-1949, computed, according to assessment made by said officer, as follows:

INCOME TAXES

1945 14.84

1946 1,144.71

1947 10.34

1948 1,912.30

1949 1,575.90

Total including surcharge and P6,157.09


compromise

REAL ESTATE DEALER'S FIXED TAX

1946 P37.50

1947 150.00
1948 150.00

1949 150.00

Total including penalty P527.00

RESIDENCE TAXES OF CORPORATION

1945 P38.75

1946 38.75

1947 38.75

1948 38.75

1949 38.75

Total including surcharge P193.75

TOTAL TAXES DUE P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3,
1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the
decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed,
and that they be absolved from the payment of the taxes in question, with costs against the respondent.

After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the
respondent, and a petition for reconsideration and new trial having been subsequently denied, the case
is now before Us for review at the instance of the petitioners.

The issue in this case whether petitioners are subject to the tax on corporations provided for in section
24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well as
to the residence tax for corporations and the real estate dealers fixed tax. With respect to the tax on
corporations, the issue hinges on the meaning of the terms "corporation" and "partnership," as used in
section 24 and 84 of said Code, the pertinent parts of which read:

SEC. 24. Rate of tax on corporations.There shall be levied, assessed, collected, and paid annually upon
the total net income received in the preceding taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (compaias colectivas), a tax upon such income equal
to the sum of the following: . . .

SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participacion), associations or insurance companies, but
does not include duly registered general copartnerships. (compaias colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute money, properly, or
industry to a common fund, with the intention of dividing the profits among themselves.

Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions
for monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not property inherited
by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial
portion thereof in order to establish said common fund.

2. They invested the same, not merely not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of
lots (24) acquired and transactions undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the aforementioned common fund or even of the
property acquired by the petitioners in February, 1943. In other words, one cannot but perceive a
character of habitually peculiar to business transactions engaged in the purpose of gain.

3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners
herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive,
paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely Simeon
Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have
been handled as if the same belonged to a corporation or business and enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15)
years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista
became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set
up already adverted to, or on the causes for its continued existence. They did not even try to offer an
explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point.

Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the
acts performed by them, a legal entity, with a personality independent of that of its members, did not
come into existence, and some of the characteristics of partnerships are lacking in the case at bar. This
pretense was correctly rejected by the Court of Tax Appeals.

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 conformity with the usual requirements of the law
on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations.
Again, pursuant to said section 84(b), the term "corporation" includes, among other, joint accounts,
(cuentas en participation)" 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 copartnerships" 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" It may not be amiss to add that petitioners' allegation to the effect that their liability in
connection with the leasing of the lots above referred to, under the management of one person even
if true, on which we express no opinion tends to increase the similarity between the nature of their
venture and that corporations, and is, therefore, an additional argument in favor of the imposition of
said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provisions of said laws, such "corporations" include "associations, joint-stock
companies and insurance companies." However, the term "association" is not used in the
aforementioned laws.

. . . in any narrow or technical sense. It includes any organization, created for the transaction of designed
affairs, or the attainment of some object, which like a corporation, continues notwithstanding that its
members or participants change, and the affairs of which, like corporate affairs, are conducted by a
single individual, a committee, a board, or some other group, acting in a representative capacity. It is
immaterial whether such organization is created by an agreement, a declaration of trust, a statute, or
otherwise. It includes a voluntary association, a joint-stock corporation or company, a 'business' trusts a
'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange operating through an attorney in fact, a partnership
association, and any other type of organization (by whatever name known) which is not, within the
meaning of the Code, a trust or an estate, or a partnership. (7A Mertens Law of Federal Income
Taxation, p. 788; emphasis supplied.).

Similarly, the American Law.

. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a
partnership as known at common law but, as well, a syndicate, group, pool, joint venture or other
unincorporated organizations 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 supplied.)

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 supplied.) .

For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships with the exception only of duly registered general copartnerships within the purview
of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned and are subject to the income tax for corporations.

As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in
part:

Entities liable to residence tax.-Every corporation, no matter how created or organized, whether
domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual
residence tax of five pesos and an annual additional tax which in no case, shall exceed one thousand
pesos, in accordance with the following schedule: . . .

The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account
(cuentas en participacion), association or insurance company, no matter how created or organized.
(emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our
National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved on June
15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14, 1939), it
is apparent that the terms "corporation" and "partnership" are used in both statutes with substantially
the same meaning. Consequently, petitioners are subject, also, to the residence tax for corporations.

Lastly, the records show that petitioners have habitually engaged in leasing the properties above
mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from
June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in section
193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to
section 194 (s) thereof:

'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing,
or renting property or his own account as principal and holding himself out as a full or part time dealer in
real estate or as an owner of rental property or properties rented or offered to rent for an aggregate
amount of three thousand pesos or more a year. . . (emphasis supplied.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the
petitioners herein. It is so ordered.

Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,


vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax
purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on
May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of
land were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels of
land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized
a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of
P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by petitioners in
1973 and 1974 by availing of the tax amnesties granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners
were assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate
income taxes for the years 1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of
tax amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and
1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or
joint venture taxable as a corporation under Section 20(b) and its income was subject to the taxes
prescribed under Section 24, both of the National Internal Revenue Code 1 that the unregistered
partnership was subject to corporate income tax as distinguished from profits derived from the
partnership by them which is subject to individual income tax; and that the availment of tax amnesty
under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax
liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case
No. 3045. In due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the
decision and action taken by respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in
fact formed by petitioners which like a corporation was subject to corporate income tax distinct from
that imposed on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the petitioners,
there was no adequate basis for the conclusion that they thereby formed an unregistered partnership
which made "hem liable for corporate income tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the
respondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT


COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP
SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION
THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN
UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT
WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE SHOULD
BE DECIDED ALONGSIDE THE EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER
TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage
their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they gained net profits from the rental income.
Thus, the Collector of Internal Revenue demanded the payment of income tax on a corporation, among
others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as
well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to the
tax on corporations, the issue hinges on the meaning of the terms corporation and partnership as used
in sections 24 and 84 of said Code, the pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected, and paid annually
upon the total net income received in the preceding taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (companies collectives), a tax upon such income equal
to the sum of the following: ...

Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participation), associations or insurance companies, but
does not include duly registered general co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

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.

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among the
contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions
for monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not a property inherited
by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial
portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2,
1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This
was soon followed, on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5)
days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and
transcations undertaken, as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not limited to the conservation
and preservation of the aforementioned common fund or even of the property acquired by petitioners in
February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of petitioners
herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid
the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do
not even suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon
Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have
been handled as if the same belonged to a corporation or business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15)
years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelists
became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set
up already adverted to, or on the causes for its continued existence. They did not even try to offer an
explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances were
present in the cases cited by petitioners herein, and, hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits among
themselves. Respondent commissioner and/ or his representative just assumed these conditions to be
present on the basis of the fact that petitioners purchased certain parcels of land and became co-
owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the common fund
or even the properties acquired by them. The character of habituality peculiar to business transactions
engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor
make any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller.
It was only 1968 when they sold the two (2) parcels of land after which they did not make any additional
or new purchase. The remaining three (3) parcels were sold by them in 1970. The transactions were
isolated. The character of habituality peculiar to business transactions for the purpose of gain was not
present.

In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the
circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new Civil Code lays down the rule
for determining when a transaction should be deemed a partnership or a co-ownership. Said article
paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived;

From the above it appears that the fact that those who agree to form a co- ownership share or do not
share any profits made by the use of the property held in common does not convert their venture into a
partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the property. This only means
that, aside from the circumstance of profit, the presence of other elements constituting partnership is
necessary, such as the clear intent to form a partnership, the existence of a juridical personality different
from that of the individual partners, and the freedom to transfer or assign any interest in the property by
one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp.
635-636)
It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain
real estate for profit in the absence of other circumstances showing a contrary intention cannot be
considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross returns
of that enterprise in proportion to their contribution, but who severally retain the title to their
respective contribution, are not thereby rendered partners. They have no common stock or capital, and
no community of interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land create a partnership; the parties are only
tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as
tenants in common, and to divide the profits of disposing of it, the brother and the other not being
entitled to share in plaintiffs commission, no partnership existed as between the three parties, whatever
their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally
participating in both profits and losses; (c) and such a community of interest, as far as third persons are
concerned as enables each party to make contract, manage the business, and dispose of the whole
property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners, though
they may use it for the purpose of making gains; and they may, without becoming partners, agree
among themselves as to the management, and use of such property and the application of the proceeds
therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form a
partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership. The
two isolated transactions whereby they purchased properties and sold the same a few years thereafter
did not thereby make them partners. They shared in the gross profits as co- owners and paid their
capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances,
they cannot be considered to have formed an unregistered partnership which is thereby liable for
corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have been
formed, since there is no such existing unregistered partnership with a distinct personality nor with
assets that can be held liable for said deficiency corporate income tax, then petitioners can be held
individually liable as partners for this unpaid obligation of the partnership p. 7 However, as petitioners
have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are
thereby relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals
of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving
petitioners of the corporate income tax liability in this case, without pronouncement as to costs.

SO ORDERED.

Cruz, Grio-Aquino and Medialdea, JJ., concur.

Narvasa, J., took no part.

G.R. No. 75875 December 15, 1989

WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and
AVELINO V. CRUZ, respondents.

G.R. No. 75951 December 15, 1989

SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B.


LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM, CHARLES
CHAMSAY and LUCIANO SALAZAR, respondents.

G.R. Nos. 75975-76 December 15, 1989

LUCIANO E. SALAZAR, petitioner,


vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG,
AVELINO V. CRUZ and the COURT OF APPEALS, respondents.

Belo, Abiera & Associates for petitioners in 75875.


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

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-G.R.
SP Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then
Intermediate Appellate Court and directed that in all subsequent elections for directors of Sanitary
Wares Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot nominate more
than three (3) directors; that the Filipino stockholders shall not interfere in ASI's choice of its three (3)
nominees; that, on the other hand, the Filipino stockholders can nominate only six (6) candidates and in
the event they cannot agree on the six (6) nominees, they shall vote only among themselves to
determine who the six (6) nominees will be, with cumulative voting to be allowed but without
interference from ASI.

The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing
and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for
foreign partners, European or American who could help in its expansion plans. On August 15, 1962, ASI,
a foreign corporation domiciled in Delaware, United States entered into an Agreement with Saniwares
and some Filipino investors whereby ASI and the Filipino investors agreed to participate in the
ownership of an enterprise which would engage primarily in the business of manufacturing in the
Philippines and selling here and abroad vitreous china and sanitary wares. The parties agreed that the
business operations in the Philippines shall be carried on by an incorporated enterprise and that the
name of the corporation shall initially be "Sanitary Wares Manufacturing Corporation."

The Agreement has the following provisions relevant to the issues in these cases on the nomination and
election of the directors of the corporation:

3. Articles of Incorporation

(a) The Articles of Incorporation of the Corporation shall be substantially in the form annexed hereto as
Exhibit A and, insofar as permitted under Philippine law, shall specifically provide for

(1) Cumulative voting for directors:

xxx xxx xxx

5. Management

(a) The management of the Corporation shall be vested in a Board of Directors, which shall consist of
nine individuals. As long as American-Standard shall own at least 30% of the outstanding stock of the
Corporation, three of the nine directors shall be designated by American-Standard, and the other six
shall be designated by the other stockholders of the Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority group,
including the grant of veto powers over a number of corporate acts and the right to designate certain
officers, such as a member of the Executive Committee whose vote was required for important
corporate transactions.

Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the
Board of Investments for availment of incentives with the condition that at least 60% of the capital stock
of the corporation shall be owned by Philippine nationals.

The joint enterprise thus entered into by the Filipino investors and the American corporation prospered.
Unfortunately, with the business successes, there came a deterioration of the initially harmonious
relations between the two groups. According to the Filipino group, a basic disagreement was due to
their desire to expand the export operations of the company to which ASI objected as it apparently had
other subsidiaries of joint joint venture groups in the countries where Philippine exports were
contemplated. On March 8, 1983, the annual stockholders' meeting was held. The meeting was presided
by Baldwin Young. The minutes were taken by the Secretary, Avelino Cruz. After disposing of the
preliminary items in the agenda, the stockholders then proceeded to the election of the members of the
board of directors. The ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin and
David P. Whittingham. The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A.
Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then
nominated Mr. Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay. The chairman, Baldwin
Young ruled the last two nominations out of order on the basis of section 5 (a) of the Agreement, the
consistent practice of the parties during the past annual stockholders' meetings to nominate only nine
persons as nominees for the nine-member board of directors, and the legal advice of Saniwares' legal
counsel. The following events then, transpired:

... There were protests against the action of the Chairman and heated arguments ensued. An appeal was
made by the ASI representative to the body of stockholders present that a vote be taken on the ruling of
the Chairman. The Chairman, Baldwin Young, declared the appeal out of order and no vote on the ruling
was taken. The Chairman then instructed the Corporate Secretary to cast all the votes present and
represented by proxy equally for the 6 nominees of the Philippine Investors and the 3 nominees of ASI,
thus effectively excluding the 2 additional persons nominated, namely, Luciano E. Salazar and Charles
Chamsay. The ASI representative, Mr. Jaqua protested the decision of the Chairman and announced that
all votes accruing to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles Chamsay, and instructed the Secretary to so
vote. Luciano E. Salazar and other proxy holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being voted cumulatively
in favor of Luciano E. Salazar. The Chairman, Baldwin Young, nevertheless instructed the Secretary to
cast all votes equally in favor of the three ASI nominees, namely, Wolfgang Aurbach, John Griffin and
David Whittingham and the six originally nominated by Rogelio Vinluan, namely, Ernesto Lagdameo, Sr.,
Raul Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, and Baldwin Young. The
Secretary then certified for the election of the following Wolfgang Aurbach, John Griffin, David
Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A.
Boncan, Baldwin Young. The representative of ASI then moved to recess the meeting which was duly
seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No. 05617). This motion to
adjourn was accepted by the Chairman, Baldwin Young, who announced that the motion was carried
and declared the meeting adjourned. Protests against the adjournment were registered and having
been ignored, Mr. Jaqua the ASI representative, stated that the meeting was not adjourned but only
recessed and that the meeting would be reconvened in the next room. The Chairman then threatened
to have the stockholders who did not agree to the decision of the Chairman on the casting of votes
bodily thrown out. The ASI Group, Luciano E. Salazar and other stockholders, allegedly representing 53
or 54% of the shares of Saniwares, decided to continue the meeting at the elevator lobby of the
American Standard Building. The continued meeting was presided by Luciano E. Salazar, while Andres
Gatmaitan acted as Secretary. On the basis of the cumulative votes cast earlier in the meeting, the ASI
Group nominated its four nominees; Wolfgang Aurbach, John Griffin, David Whittingham and Charles
Chamsay. Luciano E. Salazar voted for himself, thus the said five directors were certified as elected
directors by the Acting Secretary, Andres Gatmaitan, with the explanation that there was a tie among
the other six (6) nominees for the four (4) remaining positions of directors and that the body decided
not to break the tie. (pp. 37-39, Rollo of 75975-76)

These incidents triggered off the filing of separate petitions by the parties with the Securities and
Exchange Commission (SEC). The first petition filed was for preliminary injunction by Saniwares, Emesto
V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F.
Lee against Luciano Salazar and Charles Chamsay. The case was denominated as SEC Case No. 2417. The
second petition was for quo warranto and application for receivership by Wolfgang Aurbach, John
Griffin, David Whittingham, Luciano E. Salazar and Charles Chamsay against the group of Young and
Lagdameo (petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was docketed as SEC Case
No. 2718. Both sets of parties except for Avelino Cruz claimed to be the legitimate directors of the
corporation.

The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision
upholding the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar and
Chamsay. The ASI Group and Salazar appealed the decision to the SEC en banc which affirmed the
hearing officer's decision.

The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by
Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP No.
05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were consolidated
and the appellate court in its decision ordered the remand of the case to the Securities and Exchange
Commission with the directive that a new stockholders' meeting of Saniwares be ordered convoked as
soon as possible, under the supervision of the Commission.

Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of
Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David
P. Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF PRIVATE RESPONDENTS AS
MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT
ALL.

II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING THEIR FULL VOTING
RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS AND
THE CORPORATION THEY REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW.

III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO THE AGREEMENT OF
THE PARTIES WHICH WERE NOT THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)

Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following
grounds:

11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual agreements entered


into by stockholders and the replacement of the conditions of such agreements with terms never
contemplated by the stockholders but merely dictated by the CA .

11.2. The Amended decision would likewise sanction the deprivation of the property rights of
stockholders without due process of law in order that a favored group of stockholders may be illegally
benefitted and guaranteed a continuing monopoly of the control of a corporation. (pp. 14-15, Rollo-
75975-76)

On the other hand, the petitioners in G.R. No. 75951 contend that:

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING THAT THE STOCKHOLDERS
OF SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE
AGREEMENT AND THE LAW.

II

THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE PETITIONERS HEREIN WERE
THE DULY ELECTED DIRECTORS DURING THE 8 MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF
SANTWARES. (P. 24, Rollo-75951)

The issues raised in the petitions are interrelated, hence, they are discussed jointly.

The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its
annual stockholders' meeting held on March 8, 1983. To answer this question the following factors
should be determined: (1) the nature of the business established by the parties whether it was a joint
venture or a corporation and (2) whether or not the ASI Group may vote their additional 10% equity
during elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established among themselves
a joint venture or some other relation depends upon their actual intention which is determined in
accordance with the rules governing the interpretation and construction of contracts. (Terminal Shares,
Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg. Co.
20 Cal. 2nd 751, 128 P 2nd 668)

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the
parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated
that the parties' intention was to form a corporation and not a joint venture.

They specifically mention number 16 under Miscellaneous Provisions which states:

xxx xxx xxx

c) nothing herein contained shall be construed to constitute any of the parties hereto partners or joint
venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR No. 75875)

They object to the admission of other evidence which tends to show that the parties' agreement was to
establish a joint venture presented by the Lagdameo and Young Group on the ground that it
contravenes the parol evidence rule under section 7, Rule 130 of the Revised Rules of Court. According
to them, the Lagdameo and Young Group never pleaded in their pleading that the "Agreement" failed to
express the true intent of the parties.

The parol evidence Rule under Rule 130 provides:

Evidence of written agreements-When the terms of an agreement have been reduced to writing, it is to
be considered as containing all such terms, and therefore, there can be, between the parties and their
successors in interest, no evidence of the terms of the agreement other than the contents of the writing,
except in the following cases:

(a) Where a mistake or imperfection of the writing, or its failure to express the true intent and
agreement of the parties or the validity of the agreement is put in issue by the pleadings.

(b) When there is an intrinsic ambiguity in the writing.

Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties, to
wit:

xxx xxx xxx

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

It has been ruled:

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

In the instant cases, our examination of important provisions of the Agreement as well as the
testimonial evidence presented by the Lagdameo and Young Group shows that the parties agreed to
establish a joint venture and not a corporation. The history of the organization of Saniwares and the
unusual arrangements which govern its policy making body are all consistent with a joint venture and
not with an ordinary corporation. As stated by the SEC:

According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the Agreement with ASI in
behalf of the Philippine nationals. He testified that ASI agreed to accept the role of minority vis-a-vis the
Philippine National group of investors, on the condition that the Agreement should contain provisions to
protect ASI as the minority.

An examination of the Agreement shows that certain provisions were included to protect the interests
of ASI as the minority. For example, the vote of 7 out of 9 directors is required in certain enumerated
corporate acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is contractually entitled to designate a member
of the Executive Committee and the vote of this member is required for certain transactions [Sec. 3 (b)
(i)].

The Agreement also requires a 75% super-majority vote for the amendment of the articles and by-laws
of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to designate the president and plant
manager [Sec. 5 (6)]. The Agreement further provides that the sales policy of Saniwares shall be that
which is normally followed by ASI [Sec. 13 (a)] and that Saniwares should not export "Standard"
products otherwise than through ASI's Export Marketing Services [Sec. 13 (6)]. Under the Agreement,
ASI agreed to provide technology and know-how to Saniwares and the latter paid royalties for the same.
(At p. 2).

xxx xxx xxx


It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of the board of
directors for certain actions, in effect gave ASI (which designates 3 directors under the Agreement) an
effective veto power. Furthermore, the grant to ASI of the right to designate certain officers of the
corporation; the super-majority voting requirements for amendments of the articles and by-laws; and
most significantly to the issues of tms case, the provision that ASI shall designate 3 out of the 9 directors
and the other stockholders shall designate the other 6, clearly indicate that there are two distinct groups
in Saniwares, namely ASI, which owns 40% of the capital stock and the Philippine National stockholders
who own the balance of 60%, and that 2) ASI is given certain protections as the minority stockholder.

Premises considered, we believe that under the Agreement there are two groups of stockholders who
established a corporation with provisions for a special contractual relationship between the parties, i.e.,
ASI and the other stockholders. (pp. 4-5)

Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the
selection of the nine directors on a six to three ratio. Each group is assured of a fixed number of
directors in the board.

Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also
testified that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint venturers in respect of any transaction hereunder"
was merely to obviate the possibility of the enterprise being treated as partnership for tax purposes and
liabilities to third parties.

Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities
of a local firm are constrained to seek the technology and marketing assistance of huge multinational
corporations of the developed world. Arrangements are formalized where a foreign group becomes a
minority owner of a firm in exchange for its manufacturing expertise, use of its brand names, and other
such assistance. However, there is always a danger from such arrangements. The foreign group may,
from the start, intend to establish its own sole or monopolistic operations and merely uses the joint
venture arrangement to gain a foothold or test the Philippine waters, so to speak. Or the covetousness
may come later. As the Philippine firm enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to completely or predominantly take over
the entire company. This undermining of joint ventures is not consistent with fair dealing to say the
least. To the extent that such subversive actions can be lawfully prevented, the courts should extend
protection especially in industries where constitutional and legal requirements reserve controlling
ownership to Filipino citizens.

The Lagdameo Group stated in their appellees' brief in the Court of Appeal

In fact, the Philippine Corporation Code itself recognizes the right of stockholders to enter into
agreements regarding the exercise of their voting rights.

Sec. 100. Agreements by stockholders.-


xxx xxx xxx

2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may
provide that in exercising any voting rights, the shares held by them shall be voted as therein provided,
or as they may agree, or as determined in accordance with a procedure agreed upon by them.

Appellants contend that the above provision is included in the Corporation Code's chapter on close
corporations and Saniwares cannot be a close corporation because it has 95 stockholders. Firstly,
although Saniwares had 95 stockholders at the time of the disputed stockholders meeting, these 95
stockholders are not separate from each other but are divisible into groups representing a single
Identifiable interest. For example, ASI, its nominees and lawyers count for 13 of the 95 stockholders. The
YoungYutivo family count for another 13 stockholders, the Chamsay family for 8 stockholders, the
Santos family for 9 stockholders, the Dy family for 7 stockholders, etc. If the members of one family
and/or business or interest group are considered as one (which, it is respectfully submitted, they should
be for purposes of determining how closely held Saniwares is there were as of 8 March 1983, practically
only 17 stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees' Rejoinder
Memorandum dated 11 December 1984 and Annex "A" thereof).

Secondly, even assuming that Saniwares is technically not a close corporation because it has more than
20 stockholders, the undeniable fact is that it is a close-held corporation. Surely, appellants cannot
honestly claim that Saniwares is a public issue or a widely held corporation.

In the United States, many courts have taken a realistic approach to joint venture corporations and have
not rigidly applied principles of corporation law designed primarily for public issue corporations. These
courts have indicated that express arrangements between corporate joint ventures should be construed
with less emphasis on the ordinary rules of law usually applied to corporate entities and with more
consideration given to the nature of the agreement between the joint venturers (Please see Wabash Ry
v. American Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des Moines Union Ry; 254
Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v.
Harris, 207 Md., 212,113 A 2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571;
Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture Corporations", 11 Vand Law Rev.
p. 680,1958). These American cases dealt with legal questions as to the extent to which the
requirements arising from the corporate form of joint venture corporations should control, and the
courts ruled that substantial justice lay with those litigants who relied on the joint venture agreement
rather than the litigants who relied on the orthodox principles of corporation law.

As correctly held by the SEC Hearing Officer:

It is said that participants in a joint venture, in organizing the joint venture deviate from the traditional
pattern of corporation management. A noted authority has pointed out that just as in close
corporations, shareholders' agreements in joint venture corporations often contain provisions which do
one or more of the following: (1) require greater than majority vote for shareholder and director action;
(2) give certain shareholders or groups of shareholders power to select a specified number of directors;
(3) give to the shareholders control over the selection and retention of employees; and (4) set up a
procedure for the settlement of disputes by arbitration (See I O' Neal, Close Corporations, 1971 ed.,
Section 1.06a, pp. 15-16) (Decision of SEC Hearing Officer, P. 16)

Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that agreements
regarding the exercise of voting rights are allowed only in close corporations. As Campos and Lopez-
Campos explain:

Paragraph 2 refers to pooling and voting agreements in particular. Does this provision necessarily imply
that these agreements can be valid only in close corporations as defined by the Code? Suppose that a
corporation has twenty five stockholders, and therefore cannot qualify as a close corporation under
section 96, can some of them enter into an agreement to vote as a unit in the election of directors? It is
submitted that there is no reason for denying stockholders of corporations other than close ones the
right to enter into not voting or pooling agreements to protect their interests, as long as they do not
intend to commit any wrong, or fraud on the other stockholders not parties to the agreement. Of
course, voting or pooling agreements are perhaps more useful and more often resorted to in close
corporations. But they may also be found necessary even in widely held corporations. Moreover, since
the Code limits the legal meaning of close corporations to those which comply with the requisites laid
down by section 96, it is entirely possible that a corporation which is in fact a close corporation will not
come within the definition. In such case, its stockholders should not be precluded from entering into
contracts like voting agreements if these are otherwise valid. (Campos & Lopez-Campos, op cit, p. 405)

In short, even assuming that sec. 5(a) of the Agreement relating to the designation or nomination of
directors restricts the right of the Agreement's signatories to vote for directors, such contractual
provision, as correctly held by the SEC, is valid and binding upon the signatories thereto, which include
appellants. (Rollo No. 75951, pp. 90-94)

In regard to the question as to whether or not the ASI group may vote their additional equity during
elections of Saniwares' board of directors, the Court of Appeals correctly stated:

As in other joint venture companies, the extent of ASI's participation in the management of the
corporation is spelled out in the Agreement. Section 5(a) hereof says that three of the nine directors
shall be designated by ASI and the remaining six by the other stockholders, i.e., the Filipino stockholders.
This allocation of board seats is obviously in consonance with the minority position of ASI.

Having entered into a well-defined contractual relationship, it is imperative that the parties should
honor and adhere to their respective rights and obligations thereunder. Appellants seem to contend
that any allocation of board seats, even in joint venture corporations, are null and void to the extent
that such may interfere with the stockholder's rights to cumulative voting as provided in Section 24 of
the Corporation Code. This Court should not be prepared to hold that any agreement which curtails in
any way cumulative voting should be struck down, even if such agreement has been freely entered into
by experienced businessmen and do not prejudice those who are not parties thereto. It may well be that
it would be more cogent to hold, as the Securities and Exchange Commission has held in the decision
appealed from, that cumulative voting rights may be voluntarily waived by stockholders who enter into
special relationships with each other to pursue and implement specific purposes, as in joint venture
relationships between foreign and local stockholders, so long as such agreements do not adversely
affect third parties.

In any event, it is believed that we are not here called upon to make a general rule on this question.
Rather, all that needs to be done is to give life and effect to the particular contractual rights and
obligations which the parties have assumed for themselves.

On the one hand, the clearly established minority position of ASI and the contractual allocation of board
seats Cannot be disregarded. On the other hand, the rights of the stockholders to cumulative voting
should also be protected.

In our decision sought to be reconsidered, we opted to uphold the second over the first. Upon further
reflection, we feel that the proper and just solution to give due consideration to both factors suggests
itself quite clearly. This Court should recognize and uphold the division of the stockholders into two
groups, and at the same time uphold the right of the stockholders within each group to cumulative
voting in the process of determining who the group's nominees would be. In practical terms, as
suggested by appellant Luciano E. Salazar himself, this means that if the Filipino stockholders cannot
agree who their six nominees will be, a vote would have to be taken among the Filipino stockholders
only. During this voting, each Filipino stockholder can cumulate his votes. ASI, however, should not be
allowed to interfere in the voting within the Filipino group. Otherwise, ASI would be able to designate
more than the three directors it is allowed to designate under the Agreement, and may even be able to
get a majority of the board seats, a result which is clearly contrary to the contractual intent of the
parties.

Such a ruling will give effect to both the allocation of the board seats and the stockholder's right to
cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by the
appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (Rollo-75875, pp. 38-39)

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote
their additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a
corporation the right to cumulate their votes in electing directors. Petitioner Salazar adds that this right
if granted to the ASI Group would not necessarily mean a violation of the Anti-Dummy Act
(Commonwealth Act 108, as amended). He cites section 2-a thereof which provides:

And provided finally that the election of aliens as members of the board of directors or governing body
of corporations or associations engaging in partially nationalized activities shall be allowed in proportion
to their allowable participation or share in the capital of such entities. (amendments introduced by
Presidential Decree 715, section 1, promulgated May 28, 1975)

The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point
of query, however, is whether or not that provision is applicable to a joint venture with clearly defined
agreements:
The legal concept of ajoint venture is of common law origin. It has no precise legal definition but it has
been generally understood to mean an organization formed for some temporary purpose. (Gates v.
Megargel, 266 Fed. 811 [1920]) It is in fact hardly distinguishable from the partnership, since their
elements are similar community of interest in the business, sharing of profits and losses, and a mutual
right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043
[1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]). The main distinction
cited by most opinions in common law jurisdictions is that the partnership contemplates a general
business with some degree of continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931];
Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This
observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be
particular or universal, and a particular partnership may have for its object a specific undertaking. (Art.
1783, Civil Code). It would seem therefore that under Philippine law, a joint venture is a form of
partnership and should thus be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that although a corporation
cannot enter into a partnership contract, it may however engage in a joint venture with others. (At p.
12, Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and Selected
Cases, Corporation Code 1981)

Moreover, the usual rules as regards the construction and operations of contracts generally apply to a
contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).

Bearing these principles in mind, the correct view would be that the resolution of the question of
whether or not the ASI Group may vote their additional equity lies in the agreement of the parties.

Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the
allocation of director seats under Section 5 (a) of the "Agreement," and the right of each group of
stockholders to cumulative voting in the process of determining who the group's nominees would be
under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement
relates to the manner of nominating the members of the board of directors while Section 3 (a) (1)
relates to the manner of voting for these nominees.

This is the proper interpretation of the Agreement of the parties as regards the election of members of
the board of directors.

To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be
beholden to them would obliterate their minority status as agreed upon by the parties. As aptly stated
by the appellate court:

... ASI, however, should not be allowed to interfere in the voting within the Filipino group. Otherwise,
ASI would be able to designate more than the three directors it is allowed to designate under the
Agreement, and may even be able to get a majority of the board seats, a result which is clearly contrary
to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the stockholder's right to
cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by the
appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (At p. 39, Rollo, 75875)

Equally important as the consideration of the contractual intent of the parties is the consideration as
regards the possible domination by the foreign investors of the enterprise in violation of the
nationalization requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act.
In this regard, petitioner Salazar's position is that the Anti-Dummy Act allows the ASI group to elect
board directors in proportion to their share in the capital of the entity. It is to be noted, however, that
the same law also limits the election of aliens as members of the board of directors in proportion to their
allowance participation of said entity. In the instant case, the foreign Group ASI was limited to designate
three directors. This is the allowable participation of the ASI Group. Hence, in future dealings, this
limitation of six to three board seats should always be maintained as long as the joint venture
agreement exists considering that in limiting 3 board seats in the 9-man board of directors there are
provisions already agreed upon and embodied in the parties' Agreement to protect the interests arising
from the minority status of the foreign investors.

With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed
by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto
V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George
F. Lee as the duly elected directors of Saniwares at the March 8,1983 annual stockholders' meeting.

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a
cumulative voting during the election of the board of directors of the enterprise as ruled by the
appellate court and submits that the six (6) directors allotted the Filipino stockholders should be
selected by consensus pursuant to section 5 (a) of the Agreement which uses the word "designate"
meaning "nominate, delegate or appoint."

They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot determined by
the majority of their group.

Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors
should not be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the
Agreement. As we stated earlier, section 3(a) (1) relates to the manner of voting for these nominees
which is cumulative voting while section 5(a) relates to the manner of nominating the members of the
board of directors. The petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot now
impugn its legality.

The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot, however, be ignored. The validity of the cumulative voting procedure is dependent
on the directors thus elected being genuine members of the Filipino group, not voters whose interest is
to increase the ASI share in the management of Saniwares. The joint venture character of the enterprise
must always be taken into account, so long as the company exists under its original agreement.
Cumulative voting may not be used as a device to enable ASI to achieve stealthily or indirectly what they
cannot accomplish openly. There are substantial safeguards in the Agreement which are intended to
preserve the majority status of the Filipino investors as well as to maintain the minority status of the
foreign investors group as earlier discussed. They should be maintained.

WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in
G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is MODIFIED in that
Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul
A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the duly
elected directors of Saniwares at the March 8,1983 annual stockholders' meeting. In all other respects,
the questioned decision is AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No.
75875.

SO ORDERED.

Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.

Feliciano, J., took no part.

G.R. No. 134559 December 9, 1999

ANTONIA TORRES assisted by her husband, ANGELO TORRES; and EMETERIA BARING, petitioners,
vs.
COURT OF APPEALS and MANUEL TORRES, respondents.

PANGANIBAN, J.:

Courts may not extricate parties from the necessary consequences of their acts. That the terms of a
contract turn out to be financially disadvantageous to them will not relieve them of their obligations
therein. The lack of an inventory of real property will not ipso facto release the contracting partners
from their respective obligations to each other arising from acts executed in accordance with their
agreement.

The Case

The Petition for Review on Certiorari before us assails the March 5, 1998 Decision 1 of the Court of
Appeals 2 (CA) in CA-GR CV No. 42378 and its June 25, 1998 Resolution denying reconsideration. The
assailed Decision affirmed the ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-
21208, which disposed as follows:

WHEREFORE, for all the foregoing considerations, the Court, finding for the defendant and against the
plaintiffs, orders the dismissal of the plaintiffs complaint. The counterclaims of the defendant are
likewise ordered dismissed. No pronouncement as to costs. 3

The Facts

Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture agreement"
with Respondent Manuel Torres for the development of a parcel of land into a subdivision. Pursuant to
the contract, they executed a Deed of Sale covering the said parcel of land in favor of respondent, who
then had it registered in his name. By mortgaging the property, respondent obtained from Equitable
Bank a loan of P40,000 which, under the Joint Venture Agreement, was to be used for the development
of the subdivision. 4 All three of them also agreed to share the proceeds from the sale of the subdivided
lots.

The project did not push through, and the land was subsequently foreclosed by the bank.

According to petitioners, the project failed because of "respondent's lack of funds or means and skills."
They add that respondent used the loan not for the development of the subdivision, but in furtherance
of his own company, Universal Umbrella Company.

On the other hand, respondent alleged that he used the loan to implement the Agreement. With the
said amount, he was able to effect the survey and the subdivision of the lots. He secured the Lapu Lapu
City Council's approval of the subdivision project which he advertised in a local newspaper. He also
caused the construction of roads, curbs and gutters. Likewise, he entered into a contract with an
engineering firm for the building of sixty low-cost housing units and actually even set up a model house
on one of the subdivision lots. He did all of these for a total expense of P85,000.

Respondent claimed that the subdivision project failed, however, because petitioners and their relatives
had separately caused the annotations of adverse claims on the title to the land, which eventually
scared away prospective buyers. Despite his requests, petitioners refused to cause the clearing of the
claims, thereby forcing him to give up on the project. 5

Subsequently, petitioners filed a criminal case for estafa against respondent and his wife, who were
however acquitted. Thereafter, they filed the present civil case which, upon respondent's motion, was
later dismissed by the trial court in an Order dated September 6, 1982. On appeal, however, the
appellate court remanded the case for further proceedings. Thereafter, the RTC issued its assailed
Decision, which, as earlier stated, was affirmed by the CA.

Hence, this Petition. 6

Ruling of the Court of Appeals


In affirming the trial court, the Court of Appeals held that petitioners and respondent had formed a
partnership for the development of the subdivision. Thus, they must bear the loss suffered by the
partnership in the same proportion as their share in the profits stipulated in the contract. Disagreeing
with the trial court's pronouncement that losses as well as profits in a joint venture should be
distributed equally, 7 the CA invoked Article 1797 of the Civil Code which provides:

Art. 1797 The losses and profits shall be distributed in conformity with the agreement. If only the
share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the
same proportion.

The CA elucidated further:

In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to
what he may have contributed, but the industrial partner shall not be liable for the losses. As for the
profits, the industrial partner shall receive such share as may be just and equitable under the
circumstances. If besides his services he has contributed capital, he shall also receive a share in the
profits in proportion to his capital.

The Issue

Petitioners impute to the Court of Appeals the following error:

. . . [The] Court of Appeals erred in concluding that the transaction


. . . between the petitioners and respondent was that of a joint venture/partnership, ignoring outright
the provision of Article 1769, and other related provisions of the Civil Code of the Philippines. 8

The Court's Ruling

The Petition is bereft of merit.

Main Issue:

Existence of a Partnership

Petitioners deny having formed a partnership with respondent. They contend that the Joint Venture
Agreement and the earlier Deed of Sale, both of which were the bases of the appellate court's finding of
a partnership, were void.

In the same breath, however, they assert that under those very same contracts, respondent is liable for
his failure to implement the project. Because the agreement entitled them to receive 60 percent of the
proceeds from the sale of the subdivision lots, they pray that respondent pay them damages equivalent
to 60 percent of the value of the property. 9

The pertinent portions of the Joint Venture Agreement read as follows:

KNOW ALL MEN BY THESE PRESENTS:


This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of March, 1969, by
and between MR. MANUEL R. TORRES, . . . the FIRST PARTY, likewise, MRS. ANTONIA B. TORRES, and
MISS EMETERIA BARING, . . . the SECOND PARTY:

WITNESSETH:

That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property located at Lapu-
Lapu City, Island of Mactan, under Lot No. 1368 covering TCT No. T-0184 with a total area of 17,009
square meters, to be sub-divided by the FIRST PARTY;

Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY THOUSAND (P20,000.00)
Pesos, Philippine Currency upon the execution of this contract for the property entrusted by the
SECOND PARTY, for sub-division projects and development purposes;

NOW THEREFORE, for and in consideration of the above covenants and promises herein contained the
respective parties hereto do hereby stipulate and agree as follows:

ONE: That the SECOND PARTY signed an absolute Deed of Sale . . . dated March 5, 1969, in the amount
of TWENTY FIVE THOUSAND FIVE HUNDRED THIRTEEN & FIFTY CTVS. (P25,513.50) Philippine Currency,
for 1,700 square meters at ONE [PESO] & FIFTY CTVS. (P1.50) Philippine Currency, in favor of the FIRST
PARTY, but the SECOND PARTY did not actually receive the payment.

SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the necessary amount of
TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, for their personal obligations and this
particular amount will serve as an advance payment from the FIRST PARTY for the property mentioned
to be sub-divided and to be deducted from the sales.

THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY, the interest and the principal
amount involving the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, until the
sub-division project is terminated and ready for sale to any interested parties, and the amount of
TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, will be deducted accordingly.

FOURTH: That all general expense[s] and all cost[s] involved in the sub-division project should be paid by
the FIRST PARTY, exclusively and all the expenses will not be deducted from the sales after the
development of the sub-division project.

FIFTH: That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM 60% for the SECOND
PARTY and FORTY PERCENTUM 40% for the FIRST PARTY, and additional profits or whatever income
deriving from the sales will be divided equally according to the . . . percentage [agreed upon] by both
parties.

SIXTH: That the intended sub-division project of the property involved will start the work and all
improvements upon the adjacent lots will be negotiated in both parties['] favor and all sales shall [be]
decided by both parties.
SEVENTH: That the SECOND PARTIES, should be given an option to get back the property mentioned
provided the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, borrowed by the
SECOND PARTY, will be paid in full to the FIRST PARTY, including all necessary improvements spent by
the FIRST PARTY, and-the FIRST PARTY will be given a grace period to turnover the property mentioned
above.

That this AGREEMENT shall be binding and obligatory to the parties who executed same freely and
voluntarily for the uses and purposes therein stated. 10

A reading of the terms embodied in the Agreement indubitably shows the existence of a partnership
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.

Under the above-quoted Agreement, petitioners would contribute property to the partnership in the
form of land which was to be developed into a subdivision; while respondent would give, in addition to
his industry, the amount needed for general expenses and other costs. Furthermore, the income from
the said project would be divided according to the stipulated percentage. Clearly, the contract
manifested the intention of the parties to form a partnership. 11

It should be stressed that the parties implemented the contract. Thus, petitioners transferred the title to
the land to facilitate its use in the name of the respondent. On the other hand, respondent caused the
subject land to be mortgaged, the proceeds of which were used for the survey and the subdivision of the
land. As noted earlier, he developed the roads, the curbs and the gutters of the subdivision and entered
into a contract to construct low-cost housing units on the property.

Respondent's actions clearly belie petitioners' contention that he made no contribution to the
partnership. Under Article 1767 of the Civil Code, a partner may contribute not only money or property,
but also industry.

Petitioners Bound by

Terms of Contract

Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been expressly
stipulated, but also to all necessary consequences thereof, as follows:

Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not
only to the fulfillment of what has been expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage and law.

It is undisputed that petitioners are educated and are thus presumed to have understood the terms of
the contract they voluntarily signed. If it was not in consonance with their expectations, they should
have objected to it and insisted on the provisions they wanted.
Courts are not authorized to extricate parties from the necessary consequences of their acts, and the
fact that the contractual stipulations may turn out to be financially disadvantageous will not relieve
parties thereto of their obligations. They cannot now disavow the relationship formed from such
agreement due to their supposed misunderstanding of its terms.

Alleged Nullity of the

Partnership Agreement

Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code, which
provides:

Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an
inventory of said property is not made, signed by the parties, and attached to the public instrument.

They contend that since the parties did not make, sign or attach to the public instrument an inventory of
the real property contributed, the partnership is void.

We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo
M. Tolentino states that under the aforecited provision which is a complement of Article 1771, 12 "The
execution of a public instrument would be useless if there is no inventory of the property contributed,
because without its designation and description, they cannot be subject to inscription in the Registry of
Property, and their contribution cannot prejudice third persons. This will result in fraud to those who
contract with the partnership in the belief [in] the efficacy of the guaranty in which the immovables may
consist. Thus, the contract is declared void by the law when no such inventory is made." The case at bar
does not involve third parties who may be prejudiced.

Second, petitioners themselves invoke the allegedly void contract as basis for their claim that
respondent should pay them 60 percent of the value of the property. 13 They cannot in one breath deny
the contract and in another recognize it, depending on what momentarily suits their purpose. Parties
cannot adopt inconsistent positions in regard to a contract and courts will not tolerate, much less
approve, such practice.

In short, the alleged nullity of the partnership will not prevent courts from considering the Joint Venture
Agreement an ordinary contract from which the parties' rights and obligations to each other may be
inferred and enforced.

Partnership Agreement Not the Result

of an Earlier Illegal Contract

Petitioners also contend that the Joint Venture Agreement is void under Article 1422 14 of the Civil Code,
because it is the direct result of an earlier illegal contract, which was for the sale of the land without
valid consideration.
This argument is puerile. The Joint Venture Agreement clearly states that the consideration for the sale
was the expectation of profits from the subdivision project. Its first stipulation states that petitioners did
not actually receive payment for the parcel of land sold to respondent. Consideration, more properly
denominated as cause, can take different forms, such as the prestation or promise of a thing or service
by another. 15

In this case, the cause of the contract of sale consisted not in the stated peso value of the land, but in
the expectation of profits from the subdivision project, for which the land was intended to be used. As
explained by the trial court, "the land was in effect given to the partnership as [petitioner's]
participation therein. . . . There was therefore a consideration for the sale, the [petitioners] acting in the
expectation that, should the venture come into fruition, they [would] get sixty percent of the net
profits."

Liability of the Parties

Claiming that rerpondent was solely responsible for the failure of the subdivision project, petitioners
maintain that he should be made to pay damages equivalent to 60 percent of the value of the property,
which was their share in the profits under the Joint Venture Agreement.

We are not persuaded. True, the Court of Appeals held that petitioners' acts were not the cause of the
failure of the project. 16 But it also ruled that neither was respondent responsible therefor. 17 In imputing
the blame solely to him, petitioners failed to give any reason why we should disregard the factual
findings of the appellate court relieving him of fault. Verily, factual issues cannot be resolved in a
petition for review under Rule 45, as in this case. Petitioners have not alleged, not to say shown, that
their Petition constitutes one of the exceptions to this doctrine. 18 Accordingly, we find no reversible
error in the CA's ruling that petitioners are not entitled to damages.

WHEREFORE, the Perition is hereby DENIED and the challenged Decision AFFIRMED. Costs against
petitioners.

SO ORDERED

Melo, Vitug, Purisima and Gonzaga-Reyes, JJ., concur.


G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,


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

PANGANIBAN, J.:

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

The Case

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

WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby affirmed. 2

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

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September 20,
1990;

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

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the Agreement
plus P68,000.00 representing the unpaid price of the floats not covered by said Agreement;

b. 12% interest per annum counted from date of plaintiff's invoices and computed on their respective
amounts as follows:

i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990;

ii. Accrued interest for P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990;

c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted from
September 20, 1990 (date of attachment) to September 12, 1991 (date of auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or for the unpaid price of nets
and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total amount
P600,045.00, this Court noted that these items were attached to guarantee any judgment that may be
rendered in favor of the plaintiff but, upon agreement of the parties, and, to avoid further deterioration
of the nets during the pendency of this case, it was ordered sold at public auction for not less than
P900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds of the sale paid for by
plaintiff was deposited in court. In effect, the amount of P900,000.00 replaced the attached property as
a guaranty for any judgment that plaintiff may be able to secure in this case with the ownership and
possession of the nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder
in the public auction sale. It has also been noted that ownership of the nets [was] retained by the
plaintiff until full payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff
attached its own properties. It [was] for this reason also that this Court earlier ordered the attachment
bond filed by plaintiff to guaranty damages to defendants to be cancelled and for the P900,000.00 cash
bidded and paid for by plaintiff to serve as its bond in favor of defendants.

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

SO ORDERED. 3

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract
dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear
Industries, Inc. (herein respondent). They claimed that they were engaged in a business venture with
Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The total price of the nets
amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold to the
Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents filed a
collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities as general partners, on the
allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission. 5 On September 20, 1990, the lower court
issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on
board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.

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

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

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

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

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

c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency shall be
shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. 11

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

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

Ruling of the Court of Appeals


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

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

Hence, petitioner brought this recourse before this Court. 14

The Issues

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

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT CHUA,
YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT
EXISTED AMONG THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN QUEST FISHING
CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS
UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER LIM'S
GOODS.

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

This Court's Ruling

The Petition is devoid of merit.

First and Second Issues:

Existence of a Partnership

and Petitioner's Liability

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

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

Art. 1767 By the contract of partnership, two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.

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

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

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

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

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

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

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

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

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

(9) That the case was amicably settled through a Compromise Agreement executed between the 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 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 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 to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility for
a contract it entered into and by virtue of which it received advantages and benefits.

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

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

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

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

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

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle
art of movement and position, entraps and destroys the other. It is, rather, a contest in which each
contending party fully and fairly lays before the court the facts in issue and then, brushing aside as
wholly trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be
done upon the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality, when
it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy,
deserves scant consideration from courts. There should be no vested rights in technicalities.

Third Issue:

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.

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