SECTION 15

#1

G.R. No. L-23145 November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D.

TAYAG, ancillary administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.

Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.

Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.

FERNANDO, J.:

Confronted by an obstinate and adamant refusal of the domiciliary administrator, the

County Trust Company of New York, United States of America, of the estate of the
deceased Idonah Slade Perkins, who died in New York City on March 27, 1960, to
surrender to the ancillary administrator in the Philippines the stock certificates owned by
her in a Philippine corporation, Benguet Consolidated, Inc., to satisfy the legitimate
claims of local creditors, the lower court, then presided by the Honorable Arsenio
Santos, now retired, issued on May 18, 1964, an order of this tenor: "After considering
the motion of the ancillary administrator, dated February 11, 1964, as well as the
opposition filed by the Benguet Consolidated, Inc., the Court hereby (1) considers as
lost for all purposes in connection with the administration and liquidation of the
Philippine estate of Idonah Slade Perkins the stock certificates covering the 33,002
shares of stock standing in her name in the books of the Benguet Consolidated, Inc., (2)
orders said certificates cancelled, and (3) directs said corporation to issue new
certificates in lieu thereof, the same to be delivered by said corporation to either the
incumbent ancillary administrator or to the Probate Division of this Court." 1

From such an order, an appeal was taken to this Court not by the domiciliary
administrator, the County Trust Company of New York, but by the Philippine
corporation, the Benguet Consolidated, Inc. The appeal cannot possibly prosper. The
challenged order represents a response and expresses a policy, to paraphrase
Frankfurter, arising out of a specific problem, addressed to the attainment of specific
ends by the use of specific remedies, with full and ample support from legal doctrines of
weight and significance.

The facts will explain why. As set forth in the brief of appellant Benguet Consolidated,
Inc., Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among
others, two stock certificates covering 33,002 shares of appellant, the certificates being
in the possession of the County Trust Company of New York, which as noted, is the
domiciliary administrator of the estate of the deceased. 2 Then came this portion of the
appellant's brief: "On August 12, 1960, Prospero Sanidad instituted ancillary
administration proceedings in the Court of First Instance of Manila; Lazaro A. Marquez

1
was appointed ancillary administrator, and on January 22, 1963, he was substituted by
the appellee Renato D. Tayag. A dispute arose between the domiciary administrator in
New York and the ancillary administrator in the Philippines as to which of them was
entitled to the possession of the stock certificates in question. On January 27, 1964, the
Court of First Instance of Manila ordered the domiciliary administrator, County Trust
Company, to "produce and deposit" them with the ancillary administrator or with the
Clerk of Court. The domiciliary administrator did not comply with the order, and on
February 11, 1964, the ancillary administrator petitioned the court to "issue an order
declaring the certificate or certificates of stocks covering the 33,002 shares issued in the
name of Idonah Slade Perkins by Benguet Consolidated, Inc., be declared [or]
considered as lost."3

It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is
immaterial" as far as it is concerned as to "who is entitled to the possession of the stock
certificates in question; appellant opposed the petition of the ancillary administrator
because the said stock certificates are in existence, they are today in the possession of
the domiciliary administrator, the County Trust Company, in New York, U.S.A...." 4

It is its view, therefore, that under the circumstances, the stock certificates cannot be
declared or considered as lost. Moreover, it would allege that there was a failure to
observe certain requirements of its by-laws before new stock certificates could be
issued. Hence, its appeal.

As was made clear at the outset of this opinion, the appeal lacks merit. The challenged
order constitutes an emphatic affirmation of judicial authority sought to be emasculated
by the wilful conduct of the domiciliary administrator in refusing to accord obedience to a
court decree. How, then, can this order be stigmatized as illegal?

As is true of many problems confronting the judiciary, such a response was called for by
the realities of the situation. What cannot be ignored is that conduct bordering on wilful
defiance, if it had not actually reached it, cannot without undue loss of judicial prestige,
be condoned or tolerated. For the law is not so lacking in flexibility and resourcefulness
as to preclude such a solution, the more so as deeper reflection would make clear its
being buttressed by indisputable principles and supported by the strongest policy
considerations.

It can truly be said then that the result arrived at upheld and vindicated the honor of the
judiciary no less than that of the country. Through this challenged order, there is thus
dispelled the atmosphere of contingent frustration brought about by the persistence of
the domiciliary administrator to hold on to the stock certificates after it had, as admitted,
voluntarily submitted itself to the jurisdiction of the lower court by entering its
appearance through counsel on June 27, 1963, and filing a petition for relief from a
previous order of March 15, 1963.

Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to
what was decreed. For without it, what it had been decided would be set at naught and

2
nullified. Unless such a blatant disregard by the domiciliary administrator, with residence
abroad, of what was previously ordained by a court order could be thus remedied, it
would have entailed, insofar as this matter was concerned, not a partial but a well-nigh
complete paralysis of judicial authority.

1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee
ancillary administrator to gain control and possession of all assets of the decedent
within the jurisdiction of the Philippines. Nor could it. Such a power is inherent in his
duty to settle her estate and satisfy the claims of local creditors. 5 As Justice Tuason
speaking for this Court made clear, it is a "general rule universally recognized" that
administration, whether principal or ancillary, certainly "extends to the assets of a
decedent found within the state or country where it was granted," the corollary being
"that an administrator appointed in one state or country has no power over property in
another state or country."6

It is to be noted that the scope of the power of the ancillary administrator was, in an
earlier case, set forth by Justice Malcolm. Thus: "It is often necessary to have more than
one administration of an estate. When a person dies intestate owning property in the
country of his domicile as well as in a foreign country, administration is had in both
countries. That which is granted in the jurisdiction of decedent's last domicile is termed
the principal administration, while any other administration is termed the ancillary
administration. The reason for the latter is because a grant of administration does not ex
proprio vigore have any effect beyond the limits of the country in which it is granted.
Hence, an administrator appointed in a foreign state has no authority in the
[Philippines]. The ancillary administration is proper, whenever a person dies, leaving in
a country other than that of his last domicile, property to be administered in the nature of
assets of the deceased liable for his individual debts or to be distributed among his
heirs."7

It would follow then that the authority of the probate court to require that ancillary
administrator's right to "the stock certificates covering the 33,002 shares ... standing in
her name in the books of [appellant] Benguet Consolidated, Inc...." be respected is
equally beyond question. For appellant is a Philippine corporation owing full allegiance
and subject to the unrestricted jurisdiction of local courts. Its shares of stock cannot
therefore be considered in any wise as immune from lawful court orders.

Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue 8 finds
application. "In the instant case, the actual situs of the shares of stock is in the
Philippines, the corporation being domiciled [here]." To the force of the above
undeniable proposition, not even appellant is insensible. It does not dispute it. Nor could
it successfully do so even if it were so minded.

2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion
for the legality of the challenged order, how does appellant, Benguet Consolidated, Inc.
propose to carry the extremely heavy burden of persuasion of precisely demonstrating
the contrary? It would assign as the basic error allegedly committed by the lower court

3
its "considering as lost the stock certificates covering 33,002 shares of Benguet
belonging to the deceased Idonah Slade Perkins, ..."9 More specifically, appellant would
stress that the "lower court could not "consider as lost" the stock certificates in question
when, as a matter of fact, his Honor the trial Judge knew, and does know, and it is
admitted by the appellee, that the said stock certificates are in existence and are today
in the possession of the domiciliary administrator in New York."10

There may be an element of fiction in the above view of the lower court. That certainly
does not suffice to call for the reversal of the appealed order. Since there is a refusal,
persistently adhered to by the domiciliary administrator in New York, to deliver the
shares of stocks of appellant corporation owned by the decedent to the ancillary
administrator in the Philippines, there was nothing unreasonable or arbitrary in
considering them as lost and requiring the appellant to issue new certificates in lieu
thereof. Thereby, the task incumbent under the law on the ancillary administrator could
be discharged and his responsibility fulfilled.

Any other view would result in the compliance to a valid judicial order being made to
depend on the uncontrolled discretion of the party or entity, in this case domiciled
abroad, which thus far has shown the utmost persistence in refusing to yield obedience.
Certainly, appellant would not be heard to contend in all seriousness that a judicial
decree could be treated as a mere scrap of paper, the court issuing it being powerless
to remedy its flagrant disregard.

It may be admitted of course that such alleged loss as found by the lower court did not
correspond exactly with the facts. To be more blunt, the quality of truth may be lacking
in such a conclusion arrived at. It is to be remembered however, again to borrow from
Frankfurter, "that fictions which the law may rely upon in the pursuit of legitimate ends
have played an important part in its development."11

Speaking of the common law in its earlier period, Cardozo could state fictions "were
devices to advance the ends of justice, [even if] clumsy and at times offensive."12 Some
of them have persisted even to the present, that eminent jurist, noting "the quasi
contract, the adopted child, the constructive trust, all of flourishing vitality, to attest the
empire of "as if" today."13 He likewise noted "a class of fictions of another order, the
fiction which is a working tool of thought, but which at times hides itself from view till
reflection and analysis have brought it to the light."14

What cannot be disputed, therefore, is the at times indispensable role that fictions as
such played in the law. There should be then on the part of the appellant a further
refinement in the catholicity of its condemnation of such judicial technique. If ever an
occasion did call for the employment of a legal fiction to put an end to the anomalous
situation of a valid judicial order being disregarded with apparent impunity, this is it.
What is thus most obvious is that this particular alleged error does not carry persuasion.

3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by
its invoking one of the provisions of its by-laws which would set forth the procedure to

4
be followed in case of a lost, stolen or destroyed stock certificate; it would stress that in
the event of a contest or the pendency of an action regarding ownership of such
certificate or certificates of stock allegedly lost, stolen or destroyed, the issuance of a
new certificate or certificates would await the "final decision by [a] court regarding the
ownership [thereof]."15

Such reliance is misplaced. In the first place, there is no such occasion to apply such
by-law. It is admitted that the foreign domiciliary administrator did not appeal from the
order now in question. Moreover, there is likewise the express admission of appellant
that as far as it is concerned, "it is immaterial ... who is entitled to the possession of the
stock certificates ..." Even if such were not the case, it would be a legal absurdity to
impart to such a provision conclusiveness and finality. Assuming that a contrariety
exists between the above by-law and the command of a court decree, the latter is to be
followed.

It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to

which, however, the judiciary must yield deference, when appropriately invoked and
deemed applicable. It would be most highly unorthodox, however, if a corporate by-law
would be accorded such a high estate in the jural order that a court must not only take
note of it but yield to its alleged controlling force.

The fear of appellant of a contingent liability with which it could be saddled unless the
appealed order be set aside for its inconsistency with one of its by-laws does not
impress us. Its obedience to a lawful court order certainly constitutes a valid defense,
assuming that such apprehension of a possible court action against it could possibly
materialize. Thus far, nothing in the circumstances as they have developed gives
substance to such a fear. Gossamer possibilities of a future prejudice to appellant do
not suffice to nullify the lawful exercise of judicial authority.

4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught
with implications at war with the basic postulates of corporate theory.

We start with the undeniable premise that, "a corporation is an artificial being created by
operation of law...."16 It owes its life to the state, its birth being purely dependent on its
will. As Berle so aptly stated: "Classically, a corporation was conceived as an artificial
person, owing its existence through creation by a sovereign power." 17 As a matter of
fact, the statutory language employed owes much to Chief Justice Marshall, who in the
Dartmouth College decision defined a corporation precisely as "an artificial being,
invisible, intangible, and existing only in contemplation of law." 18

The well-known authority Fletcher could summarize the matter thus: "A corporation is
not in fact and in reality a person, but the law treats it as though it were a person by
process of fiction, or by regarding it as an artificial person distinct and separate from its
individual stockholders.... It owes its existence to law. It is an artificial person created by
law for certain specific purposes, the extent of whose existence, powers and liberties is
fixed by its charter."19Dean Pound's terse summary, a juristic person, resulting from an

5
association of human beings granted legal personality by the state, puts the matter
neatly.20

There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to
quote from Friedmann, "is the reality of the group as a social and legal entity,
independent of state recognition and concession." 21 A corporation as known to
Philippine jurisprudence is a creature without any existence until it has received the
imprimatur of the state according to law. It is logically inconceivable therefore that it will
have rights and privileges of a higher priority than that of its creator. More than that, it
cannot legitimately refuse to yield obedience to acts of its state organs, certainly not
excluding the judiciary, whenever called upon to do so.

As a matter of fact, a corporation once it comes into being, following American law still
of persuasive authority in our jurisdiction, comes more often within the ken of the
judiciary than the other two coordinate branches. It institutes the appropriate court
action to enforce its right. Correlatively, it is not immune from judicial control in those
instances, where a duty under the law as ascertained in an appropriate legal proceeding
is cast upon it.

To assert that it can choose which court order to follow and which to disregard is to
confer upon it not autonomy which may be conceded but license which cannot be
tolerated. It is to argue that it may, when so minded, overrule the state, the source of its
very existence; it is to contend that what any of its governmental organs may lawfully
require could be ignored at will. So extravagant a claim cannot possibly merit approval.

5. One last point. In Viloria v. Administrator of Veterans Affairs,22 it was shown that in a
guardianship proceedings then pending in a lower court, the United States Veterans
Administration filed a motion for the refund of a certain sum of money paid to the minor
under guardianship, alleging that the lower court had previously granted its petition to
consider the deceased father as not entitled to guerilla benefits according to a
determination arrived at by its main office in the United States. The motion was denied.
In seeking a reconsideration of such order, the Administrator relied on an American
federal statute making his decisions "final and conclusive on all questions of law or fact"
precluding any other American official to examine the matter anew, "except a judge or
judges of the United States court."23 Reconsideration was denied, and the Administrator
appealed.

In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of
the opinion that the appeal should be rejected. The provisions of the U.S. Code, invoked
by the appellant, make the decisions of the U.S. Veterans' Administrator final and
conclusive when made on claims property submitted to him for resolution; but they are
not applicable to the present case, where the Administrator is not acting as a judge but
as a litigant. There is a great difference between actions against the Administrator
(which must be filed strictly in accordance with the conditions that are imposed by the
Veterans' Act, including the exclusive review by United States courts), and those actions
where the Veterans' Administrator seeks a remedy from our courts and submits to their

6
jurisdiction by filing actions therein. Our attention has not been called to any law or
treaty that would make the findings of the Veterans' Administrator, in actions where he
is a party, conclusive on our courts. That, in effect, would deprive our tribunals of judicial
discretion and render them mere subordinate instrumentalities of the Veterans'
Administrator."

It is bad enough as the Viloria decision made patent for our judiciary to accept as final
and conclusive, determinations made by foreign governmental agencies. It is infinitely
worse if through the absence of any coercive power by our courts over juridical persons
within our jurisdiction, the force and effectivity of their orders could be made to depend
on the whim or caprice of alien entities. It is difficult to imagine of a situation more
offensive to the dignity of the bench or the honor of the country.

Yet that would be the effect, even if unintended, of the proposition to which appellant
Benguet Consolidated seems to be firmly committed as shown by its failure to accept
the validity of the order complained of; it seeks its reversal. Certainly we must at all
pains see to it that it does not succeed. The deplorable consequences attendant on
appellant prevailing attest to the necessity of negative response from us. That is what
appellant will get.

That is all then that this case presents. It is obvious why the appeal cannot succeed. It
is always easy to conjure extreme and even oppressive possibilities. That is not
decisive. It does not settle the issue. What carries weight and conviction is the result
arrived at, the just solution obtained, grounded in the soundest of legal doctrines and
distinguished by its correspondence with what a sense of realism requires. For through
the appealed order, the imperative requirement of justice according to law is satisfied
and national dignity and honor maintained.

WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the
Court of First Instance, dated May 18, 1964, is affirmed. With costs against oppositor-
appelant Benguet Consolidated, Inc.

7
#2

G.R. No. L-18216 October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,

vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.

Ramon C. Fernando for petitioners-appellants.

Office of the Solicitor General for respondent-appellee.

BAUTISTA ANGELO, J.:

On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc.
executed a certificate of liquidation of the assets of the corporation reciting, among
other things, that by virtue of a resolution of the stockholders adopted on September 17,
1960, dissolving the corporation, they have distributed among themselves in proportion
to their shareholdings, as liquidating dividends, the assets of said corporation, including
real properties located in Manila.

The certificate of liquidation, when presented to the Register of Deeds of Manila, was
denied registration on seven grounds, of which the following were disputed by the
stockholders:

3. The number of parcels not certified to in the acknowledgment;

5. P430.50 Reg. fees need be paid;

6. P940.45 documentary stamps need be attached to the document;

7. The judgment of the Court approving the dissolution and directing the
disposition of the assets of the corporation need be presented (Rules of Court,
Rule 104, Sec. 3).

Deciding the consulta elevated by the stockholders, the Commissioner of Land

Registration overruled ground No. 7 and sustained requirements Nos. 3, 5 and 6.

The stockholders interposed the present appeal.

As correctly stated by the Commissioner of Land Registration, the propriety or

impropriety of the three grounds on which the denial of the registration of the certificate
of liquidation was predicated hinges on whether or not that certificate merely involves a
distribution of the corporation's assets or should be considered a transfer or
conveyance.

8
Appellants contend that the certificate of liquidation is not a conveyance or transfer but
merely a distribution of the assets of the corporation which has ceased to exist for
having been dissolved. This is apparent in the minutes for dissolution attached to the
document. Not being a conveyance the certificate need not contain a statement of the
number of parcel of land involved in the distribution in the acknowledgment appearing
therein. Hence the amount of documentary stamps to be affixed thereon should only be
P0.30 and not P940.45, as required by the register of deeds. Neither is it correct to
require appellants to pay the amount of P430.50 as registration fee.

The Commissioner of Land Registration, however, entertained a different opinion. He

concurred in the view expressed by the register of deed to the effect that the certificate
of liquidation in question, though it involves a distribution of the corporation's assets, in
the last analysis represents a transfer of said assets from the corporation to the
stockholders. Hence, in substance it is a transfer or conveyance.

We agree with the opinion of these two officials. A corporation is a juridical person
distinct from the members composing it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members. While
shares of stock constitute personal property they do not represent property of the
corporation. The corporation has property of its own which consists chiefly of real estate
(Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W.
743). A share of stock only typifies an aliquot part of the corporation's property, or the
right to share in its proceeds to that extent when distributed according to law and equity
(Hall & Faley v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the
owner of any part of the capital of the corporation (Bradley v. Bauder 36 Ohio St., 28).
Nor is he entitled to the possession of any definite portion of its property or assets
(Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder is
not a co-owner or tenant in common of the corporate property (Halton v. Hohnston, 166
Ala 317, 51 So 992).

On the basis of the foregoing authorities, it is clear that the act of liquidation made by
the stockholders of the F. Guanzon and Sons, Inc. of the latter's assets is not and
cannot be considered a partition of community property, but rather a transfer or
conveyance of the title of its assets to the individual stockholders. Indeed, since the
purpose of the liquidation, as well as the distribution of the assets of the corporation, is
to transfer their title from the corporation to the stockholders in proportion to their
shareholdings, — and this is in effect the purpose which they seek to obtain from the
Register of Deeds of Manila, — that transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the stockholders. It is,
therefore, fair and logical to consider the certificate of liquidation as one in the nature of
a transfer or conveyance.

WHEREFORE, we affirm the resolution appealed from, with costs against appellants.

9
#3
EXCELLENT QUALITY APPAREL, G.R. No. 175048
INC.,
Petitioner,
- versus - CARPIO MORALES
TINGA,
VELASCO, JR., and
WIN MULTI RICH BUILDERS, INC., BRION, JJ.
represented by its President,
WILSON G. CHUA, Promulgated:
Respondent.
February 10, 2009
x ---------------------------------------------------------------------------------x

DECISION

TINGA, J.:

Before us is a Rule 45 petition[1] seeking the reversal of the Decision[2] and

Resolution[3] of the Court of Appeals in CA-G.R. SP No. 84640. The Court of Appeals
had annulled two orders[4] of the Regional Trial Court (RTC), Branch 32, of Manila in
Civil Case No. 04-108940. This case involves a claim for a sum of money which arose
from a construction dispute.

On 26 March 1996, petitioner Excellent Quality Apparel, Inc. (petitioner) then

represented by Max L.F. Ying, Vice-President for Productions, and Alfiero R. Orden,
Treasurer, entered into a contract[5] with Multi-Rich Builders (Multi-Rich) represented by
Wilson G. Chua (Chua), its President and General Manager, for the construction of a
garment factory within the Cavite Philippine Economic Zone Authority (CPEZ). [6] The
duration of the project was for a maximum period of five (5) months or 150 consecutive
calendar days. Included in the contract is an arbitration clause which is as follows:

Article XIX : ARBITRATION CLAUSE

Should there be any dispute, controversy or difference between

the parties arising out of this Contract that may not be resolved by them
to their mutual satisfaction, the matter shall be submitted to an Arbitration
Committee of three (3) members; one (1) chosen by the OWNER; one (1)
chosen by the CONTRACTOR; and the Chairman thereof to be chosen
by two (2) members. The decision of the Arbitration Committee shall be
final and binding on both the parties hereto. The Arbitration shall be
governed by the Arbitration Law (R.A. [No.] 876). The cost of arbitration

10
 shall be borned [sic] jointly by both CONTRACTOR and OWNER on 50-
50 basis.[7]
The construction of the factory building was completed on 27 November 1996.

Respondent Win Multi-Rich Builders, Inc. (Win) was incorporated with the Securities
and Exchange Commission (SEC) on 20 February 1997[8] with Chua as its President
and General Manager. On 26 January 2004, Win filed a complaint for a sum of
money[9] against petitioner and Mr. Ying amounting to P8,634,448.20. It also prayed for
the issuance of a writ of attachment claiming that Mr. Ying was about to abscond and
that petitioner was about to close. Win obtained a surety bond [10] issued by Visayan
Surety & Insurance Corporation. On 10 February 2004, the RTC issued the Writ of
Attachment[11] against the properties of petitioner.

On 16 February 2004, Sheriff Salvador D. Dacumos of the RTC of Manila, Branch 32,
went to the office of petitioner in CPEZ to serve the Writ of Attachment, Summons [12]and
the Complaint. Petitioner issued Equitable PCIBank (PEZA Branch) Check No. 160149,
dated 16 February 2004, in the amount of P8,634,448.20, to prevent the Sheriff from
taking possession of its properties.[13] The check was made payable to the Office of the
Clerk of Court of the RTC of Manila as a guarantee for whatever liability there may be
against petitioner.

Petitioner filed an Omnibus Motion[14] claiming that it was neither about to close. It also
denied owing anything to Win, as it had already paid all its obligations to it. Lastly, it
questioned the jurisdiction of the trial court from taking cognizance of the case.
Petitioner pointed to the presence of the Arbitration Clause and it asserted that the case
should be referred to the Construction Industry Arbitration Commission (CIAC) pursuant
to Executive Order (E.O.) No. 1008.

In the hearing held on 10 February 2004, the counsel of Win moved that its name in the
case be changed from Win Multi-Rich Builders, Inc. to Multi-Rich Builders, Inc. It was
only then that petitioner apparently became aware of the variance in the name of the
plaintiff. In the Reply[15] filed by petitioner, it moved to dismiss the case since Win was
not the contractor and neither a party to the contract, thus it cannot institute the case.
Petitioner obtained a Certificate of Non-Registration of Corporation/Partnership[16] from
the SEC which certified that the latter did not have any records of a Multi-Rich Builders,
Inc. Moreover, Win in its Rejoinder[17] did not

11
oppose the allegations in the Reply. Win admitted that it was only incorporated on 20
February 1997 while the construction contract was executed on 26 March 1996.
Likewise, it admitted that at the time of execution of the contract, Multi-Rich was a
registered sole proprietorship and was issued a business permit[18] by the Office of the
Mayor of Manila.

In an Order[19] dated 12 April 2004, the RTC denied the motion and stated that the
issues can be answered in a full-blown trial. Upon its denial, petitioner filed its Answer
and prayed for the dismissal of the case.[20] Win filed a Motion[21] to deposit the
garnished amount to the court to protect its legal rights. In a Manifestation, [22] petitioner
vehemently opposed the deposit of the garnished amount. The RTC issued an
Order[23] dated 20 April 2004, which granted the motion to deposit the garnished
amount. On the same date, Win filed a motion[24] to release the garnished amount to it.
Petitioner filed its opposition[25] to the motion claiming that the release of the money
does not have legal and factual basis.

On 18 June 2004, petitioner filed a petition for review on certiorari[26] under Rule 65
before the Court of Appeals, which questioned the jurisdiction of the RTC and
challenged the orders issued by the lower court with a prayer for the issuance of a
temporary retraining order and a writ of preliminary injunction. Subsequently, petitioner
filed a Supplemental Manifestation and Motion [27] and alleged that the money deposited
with the RTC was turned over to Win. Win admitted that the garnished amount had
already been released to it. On 14 March 2006, the Court of Appeals rendered its
Decision[28] annulling the 12 April and 20 April 2004 orders of the RTC. It also ruled that
the RTC had jurisdiction over the case since it is a suit for collection of sum of money.
Petitioner filed a Motion for Reconsideration[29] which was subsequently denied in a
resolution.[30]

Hence this petition.

Petitioner raised the following issues to wit: (1) does Win have a legal personality to
institute the present case; (2) does the RTC have jurisdiction over the case
notwithstanding the presence of the arbitration clause; and (3) was the issuance of the
writ of attachment and the subsequent garnishment proper.

12
A suit may only be instituted by the real party in interest. Section 2, Rule 3 of the Rules
of Court defines parties in interest in this manner:

A real party in interest is the party who stands to be benefited or injured

by the judgment in the suit, or the party entitled to the avails of the suit.
Unless otherwise authorized by law or these Rules, every action must be
prosecuted or defended in the name of the real party in interest.

Is Win a real party in interest? We answer in the negative.

Win admitted that the contract was executed between Multi-Rich and petitioner. It
further admitted that Multi-Rich was a sole proprietorship with a business permit issued
by the Office of the Mayor of Manila. A sole proprietorship is the oldest, simplest, and
most prevalent form of business enterprise.[31] It is an unorganized business owned by
one person. The sole proprietor is personally liable for all the debts and obligations of
the business.[32] In the case of Mangila v. Court of Appeals,[33] we held that:

x x x In fact, there is no law authorizing sole proprietorships to file

a suit in court.
A sole proprietorship does not possess a juridical personality
separate and distinct from the personality of the owner of the enterprise.
The law merely recognizes the existence of a sole proprietorship as a
form of business organization conducted for profit by a single individual
and requires its proprietor or owner to secure licenses and permits,
register its business name, and pay taxes to the national government. The
law does not vest a separate legal personality on the sole proprietorship
or empower it to file or defend an action in court.

The original petition was instituted by Win, which is a SEC-registered corporation.

It filed a collection of sum of money suit which involved a construction contract entered
into by petitioner and Multi-Rich, a sole proprietorship. The counsel of Win wanted to
change the name of the plaintiff in the suit to Multi-Rich. The change cannot be
countenanced. The plaintiff in the collection suit is a corporation. The name cannot be
changed to that of a sole proprietorship. Again, a sole proprietorship is not vested with
juridical personality to file or defend an action.[34]

Petitioner had continuously contested the legal personality of Win to institute the case.
Win was given ample opportunity to adduce evidence to show that it had legal
personality.It failed to do so. Corpus Juris Secundum, notes:

13
 x x x where an individual or sole trader organizes a corporation to take
over his business and all his assets, and it becomes in effect merely an
alter ego of the incorporator, the corporation, either on the grounds of
implied assumption of the debts or on the grounds that the business is the
same and is merely being conducted under a new guise, is liable for the
incorporator's preexisting debts and liabilities. Clearly, where the
corporation assumes or accepts the debt of its predecessor in business it
is liable and if the transfer of assets is in fraud of creditors it will be liable
to the extent of the assets transferred. The corporation is not liable on an
implied assumption of debts from the receipt of assets where the
incorporator retains sufficient assets to pay the indebtedness, or
where none of his assets are transferred to the corporation, or
where, although all the assets of the incorporator have been transferred,
there is a change in the persons carrying on the business and the
corporation is not merely an alter ego of the person to whose business it
succeeded.[35]

In order for a corporation to be able to file suit and claim the receivables of its
predecessor in business, in this case a sole proprietorship, it must show proof that the
corporation had acquired the assets and liabilities of the sole proprietorship. Win could
have easily presented or attached any document e.g., deed of assignment which will
show whether the assets, liabilities and receivables of Multi-Rich were acquired by Win.
Having been given the opportunity to rebut the allegations made by petitioner, Win
failed to use that opportunity. Thus, we cannot presume that Multi-Rich is the
predecessor-in-business of Win and hold that the latter has standing to institute the
collection suit.
Assuming arguendo that Win has legal personality, the petition will still be granted.
Section 4 of E.O. No. 1008[36] provides for the jurisdiction of the Construction Industry
Arbitration Commission, to wit:
Section 4. Jurisdiction.The CIAC shall have original and exclusive
jurisdiction over disputes arising from, or connected with, contracts entered into
by parties involved in construction in the Philippines, whether the disputes arises
before or after the completion of the contract, or after the abandonment or
breach thereof. These disputes may involve government or private contracts.
For the Board to acquire jurisdiction, the parties to a dispute must agree to
submit the same to voluntary arbitration.

The jurisdiction of the CIAC may include but is not limited to violation of
specifications for materials and workmanship; violation of the terms of
agreement; interpretation and/or application of contractual time and
delays; amount of damages and penalties; commencement time and
delays; maintenance and defects; payment, default of employer or
contractor and changes in contract cost.

14
 Excluded from the coverage of this law are disputes from employer-
employee relationships which shall continue to be covered by the Labor
Code of the Philippines.

There is nothing in the law which limits the exercise of jurisdiction to complex or
difficult cases. E.O. No. 1008 does not distinguish between claims involving payment of
money or not.[37] The CIAC acquires jurisdiction over a construction contract by the
mere fact that the parties agreed to submit to voluntary arbitration. [38] The law does not
preclude parties from stipulating a preferred forum or arbitral body but they may not
divest the CIAC of jurisdiction as provided by law.[39] Arbitration is an alternative method
of dispute resolution which is highly encouraged.[40] The arbitration clause is a
commitment on the part of the parties to submit to arbitration the disputes covered since
that clause is binding, and they are expected to
abide by it in good faith.[41] Clearly, the RTC should not have taken cognizance of the
collection suit. The presence of the arbitration clause vested jurisdiction to the CIAC
over all construction disputes between Petitioner and Multi-Rich. The RTC does not
have jurisdiction.[42]

Based on the foregoing, there is no need to discuss the propriety of the issuance of the
writ of attachment. However, we cannot allow Win to retain the garnished amount which
was turned over by the RTC. The RTC did not have jurisdiction to issue the questioned
writ of attachment and to order the release of the garnished funds.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals

is hereby MODIFIED. Civil Case No. 04-108940 is DISMISSED. Win Multi-Rich
Builders, Inc. is ORDERED to return the garnished
amount of EIGHT MILLION SIX HUNDRED THIRTY-FOUR THOUSAND FOUR
HUNDRED
FORTY-EIGHT PESOS AND FORTY CENTAVOS (P8,634,448.40),
which was turned over by the Regional Trial Court, to petitioner with legal interest of 12
percent (12%) per annum upon finality of this Decision until payment.

SO ORDERED.

15
#4

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT,
INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S.
LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,

vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of
Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of First
Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R.
No. 84197) against all defendants (respondents in G.R. No. 84197) was dismissed but
in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim

requiring Lim to pay plaintiff the amount of P311,056.02, with interest at
the rate of 12% per annum compounded monthly; plus 15% of the amount
awarded to plaintiff as attorney's fees from July 2,1966, until full payment
is made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of

16
 P184,878.74. Defendant Jacob S. Lim is further required to pay cross
party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the
other half, the amount of Pl84,878.74 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P184,878.84 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the

Cervanteses, and another P20,000.00 to Constancio B. Maglana as
attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer

against defendants Bormaheco, the Cervanteses and Constancio B.
Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of P20,000.00 as
attorney's fees and the amount of P4,379.21, per year from 1966 with
legal rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the

amount of P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action

was filed in good faith. The fact that the properties of the Bormaheco and
the Cervanteses were attached and that they were required to file a
counterbond in order to dissolve the attachment, is not an act of bad faith.
When a man tries to protect his rights, he should not be saddled with
moral or exemplary damages. Furthermore, the rights exercised were
provided for in the Rules of Court, and it was the court that ordered it, in
the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the

third-party defendant, for it only secured the attachment prayed for by the
plaintiff Pioneer. If an insurance company would be liable for damages in
performing an act which is clearly within its power and which is the reason
for its being, then nobody would engage in the insurance business. No
further claim or counter-claim for or against anybody is declared by this
Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline
business as owner-operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into
and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A

17
Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718,
arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July
18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in
G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in
favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and
spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana
(respondents in both petitions) contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were supposed to be their contributions to a
new corporation proposed by Lim to expand his airline business. They executed two (2)
separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed
by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors principally
agree and bind themselves jointly and severally to indemnify and hold and save
harmless Pioneer from and against any/all damages, losses, costs, damages, taxes,
penalties, charges and expenses of whatever kind and nature which Pioneer may incur
in consequence of having become surety upon the bond/note and to pay, reimburse and
make good to Pioneer, its successors and assigns, all sums and amounts of money
which it or its representatives should or may pay or cause to be paid or become liable to
pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in
favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in
favor of the former. It was stipulated therein that Lim transfer and convey to the surety
the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the
Register of Deeds of the City of Manila and with the Civil Aeronautics Administration
pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No.
776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request

payments from the surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage
before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third
party claim alleging that they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a
writ of preliminary attachment against Lim and respondents, the Cervanteses,
Bormaheco and Maglana.

18
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against
Lim alleging that they were not privies to the contracts signed by Lim and, by way of
counterclaim, sought for damages for being exposed to litigation and for recovery of the
sums of money they advanced to Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but
dismissed Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects the
trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT

DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND
THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF
THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT
IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE
TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer

had reinsured its risk of liability under the surety bond in favor of JDA and
subsequently collected the proceeds of such reinsurance in the sum of
P295,000.00. Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiffs instant action for the recovery of the amount
of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is
not the real party in interest to institute the instant action as it does not
stand to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover

the amount from defendants, hence, it instituted the action is utterly devoid
of merit. Plaintiff did not even present any evidence that it is the attorney-
in-fact of the reinsurance company, authorized to institute an action for
and in behalf of the latter. To qualify a person to be a real party in interest
in whose name an action must be prosecuted, he must appear to be the
present real owner of the right sought to be enforced (Moran, Vol. I,
Comments on the Rules of Court, 1979 ed., p. 155). It has been held that
the real party in interest is the party who would be benefited or injured by
the judgment or the party entitled to the avails of the suit (Salonga v.
Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is

19
 meant a present substantial interest as distinguished from a mere
expectancy or a future, contingent, subordinate or consequential interest
(Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E.
2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of
Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered

as the real party in interest as it has already been paid by the reinsurer the
sum of P295,000.00 — the bulk of defendants' alleged obligation to
Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff

Pioneer from its reinsurer, the former was able to foreclose extra-judicially
one of the subject airplanes and its spare engine, realizing the total
amount of P37,050.00 from the sale of the mortgaged chattels. Adding the
sum of P37,050.00, to the proceeds of the reinsurance amounting to
P295,000.00, it is patent that plaintiff has been overpaid in the amount of
P33,383.72 considering that the total amount it had paid to JDA totals to
only P298,666.28. To allow plaintiff Pioneer to recover from defendants
the amount in excess of P298,666.28 would be tantamount to unjust
enrichment as it has already been paid by the reinsurance company of the
amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis
defendant Lim's liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New
Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding
that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has
never been raised by any of the parties herein both in their answers in the court below
and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming
hypothetically that it was paid by its reinsurer, still none of the respondents had any
interest in the matter since the reinsurance is strictly between the petitioner and the re-
insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and
Maglana; and (4) the principle of unjust enrichment is not applicable considering that
whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money
was never raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:

xxx xxx xxx

20
 1. Has Pioneer a cause of action against defendants with respect to so
much of its obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer

still any claim against defendants, considering the amount it has realized
from the sale of the mortgaged properties? (Record on Appeal, p. 359,
Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond
it had executed in favor of JDA, collected the proceeds of such
reinsurance in the sum of P295,000, and paid with the said amount the
bulk of its alleged liability to JDA under the said surety bond, it is plain that
on this score it no longer has any right to collect to the extent of the said
amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that

is suing defendants for the amount paid to it by the reinsurers,
notwithstanding that the cause of action pertains to the latter, Pioneer
says: The reinsurers opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety
Corporation is representing the reinsurers to recover the amount.' In other
words, insofar as the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint
that Pioneer is suing as attorney-in- fact of the reinsurers for any amount.
Lastly, and most important of all, Pioneer has no right to institute and
maintain in its own name an action for the benefit of the reinsurers. It is
well-settled that an action brought by an attorney-in-fact in his own name
instead of that of the principal will not prosper, and this is so even where
the name of the principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that

'Every action must be prosecuted in the name of the real
party in interest.' This provision is mandatory. The real party
in interest is the party who would be benefitted or injured by
the judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact

is not a real party in interest, that there is no law permitting
an action to be brought by an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484; Luchauco v.
Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial

21
 Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA
706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer

has collected P295,000.00 from the reinsurers, the uninsured portion of
what it paid to JDA is the difference between the two amounts, or
P3,666.28. This is the amount for which Pioneer may sue defendants,
assuming that the indemnity agreement is still valid and effective. But
since the amount realized from the sale of the mortgaged chattels are
P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or
a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore,
Pioneer has no more claim against defendants. (Record on Appeal, pp.
360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate
court. Considering this admitted payment, the only issue that cropped up was the effect
of payment made by the reinsurers to the petitioner. Therefore, the petitioner's
argument that the respondents had no interest in the reinsurance contract as this is
strictly between the petitioner as insured and the reinsuring company pursuant to
Section 91 (should be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by

subrogation as are acquired in similar cases where the original insurer
pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F
2nd 925).

The rules of practice in actions on original insurance policies are in

general applicable to actions or contracts of reinsurance. (Delaware, Ins.
Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con.
1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of
the wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. If the amount paid by the
insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing
the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald
Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany
Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):

22
 Note that if a property is insured and the owner receives the indemnity
from the insurer, it is provided in said article that the insurer is deemed
subrogated to the rights of the insured against the wrongdoer and if the
amount paid by the insurer does not fully cover the loss, then the
aggrieved party is the one entitled to recover the deficiency. Evidently,
under this legal provision, the real party in interest with regard to the
portion of the indemnity paid is the insurer and not the insured. (Emphasis
supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-
fact of the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner was
not the real party in interest in the complaint and, therefore, has no cause of action
against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors
should not have been dismissed on the premise that the evidence on record shows that
it is entitled to recover from the counter indemnitors. It does not, however, cite any
grounds except its allegation that respondent "Maglanas defense and evidence are
certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence
to substantiate its finding that the counter-indemnitors are not liable to the petitioner.
The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to

be valid and effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts
involved, agreed to issue the bond provided that the same would be
mortgaged to it, but this was not possible because the planes were still in
Japan and could not be mortgaged here in the Philippines. As soon as the
aircrafts were brought to the Philippines, they would be mortgaged to
Pioneer Insurance to cover the bond, and this indemnity agreement would
be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties

have impaired and rendered insufficient the security under
the chattel mortgage and there is thus no other sufficient
security for the claim sought to be enforced by this action.

23
This is judicial admission and aside from the chattel mortgage there is no
other security for the claim sought to be enforced by this action, which
necessarily means that the indemnity agreement had ceased to have any
force and effect at the time this action was instituted. Sec 2, Rule 129,
Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel

mortgage on the planes and spare parts, no longer has any further action
against the defendants as indemnitors to recover any unpaid balance of
the price. The indemnity agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These defendants, as indemnitors,
would be entitled to be subrogated to the right of Pioneer should they
make payments to the latter. Articles 2067 and 2080 of the New Civil
Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the

remedy of foreclosure precludes any further action to recover any unpaid
balance of the price.

SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the payments
to JDA, the alternative remedies open to Pioneer were as provided in
Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both

by extrajudicial foreclosure and the instant suit. Such being the case, as
provided by the aforementioned provisions, Pioneer shall have no further
action against the purchaser to recover any unpaid balance and any
agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment &
Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through

the contention that Pioneer is not the vendor but JDA. The reason is that
Pioneer is actually exercising the rights of JDA as vendor, having
subrogated it in such rights. Nor may the application of the provision be
validly opposed on the ground that these defendants and defendant
Maglana are not the vendee but indemnitors. Pascual, et al. v. Universal
Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their
maturity dates discharged these defendants from any liability as alleged
indemnitors. The change of the maturity dates of the obligations of Lim, or
SAL extinguish the original obligations thru novations thus discharging the
indemnitors.

24
 The principal hereof shall be paid in eight equal successive
three months interval installments, the first of which shall be
due and payable 25 August 1965, the remainder of which ...
shall be due and payable on the 26th day x x x of each
succeeding three months and the last of which shall be due
and payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum

executed by SAL or Lim and JDA, modifying the maturity dates of the
obligations, as follows:

The principal hereof shall be paid in eight equal successive

three month interval installments the first of which shall be
due and payable 4 September 1965, the remainder of which
... shall be due and payable on the 4th day ... of each
succeeding months and the last of which shall be due and
payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes
bearing maturity dates different from that fixed in the aforesaid
memorandum; the due date of the first installment appears as October 15,
1965, and those of the rest of the installments, the 15th of each
succeeding three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates,

effected twice, were done without the knowledge, much less, would have it
believed that these defendants Maglana (sic). Pioneer's official Numeriano
Carbonel would have it believed that these defendants and defendant
Maglana knew of and consented to the modification of the obligations. But
if that were so, there would have been the corresponding documents in
the form of a written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of this
was the extinguishment of the obligations and of the surety bond secured
by the indemnity agreement which was thereby also extinguished.
Applicable by analogy are the rulings of the Supreme Court in the case of
Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of
Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor

without the consent of the guarantor extinguishes the
guaranty The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extension time referred to herein, (New
Civil Code).'

25
 Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer

paid the same. Consequently, Pioneer has no more cause of action to
recover from these defendants, as supposed indemnitors, what it has paid
to JDA. By virtue of an express stipulation in the surety bond, the failure of
JDA to present its claim to Pioneer within ten days from default of Lim or
SAL on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these

defendants thru the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him

to reimbursement from his co-debtors if such payment is
made after the obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees

from Pioneer and its surety by reason of the filing of the instant case
against them and the attachment and garnishment of their properties. The
instant action is clearly unfounded insofar as plaintiff drags these
defendants and defendant Maglana.' (Record on Appeal, pp. 363-369,
Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose

agreement was to do business through the corporate vehicle but who
failed to incorporate the entity in which they had chosen to invest? How
are the losses to be treated in situations where their contributions to the
intended 'corporation' were invested not through the corporate form? This
Petition presents these fundamental questions which we believe were
resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of
respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim
to incorporate, a de facto partnership among them was created, and that as a
consequence of such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution. The petitioner, therefore, questions the

26
appellate court's findings ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants'

cross-claims in the total amount of P184,878.74 as correctly found by the
trial court, with interest from the filing of the cross-complaints until the
amount is fully paid. Defendant Lim should pay one-half of the said
amount to Bormaheco and the Cervanteses and the other one-half to
defendant Maglana. It is established in the records that defendant Lim had
duly received the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of the
subject airplanes and spare parts (Exhibit 58). In addition, the cross-party
plaintiffs incurred additional expenses, hence, the total sum of P
184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be governed
by the supposed charter and the laws of the state relating thereto and not
by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121,
96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who
attempt, but fail, to form a corporation and who carry on business under
the corporate name occupy the position of partners inter se (Lynch v.
Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase
property to carry on a business, and their organization is so defective as to
come short of creating a corporation within the statute, they become in
legal effect partners inter se, and their rights as members of the company
to the property acquired by the company will be recognized (Smith v.
Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker,
29 Mich. 369). So, where certain persons associated themselves as a
corporation for the development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them contracted to pay a
third the difference in the proportionate value of the land conveyed by him,
and no stock was ever issued in the corporation, it was treated as a
trustee for the associates in an action between them for an accounting,
and its capital stock was treated as partnership assets, sold, and the
proceeds distributed among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a
relation does not necessarily exist, for ordinarily persons cannot be made
to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist (London Assur. Corp. v.
Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it
should be implied only when necessary to do justice between the parties;
thus, one who takes no part except to subscribe for stock in a proposed

27
 corporation which is never legally formed does not become a partner with
other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution (Ward v. Brigham,
127 Mass. 24). A partnership relation between certain stockholders and
other stockholders, who were also directors, will not be implied in the
absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen, 44
N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics
supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his
failure to appear during the pretrial despite notification. In his answer, the petitioner
denied having received any amount from respondents Bormaheco, the Cervanteses
and Maglana. The trial court and the appellate court, however, found through Exhibit 58,
that the petitioner received the amount of P151,000.00 representing the participation of
Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave P75,000.00 to
petitioner Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with
the respondents despite his representations to them. This gives credence to the cross-
claims of the respondents to the effect that they were induced and lured by the
petitioner to make contributions to a proposed corporation which was never formed
because the petitioner reneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco

Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary certificates of
public convenience and necessity as well as the required permits for the
operation thereof. Maglana sometime in May 1965, gave Cervantes his
share of P75,000.00 for delivery to Lim which Cervantes did and Lim
acknowledged receipt thereof. Cervantes, likewise, delivered his share of
the undertaking. Lim in an undertaking sometime on or about August
9,1965, promised to incorporate his airline in accordance with their
agreement and proceeded to acquire the planes on his own account.
Since then up to the filing of this answer, Lim has refused, failed and still
refuses to set up the corporation or return the money of Maglana. (Record
on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer,

counterclaim, cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering
defendants to purchase two airplanes and spare parts from Japan which
the latter considered as their lawful contribution and participation in the

28
 proposed corporation to be known as SAL. Arrangements and
negotiations were undertaken by defendant Lim. Down payments were
advanced by defendants Bormaheco and the Cervanteses and
Constancio Maglana (Exh. E- 1). Contrary to the agreement among the
defendants, defendant Lim in connivance with the plaintiff, signed and
executed the alleged chattel mortgage and surety bond agreement in his
personal capacity as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery and misrepresentation
of the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic)
allegedly executed by defendant Lim, thereby forcing them to file an
adverse claim in the form of third party claim. Notwithstanding repeated
oral demands made by defendants Bormaheco and Cervanteses, to
defendant Lim, to surrender the possession of the two planes and their
accessories and or return the amount advanced by the former amounting
to an aggregate sum of P 178,997.14 as evidenced by a statement of
accounts, the latter ignored, omitted and refused to comply with them.
(Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily,
no de facto partnership was created among the parties which would entitle the petitioner
to a reimbursement of the supposed losses of the proposed corporation. The record
shows that the petitioner was acting on his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.

SO ORDERED.

29
#5
[G.R. No. 136448. November 3, 1999]
LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES,
INC., respondent.
DECISION
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 partners, 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 plaintiffs 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 of 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 attorneys 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.

30
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 of 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
respondent 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.

31
 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.[12]
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 x x
x. Obviously, the ultimate undertaking of the defendants was to divide the profits among
themselves which is what a partnership essentially is x x x. 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]

32
 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 LIMS GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats
purchased 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 Courts 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:
Article 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 Yaos 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.

33
(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, Chuas FB Lady Anne Mel and
Yaos 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 petitioners
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

34
 Petitioner argues that the appellate courts 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 petitioners 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 petitioners 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.
Section 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.

35
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

36
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 rapiers 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.

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